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THE LEGAL "TUNEUP": FIVE THINGS YOU CAN DO NOW TO AVOID EXPENSIVE PROBLEMS LATER

THE CONCEPT OF "PREVENTIVE LAW"

Preventing legal problems is much easier and more effective than curing them once they surface. Still, most executives spend more time practicing preventive maintenance on their cars than they do on their businesses. The reason for this anomaly is, most likely, the fact that the business community generally believes that most legal problems are inevitable, and that preventive techniques will be too cumbersome and expensive, making the cure worse than the disease.

It is true that many legal problems cannot be practically anticipated or avoided; but it is also true that a great many legal problems can be prevented through foresight and planning.

THE FIRST STEP: PERFORM A "LEGAL AUDIT"

The first step in any legal "tuneup" is to inventory the problems you have had and, using your experience and the experience of counsel, "audit" the business in the effort to find the potential trouble spots that might cause problems in the future. For instance:

• Collection problems
• Disputes with clients over what was said or promised
• Employment discrimination claims
• Sexual harassment claims
• Insurance coverage disputes
• Overtime liabilities
• Copyright violations
• Problems arising from employee defections
• Problems arising from dealings with landlords
• Problems arising from dealings with vendors

THE SECOND STEP: REPLACE DISCRETION WITH STRUCTURE

The "If Only I Had ..." Problem

Business people in legal trouble often find out that when the events that led to the problem were unfolding, they did not do something that would have helped them tremendously -- there is a missing file document, the wrong sort of memo was generated, the wrong wording was used, something was not set up as it should have been. This is because of the fact that employees have little choice but to deal with problems using their discretion and common sense and, often, legal requirements are not common sensical. This creates the "If Only I Had..." problem that preventive law programs focus on.

The "Follow the Directions" Solution

The solution to the "If Only I Had..." problem is to replace discretionary ad-libbing with structured, simple, "just follow the directions" systems and procedures. Do it in two ways:

1. Scripts and forms. Create routines ("when this happens, do this" procedures) for foreseeable problem areas. The idea is to use forms, written instructions and checklists in a way that will not add time or inefficiency to the business day while at the same time taking individual discretion out of selected business functions.

2. Set up a preventive business infrastructure. Many problems can be prevented if things are set up in certain ways at the onset, and then periodically monitored.

TRIED AND TRUE TECHNIQUES

Aside from the issues that are typically addressed through insurance policies and contract drafting for particular projects, here are some of the most effective methods that can be used to prevent some of the most predictable legal problems:

POLICIES AND PROCEDURES MANUALS

Every firm should have a policies and procedures manual that does at least two things beyond the usual statement of vacation policies and employment benefits:

1. A manual should be used to disseminate policy statements and notices that will create defenses to certain types of claims. Examples:

• The courts have ruled that a proper sexual harassment policy can help in the defense of the employer's (as opposed to the accused employee's) liability for sexual harassment:
• If you are subject to the FMLA, an appropriate leave policy will defeat certain types of FMLA claims;
• Consistently applied employee evaluation procedures can defeat many employment discrimination claims;
• Proper employee complaint and follow up procedures can defeat many employee harassment claims;
• Damages for certain liabilities (i.e., employment discrimination, copyright violations) can be dramatically reduced if the firm has promulgated policies that reflect an attempt to do things the right way.

2. You need to anticipate what employees might do that could cause a problem, and create a procedure that removes employee discretion and judgment and substitutes a checklist, a form, etc. Some examples:

• Problem: Employees often say and do the wrong things at employment interviews, leading to discrimination, defamation and other claims. Solution: Promulgate an interview procedure with checklists, "do's" and "don'ts" and forms with clear instructions. Benefit: Fewer potential violations, better proof that you did it right, much less chance of punitive damages.
• Problem: Employees do business with non-credit worthy clients. This leads to collection problems and liability counterclaims. Solution: Set up a structured client intake, acceptance and accounts receivable criteria and procedure. Benefit: Less collection procedures and liability counterclaims.
• Problem: Clients claim that certain things were said or promised, and sue for breach. Solution: Set up a structured file documentation procedure. Benefit: Less client dissatisfaction, problems; better proof in case of a dispute.
• Problem: Employee says he was singled out for special adverse treatment and was not promoted as he should have been, due to race, age, gender, etc. Solution: Clear, uniformly applied evaluation, warning and employee record keeping shows rational, legal motive for employer conduct. Benefit: Less employment discrimination cases.
• Problem: Disgruntled employee contacts the feds claiming overtime violations. Huge FLSA liability and fines. Solution: Clear exempt-nonexempt definitions, policies on time records and advance approval for overtime. Benefit: Less risk of FLSA violations, better control over overtime burden.
• Problem: Disgruntled employee blows the whistle to Software Publishers Association about software being loaded on various computers. Huge copyright violation, statutory damages and attorney fee damages. Solution: Software usage policies. Benefit: Less likelihood of copyright violations, less damages since no willful violation.

But remember: The policies and procedures, once instituted, have to be applied consistently and uniformly in order to be effective.

TRAINING

This cannot be stressed too much. Particularly in the employer liability field, the Supreme Court has emphasized that employers who train their employees will be looked upon favorably when a claim arises, and employers who do not train their employees will be dealt with severely.

We formed Powell Trachtman Training and Consulting., LLC, specifically to provide the requisiste training that all companies require.

EMPLOYMENT AGREEMENTS

• Protecting your intellectual property and work product. An employment agreement can establish your right to preclude an employee from taking your work product, file materials, business and marketing plans, client lists, etc. to the competition.
• Protecting your clients. Covenants not to compete can run the spectrum from merely prohibiting an employee from conducting business with the clients for whom he worked when he was your employee, to precluding any competition in a specific area for a specific time. This lessens impact of "head hunters" and removes the incentive to shop around.
• Protecting your employees. An employment agreements can include provisions that preclude an ex-employee from soliciting your current employees to leave your firm.
• Protecting against wrongful termination claims. An employment agreement can make certain that employees remain terminable at will, or it can establish the ground rules for termination.

CREATING FILE DOCUMENTS

The "my word against your word" problem dominates litigation. Documents are more believable than recollections in court, but they must be admissible.

• Notes:
  • Create them as contemporaneously as you can so they reflect recollections as close in time to the events as possible;
  • Keep the originals;
  • Make it a business practice, which avoids the appearance of falsification;
  • Remember that everything is discoverable -- be prepared to live with what you wrote.
• Confirming letters:
  • Confirm the point clearly;
  • State that you are relying upon what they told you;
  • State that unless you hear from them to the contrary in writing by a realistic date, you will presume the accuracy of your statement;
  • Be able to prove they got it;
  • Be willing to live with it.
• Examples:
  • Dealing with insurance agent
  • Dealing with vendor
  • Dealing with client
  • Dealing with consultant
  • Dealing with employees

PROCEDURES PACKAGES

Use "procedures packages" to take the discretion out of predictable business situations that you know can lead to trouble. Some of these can be incorporated in policies and procedures manuals or they can serve as companions to more general guidelines in such manuals. Examples:

• Create a "paragraphs" library for contracts and typical confirming letter situation;
• Employment interview checklist, form and procedure;
• Employee hiring checklist, form and procedure
• Employee evaluation/discipline checklist, form and procedure;
• Employee termination checklist, form and procedure;
• Employee complaint checklist, form and procedure;
• Employee leave request form and procedure;
• Rules, procedures for dealing with vendors;
• Rules, procedures for dealing with overdue accounts;
• Rule, procedures for e-mail;
• Rules, procedures for internet usage;
• Rules, procedures for software installation and copying;
• Rules, procedures for drug and alcohol usage;
• Rules, procedures for security inspections;
• Rules, procedures for dealing with certain types of engagements, clients

PLANNING FOR THE "BIG HIT"

Obviously, insurance is the best way to protect against liabilities, but you cannot insure against all losses. There are limits to what you can do in the effort to protect against the "big hit", and you need to devote some thought and planning to the process.

• The power of a "judgment". A plaintiff, if successful, will obtain a "judgment". A judgment constitutes a lien on real property in the name of the judgment debtor, and gives the judgment creditor the right to attach and sell other property of virtually any type. A judgment creditor can also obtain full scale discovery of all of your assets.
• Why not just put all your assets in someone else's name? Its not that easy. "Fraudulent conveyance" statutes prevent transfers to avoid judgments.
• Personal planning versus business planning. These are two separate issues, and they need to be coordinated.
• Estate planning devices.
• Joint ownership with spouse: In Pennsylvania, assets held jointly by spouses are generally protected from creditors, but only until divorce or death. Disadvantages include estate planning and tax minimization complications.
• Trusts: Trusts can be used to secure assets from creditors, so long as they are real and irrevocable. If you can still get to the money, so will the creditor. Same with gifts.
• Be careful: Fraudulent conveyance rules still apply.
• Choice of entity. A design professional remains liable for his or her own professional negligence. But what about the negligence of one of your colleagues -- are you liable for that as well?
• General partnership: These are a creditor's best friend. Each partner is liable for mistakes of every other partner;
• Corporate or limited liability entities: Doing business through a corporate form, or through a limited liability entity, limits each owner's liability.
• Be careful: Make certain you comply with applicable licensing requirements.
• Consider the possibility of multiple entities.
• For instance, real estate developers place the land in one company, and deal with customers through another, so that if a liability hits, it hits the company without assets.
• In most situations involving design professionals, the major asset is the receivables, which probably cannot be separated from the entity doing the work.
• But what if you have varying businesses that can be broken down into separate entities? You can take all of your eggs out of one basket -- i.e., separate companies for residential, commercial, etc.
• And if you do have assets -- building, intellectual property -- get them into a separate entity.

©2009 Powell, Trachtman, Logan, Carrle & Lombardo, P.C. The foregoing is intended for general information purposes only and does not constitute legal advice. All business and legal decisions should be made in conjunction with competent legal advice as applied to specific situations. Portions of this article may be quoted for non-commercial purposes with proper attribution.