LLC Not Liable For Injuries Suffered By Independent Contractor

LLC Not Liable For Injuries Suffered By Independent Contractor

      Auslander Properties, LLC (the “LLC”), owned jointly by Steve Auslander (“Auslander”) and his wife (not otherwise named in the opinion), owned several residential and commercial buildings in Bardstown and Louisville. When a tenant complained about some tree limbs overhanging a building, Auslander contacted Joseph Nalley, an experienced handyman who had previously been retained to do work for the LLC. While removal of the first offending branch went fine, unfortunately, while working on the second tree, Nalley put his weight on some decorative wooden rafters, leading to a fall to a concrete surface where he sustained injuries including fractures of his spine and traumatic brain injury. Nalley filed suit against the LLC, and both the trial court in the Court of Appeals agreed that the LLC was liable. That determination was reversed by the Kentucky Supreme Court, finding that, as an independent contractor, the LLC was not responsible for Nalley’s injuries.  Auslander Properties, LLC v. Nalley, Case No. 2016-SC-000099-DG, 2018 WL 2979947 (Ky. June 14, 2018).

      At trial, while the LLC was exonerated on a common-law negligence claim, it was held liable for violations of certain regulations of the Kentucky Occupational Safety And Health Act (“KOSHA”)in that the LLC had not provided appropriate safety equipment for an employee working more than 10 feet above the ground.  The Court of Appeals, in affirming the action the trial court’s decision, agreed that the LLC was Nalley’s  employer as defined in KOSHA. On a theory that is somewhat confusing, Nalley asserted that Auslander was an employee of the LLC. Reading between the lines, this may be an argument that Auslander, in assisting Nalley, was doing activities integral to the operation of maintaining the various pieces of rental property, and that Nalley was simply assisting in those efforts. Regardless, the Supreme Court rejected that characterization, noting that:

A member of an LLC conducting business and performing work as agent of the LLC does not automatically become an employee of the LLC. 2018 WL 2979947, *5 (footnote omitted).

      From there the Supreme Court laid out the boundaries of its opinion. First, it held that Nalley’s independent contractor status, as contrasted with that of an employee of the LLC, is not fatal to his claim under KOSHA. It then reviewed a number of decisions which generally stand for the proposition that in retaining the services of independent contractors, the employer must give them the same protections as are given to its own employees. Conversely, it also reviewed cases in which independent contractors were injured when doing work dissimilar from that performed by its own employees. The court noted that, with respect to atypical work, the employer cannot be held to knowledge of the specific issues involved, that being the reason that specialized outside contractors are utilized rather than in-house labor. “[W]hen the employer engages the services of an independent contractor for a task alien to the core function of the employer’s business, the employer is relying upon the special expertise and ability of the contractor to know and obey the applicable safety standards of that activity.” Id., *6.

      Applying this rule, the Supreme Court determined that cutting away branches in the manner that gave rise to this case is not part of property management. Rather:

Certainly, some basic aspects of routine landscape maintenance fall within the core functions of managing and renting real estate, but specialized work like climbing rooftops and ladders, reclining into the tree itself, to cut branches requires specialized knowledge and skills beyond what is reasonably expected of an ordinary property rental business. Id.

      Ultimately, Nalley’s suit was dismissed:

At the time of his injury, Nalley was an independent contractor rather than an employee of the LLC, and he was performing specialized work unrelated to the normal operations of the LLC’s property rental business. The responsibility for complying with safety laws applicable to that specialized work was upon Nalley. Since the LLC had no duty of compliance, Nalley’s negligence per se claim fails as a matter of law.

General Partner with Dementia Was Still a General Partner Able to Bind the Partnership

General Partner with Dementia Was Still a General Partner Able to Bind the Partnership

      In Mary Hubert Limited Partnership v. Hasselbring, 2018 Il. App.(3d) 160623-U 2018 WL 298293 (3^rd Dist., Ill App. Jan. 3, 2018), the court found that an elderly general partner, suffering from dementia, had not been dissociated as a general partner and therefore still had the ability to bind to the partnership. On other grounds, however, the lease that was the subject of the litigation was held unenforceable on grounds of unconscionability.

 

 

Corporate Officer Held Liable for Unremitted Trust Fund Taxes

Corporate Officer Held Liable for Unremitted Trust Fund Taxes

      Officers of a business corporation are, as a rule, not personally responsible for the corporation’s debts and obligations. Like all rules, there are exceptions. One of those sections applies when payroll/trust fund taxes, withheld from employee paychecks, are not remitted to the government. In those situations, the Internal Revenue Code, specifically 26 U. S. C. § 6672(a), may impose liability on somebody who is both required to remit those taxes and “willfully” fails to do so. A recent decision from the Sixth Circuit Court of Appeals identifies a circumstance in which a willful failure was identified. United States of America v. Hartman, No. 17-2273 (6^th Cir. July 25, 2018).

      Hartman and Ott founded Spectrum Tool & Design, a Michigan corporation. Ott was assigned the responsibility of overseeing payroll and the remission of payroll taxes. This was initially done through an outside payroll company. When in December 2003, the payroll company learned that Spectrum could not afford both the wages and appropriate payroll taxes, it dropped Spectrum as a client. Thereafter, Hartman and Ott made arrangements to pay current wages, but not the related payroll taxes. Ott kept the responsibility for overseeing payroll services. Ott, however, was not up to the task. Hartman, in July, 2004, saw that checks made out to the IRS had not been mailed “Hartman phoned the Internal Revenue Service and met with an agent, who informed him that Spectrum should pay its current taxes going forward and make up the shortfall over time.” In October of that same year, the IRS agent advised Hartman that Spectrum was not paying its current taxes.

      Still, Hartman left Ott in charge of payroll obligations, assuming that everything was being handled because there were entries in the internal bookkeeping system to that effect.

      Ultimately, Spectrum would file for Chapter 11 Bankruptcy, which was ultimately converted into a chapter 7 liquidation. Suit was then brought against Hartman to recover the unpaid payroll taxes. The District Court granted summary judgment against Hartman, “ruling as a matter of law that Hartman was responsible for remitting Spectrum’s payroll taxes and that he recklessly disregarded an ‘obvious risk’ that his company was not paying those taxes.”

      In order to prevail, the government needed to demonstrate that Hartman was “willful” in failing to pay the taxes. The Six Circuit affirmed the determination that he had been willful in that:

Hartman acted willfully in this instance by repeatedly claiming to believe that Ott paid the taxes when he no longer had any plausible basis for thinking that was so. He knew of Ott’s past failures and had ample means to identify and remedy Ott’s misconduct.

Think about the uncontested chain of events that preceded the failure to pay the taxes in December 2004, before the company filed its bankruptcy petition. In December 2003, Hartman knew that Spectrum missed a payroll payment. In July 2004, Hartman found the undelivered checks on Ott’s desk and learned about Spectrum’s deficiency from the Internal Revenue Service agent. In October 2004, Hartman learned again that Ott had not been paying the taxes properly. Faced with Ott’s extensive track record of misconduct, Hartman had no plausible basis for continuing to trust Ott to remit the payroll taxes. Slip op. at 4.

      The court went on to review a similar string of factual failures that took place after the bankruptcy filing.

      While not mentioned in this decision, barring exceptional circumstances, the liability with respect to unremitted trust fund taxes is not subject to discharge in bankruptcy. For that and many other reasons, if and when a company finds itself in distress, members of management need to undertake effective efforts to be sure that current taxes are satisfied and that taxes in arrears are brought current.

More on Joint Employers; in This Instance They Were Not

More on Joint Employers; in This Instance They Were Not

      In a decision rendered last week by the 11th Circuit Court of Appeals, it reversed the trial court and held that a citrus grower was not the “employer” of the employees with the contractor who supplied fruit pickers. Gaudencio Garcia-Celestino v. Ruiz Harvesting Inc., Case No. 17-12866 (11^th Cir. Aug. 2, 2018).

      Consolidated Citrus LP hired Ruiz Harvesting Inc. to provide fruit pickers. The pickers were employees of Ruiz. Suit was brought against Ruiz for violations of the Fair Labor Standards Act and breach of immigration work contracts. The supplied workers were paid based on the volume of fruit picked, sometimes resulting in a payment, on a per hour basis, below the minimum wage. While Ruiz purported to pay the workers the differential, it as well demanded repayment of those amounts at the risk of a threat of deportation. When a class action was filed, the aggrieved employees asserted that Consolidated Citrus should be treated as a joint employer. This case is already wound its way to appeal previously, a prior appellate decision finding that the correct standard was applied with respect to liability under the Fair Labor Standards Act, but the incorrect standard applied to the breach of contract claim. Under the FSLA, speaking generally, an employment relationship exists on the basis of economic dependency. In this case, focusing on breach of contract, the question turned upon the common law definition of the employment relationship. Notwithstanding that Consolidated Citrus set approximate start times for each shift in the amount of fruit to be picked each day, it was Riuz who actually controlled the employees’ performance. As such Riuz (and not Consolidated Citrus) was the employer.

If Intellectual Property is Important to Your Business, It Deserves Your Attention

If Intellectual Property is Important to Your Business, It Deserves Your Attention

      Peter Mahler, in his blog New York Business Divorce, has in a recent posting discussed a pair of cases demonstrating the significant problems that can arise when a business fails to focus upon the ownership and control of its intellectual property.

      In the first of the cases discussed, Freedmen v. McInnis, 2018 NY Slip op. 30210(u) [Sup. Ct. NY County Feb. 2, 2018], arose in connection with the use of the name “Root & Bone” for certain restaurants. While the court was willing to issue an injunction against certain uses of those names by certain of the members in business ventures unrelated to the LLC, that injunction was premised upon the plaintiff member posting a $500,000 bond.

      This dispute had its basis in the fact that, before the LLC’s formation, one of the members, McInnis, filed a trademark registration for “Root & Bone” with the US Patent and Trademark Office in his own name. While McInnis did not disclose this registration, the LLC’s operating agreement failed to address the name and failed to require that each member contribute any intellectual property rights in the name to the LLC.

      In the second case, Oliver v. Johanson, 5:17-cv-05129 [W.D. Ark. June 29, 2018], the ownership of a significant software package, substantially crafted by one of and LLC’s members, arose, with the author member claiming it was not a “work for hire” because he was not an employee of the LLC, but rather an independent contractor.

      Again, the failure to specifically address ownership in the operating agreement gave rise to the dispute.

       These decisions are reviewed by Peter Mahler in his posting Dissension Follows When Business Owners Don’t Put Their IP House in Order (July 23, 2018); HERE IS A LINK to that posting.

The Statute Means What the Statute Says, and 50% is not the Same as 49%

The Statute Means What the Statute Says, and 50% is not the Same as 49%

       Peter Mahler, in his blog New York Business Divorce, reported upon an interesting decision from New York, Balkind v. Nickel, 2018 NY Slip Op 31703(U), [Sup. Ct. NY County July 16, 2018]. In this case, there was a corporation which, pursuant to a shareholder agreement, was run equally by the two shareholders. Each had the right to appoint a director, and functionally all decisions, whether of the board or of the shareholders required unanimity. This equality in treatment did not come about, however, by reason of share ownership. Rather, one shareholder owned 51% of the stock, and the other 49%. Why there was this dissimilarity in share ownership even as there was, by contract, an agreement to treat all shareholders equally, is not discussed in the opinion.

          Under New York law, a 50% shareholder may move for judicial dissolution of the company. In this instance, the 49% shareholder sought judicial dissolution, arguing, inter alia, that the equal position in control of the company should be the focus. In contrast, the 51% owner argued that the statute means what the statute says, namely a 50% shareholder, which the plaintiff was not. The court agreed, holding that where the statute set a threshold of 50%, the 49% shareholder did not have standing to move under that statute.

       Peter Mahler’s review of this decision appears under a posting on July 30 titled 49% Shareholder Can’t Seek Deadlock Dissolution Despite Shareholders’ Agreement Granting Co-Equal Control; HERE IS A LINK to that posting

Massachusetts Moves to Rewrite Noncompetition Law

Massachusetts Moves to Rewrite Noncompetition Law

      In legislation that has been sent to the governor for signature (whether or not it will be signed remains to be seen), the Massachusetts legislature has proposed to significantly rewrite the law of noncompetition agreements. Under the proposed legislation, as to numerous classes of employees, including those with relatively low wages, minors, university students, those who are laid off and anyone terminated without cause, a noncompetition agreement could not be enforced. With respect to those agreements that are enforceable, they will be limited to one year and further required to be “no broader than necessary” in order to protect the employer’s “legitimate business interests,” which are defined as trade secrets, other confidential information and the employer’s goodwill. In addition, employers would be required, in effect, to make additional payments when enforcing a noncompetition agreement; those former employees would be entitled to receive at least half of their prior compensation during the non-compete. There is, in the alternative, the possibility that the employer and the employee would by contract agree on the payments to be made during the noncompetition period.

      Generally speaking, assuming consideration, Kentucky will enforce reasonable noncompetition agreements. In contrast, California will generally speaking not enforce noncompetition agreements. If enacted, this Massachusetts legislation would put Massachusetts closer to the California position then to the Kentucky position.