Author: Ben Byrd

Disability Lawsuits Are On The Rise. Is Your Business In Compliance?

Posted on by Ben Byrd

One Atlanta resident has filed over a hundred lawsuits against businesses in Georgia and Florida in the past 10 years. Another has sued 120 different Atlanta-area businesses just since 2015. What do these lawsuits have in common? In each case, the plaintiff suffers from a physical disability and claims that the business has violated the Americans with Disabilities Act (“ADA”) by preventing the plaintiff access to the business establishment.

These plaintiffs are not alone. Hundreds of plaintiffs have filed similar accessibility-based suits across the country. Experts say these suits already number in the thousands, and will only become more prevalent as time goes on. So how does the ADA apply to your business, and what can you do to protect your business against an ADA claim?

What is the ADA, and to whom does it apply?

In 1990, Congress passed the ADA in an attempt to eliminate a variety of barriers, both literal and figurative, that people with disabilities face every day. One section of the ADA, Title III, requires businesses that operate “public accommodations” to not discriminate against the disabled. In particular, the ADA requires the proprietors of such businesses to remove “architectural barriers” and “communication carriers” that prevent the disabled from equally enjoying the accommodations, if the removal of the those barriers is “readily achievable.”

So what is a “public accommodation”? A public accommodation is any private business that provides goods or services to the public. It includes restaurants, theaters, hotels, and any type of shopping center. But the statute is not limited just to retail-type establishments. It also includes professional offices, such as law offices and medical practices, as well as any other “service establishment.”  Even a publicly-accessible website may be a public accommodation to which the ADA applies (more on that below).  In short, if members of the public are coming to your property (or website) to transact any sort of business, you should expect to be subject to the ADA.

Importantly, there is no exception for accommodations that were built before the ADA became law. All public accommodations must comply with the ADA (though the requirements for compliance may differ based on various factors discussed below).

What does the ADA require?

Again, the ADA requires businesses to remove any barriers that would prevent a person with disabilities from enjoying a public accommodation if removal of the barrier is “readily achievable.” The United States Department of Justice (DOJ), which is charged with enforcing the ADA, publishes a set of standards called the “ADA Standards for Accessible Design” (the “Standards”) which provide, in minute detail, guidance for the design of public accommodations. The Standards cover everything from the size and location of wheelchair-accessible parking spaces to the height of toilet-paper dispensers.

Newly constructed facilities, first occupied on or after January 26, 1993, must meet or exceed the minimum requirements of the DOJ’s Standards. If any part of an existing facility has been altered or renovated since January 1992, it too must comply with the Standards.

For older facilities, the law is trickier. If the public accommodation pre-dates the ADA, the DOJ Standards still act as a guide, but a property owner does not have to meet those Standards unless doing so is “readily achievable.” Whether meeting a given Standard is readily achievable depends both on the cost of the alteration and the resources of the property owner. Bigger, wealthier property owners will be expected to make changes that smaller property owners are not. In the end, whether a change is “readily achievable” can only be decided on a case-by-case basis, and this fact gives rise to much litigation.

We noted above that the ADA’s definition of a “barrier” includes “communication barriers” as well as “architectural barriers.” Because of this, a new generation of ADA plaintiffs claim that a business’s website is also a public accommodation and must comply with the ADA. In particular, these plaintiffs claim that a business’s website be reasonably accessible to the blind, such as by providing means to navigate the site through sound instead of by sight. Neither the ADA nor the DOJ Standards addresses websites expressly, and the federal courts are divided on the questions of whether, and how, the ADA should apply. (In the absence of express federal guidance some courts assess website accessibility by reference to the independently-developed Web Content Accessibility Guidelines 2.0 (WCAG)). Nevertheless, more than a thousand such suits were filed in 2018 alone.

What if I am merely a tenant in a building owned by someone else?

By its own terms, the ADA applies to “any person who owns, leases (or leases to), or operates a place of public accommodation.” So when a business owner leases space for its business, both the business and the business’s landlord are liable for violations of the ADA inside the space leased by the tenant-business. In contrast, when a violation is in a common area of a multi-tenant commercial building, such as a parking lot or an elevator, the courts generally agree that any ADA violations are the responsibility of the landlord alone.

How do these lawsuits work?

The ADA authorizes any person who has been discriminated against as a result of a violation of Title III to sue the business responsible for the violation in federal court to have the barrier removed. The ADA primarily allows the plaintiff to obtain an injunction – that is, a court order – requiring the offending property owner to remove any barrier that violates the ADA. Business owners are often shocked to discover that they have been sued for a laundry list of alleged violations. While these violations may seem minor, if a public accommodation does not meet the ADA, the law is clear that a patron may seek an injunction to bring the premises into compliance.

The statute does not provide for the plaintiff to receive monetary damages to compensate for the alleged discrimination itself, but it does allow the plaintiff, if successful, to recoup any reasonable legal fees and expenses that he incurred in the process of bringing the suit. And that, as they say, is the rub. The ADA does not require a potential plaintiff to give a business owner any prior notice before filing suit. So by the time the alleged offender is aware that anyone is claiming there is a problem, the plaintiff has already incurred legal fees, court costs, and possibly hired an expert in ADA compliance. All of these expenses are recoverable from the business owner if the plaintiff is successful in court.

None of this is to say that there is no defense to an ADA complaint. For example, it is not uncommon for a plaintiff to complain about a condition that is not, in fact, a barrier to entry. And even if a given condition would be a violation of the current Standards, it may be that the building pre-dates the ADA and removing the offending condition is not “readily achievable.”  On rare occasions, a plaintiff’s claims are downright fraudulent. For example, the plaintiff may have never set foot in the defendant’s establishment and, even if he did, he may have no plans to ever return. In short, it is possible to defeat an ADA claim on its merits.

But for every hour a business spends litigating the merits of a claim, the plaintiff’s expenses accumulate and increase the potential liability to the defendant.  For this reason, many business owners who are sued under the ADA seek to negotiate a quick settlement with the plaintiff rather than fight it out in court. In practice, very few of these claims go all the way to a trial.

If this process does not strike you as being especially fair to the accused business owner, you are not alone. The recent surge in ADA accessibility suits has caused some rumblings for reform in Congress. While at least one bill has been introduced to amend Title III, no such bill has passed and the statute will stay the same for the foreseeable future.

What can a business owner do?

Some industry observers suggest that if you maintain a “public accommodation” it is just a matter of time before you are the target of an ADA suit. Given that, what can a diligent business owner do now, before she is sued, to put her business in the best position to prevent or defend against a future claim?

  • First, check your insurance coverage. Many liability policies cover ADA claims, but just as many don’t. If you are not sure whether your policy covers ADA claims, talk with your insurance broker.
  • Second, hire a consultant knowledgeable in the ADA and disability issues to audit your business now, before you are the target of a lawsuit, to help identify any areas that might give rise to a claim later on and, if feasible, remedy them before a claim is brought.  If you are sued, you will likely have to hire one of these professionals to evaluate the plaintiff’s claims and advise you about where you may have compliance issues, at a time when you are also incurring liability to the plaintiff for his or her legal expenses, court costs and expert fees – so hiring a compliance consultant before you are sued may ultimately be more economical for your business in the long run.

In the end, if you are sued, always contact your lawyer immediately. Accessibility claims are technical by their very nature, so seeking professional guidance as early as possible is essential.

If you need assistance in assessing your business’s responsibilities under the ADA or responding to a claim that you have violated the ADA, please contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 to discuss further.

Beyond the Non-Compete: Things to Consider when Hiring a Competitor’s Employees

Posted on by Ben Byrd

When engineer Anthony Levandowski announced in January 2016 that he was leaving Google for Uber, his employer was not happy. Levandowski was not just any engineer. As the head of Google’s efforts to develop a self-driving car, he was a Silicon Valley superstar, and now he was taking his considerable talents to Google’s chief rival in the race to develop a truly autonomous automobile.

Google was not going to take the defection lying down. Not long after Levandowski departed, Google sued Uber seeking $1.85 billion in damages and an injunction that would severely limit the work Levandowski would be able to do for Uber. Although the case eventually settled (during trial) for just a fraction of what Google originally sought, the wreckage was widespread: Levandowski was left unemployed, Google received $250 million worth of Uber stock, and both parties owed their attorneys tens of millions of dollars in legal fees.

The remarkable thing about Levandowski’s case is that Google never alleged that Levandowski had breached a non-compete agreement. They couldn’t, because he never had one. Non-competes are completely unenforceable in California.

The Levandowski case serves as a reminder that an employee and his future employers are bound by a web of legal obligations even when the employee is otherwise free to leave his current employment and go to another employer of his choosing.

The Duty of Loyalty and Other Limits on the Privilege to Compete

Most businesses are familiar with the doctrine of at-will employment. It provides that, generally, an employer can terminate an employee at almost any time and for almost any reason. (There are notable exceptions, such as terminating for an illegal or discriminatory reason.) The principle goes both ways. Employees are generally free to leave for greener pastures wherever they can find them. On top of that is the “privilege to compete,” which allows a company to compete against others in the open market for scarce customers, resources, and even talented employees. These doctrines are reinforced by states’ longstanding public policies against non-compete agreements and other “restrictive covenants.” This animosity toward limiting competition often renders any attempt to contractually bind an employee from jumping ship substantially – or even completely – unenforceable. Together, these doctrines help create an economy where the competition among companies for good employees is just as stiff as the competition for good customers.

But even against that background, neither the at-will employment doctrine nor the privilege to compete are unlimited. Both are restricted in ways that create potential risks for employers and the talent they seek to recruit.

As an initial matter, all workers – even the rank and file – have a “duty of loyalty” to their employers. The duty of loyalty is not as restrictive as the “fiduciary duty” that binds officers, directors, and other essential personnel, but it has “teeth” nonetheless. At its core, the duty of loyalty means an employee cannot compete against her employer or otherwise actively work against her employer’s interests. In practice, this typically means that an employee can plan to compete against her employer, but she cannot in fact compete against her employer while she is still employed.

To illustrate: George works for an advertising agency, but he dreams of having his own agency one day. While he is still working for his current agency, can he form an LLC, rent office space, and print business cards in anticipation of the day he finally strikes out on his own? He can. But can he take his clients out to lunch to discreetly inform them of his plans and solicit their business for his future agency? He cannot. The former is merely planning to compete against his current employer. The latter is actually competing against his current employer, and that is forbidden by the duty of loyalty.

Hiring a Competitor’s Employees – “Wrongful Means” and Employee Raiding

In addition to the duty of loyalty, the law recognizes that a business has a legally-protectible interest in an existing relationship between it and its employee, even when the relationship is at will, and the law will punish a third party’s attempts to induce a breach of loyalty or wrongfully interfere with that relationship. As a result, these obligations create some risk for the prospective employer, who must take care not to contribute to an employee’s breach of his duty of loyalty or otherwise interfere with the current employer’s rights.

So what can you do to hire away employees from another business? In Georgia and many other states, a prospective employer (Employer B) will be protected from liability when recruiting from a competitor (Employer A) if the following conditions are met:

  • The relationship between the employee and Employer A concerns a matter involved in the competition between Employer A and Employer B;
  • Employer B does not use any “wrongful means” to recruit the employee;
  • Employer B’s actions don’t create or continue an “unlawful restraint of trade” (that is, they are not intended to help Employer B create a monopoly for its goods or services); and
  • Employer B’s purpose is at least in part to advance its own interest in competing with Employer A.

It’s the second prong – the use of “wrongful means” – that most commonly causes issues. What exactly are wrongful means? They are often described as actions that are wrong on their own, even outside the context of recruiting – such as using fraud or defamation. But cases involving such obviously wrongful means are not particularly common. The following scenario is both more common and less obvious.

Imagine that our adman George has decided he would rather not go out on his own after all. What he really wants to do is join a better agency, and his valuable book of business has landed him an offer with his current agency’s biggest rival. Of course, both George and the new agency expect George to bring his clients with him when he leaves. But George can’t serve those clients all on his own, and he would like to bring some additional talent with him to the new agency. So after putting in his two weeks’ notice – but before he actually leaves his employment with the company – he sets about recruiting some key members of his team to come with him and, with the new agency’s permission, extends formal offers of employment.

Is this allowed? Usually not. George is still an employee of the first agency, and by recruiting the first agency’s talent he is benefitting the new agency at the expense of his own employer. In short, George is violating his duty of loyalty to the first agency. But the new agency’s hands are not clean either. It has knowingly used George as a double agent to recruit talent from a competitor. This is the kind of “wrongful means” that the law forbids.

A special situation arises when one company “raids” another by hiring away a large portion of its employees at one time. As in a case where only one employee is hired, the central question is usually whether the hiring company used any wrongful means in its efforts to recruit. The problem in a case of mass hiring comes when the hiring party’s efforts are so successful that the mass defection leaves the competitor unable to function. In these cases, some courts have found that the crippling of the competitor is itself wrongful and therefore prevents the hiring company from claiming the protection of the privilege to compete.

It is often remarked that this is especially true if “other circumstances are present.” Unfortunately, few courts explain what those other circumstances may be, creating a zone of uncertainty for companies that aggressively recruit from their competitors. In the end, special care must be taken before recruiting a group of employees to leave a competitor en masse.

The Trade Secrets Trap

The special knowledge that makes a recruit highly desirable often includes special knowledge about his employer. For this reason, claims that a company used wrongful means to hire from a competitor are often accompanied by accusations that the competitor’s trade secrets have been stolen. These claims often directly implicate the hiring company as a co-conspirator. Google’s lawsuit against Uber, for example, turned largely on allegations that Uber used Levandowski to steal Google’s trade secrets.

A trade secret is generally defined as having four qualities: One, it must be information. Two, the information must derive economic value from the fact it is secret. Three, the information must not be generally known. And four, the information must be the subject of reasonable efforts to maintain its secrecy.

The subject of what is and is not a trade secret could never be adequately covered in a single article. But for the purposes of hiring from a competitor, one characteristic should always be remembered: Trade secrets may or may not be the subject of a confidentiality agreement. Trade secrets are protected by state and federal law, so the fact that a new hire is not bound by a confidentiality agreement with her former employer does not, by itself, mean she does not possess any trade secrets that could create liability for the new employer.

Furthermore, liability for the theft (or misappropriation) of trade secrets is not limited just to the individual who actually pilfered the information. It also extends to any person who acquires or uses the information knowing that it was wrongfully obtained in the first place – or even simply having reason to know that the source of the information (i.e., the new hire) had a duty to a third party (i.e., the former employer) to keep it secret. This principle creates some measure of risk when hiring an employee who may possess sensitive information.

Difficult problems arise when a departing employee does not actively “take” his former employer’s trade secrets but, rather, simply possesses his former employer’s trade secrets only in his memory. It’s fair to say, though, that the typical suit over trade secrets involves much more concrete claims. The jilted employer often alleges that the former employee left with copies of his former employer’s files. These days, it is not uncommon to read allegations that, prior to his departure, the employee downloaded valuable files to a thumb-drive, sent them as attachments to a personal email account, or even photographed files with a smart phone.

Not all files contain trade secrets, of course. Nevertheless, an employer should never encourage or facilitate a new hire’s removal of files from his former employer.

Conclusion

Non-compete agreements and other restrictive covenants are often a concern when hiring new employees, especially those with specialized skills and abilities. Even in the absence of a restrictive covenant, however, employees and their suitors are still bound by rules that arise solely from the law. Employers must be mindful of these non-contractual restrictions when recruiting potential employees.  If you have any questions about this article or need assistance in assessing your business’s rights with respect to a prospective employee or a departing employee, please contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 to discuss further.

Terms and Conditions May Not Apply – How to Make Sure Your Terms and Conditions Work for You

Posted on by Ben Byrd

“Additional terms and conditions apply” is a phrase we have all heard from a voice-over on a late-night infomercial hawking vegetable juicers or subscriptions to a knife-of-the-month club. But just what are “terms and conditions” and how are they different from a normal contract? And what concern are they to businesses that occupy, shall we say, more reputable corners of the marketplace?

What are “terms and conditions”?

As an initial matter, every contract has “terms”. These are simply the various promises that the parties to a contract make to each other: WidgetCo shall provide Customer with 600 widgets. In return, Customer shall pay WidgetCo $1,000 per widget. These are both terms.

Terms can be conditional—if Customer pays within 30 days of delivery, WidgetCo will give Customer a 5% reduction off the quoted purchase price. But conditional terms are still terms and, legally, there is no meaningful distinction between terms and conditions. Like “cease and desist” or “will and testament”, “terms and conditions” is simply a stock phrase that has become a fossilized part of legal language.

As a practical matter, though, when we hear the phase “terms and conditions”, what is usually meant are contract terms that have two characteristics. First, they are boilerplate terms—that is, standardized terms that are ancillary to the “real” terms of the deal that have been hammered out between the two parties with respect to the transaction at hand (for example, quantity purchased, delivery dates and locations). Second, they are often contained in a document (often titled “Terms and Conditions”) that is separate from the primary “deal-specific” document (such as a purchase order or statement of work) that gives rise to a particular deal. Terms and conditions are often, but not always, dictated by the seller of the goods or services without negotiation. It is in this sense that we will use the phrase “terms and conditions” in this article.

Considerations in using separate “terms and conditions”:

It can be useful to structure a transaction so that there are separate terms and conditions, and it is a practice that is especially common in internet-based commerce. Nevertheless, if you choose to employ terms and conditions, there are several considerations you must account for. Otherwise, you may end up with a contract different from the one you thought you agreed to.

Do you have a meeting of the minds? The first challenge that terms and conditions present is that they have a funny way of never making it into the contract at all. Any lawyer can tell you that a commercial contract is a “meeting of the minds” – that is, an agreement – between the buyer and the seller. In short, terms that both parties agree to become a part of the contract. Those that haven’t been agreed to do not.

The legal burden is on the party seeking to enforce a term to prove that the term was agreed to by both parties to be part of their “deal”. And, generally, this requires proof that the other party (i) had notice of the additional terms and an opportunity to review them, and (ii) agreed to be bound by them.

A problem with separate terms and conditions is that one party may not be aware that they exist at all. (In fact, a cynic might conclude that one reason terms and conditions are so popular is they seem to allow one party to insert terms into a deal without bringing them to the other party’s attention.) But if one party isn’t aware of certain terms, that raises the possibility that there was no meeting of the minds as to those terms, and so they do not become a part of the parties’ contract.

  • Imagine, for example, WidgetCo sells widgets through its website, widgetsforless.com. Within that website is a web page laying out the terms and conditions for purchases made through the website. However, a customer never has to visit that page to complete an order, nor is there a specific reference or link to the terms and conditions during the order process—so a customer can place an order without ever being exposed to the “other terms and conditions”. Instead, the website may contain just a general—and inconspicuous—statement that merely browsing or using the website binds the customer to the terms and conditions. This approach is often referred to as a “browse wrap” agreement. (The word “wrap” is an allusion to the earlier practice of selling software with terms and conditions included inside a box wrapped in shrink-wrap.)

In this situation, can we really say—or prove—the customer has knowingly agreed to those terms? Without something more, that is a very hard conclusion to reach, and courts usually agree. Browse wrap terms are often found to be unenforceable for the fundamental reason that they were never mutually agreed to—because the customer did not have adequate notice of the terms.

  • Now imagine WidgetCo uses a printed order form that contains the statement “WidgetCo’s standard Terms and Conditions apply”. This is better, because WidgetCo’s customer should at least be on notice that there are other terms out there that it needs to be aware of. But does WidgetCo’s customer really know the substance of the terms it’s agreeing to when it submits the order form? Can it find out what it’s agreeing to? If not, whose fault is that—WidgetCo’s or the customer’s? In this case, it would be WidgetCo’s fault—while WidgetCo has notified the customer that additional terms apply, it has not given the customer any opportunity to review those terms. As such, the customer cannot be said to have agreed to terms that it could not review.

To avoid these questions, the best practice would be for WidgetCo to include a copy of its separate terms and conditions with the primary contract document and to get some affirmative manifestation that the customer agrees to those terms, such as a signature on the terms and conditions document.

But that is not always possible. So, at a minimum, WidgetCo needs to include a provision in the main document that clearly and unambiguously

  • incorporates the additional terms into the parties’ agreement; and
  • provides clear direction on how the customer can find those terms to review them.

So long as the terms and condition of a contract have been made available for review by a party, the law will usually presume that the party read them and understood their contents—even if the party chose (for whatever reason) to not actually review the terms.

A useful provision could look something like this:

This transaction is subject to WidgetCo’s standard Terms and Conditions, last modified August 1, 2015. WidgetCo’s full Terms and Conditions are available to Customer on WidgetCo’s website at www.widgetsforless.com/terms_and_conditions. 

In an e-commerce context, the same thing can be accomplished by having the buyer/user click a box signaling that he or she agrees to the seller’s terms and conditions, with the actual terms and conditions being available for review via a conspicuous hyperlink. (This is commonly referred to as a “click wrap” agreement, as distinguished from browse wrap.)  Where the terms are available for review by clicking on a conspicuous hyperlink, courts again generally presume that the buyer/user has read them and understood their contents before checking the “I agree” box—even if the buyer/user later admits that they chose to not click on the hyperlink or to actually review the terms.

Can you prove what  terms and conditions the parties agreed to? At this point, we do know the customer has agreed to a set of terms and conditions. But, we still may not necessarily be able to prove what those terms and conditions are. That brings us to our next issue.

In this case, the terms and conditions are almost certainly for WidgetCo’s benefit, so it is likely WidgetCo that is going to want to assert the rights and protections they provide if the deal falls apart. That means the burden will be on WidgetCo to prove the content of the terms and conditions to a court. Experience has shown that that can be harder than it sounds.

Let’s assume WidgetCo’s customer has clearly and unambiguously signaled its consent to be bound by WidgetCo’s  terms and conditions that were in effect on the date their deal was struck. If the terms and conditions were reproduced in full on a document that the customer signed, it’s easy to prove what terms and conditions were agreed to.  But if he has signed a printed document containing a provision like the one in the section above, or he has checked a box on WidgetCo’s website showing his assent—i.e., in both cases, where the terms were made available to the customer through a hyperlink or web address—what now?  Especially if WidgetCo has since revised the terms and conditions found on its website?

Almost by their nature, terms and conditions change over time (a point we will discuss further below). More than once, a business has appeared in court ready to prove how their current terms and conditions appear on their website, only to be told that their current terms and conditions are irrelevant. What matters, of course, are the terms and conditions that were in place at the time this contract was formed with this customer. If the business has not maintained the entire history of its terms and conditions in a structured way—and many businesses do not—it may find itself unable to prove what earlier terms and conditions were in place on the date that this customer entered into the contract.

Therefore, if a business intends to rely on separate terms and conditions, it is essential that it maintain records of its various terms and conditions in such a way that it can prove the contents of the terms and conditions that every individual customer has actually agreed to. To do this will require the business to:

  1. Maintain all prior versions of its terms and conditions in a repository;
  2. Make sure that the repository uses a system that will show not only the version that was in effect on a given day, but also that the customer could have accessed them or did in fact access them (for example, the website containing the terms was not “down” or unavailable at the time; a record showing that the customer clicked the link or “checked the box” (if applicable)); and
  3. Make sure that the repository system is designed so that future employees will be able to testify with certainty about what terms and conditions were in effect on a given date. (Murphy’s Law dictates that all the employees from the time of the sale will be long gone, years later, when the terms actually become relevant to a dispute.)

Are the terms and condition “subject to change”? A common characteristic of standard terms-and-conditions forms is a provision that the terms and conditions themselves are subject to change, usually at the sole discretion of the party that drafted them and often without notice to the other party. The terms may then go on to say that any such change automatically becomes binding on the other party as soon as the change is made. These types of provisions would obviously be useful to the drafting party if they were enforceable. The problem is, they often aren’t.

Again, a contract is an agreement by two parties to a common set of promises. Imagine WidgetCo’s terms and conditions contain the following language:

All invoices shall be paid within 30 days. All invoices that remain unpaid after 30 days shall incur interest at the rate of 4 percent per annum.

If WidgetCo can retain the right to change any term at any time and in its sole discretion, what’s to stop WidgetCo from amending its terms and conditions to require payment within 14 days? Or 4 days for that matter? Why couldn’t it raise the interest rate to 12% and disavow any warranties at the same time? In fact, while it was at it, why couldn’t WidgetCo change its terms and conditions to say that a customer representative had to come to the home of WidgetCo’s president and mow her lawn every Sunday until the balance is paid?

These scenarios may seem absurd, but they illustrate the fundamental unfairness that a unilateral “subject-to-change at will” clause presents. The law recognizes this unfairness and so, generally, renders “subject-to-change at will” provisions unenforceable.  In some cases, courts have gone even further to find that the mere presence of a “subject-to-change at will” provision makes the entire contract unenforceable from the outset.

To make changes to your terms and conditions binding on the other party, you need to comply with the same fundamental requirements as were needed to form the initial contract. That generally means:

  1. Giving the customer actual notice of the new terms;
  2. Getting the customer’s consent to the new terms (which can be express or implied, depending on the circumstances); and
  3. Giving some new promise or performance—or giving up an existing right—in return for the customer’s agreement to make changes to the existing deal.

The last of these is probably the least intuitive for non-lawyers. That is because to be a legally enforceable contract, an agreement cannot be just a meeting of the minds. To be enforceable, an agreement also has to have “consideration” given by each party to the other.  Without new consideration, changes to terms and conditions will generally be found to be an unenforceable attempt to unilaterally modify the terms agreed to by the parties.

Consideration is a legal term of art that refers to the thing that each party agrees to, or gives up, as its part of the deal. For example, in a commercial transaction, the seller promises to give up goods or services, and the buyer gives up his money. These promises are consideration. When the terms of an agreement are changed, the customer’s agreement to proceed under the new, changed terms is usually the necessary consideration given on the part of the customer—but the seller must give something in return as well. It could be a promise to accept future orders from the customer (if the seller would otherwise have the right to refuse such orders), a relaxing of payment terms, or something else.   Depending on the facts and the type of business at hand, the possibilities are potentially limitless—so long as the seller gives something in exchange for the customer’s agreement to accept the changed terms.

In the end, terms and conditions are a fixture of modern commerce, especially online commerce, but they present issues that must be addressed before they can be effective. If you have any questions about your business’s terms and conditions, please contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 to discuss further.

Dissenters’ Rights in Georgia: Litigating “Fair Value”

Posted on by Ben Byrd

What are dissenters’ rights, and why do they exist?

There is a general feeling among transactional lawyers that corporate shareholders are becoming more and more likely to assert their right to “dissent” from a corporate transaction and liquidate their shares. While it is hard to prove or disprove whether this feeling is accurate, it is nevertheless useful to understand the nature of the right to dissent and to examine some of the issues these claims present in litigation.

In an earlier era, corporate law required shareholders to vote unanimously in favor of major changes to a corporation’s structure or operations. As a result, a single shareholder could thwart a deal, regardless of how good it was for the entire ownership. On the other hand, the unanimity rule protected the individual shareholders, who had no legal right to liquidate their shares in the face of a transaction they did not like. Over time, though, the unanimity requirements were loosened, and today a simple majority of shareholders can make most corporate decisions. In theory, this change gave a company’s ownership the flexibility it needs to take advantage of opportunities that might otherwise be missed because of single holdout. But with that flexibility came the risk that controlling shareholders will exercise their power at the expense of the minority.

Two scenarios are distressingly common. Imagine that Tom, Dick, and Harry are equal owners of Pin Heads, Inc., which owns a chain of bowling alleys. If Tom and Dick decide to cut Harry out of the business against his will, all they have to do is form another corporation without Harry and then vote to sell Pin Heads’ assets to the new entity, leaving Harry out in the proverbial cold.[1] This is the classic “freeze out” or “squeeze out” situation. Worse, if Tom and Dick sell Pin Heads’ assets to their new company for less than market value, they haven’t just frozen Harry out of the operation, they have stolen his equity as well.

Consider another scenario: Pin Heads has done well and is now worth $3 million. Our three shareholders reasonably expect to receive $1 million each if the company is sold. Because they are in control, Tom and Dick negotiate the sale of the company’s assets to an unrelated buyer for just half a million dollars, which will eventually be distributed to the shareholders equally. At the same time, Tom and Dick negotiate sweetheart agreements with the buyer just for themselves. These agreements might require Tom and Dick to provide “consulting” services to the buyer, or not to compete with the buyer, or maybe both. In return for these commitments, the buyer will pay Tom and Dick—you guessed it—$1.25 million each. (Harry, of course, isn’t offered a contract.) Tom and Dick’s agreements may not have any real value to the buyer, but that is exactly the point. The contracts are a sham that Tom and Dick have created to divert money from the buyer to themselves when it  ought to have gone to the corporation as a whole. Harry is again left out in the cold.

To protect Harry and his fellow minority shareholders, most states—including Georgia—passed statutes allowing a shareholder to “dissent” from certain corporate transactions that change the fundamental nature of the business and to liquidate his shares for their “fair value.”[2] In Georgia, the right to dissent is available both to shareholders of corporations and members of limited liability companies[3], and it is triggered most often when there is a merger or asset sale.[4]

When there is such a transaction, the company must notify the shareholder of the transaction and his right to dissent. The dissenting then notifies the company of his intent to dissent.[5] After receiving notice that a shareholder dissents, the corporation must offer the shareholder what it believes to be the fair value of the shareholder’s interest, along with certain financial information supporting that valuation.[6] The shareholder can either accept the corporation’s offer or counter with his own valuation. But if the shareholder and the corporation cannot come to an agreement, the corporation must institute a court action to determine the fair value of the dissenter’s shares. The valuation proceeding is a nonjury, equitable hearing, so it must be brought in the superior court.[7] Although it presents some opportunities for either party to stumble, this basic procedure is not terribly complicated. The bigger challenge by far is proving fair value.

What is “fair value”?

The Georgia Code defines fair value as “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action.”[8] This definition is remarkably circular, and there is almost no Georgia case law expanding the meaning of fair value. However, the little authority that does exist establishes that “a shareholder should generally be awarded his or her proportional interest in the corporation after valuing the corporation as a whole.”[9] In effect, the “fair value” of a minority interest may be different from the “fair market value” of that same interest.

To illustrate, assume Pin Heads is worth $3 million. On the open market, Harry’s one-third interest in the company would likely be worth less than $1 million. After all, with partners like Tom and Dick, who would want to buy Harry’s shares? But under the dissenter’s rights statute, Harry would be entitled to his pro rata portion of the company’s value, without any discounts to account for the lack of marketability or control associated with his individual shares—that is, $1 million.[10] This is an important point, but it still leaves us with the task of determining the value of the company as a whole.

Because there is so little Georgia authority on this point, the practitioner must look to other sources for guidance.[11] Fortunately, it is generally agreed that a dissenting shareholder is entitled to be compensated for what he has lost, which is an interest in a “going concern” and not just a share of the corporation’s liquidated assets. As such, he is entitled to his share of the company’s “intrinsic” value—that is, the present value of all future benefits that would flow to the company’s owners from its operations—not just the price the company would bring if it were sold.[12]

This conceptual difference between intrinsic value and market value is not always obvious to parties or to courts. Moreover, the distinction is blurred by the fact that, as a practical matter, the intrinsic value and market value of a given company will often coincide (a point we will return to below). Nevertheless, the practitioner must remember that these are two distinct measures of value.[13]

Proving Value: Cash flows and multiples.

Business valuation is an established field that exists separate and apart from any role it plays in dissenters’ rights cases, but its tools are essential to the dissenters’ rights process.[14] The litigator must be comfortable enough with business valuation techniques to understand why each expert has chosen a given tool and how his conclusions would change if a different tool were used.

Mainstream valuation theory rests on the idea that the intrinsic value of any financial asset, such as a share of corporate stock, is the product of the expected cash flows its owner will receive, on a risk-adjusted basis. Therefore, the value of a business is a function of the money it is expected to make in the future, not the money it has made in the past. This can seem counterintuitive, especially because we are accustomed to hearing businesspeople and financial analysts speak about companies’ values in terms of some multiple of their past revenues or profits. But it is important to remember that these multiples are a reflection of the likelihood that a company’s past performance (good or bad) will continue in the future. So, even when it is defined in terms of past performance, value is still fundamentally about the future.

Business valuation, then, is inherently forward-looking, and this forward-looking orientation distinguishes it from other related disciplines. Accounting, for example, is a system for recording financial transactions that have already happened, so by its very nature it is backward-looking. This is not to say that accounting is not a part of valuation. In fact, accounting information is absolutely necessary for valuation. But financial statements and other accounting data on their own are merely necessary for performing a proper valuation. They are never sufficient.

The business valuation profession recognizes various approaches for valuing a company. Two of these approaches—the “income approach” and the “market approach”—are typically the most useful for determining the value of company as a going concern. Within these approaches there are various methods, but as a practical matter the litigator will generally only encounter three of them.

Under the income approach, the “discounted cash flow” (or “DCF”) method is the one most commonly encountered in litigation matters. A DCF analysis is used to forecast or project a company’s future cash flows—and therefore its intrinsic value—directly. It involves two steps: First, the expert must identify (or produce) reliable projections of the company’s future cash flows. Then, she must “discount” those earnings to their present value in order to take into consideration the time value of money and the risk that the expected cash flows may never materialize.

The DCF method is widely accepted, so much so that an expert must have a good reason for not performing a DCF analysis or risk having his opinions as a whole discarded.[15] Nevertheless, the DCF method is not flawless. For one thing, it is generally disfavored for the expert to create his own projections for the purpose of performing a DCF analysis. It is far more credible for the expert to use projections that were created either by company management or by a third-party for reasons unrelated to the litigation.[16] But not every company has projections that are independent of the litigation matter, so often a DCF analysis simply can’t be done.

Even if projections are available, some caution must be exercised before they are blindly adopted by an expert. For a DCF analysis to have any value, the projections that are used must be both reliable and current as of the valuation date.[17] If favorable projections exist, a dissenting shareholder can almost be certain that the company will claim there was some reversal of fortune between the date of the projections and the date of the valuation that renders the projections useless. Similarly, if the projections were created primarily to attract investors and not to guide management decisions, it is very possible that they are unreasonably optimistic and so can’t be used without some sort of adjustment.[18] It is the litigator’s job to determine, through careful fact discovery, the reliability of any projections before they become the basis of an expert’s opinion. Again, although the DCF method is not always available, it must always be considered.

In contrast to the DCF method (and income approach generally), the market approach is an indirect measure of value. The market approach assumes that markets are reasonably efficient and therefore the prices at which companies (or shares of companies) sell are generally an accurate reflection of their intrinsic value. There are different methods under the market approach, but at a high level they all contain the same basic elements. First, the expert identifies companies that are similar or “comparable” to the company in question. By comparing the market value of these companies to some common financial metric, such as earnings, the expert can create a ratio or “multiple,” which can then use to estimate the market value of the subject. For example, if we wanted to value our fictional company Pin Heads, our expert would first look at companies similar to Pin Heads that have recently sold. If companies similar to Pin Heads have recently sold for three times their annual earnings, our expert can then infer that Pin Heads would also sell for three time its annual earnings.

There are two principal methods for applying the market approach. One uses publicly traded companies as comparables (the guideline public company method), and the other looks at sales of privately held companies (the guideline merged and acquired company method). Both methods present similar challenges. The first of these is identifying which companies, if any, are truly “comparable” to the business at issue. If you are trying to value a company that owns bowling alleys, you aren’t likely to find another chain of bowling alleys that has sold recently, so you will have to cast your net more widely. Would a chain of go-cart tracks be sufficiently similar to the bowling alley business? What about amusement parks? Unfortunately, there is no objective measure of comparability, and you will quickly find that a certain amount of subjectivity is unavoidable. An unscrupulous expert can use his discretion to select comparables that push the data toward a conclusion that favors his client.

The second challenge is creating the right multiple. Even if an expert has chosen comparable companies that are in the same general business as the subject company, they will differ from each other (and the target company) with respect to fundamental financial characteristics, such as their size, growth potential, and riskiness. Each of these differences will affect a company’s future prospects, so the expert cannot just simply calculate the comparable companies’ multiples and then mechanically apply the average to the subject company. Instead, she should try to determine how, and to what degree, the subject company differs from those in her set and adjust her final multiple accordingly. In theory, an expert might consider an elaborate multi-variable regression analysis to identify which fundamental characteristics have an effect on value and the relative significance of each. In practice, this almost never happens, and multiples must be adjusted by less formal methods. Unfortunately, an expert often adjusts his multiples by relying only on his own subjective “judgment.”[19] The opportunities to abuse this process are obvious.

This discussion may seem to paint an unfairly cynical picture of valuation practice. After all, these techniques guide the allocation of enormous sums of capital in the financial markets, and they are regularly accepted as valid by courts in all sorts of cases involving the value of businesses. Nevertheless, the litigator is wise to remember that valuation is ultimately as much “art” as it is “science.”[20]

The role of transaction price and other considerations.

While a dissenter’s case almost always involves a battle of valuation experts, one factor that can never be ignored is the transaction price—that is, the price that the buyer has actually paid to acquire the business in question. If markets were perfectly efficient, with all parties having perfect knowledge and negotiating at arm’s length, we would expect the purchase price to track a company’s intrinsic value very closely, if not match it exactly. And even without perfect efficiency, market forces do push transaction prices toward intrinsic or fair value. Courts recognize this, and they often rely heavily on transaction price when assessing fair value.

The Delaware courts, for example, have repeatedly held that “the fact that a transaction price was forged in the crucible of objective market reality (as distinguished from the unavoidably subjective thought process of a valuation expert) is viewed as strong evidence that the price is fair.”[21] The apparent objectivity of transaction price has led more than one court to discount the opinions of the parties’ experts entirely and rely solely on transaction price when determining the fair value of a company.[22]

Not every deal, however, will lead to a transaction price that approximates fair value. For example, the magic of finance often creates opportunities for “synergy”—that is, where the combination of two companies is more valuable than the sum of its two parts standing alone. Synergy is often a prime motivator in acquisitions, and if a buyer can create synergies by acquiring the target company, it may be willing to pay more than what the target company, standing alone, is worth to its current owners.[23] In that case, the deal might result in a transaction price that is higher than the target’s intrinsic value.

Conversely, a company’s controlling shareholders might be willing to accept less than fair value for the company as a whole if they can structure the deal so they benefit in some way other than receiving their share of the transaction price (for example, by entering into valuable personal contracts with the buyer). In that case, the deal might result in a transaction price that is lower than the target’s intrinsic value. In the end, transaction price can be very important evidence of fair value, but only “so long as the process leading to the transaction is a reliable indicator of value and [transaction]-specific value is excluded.”[24]

Again, the dissenter’s rights statute does not account for transaction price or, for that matter, any other factor that may weigh on the issue of fair value. But as a practical matter transaction price looms over every judicial appraisal of fair value. Therefore, from the shareholder’s perspective, it isn’t sufficient just to assert that the company was worth more than what was paid for it, even if that assertion is supported by a gold-plated expert report. The shareholder must also carry the implicit burden of showing there was some defect in the transaction, such as self-dealing, that resulted in a sale for less than fair value.

Better yet, the dissenter will also prove how the missing value was diverted, in whole or in part, to the controlling shareholders. If the controlling shareholders accomplished this through contracts with the buyer, the dissenter should be prepared to offer expert testimony regarding the true value of the controlling shareholders’ promises under the contract. (This may require the dissenter to retain a second expert with expertise in executive compensation or related areas.) Again, none of these elements are literally required by the dissenter’s statute. But without this showing, it is hard for even the best expert opinion to prevail over transaction price.

This paper can only scratch the surface of the issues that will confront the litigator in a dissenters’ rights case. For understanding valuation in general, Investment Valuation by Aswath Damodaran and Financial Valuation by James Hitchner are both essential resources. Likewise, The Lawyer’s Business Valuation Handbook by Shannon Pratt and Alina V. Niculita is useful for understanding how these principles are applied in business disputes.

If you have any questions about dissenters’ rights or the fair value of your share in a company, please contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 to discuss further.

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[1] See Note, Freezing Out Minority Shareholders, 74 Harv. L. Rev. 1630 (1961); Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 3 fn. 1 (1985)(discussing squeeze-out mergers).

[2] The history and theory behind dissenter’s rights is treated at length in Barry M. Wertheimer, The Purpose of the Shareholders’ Appraisal Remedy, 65 Tenn. L. Rev. 661 (1998).

[3] O.C.G.A. § 14-2-1301 et seq. (corporations); O.C.G.A. §  14-11-1001 et seq. (LLCs). Because the two statues are substantively identical, we will refer only to the Business Corporation Code.

[4] O.C.G.A. § 14-2-1302.

[5] O.C.G.A. § 14-2-1320 to 1324.

[6] O.C.G.A. § 14-2-1325.

[7] O.C.G.A. § 14-2-1330(b).

[8] O.C.G.A. § 14-2-1301(5).

[9] Blitch v. Peoples Bank, 246 Ga. App. 453, 457 (2000).

[10] Id.

[11] Delaware in particular has a well-developed body of case law on the issue of fair value in the context of dissenter’s rights. Further, the Georgia statute is based on the original Model Business Corporations Act, the comments to the Model Act are useful as guidance. Blitch v. Peoples Bank, 246 Ga. App. 453 (2000). Although the Model Act has been amended since the Georgia statute was passed, the Georgia Court of Appeals has even looked to the changes in the Model Act for guidance. Id.

[12] See Cede & Co. v. Technicolor, Inc., 542 A.2d 1182 (Del. 1988)(equating “fair value” and “intrinsic worth”). In Atlantic States Construction, Inc. v. Beavers, 169 Ga. App. 584 (1984), the Georgia Court of Appeals adopted intrinsic value as the standard for fair value. However, that opinion is only physical precedent, and it has been abrogated in other respects by later opinions. Blitch, 246 Ga. App. at 457 fn. 21.

[13] See Cede & Co., 542 A.2d at 1188 fn. 8 (noting that market price may not reflect intrinsic value).

[14] The current version of the Model Business Corporations Act, for example, provides that fair value is to be determined “using customary and current techniques generally employed for similar businesses in the context of the transaction requiring appraisal.” MBCA, § 13.01(4)(ii).

[15] See, e.g., Lippe v. Bairnco Corp., 288 B.R. 678, 689 (S.D.N.Y. 2003) aff’d, 99 F. App’x 274 (2d Cir. 2004); In re Med Diversified, Inc., 334 B.R. 89 (Bankr. EDNY 2005).

[16] See In re ISN Software Corp. Appraisal Litigation, 2016 WL 4275388 at *5 (Del. Ch. 2016)(experts’ creation of projections “inherently less reliable than using long-term management projections”); In re Radiology Assocs., Inc. Litig., 611 A.2d 485, A.2d 490–491 (Del. Ch. 1991)(discussing need for projections not created by expert).

[17] See Highfields Capital, Ltd. v. AXA Financial, Inc., 939 A.2d 34 (Del. Ch. 2007)(favoring DCF that relied on current management projections over analysis that relied on outdated projections).

[18] See In re Appraisal of Ancestry.com, Inc., 2015 WL 399726 (Del. Ch. 2015)(rejecting valuations based on projections that were not created in the ordinary course of business, but only to attract buyers).

[19] See, e.g., Merion Capital, L.P. v. 3M Cogent, Inc., 2013 WL 3793896, at *23 (Del. Ch. 2013)(rejecting expert’s choice of multiples based only on professional “judgment call”); In re IH 1, 2015 WL 5679724 (D. Del. 2015)(rejecting opinion of expert who made “judgment call” to reduce comparable multiples by 50% without any explanation).

[20] See, Matter of Shell Oil Co., 607 A.2d 1213, 1121 (Del. 1992)(“Valuation is an art rather than a science.”); In re Smurfit–Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *24 (Del. Ch. 2011)(“[U]ltimately, valuation is an art and not a science.”)

[21] Van de Walle v. Unimation, Inc., 1991 WL 29303, at *17 (Del. Ch. 1991).

[22] E.g., Union Illinois 1995 Investment L.P. v. Union Financial Group, Ltd., 847 A.2d 340 (Del. Ch. 2003).

[23] M.P.M. Enter., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999).

[24] Union Illinois, 847 A.2d at 357.

Think your workers are independent contractors? Think again.

Posted on by Ben Byrd

The “ride sharing” company Lyft is facing a class-action lawsuit by its drivers, who claim the company misclassified them as independent contractors when they should have been classified (and paid) as employees. Lyft thought it had reached a settlement with the drivers for over $12 Million, but the federal judge overseeing the case refused to approve the settlement, expressing concern that the settlement amount was too low. The parties have now resubmitted their proposal to the court–this time for $27 Million. But even that eye-popping amount is nothing compared to the $100 Million that Lyft’s competitor, Uber, recently offered to pay to settle its own misclassification case. (Uber’s offer was rejected by the judge in its case as well, and the case is still pending.) What can we learn from these start-ups’ recent troubles?

The dollar amounts involved in the Lyft and Uber cases may be unusual, but claims that a business has misclassified its employees as independent contractors are not. Many businesses, it seems, routinely mistake their employees for contractors – and end up paying the price for this mistake.

“Employee” or “Contractor”: The Choice Is Not Up To You.

Most businesses understand that—all things being equal—it is usually cheaper and easier to treat a worker as an independent contractor. So it makes economic sense that businesses want to classify as many workers as possible as contractors. Unfortunately, whether a worker is an employee or an independent contractor is a legal question, and the law does not leave the answer to the employer’s discretion. In short, simply calling your workers “contractors” does not make it so.

What Difference Does the Employee / Contractor Distinction Make?

Not only is the employee / contractor distinction not discretionary, it touches many fundamental aspects of the employment relationship, so it is critical that your organization get it right. Getting it wrong can affect:

  • Payroll Taxes. Federal tax laws require employers to withhold incomes taxes, and to withhold and pay Social Security, Medicare, and other payroll taxes on wages paid to employees. Generally, you do not have to withhold or pay any taxes on payments to independent contractors.
  • Minimum Wage and Overtime. Under the federal Fair Labor Standards Act, employees are entitled to minimum wage and overtime benefits; contractors are not. The same is generally true in states that have their own minimum wage and overtime laws.
  • Unemployment Benefits. Under both federal and Georgia law, employees are entitled to unemployment benefits, while contractors are not. These benefits are funded by a tax paid by employers on wages paid to employees, but not on payments to independent contractors.
  • General Liability. A business will normally be liable for the negligence of its employees, but not its contractors. Similarly, your liability insurance will normally not cover you for damages caused by your contractors.
  • Workers’ Compensation. Employees who are hurt on the job are entitled to workers’ compensation benefits. By the same token, the injured employee cannot sue her employer for negligence. The reverse is true for contractors: they do not receive workers’ compensation benefits, and their employers are not immune from suit. In turn, a business’s workers’ compensation insurance premiums are determined in part by the number of its workers that are classified as employees.
  • Unionization and Collective Bargaining. Whether your workers are your employees will determine whether federal labor laws apply to your relationship.
  • Application of Other Federal Employment Laws. Most federal employment laws, such as the Family and Medical Leave Act, only apply to businesses that have more than a given threshold of employees. Whether these laws apply to your business will depend in part on whether your workers are counted as employees or contractors.

What is the Test?

If the employer’s wishes don’t determine which workers are employees and which are contractors, what does? That depends on what aspect of the employment relationship is at issue. But generally, there are two tests a court will use to determine a worker’s status: the “right to control” test and the “economic dependence” test.

The “Right to Control” Test.

Under the law of most states, including Georgia, it is usually said that when the employer retains the power to control the “time, place, or manner” of the worker’s activities, the worker is an employee, not a contractor. Some examples of this control include setting work hours, assigning a place to do the work, and dictating how the work is performed. Note that under this test a worker is your employee if you have the right to control his work, even if you never actually exercise that right.

A common mistake is to assume that a part-time or seasonal worker is a contractor. Again, if you retain the right to control the work, your worker is mostly likely an employee–albeit a part-time or seasonal one.

The control test can have unexpected consequences. For example, the National Labor Relations Board recently ruled that workers hired by your sub-contractor can be considered your employees if the agreement with your sub gives you the right to exercise control over the workers (such as, for example, by giving you the right to specify work hours or locations for your sub’s workers, to remove your sub’s workers from the project, or to set other minimum qualifications or requirements for performing the work). As a result, the workers can be considered your employees (and subject you to federal collective-bargaining laws) even if that control was only exercised “indirectly” through your contract with the sub.

The “Economic Dependence” Test.  

The control test is widespread, but it isn’t universal. Most significantly, the federal Fair Labor Standards Act, which creates minimum wage and overtime obligations, broadly defines an “employee” as “any individual employed by an employer”, and further defines “employ” as “to suffer or permit to work”.  The United States Supreme Court has held that Congress intended this language to be construed more broadly, and to include more workers, than the right to control test. Working from the statute and the Supreme Court’s opinion, the federal Department of Labor, which enforces the Fair Labor Standards Act, has developed its own test: A worker is an employee if she is “economically dependent” on her employer.

But, you might reasonably ask, when is a worker “economically dependent” on her employer? To answer that question, we have to look at several factors, including:

  • Do you control the time, place and manner of the worker’s efforts?
  • Does the worker stand to profit if the venture is successful and, conversely, to lose money if it is a failure–or does he stand to make the same pay for the work done, regardless of the outcome?
  • Does the worker buy his own equipment and materials, or do you provide them for him?
  • Does the worker possess any special skills?
  • Is your agreement with the worker long-term and relatively permanent?
  • How central to your business is the service that the worker is providing?

None of these factors is controlling, however, and they must be considered in the overall context of the relationship. Unfortunately, there are very few bright lines to guide an anxious employer. In the end, though, we can be certain that current state and federal laws are intended to classify the vast majority of American workers as employees, not contractors.

So What Do We Do?

As Lyft’s and Uber’s experiences show, the consequences of misclassifying workers can be significant, maybe even catastrophic, to your business. Nevertheless, it is possible to structure these relationships so that your workers are legitimate independent contractors. But it is much safer—and far less costly in the long run—to take these steps at the outset of the relationship than it is to wait until after an investigator or a court has gotten involved.

Before you decide to classify a worker as a contractor, always consult your legal counsel. If you have questions regarding how to properly classify your workers, contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 for more guidance.

Background Checks on Job Applicants: 3 Things You Need to Know

Posted on by Ben Byrd

Are you using criminal background checks as part of your hiring process? If so, your use of them is subject to federal law. We can show you how to avoid some common – and dangerous – pitfalls when using background checks to safeguard your business.

Georgia law requires every employer to use “ordinary care” to ensure that its employees don’t pose an unreasonable risk of harm to others. Georgia courts have held that, at least sometimes, ordinary care will require an employer to perform a background check before hiring a potential employee. For example, in 2007 our Court of Appeals held that a home-security company that knew its salesmen would be entering customers’ homes as part of their job could be held liable for failing to run a background check on a salesman who later attacked a customer. Underberg v. Southern Alarm, Inc., 284 Ga. App. 108 (2007). Given the potential for liability, it isn’t surprising that many employers run criminal background checks on potential employees as a matter of course. But even though it might be required, running a background check on a potential hire carries its own risks if you fail to comply with applicable law governing how you procure and use background checks in the hiring process.

Before you use a background check in your hiring process, here are three things you need to know:

  • Federal law governs how you obtain the background check and what you do with it;
  • You have to get the potential employee’s consent before you begin; and
  • You have to take certain actions both before and after you reject the potential employee.

One: Federal law applies when you run a background check on a potential employee.

Even though state law may require a company to perform a background check, federal law imposes a completely independent set of requirements. That is because of the federal Fair Credit Reporting Act (or “FCRA”). 15 U.S.C. § 1681 et seq. To judge by its name, you might think the FCRA only applies to credit reports, not criminal background checks. You would be wrong. The FCRA is worded so broadly that many other types of reports fall within its purview. The statute applies to almost any commercially prepared report about a person’s “character, general reputation, personal characteristics, or mode of living” if the report is used to determine that person’s eligibility for employment. That statutory definition includes criminal background reports. See Farmer v. Phillips Agency, Inc., 285 F.R.D. 688 (N.D. Ga. 2012).

Two: You have to get the applicant’s permission before you get the report.

The FCRA requires a company to take specific steps any time it uses a background report in the hiring process. Before you get a background check, you must:

  • Tell the potential employee in writing that you intend to get a background report and get the applicant’s written permission to do so before ordering the report. And,
  • Certify to the company that is providing the report that you have complied with the FCRA’s requirements that you disclosed your intent to get the report and you got the applicant’s permission before you obtained the report. You also have to certify that you will comply with the FCRA’s dispute-resolution requirements, which are described below.

Three: You have to give the applicant a chance to respond to the report before you reject the applicant, and then you have to provide additional notice once you make the decision.

Once you get the report, the FCRA controls how you use it. Before you reject an applicant based on a background report, you must give the job-seeker:

  • A copy of the background report that you are relying on;
  • A summary of the employee’s rights under the FCRA prepared by the federal Consumer Financial Protection Bureau (CFPB), which include the right to dispute with the reporting agency any incomplete or inaccurate information contained in the report (a copy of the summary can be found on the CFPB’s website at http://files.consumerfinance.gov/f/201410_cfpb_summary_your-rights-under-fcra.pdf); and
  • Five days to raise any objection to the contents of the report.

If you have met these requirements, you can then reject the potential employee’s application. But your obligations don’t stop there. Once you have made the decision to reject the applicant, you must notify the applicant that you have declined him on the basis of the report and also provide him with:

  • The name, address, and phone number of the consumer reporting agency that supplied the report (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis);
  • A statement that the consumer reporting agency that supplied the report did not make the decision to reject the applicant and cannot give the applicant the specific reasons for that decision; and
  • A notice of the person’s right to dispute the accuracy or completeness of any information the consumer reporting agency furnished, and to get an additional free report from the agency if the person asks for it within 60 days.

Be aware that these requirements apply if the report has played any role in your decision to reject the applicant. The report does not have to be the only factor in your decision, or even the primary one.

If you fail to meet any of these requirements, the applicant can sue you. What’s at stake if you get sued? Potentially a lot. At a minimum, the rejected applicant can recover any actual damages that she suffered as a result of the violation. You should be aware that “damages” include the applicant’s attorneys’ fees and court costs, which often far exceed any economic damages that the applicant directly suffered. Remarkably, actual damages can also include emotional distress. So even if the applicant did not suffer any measurable economic harm, you can still face a claim for substantial damages. Even worse, if a court finds that your failure to comply with the statute was “willful,” it can impose additional penalties, including punitive damages.

These types of suits are surprisingly common – one Atlanta law firm that specializes in FCRA cases has filed over 800 of these suits on behalf of rejected job applicants. To make matters worse, any liability you face for a failure to comply with the FCRA may not be covered under your business’s general liability insurance policy. To be covered by insurance, you will almost always need a separate employment-practices liability policy, and even then you will need to confirm that your specific policy provides coverage for violations of the FCRA. At a minimum, you will need to carefully follow the procedures described in the insurance contract regarding giving notice of the claim to the insurer.

As in so many areas of the law, an ounce of prevention is worth a pound of cure. If you have any doubts about your procedures or the state of your business’s insurance coverage when it comes to the use of background checks, contact Ben Byrd at Friend, Hudak & Harris for more guidance.