An ounce of prevention is worth a pound of cure.
That maxim could apply to many business issues, including reading and understanding the fine print of provisions before signing contracts, keeping abreast of changing labor laws, or ensuring ownership of intellectual property central to startups, according to a handful of area lawyers. The thinking: A little due diligence and legal review early on can prevent sometimes-expensive headaches later.
425 Business queried four lawyers with Eastside offices or clients about some of the issues business owners and managers should know based on what they encounter. One theme was constant: Monitor employment rules.
“Business owners really need to understand employment laws and pay attention to them to the same extent they do with prioritizing other things in their businesses,” said Kate Tylee Herz, who focuses on employment counseling at Davis Wright Tremaine LLP in Bellevue.
One of those issues is the state’s new Paid Family and Medical Leave (PFML) law, which will offer employees a partial wage reimbursement while on leave for qualifying events, including baby bonding or family sicknesses, starting Jan. 1. Leave can reach 12 to 18 weeks. Employers and employees began bankrolling the fund this year through payroll taxes.
Qualifying leave conditions extend beyond the federal Family and Medical Leave Act (FMLA), “so we’re going to see more expanded use with PFML,” Herz said, adding, “There’s never been any paid leave under the FMLA — that’s always been unpaid leave.”
She encourages businesses to learn about Paid Family and Medical Leave and understand its nuts and bolts.
“It’s complex, and it intersects with a lot of different laws,” she said.
Paid Family and Medical Leave is among employment issues that can trip up small businesses, especially new ones, particularly if they’re trying to do their own accounting work, said Howard Bundy, founder and managing member of Bundy Law Firm in Kirkland.
“It would be an easy one to miss,” he said.
Bundy; Herz; and Michelle Bomberger, CEO and managing attorney at Equinox Business Law Group in Bellevue, also cited new restrictions regarding noncompete agreements taking effect Jan. 1.
“What they’ve done with this new law is they’ve basically said if someone is making less than $100,000, you can’t put a noncompete in place at all,” Bomberger said. “If it’s over $100,000, the maximum is 18 months, and there’s more nuance to it than that, but that’s the core of it.”
Other recent changes include amendments to the state’s Equal Pay and Opportunities Act, which includes prohibiting asking applicants about salary history as of last July.
Another recruiting heads-up: Employers can’t ask about criminal history until later in the application process, Bomberger said, noting Washington’s place among states often leading employment initiatives.
“Those things are happening on a very regular basis in our state, and if you’re not reviewing your employee handbook, at least annually, you’re probably behind,” she said.
Employee count also matters on whether and how certain employment laws apply, Herz said. Employers who might be startups or growing significantly should monitor how they’re classifying employees, she said. As they grow, they should ensure they’re not misclassifying people as independent contractors who should be classified as employees, Herz said. Issues also include proper classification as exempt or nonexempt.
Bundy, whose primary work is franchise law, also cautioned people considering franchises to factor in wage requirements in Washington. Here, minimums are higher than some parts of the country, where a franchisor may be based and wage-cost models lower.
It’s one part of the important due diligence someone looking to buy a franchise needs to consider, he said. While marquee franchises in good locations can be attractive, many clients Bundy sees are buying franchises with lower upfront investments with business-survival rates in the first five years similar to independent businesses — about 15 percent.
The same risks are at play: undercapitalization, lack of training and systems, and market changes, Bundy said.
“Understand, do your due diligence,” he said. “Don’t take all of your legal advice and business advice from the franchise salesman, no matter how charming they are.”
The same due diligence applies to buying any business, Bundy said. Buyers need to be aware of reasons behind any recent declines in business, disruptors in the industry, and ask sellers to disclose what’s occurring, he said.
“Trust, but verify,” he said. “A few dollars spent on legal fees putting together a good due-diligence program and a good purchase agreement may save you a bankruptcy down the road.”
Related, Bomberger sees a need for careful contract review among businesses. Beyond detailing what will be done for what price, businesses should carefully check what may look like standard provisions.
“Those provisions, as much as they’re ‘boilerplate,’ they’re all unique,” she said.
Risks to one’s business, including limitation on liability, indemnity, and other provisions, need to be reviewed, she said.
“Obviously, if you’re getting a contract from someone else, it’s probably built to protect them, but are those built to protect me?” she said.
For example, a small graphic design firm doing a logo for a large tech company bound by data-privacy requirements that isn’t touching the tech company’s data could ask to strike data privacy provisions rather than ignore them by thinking they don’t apply.
Lee Schindler, partner in the emerging companies and venture capital group at Perkins Coie, said recurring issues he sees among tech and life sciences clients include ownership of intellectual property (IP), “making sure the company has appropriately acquired the rights to use the IP that they need to create the business they’re trying to create.”
In most cases, the IP’s being developed by the founders, employees, and consultants, so it’s key to have the right types of contractual IP assignments in place, he said. For example: assigning to the company ideas related to the business or work created while working for the business.
One IP issue that sometimes arises are claims on the IP from a prior employer. If someone has an idea or starts work on it while he’s employed by someone else — and what the person is creating relates to work for a prior employer or uses any of its company resources — then the prior employer might own that IP, Schindler said.
“That’s an issue that has to be navigated carefully in some circumstances, and sometimes it means you can’t launch the business you want to launch without getting permission or some sort of release from the prior employer,” he said.
Other issues can occur at the formation stage. Mistakes Schindler sees range from setting up the wrong entity, one that doesn’t make sense from a tax perspective for the business being formed or that is unattractive to the types of investors that want to fund the company, to not documenting the equity allocations in the company, he said.
Uncle Sam needs to be considered, too.
“The acquisition of ownership in these companies has tax implications, and as the companies become more valuable over time, those tax implications grow,” Schindler said.
For startup founders or employees receiving restricted stock, a common way for shares to be issued at a company’s earliest stages, it’s important that share recipients file an 83(b) election with the IRS, he said.
That’s a choice to be treated for tax purposes as acquiring the shares upfront when the shares aren’t worth much instead of being taxed on the shares as they vest over time and as the value mostly grows, he said, noting the 30-day window to file the 83(b) from time of share acquisition.
“It’s a choice, but in my world it’s kind of a choice where there’s only one right answer,” Schindler said.