My practice will continue to focus on small business law, and I plan to expand into areas of employment, labor, and estate planning.  For more information about WCS, visit the firm Web site at http://wcslawfirm.com/.

Something as seemingly innocuous as screening and interviewing potential employees needs to be approached carefully.  Numerous state and federal statutes exist to protect employees and prospective employees from illegal discrimination.  Do your homework!  And follow this little axiom: Don’t ask any question to a potential employee unless it’s relevant to the job he or she will perform, ESPECIALLY if the question relates to a protected class or status.  And after you’ve hired someone, do not, do not, do not, make advancement decisions or create policies that disfavor or disadvantage members of a protected class.

And as long as we’re putting important things in bold: remember that unlike most federal statutes, Oregon law prohibits discriminating against protected classes even if you only have one employee.  New employees are great, but disgruntled employees or rejected interviewees who have grounds to sue you are not!  This section discusses protected classes that you need to be aware of when making hiring and advancement decisions and in crafting employment policies.

Protected classes under federal and Oregon law

The protected classes outlined under Title VII of the 1964 Civil Rights Act kick in when an employer employees 15 employees.  The Oregon protections, however, kick in after the first employee (I know I already mentioned this, but it’s important).

Federally protected employee classes under Title VII

• Race
• Color
• Gender
• National Origin
• Religion
• Association with the above protected classes
• Retaliation (you cannot take adverse action against an employee who objects to unlawful employment practices, files a complaint, or otherwise exercises his or her rights under federal law).

But wait, there’s more federally protected employee classes

• Disability under the ADA
• Military and veteran’s status under the USERRA (applies even if you only have one employee)
• Age if the applicant or employee is over 40 (must have over 20 employees to be applicable)
• Family and medical leave under FMLA (over 50 employees)

Oregon protected employee classes

• Race
• Color
• Gender
• National origin
• Religion
• Sexual orientation and gender identity
• Association with the above protected classes
• Retaliation
• Age if over 18
• Oregon family and medical leave (25 or more employees)
• Physical or mental disability (six or more employees)

Additional Oregon statutory protections for employees:

• Marital Status
• Family Relationship
• Prohibition on Genetic Screening and Brain-wave Testing
• Right to Testify at Employment Division Hearings
• Access to Employer-owned Housing
• Right to Report Health Care Violations
• Volunteer firefighter leave, ORS 476.574
• Expunged Juvenile Record
• Prohibition on Polygraph Exams
• Limits on Breathalyzer and Blood Alcohol testing
• Leave to Donate Bone Marrow
• Victims of Domestic Violence
• Leave for Victims of Domestic Violence
• Injured Workers (six or more employees)
• Leave for spouses of military service members called to active duty (in companies with 25+ employees)
• Military services member status
• Veterans status
• Veterans’ preference in public employment
• Child support garnishment, ORS 25.424

1. Fast;
2. Cheap;
3. Informal;
4. Empowering; and
5. Confidential

Frankly, I have mixed feelings about contracting for mandatory mediation in business contracts.  Mediation is great for resolving business contract disputes between rational people, especially if they have a history of dealing with each other and plan to continue dealing with each other into the foreseeable future (a retail business and a supplier, for example).  But, if both parties are already too far apart on the issue of performance, then neither party is likely to come to mediation with an open mind, making the process something of a farce.

Mediation pros

Confidentiality

I’m going to start with number 5 on Mr. Christiansen’s list, because it might be the most compelling.  In Oregon, and anywhere else for that matter, if you file a suit in a county circuit court, the pleadings and transcripts of hearings and trials are public records.  Sometimes you don’t want to advertise your disputes.  Whether it’s personal, cultural, or purely for business reasons, mediation is a way to resolve problems without filing anything public.   In the first place, mediation, like all other settlement negotiations in Oregon, are not admissible in court under ORS 36.222, so you needn’t worry about your mediation efforts being used against you later.  Secondly, and more importantly if you really value discreteness, you and the other party can agree that all mediation communications and the terms of the agreement are confidential as provided in ORS 36.220.

Expediency and cost

Mediation can be resolved much quicker than full-blown litigation.  The list of private mediators in Oregon is lengthy, and you can certainly find one to handle your business contract dispute without much delay.  Although you’ll likely need multiple sessions and have to pay the mediator for his time, you’re still going to spend far less and get an agreement reached (assuming both parties are willing to negotiate in good faith) much more quickly than you would through arbitration or the circuit courts.  10 hours of mediation at $150 an hour is $1,500 or $750 for each side.  The filing fee alone for claims of $10,000-$50,000 in Multnomah County is $197; bump that up to $335 if you’re seeking damages between $50,000 and $149,000; and add $50 for each motion; oh, and of course there are the usual attorney fees, which average $230 per hour in Oregon.  10 hours of legal fees at that rate would be $2,230.  Do the math.

Informal

If you’ve never had the privilege of seeing the inside of a courtroom, let’s just say that mediation doesn’t have quite the same stuffy, formal, rigamarole.  You won’t be questioned and cross examined by attorneys.  In fact, you probably won’t even have attorneys present at the actual mediation sessions.  You won’t be sworn in, and there won’t be a judge or jury.  You can speak frankly and the mediator will do his best to facilitate communication.  Mediation sessions are usually done at the mediator’s office, which is a little less intimidating than the inside of the courthouse.

Mediation cons

Requires an open mind

Successful mediation requires two sides to open-minded, respectful, and willing to negotiate in good faith.  In a high-conflict case with irrational parties, mediation probably won’t be very successful.  This is something to consider before you commit yourself to mediation in every contract your Oregon business enters into.  You may want to consider limiting the issues subject to mediation so that an obvious material breach like non-payment  needn’t be subject to a fruitless negotiation.

Mediation is non-binding

A mediator does not have the same authority as an arbitrator or a judge.  Mediators cannot decide for you and, until the agreement is formalized into a contractual settlement for consideration, the results of mediation are non-binding.  This means that if you come to an understanding during mediation contingent upon the parties’ lawyer drafting an agreement and something falls through, your agreement isn’t enforceable.

The verdict

Pre-suit mediation can, and that’s a qualified can, be a good idea for your standard Oregon business contracts.  The downside is minimal, and possible quick, cheap, and confidential resolution make mediation a good first step in any contract dispute.  But be careful to handcuff yourself to mediation in every contractual agreement over every term of the contract.  The last thing you want is to drag someone into mediation when the only dispute is about when they’re going to pay for the service or goods you’ve already provided.  In that situation, anything standing in the way of you and a favorable arbitration result or judgment is just a hassle.

Small business breakups are a lot like divorce.  One minute things are going good, you and your business partners see eye-to-eye, and the next thing you know all hell has broken loose and you’re fighting over every last scrap of the business.  Poor planning for disagreements over the management of an LLC, particularly a two-member LLC with 50/50 ownership and voting rights, can be disastrous.  Without a solution to management deadlock, dissolution of the LLC may be the only choice.

An all too-common hypothetical: friends doing business don’t plan for deadlock and the business dissolves as a result

Two friends, Joe and Bob, start up an Oregon LLC.  They file their articles of organization with the Secretary of State Corporation Division online, and create Hypothetical Restaurant LLC (this is a hypothetical, so the name seems appropriate).  They’ve been friends for years, agree on all aspects of the new business, and can’t wait to get started.  And here’s where they went wrong:

• They don’t draft an operating agreement or a buy-sell agreement, believing that they’ll be able to work any disagreements out amongst themselves.
• They don’t consult with an Oregon small business lawyer because they can’t envision a situation where they won’t be able to figure things out for themselves.
• They are now subject to the default provisions of the Oregon Limited Liability Company Act.  Each member has a proportional ownership of the business at 50 percent, and each has an equal say in how the business is run.

Let’s say Hypothetical Restaurant LLC’s two members face the following dilemma: after opening 3 years ago they were a smash hit.  Business was booming, and they opened up a second location.  They secured a loan, and each of them is a personal guarantor for the loan.  They signed a 5-year lease on the new space.  After another two years, the second location isn’t performing.  They’re losing money by staying open and it’s draining their savings.  Bob wants to close down and sublet the space to recoup costs, but Joe wants to ride out the down cycle and wait for the second location to become more profitable.  Our two friends, who have never had a disagreement over the future of the business until now, are at a management deadlock.

Without deadlock provisions or a suitable buy-sell arrangement, dissolution rears its ugly head

The problem is, the Oregon Limited Liability Company Act doesn’t provide guidance or provisions that apply to deadlock.  LLC members are free to contract for whatever legally acceptable provisions they want, and these provisions can be put into an operating agreement that governs the LLC.  When Oregon LLC members fail to draft their own deadlock provisions, and they ultimately arrive at a fork in the road and can’t come to agreement, the business comes to a grinding halt.  Common operating agreement mechanisms to resolve deadlock include mediation or arbitration.  A buy-sell agreement can also assist in planning for the exit of one partner who no longer wishes to continue in the business because he wants to take it in a different direction.

In the case of our two friends, neither one can afford to buy the other out, and neither one wants to go along with the other’s plans.  They each have an equal say in how the business is run, and they have nowhere to go but to court.  ORS 63.661(2) provides that judicial dissolution of an LLC is appropriate when it is “not reasonably practicable to carry on the business of the limited liability company in conformance with its articles of organization or any operating agreement.  If two members are at odds to the point of management deadlock with no governing provisions to resolve deadlock, judicial dissolution is the likely result as soon as one partner gives up trying to convince the other of the error of his ways.

ORS 63.661 Grounds for judicial dissolution.

The circuit courts may dissolve a limited liability company:

(1) In a proceeding by the Attorney General if it is established that:

(a) The limited liability company obtained its articles of organization through fraud; or

(b) The limited liability company has continued to exceed or abuse the authority conferred upon it by law.

(2) In a proceeding by or for a member if it is established that it is not reasonably practicable to carry on the business of the limited liability company in conformance with its articles of organization or any operating agreement.

(3) In a proceeding by the limited liability company to have its voluntary dissolution continued under court supervision. [1993 c.173 §66]

1. Check the Oregon Corporation Division’s Business Registry to see if your desired LLC name is available.
2. Decide if your LLC will be member-managed or manager-managed.
3. File your articles of incorporation with the Oregon Secretary of State at filinginoregon.com.
4. Apply for an employer identification number from the IRS via their online application process.
5. Apply for applicable Portland/Multnomah County business licenses (or other applicable city and counties)
6. Draft an operating agreement.
7. Draft a buy-sell agreement.
8. Obtain necessary insurance and bonds.
9. Put all new contributions into the name and control of the LLC.
10. Research applicable zoning laws.
11. Visit the Oregon Workers Compensation site and set up an account if you plan of having employees.
12. Draft an employee policy manual (not a requirement, but probably a good idea).

The above list is not exhaustive, but it’s a good outline of the steps required to start your new Oregon LLC.  Now go forth and channel your inner entrepreneur!

See also:

1. IRS checklist for starting a business
2. Portland new business guide
3. Oregon license information

If you answer too many of these questions with a yes, you’ve got yourself some employees!

1. Do you control the means and manner of the work?
2. Do you directly supervise your workers?
3. Do workers perform their jobs on site at your business?
4. Do your workers only work for you?
5. Do you set the wages and hours for your workers?
6. Do you provide your workers with materials and supplies for the job?
7. Do you retain the right to terminate your workers at will with no contract describing the work to be done?

Although no one factor is determinative, if you retain the right to direct and control the work being performed, you’re probably an employer and your worker is an employee.  The Oregon statute defining independent contractors is ORS 670.600.

Buy-sell agreements may be the most important documents Oregon small business owners create upon forming a new company.  I’ll let that sink in for a moment… Buy-sell agreementss are contracts between business owners that spell out the rights each owner to transfer his interest in the business.  Buy-sell agreements generally come in three flavors:

1. Redemption Agreements.  Agreements where the company has the option or obligation to purchase an owner’s interest in the company upon the occurrence of certain triggering events (e.g. retirement, death, disability, or divorce).
2. Cross-Purchase Agreements.  Agreements where each owner has the right or obligation to purchase another owner’s interest upon certain triggering events.
3. Hybrid Agreements. Agreements that contain some combination of redemption and cross-purchase terms.

Why you want need a buy-sell agreement to for your closely held Oregon business

Buy-sell agreements are particularly important in small and closely held businesses because they provide answers to questions that you’re not asking at the beginning of a business venture, but almost certainly will have to ask at some point down the road, such as:

1. When can an owner transfer his interest in the company?
2. Who can an owner transfer his interest in the company to?
3. How is an owner’s interest in the company valued?

Buy-sell basics

Give the company and remaining owners the option to buy back remaining shares: the right of first refusal. The backbone of most buy-sells is the right of first refusal.  When one owner wants to sell, the agreement provides that the company or other owners have the right to purchase the selling owner’s interest before any other buyer.  So if your Oregon LLC has three members, and Member A wants to sell his interest in the company to Buyer for $25,000, Member B and Member C have the right to purchase Member A’s interest at $25,000 first.

Ownership transfers can be disruptive, so limit them. By their very nature, small businesses are, well, small.  They’re owned and operated by a select few, usually friends, family, or longtime business partners.  Bringing in unknown third parties to the delicate ownership ecosystem of a small business can be disruptive.  A well-drafted buy-sell agreement between the owners of an LLC or other small business entity can define when a business owner may sell his interest and to whom he may sell it to, which limits surprises and the potential for deadlock.  Buy-sells can also limit transfers between owners to preserve each original owner’s proportionate ownership.

You don’t need to limit all transfers, just some of them. For practical and legal reasons (read: you probably can’t do it anyway), a buy-sell needn’t forbid all transfers of ownership in a company. Buy-sells routinely define a class of transferee whom an owner may sell to without restriction.  This type of agreement preserves unrestricted transfer rights to a limited group of potential buyers such as certain family members in a family owned business. And all buy-sell agreements allow an owner to sell to another party if the remaining business owners consent.

Clearly define the events that trigger buy-sell agreement terms.  This is the meat and potatoes of the buy-sell agreement.  Owners need to know when/if a buy-sell provision applies, so be specific.  Both voluntary and involuntary transfers can be triggering events.  Transfers can be sales, gifts, exchanges, contributions, devises, ledges, bankruptcy transfers, divorce settlements, foreclosures, or anything else that would cause a change in the current ownership percentage.  Draft accordingly.

Name your price and payment terms. If you’ve never tried, valuing a small business can be exceedingly difficult, so don’t punt on this one.  An otherwise good buy-sell can fall apart if price and payment terms aren’t defined properly.  It’s great to to know who can buy out whom, but if you don’t know at what price and when payment must be tendered, you don’t really have an agreement at all.  There’s no right answer to this, but common methods are:

1. State a definite value of the business in the buy-sell.  This provides certainty at the outset, but owners must be mindful to revisit and reevaluate the buy-sell price as the business grows and changes.
2. Leave the price to be agreed upon later.  Simple, yes, but also dangerous.  With no set price or formula there is much uncertainty when triggering events occur.
3. Base the price on a bona fide offer.  This works well in a right of first refusal situation.
4. Create a formula.  Assuming the company’s owners have a sophisticated understanding of how to value their business, a formula is fair, predictable, and automatically accounts for changes in the business.  On the other hand, creating the formula itself can be difficult during the infancy of a business.
5. Use an appraisal value.  This method is fair and impartial, but costly and time-consuming.
6. My personal favorite: the shotgun price.  Under this arrangement, one party names a price and the other party has a right to buy or sell at that price.  This keeps everyone honest, but it also has practical limitations when one party has limited financial resources compared to the other.

Of course, buyout provisions need payment terms, too.  Few small businesses will be able to afford to buy back half of its interest in cash on the spot.  That type of liquidity means business is doing very well.  Owners need to be very cognizant of their ability to purchase the interests of other owners and to be specific about the payment terms they are willing to accept.  In some cases, this may mean the business must take out a line of credit to repurchase an outgoing member’s interests.

Here’s the gist:

Limited liability

If you’re in business for yourself, you want to limit your personal exposure for the debts and liabilities of your business, whether large or small.  Becoming a corporation is the best way to do this, as partnerships and sole proprietorships do not insulate you in the same way.  Although a limited liability partnership, or an LLP, would accomplish nearly same thing as LLC, LLPs in Oregon are limited to professionals (e.g. doctors, lawyers, and CPAs).  In a limited liability partnership however, one partner must be subject to personal liability for the partnership.  An LLC has no similar requirement.

Only taxed once

LLCs also avoid the tax problems of corporations.  Generally speaking, you’ll pay a price for your limited liability corporate status: double taxation.  Unlike regular corporations, LLCs in Oregon are not subject to entity-level taxes on operating profits, liquidation, or distributions to the LLC’s members.  LLCs also aren’t subject to limits on the number of members and types of equity interests like S corporations are.  In an LLC, members are only taxed on their individual incomes from the LLC.

As those in the business of pouring tasty libations in Oregon will attest, the OLCC has traditionally been a head case about advertising discounted drinks for happy hours.  Under the current rule, OAR 845-007-0020, a liquor-serving business in Oregon may not advertise temporary discounts on alcohol outside of its place of  business. As ridiculous as this sounds, even using the words “happy hour” in reference to alcohol is prohibited under the current rule.

The proposed revision, available here, would read:

(2) The Commission prohibits any advertising of the promotional practices that are prohibited under OAR 845-006-0345(10). In addition, the Commission prohibits advertising outside the licensed premises that contains the price of an alcoholic beverage to be consumed on the premises if the advertised price is a temporarily reduced price (for example, $2.00 draft beer on Fridays or $4.50 well drinks 4:00 – 6:00 p.m.).

Although this revision would still prohibit references to the actual price of the alcoholic beverage in question, it’s still a considerable improvement from the current nonsense, which reads:

(2) The Commission prohibits references to temporary price reductions for alcoholic beverages to be consumed on the licensed premises. These references include “happy hour,” “dimers,” “two-for-one,” “social adjustment hour,” “free,” or similar terms. The licensee may make references to temporary price reductions inside the licensed premises if the reference is not visible from the outside.

Before you get too excited, the revision has little to do with the OLCC changing it’s liquor-loathing ways and more to do with practicality: the OLCC simply lacks the resources to enforce the current rule across the wide spectrum of advertising mediums available to the modern Oregon bar. Conventional print media, online advertising, social media sites, Twitter streams, and the like bombard Oregon consumers with potential places to whet their whistles after work.  The OLCC currently employs only 49 liquor inspectors.
At least we can all look forward to ads for the “cheapest PBR in town,” even if we don’t know exactly how cheap.

]]> http://uncommonsenselawyer.com/2009/10/23/olcc-to-lighten-up-on-happy-hour-rules-in-oregon/feed/ 0 Scott Phillips