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  Report From Counsel  
    Winter 2001  


The business world is in the midst of rapid transformation driven by globalization, e-commerce, and an array of technological advances. One aspect of this evolution that has not received much attention until recently is the trend away from the classic employer-employee relationship that has characterized our economy since the Industrial Revolution. Previous generations of workers were likely to experience only long-term, rigidly hierarchical employment that was long on security but short on flexibility. Today, the work at many firms is being done by workers who do not fit the conventional model. They may be leased employees, freelancers, independent contractors, part-time or temporary employees, or an amalgam of these or other concepts to suit the needs of today's businesses. Collectively, such workers have come to be known as the contingent workforce.

The growth of the contingent workforce raises some new legal issues concerning employer compliance with a range of federal and state statutes, including the Fair Labor Standards Act, the Internal Revenue Code, the Age Discrimination in Employment Act, the Employee Retirement Income Security Act (ERISA), and state laws on workers' compensation and unemployment insurance. In resolving these issues, our courts often distinguish an "employee" from other workers, using criteria that were first developed long before there was cyberspace or a "new economy."

Generally, the defining characteristic of an employer-employee relationship is the right of the hiring party to control the manner and means by which the product is accomplished. Among the factors relevant to this analysis are: the skill required of the worker; the source of the instrumentalities for accomplishing the work; the location of the work; the duration of the parties' relationship; whether the hiring party has the right to assign new projects to the worker; the extent of the worker's discretion over when and how long to work; the method of payment; the worker's role in hiring and paying assistants; whether the work is part of the hiring party's regular business; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the worker.

Determining that a contingent worker is an "employee" by weighing the various factors will not necessarily be decisive for purposes of statutory rights or benefits. For example, in order to be entitled to retirement benefits that are protected under ERISA, a person must be an employee and be entitled to receive retirement benefits under the language of the employer's retirement plan. In a recent case, a computer programmer found work with a major corporation when she answered an ad placed by an independent staffing company. Her only written contract, which described her as an "independent contractor," was with the staffing company. She worked for the corporation under renewable one-year contracts between the corporation and the staffing company that governed her compensation and length of employment. Eventually, the programmer was told that her services were no longer needed.

According to a federal appeals court, the programmer had a legitimate argument that she was an "employee" of the corporation for purposes of retirement benefits despite the fact that she was leased to the corporation by the staffing company. She still did not come under the protection of ERISA, however, because the corporation's plan was generally restricted to "regular employees," defined in the plan as excluding temporary employees and including only employees working standard hours per week and weeks per year. In addition, other parts of the plan explicitly excluded leased employees.

If the law being interpreted is remedial in nature, some courts have defined the terms "employer" and "employee" even more expansively than they would under traditional criteria. For purposes of enforcement of the overtime provisions in the Fair Labor Standards Act, a federal appellate court ruled that temporary workers were "employees" of two temporary employment agencies that provided temporary workers for other businesses. Some of the same factors used in other contexts were relevant, but the court applied a broad "economic reality" test to all of the circumstances considered together. The bottom line is that the worker generally will be regarded as an "employee" if he or she is economically dependent on the "employer."

In the above case, the temp agencies did not exercise direct supervision of workers at their client companies, but the agencies were solely responsible for hiring the workers and setting their work schedules. The agencies also determined the rate and method of payment, maintained employment records on the workers, and reserved the right to intervene if problems arose as to job performance. The workers were held to be employees of the temp agencies and could assert a right to overtime pay against them, notwithstanding that the agencies had required all job applicants to sign a "contractor agreement" that expressly stated that the workers were not employees of the agencies. Moreover, the fact that in the same litigation the workers were claiming to be employees of the client companies did not hurt their case. More than one "employer" can be found to have obligations to the same workers if the applicable test is met for each person or entity claimed to be an employer.


Appraiser Liability

After visiting the property and negotiating with its owners, Harry decided to purchase a large antebellum plantation. In arriving at a purchase price acceptable to everyone, the parties relied on an appraisal of the property. The appraisal had been prepared for the benefit of an individual who owned the real estate firm involved in the transaction and who was a stockholder in the corporation that owned the plantation. After Harry signed the contract to purchase and sent a check for earnest money, his banker discovered an error in the appraisal. The parties disagreed as to whether the cause of the error was mathematical or typographical, but the stated appraised value was almost $100,000 greater than the underlying numbers supported.

Harry wanted out of the contract and demanded the return of his earnest money. When the sellers refused, he sued them, the realty firm, and the appraiser. The claim against the appraiser was for negligent misrepresentation. Harry's claim against the appraiser was dismissed by the trial court and the dismissal was upheld on appeal, but not before the appeals court adopted principles of law that would allow recovery by a buyer against an appraiser on slightly different facts.

A real estate appraiser can be held liable for negligent misrepresentation to a party who did not hire the appraiser, but only if the appraiser either intended to influence that party by his representations or if he knew that his client intended to influence that party by means of the appraisal. However, for the appraiser to have a duty to a third party, it is not necessary that the appraiser contemplate the specific identity of the person who may rely on the representation.

Harry's case against the appraiser failed because, although the appraisal was used in negotiations, it was issued not for Harry's benefit but for the benefit of a stockholder in the corporation that owned the property. There was insufficient evidence that the appraiser knew, or should have known, that his appraisal would be used by potential purchasers like Harry. Language in the appraisal stated that the report could be used for no purpose other than its "intended use," which, according to the court, did not include use as a selling tool by the owners.

The outcome in Harry's case suggests that someone should be cautious in relying on a real estate appraisal prepared at the behest of someone else. If the circumstances surrounding a transaction do not make it obvious that the appraiser intended someone in a position such as a prospective purchaser to use the appraisal, any reliance on the appraisal should be preceded by language in the report itself that clearly contemplates such use of the appraisal.


As the name implies, a charitable remainder trust involves the transfer of assets to a trust with the income going to an individual or individuals (which can include the owner of the assets) and with a charity receiving the assets at the expiration of the trust period. Such a trust device benefits the individuals who are the objects of the property owner's generosity, it transfers assets to the property owner's preferred charities, and it yields tax savings for the property owner.

If the trust is created during the property owner's life, there is a charitable tax deduction equal to the value of the charity's remainder interest, and the transferred property will escape federal estate tax. If the trust is established under a will, the charitable deduction will remove the property from the taxable estate.

There can be other, not so obvious, benefits. Where appreciated assets are transferred, especially where the assets have a low cost basis and there is a likelihood that the property owner would have sold the assets at some point had he not transferred them to the trust, the property owner avoids the capital gains tax that would be imposed upon an outright sale. If the trust sells the assets, it will have no capital gains tax liability because the trust will be a tax-exempt entity. If the property owner has established the trust in his lifetime, the fact that the trust can sell the property tax free maximizes the income base for the income beneficiary, which can be the property owner himself. Moreover, if the trust is a charitable remainder unitrust (CRUT), under which the income is measured as a percentage (no less than 5% of the value of the trust property in a given year), the trust serves as a hedge against inflation for the income beneficiary because as the trust property appreciates in value the income paid out increases. This is not true under the other type of charitable remainder trust, the charitable remainder annuity trust (CRAT), under which a fixed amount of income is paid out each year.

A unitrust can be used as a retirement plan. Although a CRUT usually pays a percentage of the trust's annual value, it can provide that income distributions may not exceed the amount of income actually earned by the CRUT in a given year. Any shortfall in income can then be made up when there is sufficient income. During the property owner's preretirement years, the CRUT can be invested in growth stocks, thus producing little or no income. Upon retirement, those assets can be sold with the proceeds invested in income-producing assets that will yield the agreed-upon income percentage plus a "make-up" portion to compensate for the earlier shortfalls. Thus, income distributions from a CRUT can be minimized during the preretirement years and then maximized for the retirement years.

It is important to remember that a charitable remainder trust must meet a series of technical requirements and therefore should be drafted only by an experienced professional.


The Fair Credit Reporting Act gives specific rights to consumers whose credit information is collected by consumer reporting agencies (CRAs) and distributed to others. State laws may provide additional rights, but the following is an outline of the basic federal protections:

* Anyone who uses information from a CRA against you must tell you so and give you information on how to contact the CRA.

* Upon your request, a CRA must give you the information in your file and a list of who has requested it recently. The most the CRA can charge for this is $8 and under some circumstances the report is free.

* You can dispute the accuracy of information held by the CRA by following a detailed procedure. The CRA will provide a written report of its investigation. Inaccurate or unverified information must be removed from the CRA's files or be corrected, usually within 30 days after it is disputed. If you notify the source of a CRA's information, such as a creditor, that you dispute such information, the source may not report the information to the CRA unless it also gives the CRA notice of the dispute.

* Generally, negative credit information that is more than seven years old may not be reported by a CRA. The time period is extended to 10 years for bankruptcies.

* Not just anyone can have access to your credit information. A CRA can give information only to those who need it for reasons stated in the law. Usually, this means businesses to whom you have applied for credit, insurance, employment, or housing.

* Your consent is required before a CRA can give out any kind of credit information about you to your employer or to a prospective employer. If it has medical information about you, the CRA also needs your permission to provide that information to creditors, insurers, or employers.

* If a CRA, a user of the CRA data, or in some cases a provider of the CRA data violates the federal law's requirements, you may sue the individual or entity in state or federal court.


Using electronic signatures will change the way businesses interact with other businesses, how businesses work with their customers, and even how government serves its citizens. Paying bills, applying for loans, trading securities, buying goods, and contracting for services will all be made easier. Encryption technologies will give greater protections to consumers who conduct business with electronic signatures, and those who would seek to defraud consumers with electronic signatures may well leave a trail to their door in the process.

New federal legislation is trying to catch up with this technology by giving electronic signatures and records the same legal validity as those on paper. The law is intended to give businesses and their customers in transactions affecting interstate commerce the legal certainty needed to participate fully in electronic commerce. As of October 1, 2000, no contract, signature, or record may be denied legal effect solely because it is in electronic form. To be legally enforceable, however, such contracts and records must be in a form that is capable of being retained and accurately reproduced for later reference. The law does not favor one form of technology over another.

Consumers who may be unprepared to enter into electronic transactions are protected by a provision in the new statute that requires that the consumer's consent to a transaction be secured in a manner that reasonably shows that he or she can access relevant information in an electronic form. This means that the consumer must confirm a desire to conduct business electronically and attest to having the ability to access pertinent information electronically. The requirement that parties to a contract affirmatively agree to use electronic signatures does not apply to government agencies.

The E-Sign Act, as it is sometimes called, sets forth some specific contracts and other records to which it does not apply. These include wills; family law documents, including prenuptial agreements and divorce decrees; court documents; contracts covered by most parts of the Uniform Commercial Code; and notices relating to termination of utility services, evictions or foreclosures, cancellation of health insurance or life insurance benefits, and recalls of unsafe products.

Electronic transactions remain subject to applicable state and federal laws that prohibit unfair and deceptive acts and practices. The consumer consent requirements in the E-Sign Act are in addition to, not in place of, other statutory requirements with which the parties to the transaction must comply. Other statutes may include a state's own counterpart to the E-Sign Act. However, no state law can restrict the scope of coverage provided for in the federal law.


The Internal Revenue Code taxes the transfer of property by gift. A donor does not pay gift tax on the first $10,000 of gifts made to any person during the calendar year, but this exclusion applies only to gifts of a present interest in property. A recent federal appeals court decision has held that gift tax was owed on the forgiveness of a corporation's debt because that transaction constituted an indirect gift of a future, not a present, interest to the shareholders of the corporation.

The donor in the case was a family matriarch who had formed a corporation with her five children and two grandchildren. She sold valuable farmland to the corporation to be paid for over 20 years. She then forgave the principal indebtedness on the sale of the land over three successive years. The corporation eventually sold all of the land, converted its assets to cash, and dissolved. When the donor died, the IRS audited her estate and ruled that forgiveness of the debt did not qualify for the gift tax exclusion.

The estate of the donor argued to no avail that when the corporate debt was forgiven the resulting gift was of a present interest in two respects: (1) the net worth of the corporation immediately increased by the amount of the debt reduction, and (2) the shareholders' stock increased in value. However, the shareholders could not individually enjoy these benefits without delay and without the action of others. Under the corporation's bylaws and the law of the state where the corporation was formed, corporate property could be sold only with the approval of two-thirds of the members of the board of directors and the holders of two-thirds of the stock. A majority of the board was required to authorize the declaration of a dividend. Since the gift of forgiveness in this case was a gift of a future interest, the gift tax that the donor's estate had paid under protest would not be refunded.


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