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  Report From Counsel  
    Spring 2001  
   

HOME IS WHERE THE BUSINESS IS

The advantages of operating a business from your home need to be balanced against legal considerations that may not be as apparent. Attention to these matters at the outset of starting a home-based business can help you avoid legal pitfalls and can greatly enhance your prospects for success.

Business Organization

Your business may be a glorified version of a former hobby, but, as an ongoing business, the enterprise needs to take a legal form best suited to your circumstances. Factors such as tax issues, the number of employees (if any), and avoiding personal liability will influence the decision on a business's legal structure. The most common choices are sole proprietorship, partnership, corporation, and limited liability company.

Zoning and Building Codes

A plan for a home-based business will stall if local land-use regulations prohibit a business from being run on property that is zoned "residential." Just what qualifies as a "business use" under a zoning ordinance is not always clear, however, and home-based businesses may be permitted if certain restrictions or conditions are met. In a recent case, for example, a court ruled that a city ordinance allowed a professional office to be operated as a secondary use of a residence. As long as the business use of the property remained incidental to the dominant use of the property as a home, even other professionals or support personnel aside from the homeowner could work out of the residence.

When your home doubles as a business office, compliance with local building codes becomes a bigger issue. Features that may not apply to a residence can come into play, such as handrails or ramps for providing access for persons with disabilities. Your electrical system could need an overhaul in order to comply with the code, especially if the business requires computers or other technologies not typically found at home.

Insurance

Because a fledgling business is vulnerable to financial injury from lost or damaged business property or injury to a client, it is also in need of appropriate insurance. Simply continuing your homeowner's insurance without changes may not be sufficient when starting up an in-home business, especially since such policies generally are meant to cover personal property only. The simplest and least expensive solution may be to add a "rider" to an existing policy that covers business assets and liability. Another alternative is a new, separate policy covering anything related to the business.

The importance of having the right insurance is illustrated by a case in which homeowner's insurance did not cover the medical expenses incurred by an employee who was injured on the premises of a home-based business. A married couple lived on the second floor of their home while using the first floor to house their construction business. They used an adjoining garage to store personal belongings. When a company employee was searching in the garage for company records, he slipped and injured himself. An exclusion in the homeowner's policy for "business pursuits of any insured" meant that the injury was not covered under the policy.

CASE BY CASE

Employee Health Coverage

Under the employee benefits plan for a large retailer, employees who left the company and then returned within a year could have their health insurance reinstated immediately, but with a one-year exclusion for preexisting conditions. An employee could choose to maintain coverage under COBRA, a federal law allowing a former employee to continue insurance coverage as a bridge to coverage from a new employer. In that event, the returning employee would be considered to have continuous coverage and would not be subject to the exclusion for a preexisting condition. Although it was not spelled out clearly in the plan, the employer's practice was to allow continuous coverage, free of the exclusion, only where the employee had paid a premium for the insurance that was in effect while the employee was away.

Tamyra quit her job with the retailer and learned soon thereafter that she was pregnant. She was rehired a month later, at which time a supervisor told her that her coverage was immediately restored without a preexisting condition exclusion. Tamyra had not paid her first premium for health coverage because she had been rehired so quickly. When her pregnancy expenses were submitted for payment, the plan declined to pay them on the grounds that they related to a preexisting condition, which was excluded because Tamyra had never made a premium payment during the month she was not employed by the retailer.

Tamyra sued to obtain payment for her medical expenses. A federal court ordered the employer to pay the expenses. The employer could not deny coverage under its plan on the basis of the failure to pay a premium where the necessity for such a payment was not apparent in the plan documents and was in fact contradicted by representations made to the employee. Apart from her supervisor's statements, a service representative for the plan also had told Tamyra that she would "fix" the problem of the unpaid medical bills, without the need for further action by Tamyra.

Courts will not allow oral representations to trump the written terms of a benefit plan, but this rule applies only if the documents are free from ambiguity. Where an employee must resort to guessing as to the appropriate course of action, as Tamyra did, it is unfair to penalize her for making the wrong guess.

When Express Mail Fails

A manufacturing company recently sued United Parcel Service for its loss of over $395,000 in profits because UPS did not deliver the company's bid package on time. The manufacturing company mailed a bid and samples of its product to a government agency through UPS on the day before the bids were due. The company's office manager spoke directly to the UPS driver and stressed the importance of timely delivery. UPS missed the next-day delivery, delivering the package one day late. Due to the missed deadline, the company lost the manufacturing contract. After investigating, the company discovered that if its samples had been reviewed and found acceptable its bid would likely have been accepted since its overall price was the lowest.

The company's lawsuit against UPS was dismissed. The UPS pre-printed shipping form clearly indicated that the package contents were insured up to $100 in value and that any special damages or consequential losses were not recoverable. The court found that the shipping form was a contract. While the print on the form was small and the office manager did not read or accept the language limiting UPS's liability, the court nevertheless found that the limiting language was binding. Finding that UPS handles an "exceedingly high volume" of packages on a daily basis, the court concluded that it is unreasonable to expose any shipper to liability for enormous and unforeseeable damages in return for "an $11.75 shipment fee."

EPA Excesses

The federal government's criminal charges against a company and its owner for alleged violations of the Clean Water Act backfired. In an unusual ruling, a federal court held that the company was entitled to recover some of its attorney's fees and legal costs incurred in defending against the bad-faith prosecution.

The company made steel mesh for lobster traps. The waste water from its 150-employee plant emptied into a town's sewer system. In a much publicized action, the federal Environmental Protection Agency (EPA) accused the company and its owner of discharging highly acidic waste water into the public sewer. Later, the charges were dismissed after the prosecutor discovered that information that would have cleared the defendants had been left out of a search warrant application. Samples taken by the EPA not only failed to support the accusations but showed that there was no violation.

The omission of key information from the search warrant application was only part of a pattern of behavior by the government that the court described as "vexatious," that is, lacking good cause and calculated to harass. The overzealous actions by the government came to light when the company brought a claim under a federal law that allows exonerated defendants to recover legal costs if they can prove that the government's case against them was brought in bad faith. Recovery of such fees and costs is relatively rare. There is a heavy burden of proving that the government's pursuit of the case was without any reasonable cause or grounds or amounted to conscious wrongdoing.

Aside from withholding evidence, the EPA agents also altered evidence pertaining to the chemical makeup of samplings taken at the plant. They took samplings in the absence of company personnel, in violation of an agreement between the EPA and the company. The federal agents crossed the line from enforcement to harassment when, in the court's words, "a virtual 'SWAT' team consisting of twenty-one EPA law enforcement officers and agents, many of whom were armed, stormed the [company] facility to conduct pH samplings."

NEW LEAD PAINT RULES

The federal Department of Housing and Urban Development has issued a new regulation designed to give greater protection to young children exposed to lead-based paint hazards in housing that is financially assisted, or sold, by the federal government. The requirements apply to housing built before 1978, when lead-based paint was banned nationwide for use by consumers. The regulation on its face applies only to federally assisted housing, but the in-depth scientific research that went into writing the regulation may also make it a liability standard in lawsuits brought against owners of private housing. Owners of private residential property containing lead-based paint are well-advised to become familiar with the new regulation.

Since childhood exposure to lead comes primarily from deteriorated lead-based paint and lead-contaminated dust and soil in the living environment, the regulation focuses on these conditions. The specific requirements vary, depending on the nature of the federal involvement (disposal of, or assistance for, the property), the type, amount, and duration of financial assistance, the age of the structure, and whether the dwelling is a rental or is owner-occupied.

Standards for "clearance testing" and safe work practices apply to most federal housing. Studies have shown that the most common way children are poisoned by lead is through dust. As a result, clearance testing is required whenever lead paint is disturbed, such as when deteriorated paint is repaired. The testing involves two steps. The first is a visual search for any remaining deteriorated surfaces and any dust, debris, paint chips, or residue. The second step is a test of dust from the work area to insure that the standards for safe levels of lead have been met.

Contractors generally must comply with safe work practices, such as containing the work area, using special vacuums during cleanup, and making sure occupants are not present while the work is being done. The requirements for clearance testing and safe work practices do not apply for the smallest, or "de minimis," areas of paint. An area of paint is "de minimis" if it is under 20 square feet of exterior surface, under 2 square feet in an interior room, or less than 10% of a building component with a small surface area, such as a window frame.

The new regulation does not apply to nonresidential property; housing exclusively for the elderly or disabled, unless a child under age six is expected to live there; "zero bedroom" dwellings, such as efficiency apartments, dormitories, or military barracks; properties found to be free of lead-based paint by certified lead-based paint inspectors; unoccupied housing that will stay vacant until it is demolished; and rehabilitation or housing improvements that do not disturb a painted surface.

DISABILITY GUIDANCE FOR EMPLOYERS

The Americans with Disabilities Act (ADA) prohibits an employer from asking applicants and employees disability-related questions or requiring them to undergo medical examinations, unless such requirements are "job-related and consistent with business necessity." The Equal Employment Opportunity Commission (EEOC) previously issued guidelines that were only applicable to job applicants, but recently the EEOC issued a "Guidance" that shifts the focus to questions and medical examinations during employment. Employers should make sure that their policies and handbooks are consistent with the Guidance. Questions or medical exams that are not allowed by the Guidance may lead to liability under the ADA's enforcement provisions. Even if questions are illegally asked of, or exams illegally required for, employees who are not disabled, an employer is exposed to liability under the ADA.

The Guidance gives some examples of disability-related inquiries that are not permitted: Do you have a disability?; Have you ever sought workers' compensation benefits?; questions about genetic backgrounds; and any broad questions about an impairment that are likely to elicit information about a disability. Unless it is shown to be job-related, an employer cannot ask all of its employees about their use of prescription medications. On the other hand, questions that relate to job performance and the necessities of the business are more likely to be acceptable. For example, an employer can ask about an employee's current illegal drug use or drinking; whether the employee can perform certain job-related functions; and the employee's general well-being.

The Guidance sets forth situations in which an employer can ask for information about an employee's medical condition. Such questions are permitted when (1) an employer reasonably believes that an employee either will be unable to perform essential job functions or will pose a direct threat to others due to a medical condition; (2) an employee has requested a reasonable accommodation for a disability; (3) federal laws or regulations require that an employer obtain the information; (4) an employer offers voluntary programs for treatment of certain health problems; or (5) the information is to be used to further affirmative action programs.

When an employee requests a reasonable accommodation for a disability, if the employee does not provide necessary medical information, the employer can request a medical exam to be conducted by its doctor. First, however, the employer must have given the employee an opportunity to provide the information in a timely manner. In somewhat ambiguous language, the Guidance further states that an employer "should consider consulting with the employee's doctor (with the employee's consent)" before requiring an in-house exam.

An employer's right to require submission to a medical exam is also triggered by the employer's reasonable belief that an employee poses a direct threat. If the opinions of the employer's and the employee's doctors are in conflict, the employer must evaluate them according to the doctors' areas of expertise, the kind of information provided, and the employer's first-hand observations of the employee. In the case of employees who balk at questions or requests for exams, the Guidance states that any resulting disciplinary actions should relate to performance problems (the inference being that the employee should not be punished for insubordination).

Some tests and procedures commonly used by employers are not medical exams, although they may be intrusive. Thus, neither the Guidance nor the ADA limits the use of tests for current illegal use of drugs, physical agility tests, psychological tests measuring personality traits, and polygraph examinations. The ADA requires employers to treat any medical information, whether voluntarily disclosed by an employee or obtained from an inquiry or a medical examination, as a confidential medical record. Only in limited circumstances may employers share such information with supervisors, managers, first-aid and safety personnel, medical personnel, and certain government officials.

You can read or download the Guidance online at www.eeoc.gov/docs/guidance-inquiries.html.

ESTATE PLANNING

Stretch Your IRA

The Individual Retirement Account (IRA) has long been established as a retirement investment vehicle for those who may not be participants in, or who wish to supplement, employer-sponsored retirement plans. Two basic rules governing IRAs are: (1) an individual can contribute income to the IRA until age 70 without paying federal income tax on the amount in the year of contribution; and (2) the individual must begin to receive distributions from the IRA by April 1 of the year following his or her attainment of age 70 (income tax is payable on such distributions). Thus, the tax deferral under these rules is limited to the period of the individual's life.

There are rules that allow the tax deferral on the IRA to extend beyond the lifetime of the individual who created the account. An IRA having such an extended tax deferral period is known as a "multi-generational" or "stretch" IRA. There are variations on the structure of a stretch IRA, but the simplest example is for the individual to elect that, if he or she lives beyond age 70 , the payments from the IRA are to be made to a beneficiary following the individual's death. Typically, the beneficiary would be the individual's child. By naming a person from a younger generation as the beneficiary, the schedule of minimum payments is extended over the life expectancy of the beneficiary. This will lower the amount of the distributions that the individual will be forced to take after reaching age 70 . More money will be left in the IRA in a tax deferred status for a longer period of time, thereby insuring that a greater amount will reach the individual's heirs.

A more complicated stretch IRA involves breaking up the IRA into several IRAs, each with its own beneficiary. The beneficiary under one of the new IRAs can be the individual's spouse (the tax deferral period of that IRA would, presumably, not be greatly extended because it would be measured by the joint life expectancies of the spouses). The other new IRAs could have the individual's children and grandchildren as beneficiaries, thus achieving significantly longer deferral periods on those accounts.

It is extremely important that the desired structure of the stretch IRA be elected in a precise and correct manner. The election must be made by April 1 of the year after the individual turns 70 . Given that the popularity of this estate planning technique is recent, not all professionals are experienced in establishing stretch IRAs. Make sure to seek out someone who is experienced in such planning.

 
   
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