Business Contraction

Summary:

With economic problems growing, you might be inclined to contract
your business or professional practice. Unfortunately, there are a myriad of
issues and problems with this seemingly simple task. This checklist reviews
only a few of the many concerns you’ll face. (See Practical Planner April 2007
for a discussion of an employee’s perspective on reviewing a termination
agreement).

◙ Can you
Fire a Partner.

When business was
humming, marginal partners may have been profitable. Now they may not even be
tolerable. Can you fire a partner? While a severe measure, it may become
necessary. Since there may be no right under state law to remove a partner, the
provisions of the partnership agreement are essential to consider. So start by
reviewing all governing documents (employment agreement, shareholders’
agreement, etc.). What do the agreements provide for? Is there a mechanism to
force a buyout or termination? Has the situation eroded to a point where
application of a “for cause” provision can be justified? Be mindful that
remaining partners owe a fiduciary duty to the targeted partners. What are the
demographics of the particular partner you’re seeking to terminate? Evaluate
the risk that a terminated partner may claim age discrimination. Terminated
partners might also sue on the basis that the remaining partners violated their
fiduciary or contractual obligations due the terminated partner. Evaluate all
the potential risks, disruption to the practice, and the costs of severance and
termination into your analysis. Perhaps creating a contract or non-equity
partner status may be a preferable compromise to both parties to reduce the
likelihood of suits and costs that offset the hoped-for savings.

◙ Defer
Making a New Partner. 

Your medical
practice hired a new associate 2 years ago under an employment agreement that
gave you an opportunity to “date” until both sides made a decision as to partnership.
Your practice focuses on high end elective procedures so that the economic
downturn is having an impact on your revenues, and you fear it will worsen. If
the associate is a good fit, perhaps you can delay partnership another year to
keep the practice profitable for existing senior partners.  Before making this move carefully
determine who told what to the new associate. If the managing partner of your
practice promised the associate that she’d be a partner “for sure”, she might
have a successful claim against you for the deferral. Bottom Line: This doesn’t
mean that deferral isn’t a possible course of action, just that you have to be
mindful of the risks inherent in the process.

◙ Terminated
Employee/Partner Non-Compete.

Will the
non-compete clauses in the partnership or employment agreement protect your
business? The law governing non-compete agreements is constantly evolving, and
varies by state, caution is always in order. In a recent California case, for
example, Edwards v. Arthur Andersen, LLP, S147190 (Cal. Aug. 7 2008), the court
upheld a California statute limiting non-compete agreements.  In this case the employee signed a
non-compete when he began employment as a tax accountant in which he agreed
that for 18-months after termination he would not perform similar services for
any clients of his employer and that for 12 months after termination he would
not solicit any of the employer’s clients. The court found that the
noncompetition agreement was invalid because it restricted the employee’s ability
to practice his profession in violation of the statute. Bottom Line: Review any
restrictions before taking action. If a former employee/partner will be able to
compete, especially at a lower cost in hard economic times, is termination the
best option? Be certain all future agreements contain enforceable provisions,
include severability clauses that endeavor to save the rest of the agreement
(and other restrictions) in the event the non-compete (or any other clause) is
deemed too broad to be valid.

◙ Get a
Release/Termination Agreement.

If you’re
terminating an employee or partner, it has become common practice to make a
severance payment to obtain a release of claims to hopefully avoid the issues
outlined above. But releases are not a guarantee against a lawsuit. Give the
employee reasonable time to review the release. The release should be
understandable (if you cannot read it without crib notes, it won’t past
muster).  Use captions, define
technical terms, etc. Some claims can only be waived if they are expressly
noted in the release or termination agreement, such as the waiver of age based
claims under the EEOC or the Older Workers Benefit Protection Act (OWBPA). Some
claims cannot be waived in a termination agreement with an employee, such as claims
under the Fair Labor Standards Act (FLSA) so that these should be excluded.
Some advisers even advocate that the right to pursue these claims be
affirmatively stated in the agreement.

Conclusion.

Economic
challenges will force many businesses to restructure to survive. Before
proceeding with any step, carefully evaluate all the practical, business, legal
and other ancillary issues.