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.