This document discusses 5 major legal risks that can expose businesses to liability. It begins by explaining how failing to properly maintain company records, reports, and governance can lead to legal and financial issues. Next, it describes how failing to use contracts to protect a company's interests can leave it unprotected. It then discusses how failing to proactively address workplace issues like policies in an employee handbook or misclassifying workers as contractors increases risks. Finally, it notes that lacking a comprehensive immigration compliance plan can result in violations and claims against a business.

1. Legal Risk Management Seminar Cowles & Thompson, PC
October 28, 2015
5 Major Mistakes Business Owners Make that Expose
Their Businesses to Huge Legal Risk, Severe Financial
Loss and Bad Publicity

2. Failing to Meet Requirements for
Company Records, Reporting, and
Governance
1

3. Failure to Negotiate and Use
Contracts to Protect Company
Interests
2

4. Virtually Ubiquitous

6. Eligibility to File
for Chapter 7 or
Chapter 11 Relief
.
 No insolvency requirements
 No debt ceiling limitations
 No income requirements

8. Chapter 7
 Appoints an interim Chapter 7
 Right to elect a different
trustee
 Trustee is authorized to hire
counsel and other
professionals
 Operate the Debtor’s Business

10. Chapter 11
 Fiduciary of the bankruptcy
estate
 Remains in possession and
control of its assets
 The debtor will operate its
business and conduct its affairs
in the ordinary course

11. Unsecured
Creditors’
Committee
Represents the interests of the
unsecured creditors as a whole

12. Property of the Bankruptcy Estate
All legal and equitable interests of the
debtor in property of any kind at the time
the case is commenced, the proceeds of
that property, and interests in property
that the estate acquires after the
commencement of the case.

13. The Automatic
Stay
Operates as a stay of “the
commencement or continuation…
of a judicial, administrative, or
other action or proceeding
against the debtor that was or
could have been commenced
before the commencement of the
case.”

14. The Automatic
Stay
Operates as a stay applicable to
all entities, of any act to obtain
possession of property from the
estate or to exercise control over
property of the estate.

15. The Automatic
Stay
• The automatic stay contains
exceptions
• Does not prevent the
commencement or continuation
of criminal proceedings against
a debtor nor actions by the
government in exercising its
police and regulatory powers.

16. Automatic Stay
The automatic stay protects only the debtor
and usually does not extend to separate legal
entities.
However, despite the general rule, courts
have held that the automatic stay can reach
beyond a debtor to stay actions against non-
debtor third parties, such as officers,
directors and others.
Actions brought by the debtor are not
stayed.

17. Executory Contracts and
Unexpired Leases

18. Executory Contracts
Debtors are permitted to assume
executory contracts and unexpired leases
and assign those contracts or leases to
third parties regardless of any prohibition
on assignment in the contract or lease
and over the objection of the non-debtor
party

19. Executory Contracts
Contracts and leases cannot be assumed
or assigned if applicable non-bankruptcy
law would excuse the non-debtor party
from accepting performance from or
rendering performance to any party other
than the debtor

20. Executory Contracts
As a condition to the assumption or assignment
of a contract or lease, the debtor must:
(i) cure or provide adequate assurance of a
prompt cure of any monetary defaults;
(ii) compensate the non-debtor party for actual
pecuniary loss resulting from the debtor's
default; and
(iii) provide adequate assurance of the debtor’s
(or assignee’s) further performance under the
contract or lease

21. Executory Contracts
Upon rejection, the contract is deemed
breached, as if such breach occurred
immediately prior to the filing of the
bankruptcy petition.
Rejection results in the non-debtor party
having a general unsecured claim for
damages arising from the rejection.

22. Setoff and
Recoupment
The Code preserves any setoff
rights a claimant may have under
applicable non-bankruptcy law

23. Setoff
In order to establish a valid right of
setoff, the parties obligations must
arise prior to the commencement
of the bankruptcy case and must
be mutual obligations

24. Recoupment
• Right of recoupment is similar to
that of setoff
• Recoupment must arise from the
same transaction or occurrence

25. Reclamation
Reclamation allows a
creditor to reclaim goods
previously shipped to the
debtor under the
applicable provisions of
the Uniform Commercial
Code

26. Sale of Assets
Debtor in possession is permitted to
operate the debtor’s business and as such
may use, sell or lease estate assets in the
ordinary course of that business
Debtor in possession is permitted to use,
sell or lease assets outside the ordinary
course of business either through a
confirmed plan or by motion under section
363

27. Appointment of a
Chapter 11 Trustee
The standard for appointment a trustee is
“cause” which is defined to include fraud,
dishonesty, incompetence or gross
mismanagement

28. Dismissal and Conversion
The court may convert the chapter 11 case to
one under chapter 7 or dismiss the case –
whatever is in the best interest of creditors –
for “cause”

29. Avoidance Actions
Preferences and Fraudulent Transfers

30. Fraudulent Transfers
(i) Made with the actual intent to hinder, delay or
defraud a creditor; or (ii) made in exchange for
less than reasonably equivalent value, (a) while
the debtor was insolvent or which rendered the
debtor insolvent, or (b) which left the debtor with
inadequate capital to continue in business, or (c)
which rendered the debtor unable to pay its
debts as they became due.

31. Preferences
The analysis focuses on whether the creditor’s
position was improved by the transfer during
the preference period

32. Definition of a Preference
1. There must be a transfer of property to or
the benefit of the creditor;
2. The transfer must be on account of an
antecedent debt owed by the debtor before
the transfer was made;
3. The transfer must have been made with the
debtor was insolvent;

33. Definition of a Preference
4. The transfer must have been made on or within 90 days
prior to the filing date of the bankruptcy petition (or
within one year if the transferee was an insider of the
debtor); and
5. The transfer must have enabled the creditor to receive
more than it would have received in chapter 7

34. Definition of Transfer of Property
Almost any conceivable mode of disposing of
property is included.

35. Defenses to Preference Claim
New Value
Contemporaneous Exchange
Ordinary Course

36. New Value
The creditor must have given the
debtor money or money’s worth,
new credit or a release of
property previously transferred
that is not secured by an
otherwise unavoidable security
interest and on account of which
the debtor did not make an
otherwise unavoidable transfer

37. Contemporaneous
Exchange
• If the transfer was intended by
the debtor and the transferee to
be a contemporaneous
exchange;
• The exchange was for new
value; and
• The exchange was
contemporaneous or
substantially contemporaneous

38. Ordinary Course
• Transfer must have been incurred in the
ordinary course of business or financial
affairs of both the debtor and the creditor;
and
• The transfer was made in the ordinary
course of the debtor and the creditor; or
• The transfer was made according to
ordinary business terms

39. Ordinary Course
If the timing of the payments
made by the debtor to you
during the 90 days pre-petition
are not consistent with the
debtor’s pre-preferential period
payments, the preference
period payments may be
preferential

41. Ordinary Course
Courts will review the manner, the amount
and the timing of the payments made to see
whether the preference period transactions
fall within the typical range for either the
parties’ or the industry’s payment terms

42. Preventative Measures
to Avoid a Preference
Maintain routine payment schedules
Require cash in advance or on delivery
Obtain collateral
Always accept payment

43. Fraudulent Transfers
• Transfers made by a debtor with the actual
intent to hinder, delay or defraud
• Transfers made for less than reasonably
equivalent value
• Transfers by a partnership to a general
partner while the partnership is insolvent or
by which it became insolvent
• Transfers to self-settled trusts in which the
debtor is a beneficiary

44. Badges of Fraud
• Transfer made to an insider
• Debtor retain possession or control
• Transfer was concealed
• Debtor was in litigation
• Transfer involved all the debtor’s assets
• Debtor was insolvent or was rendered insolvent
• Unreasonable consideration for the transfer
• Transfer was outside the ordinary course
• Transfer involved shell entities

45. Constructive Fraud
• Transfer for less than reasonably
equivalent consideration
• Transfer leaves the debtor with
unreasonably small capital
• Transfer caused the debtor to incur debts
beyond its ability to pay

46. Defenses to Fraudulent Transfer
Good Faith
Savings clause for an initial transferee that
gives reasonably equivalent value to the
debtor for the transfer and the transferee
exhibits good faith
Burden of proof is on the transferee

47. Failure to Proactively Deal With
Workplace Issues
3

49. EMPLOYEE HANDBOOKS
Employers should have them(!)
o Without a handbook, it’s more difficult to
defend EEOC charges of discrimination,
unemployment, etc.
o Also, handbook is basic source of information
for employees on rules at their place of
employment.

50. EMPLOYEE HANDBOOKS
But employers want to avoid
curtailing “at-will” employment
with handbooks, and in Texas, they
generally can.

51. EMPLOYEE HANDBOOKS
Handbooks are not generally
treated as binding contracts:
"There is a 'generalized rejection [by
Texas courts] of the claim that
employment manuals issued
unilaterally by an employer can per
se constitute written employment
contracts and create specific
limitations which take the cases out
of the at-will doctrine.“
Hays v. HCA Holdings, Inc., 2015 U.S. Dist.
LEXIS 131960 (W.D. Tex. 2015)

52. EMPLOYEE HANDBOOKS
Avoid promises of lifetime employment,
termination only for good cause, etc.
BUT—even these seldom create
enforceable contracts nullifying
employment at will.

53. EMPLOYEE HANDBOOKS
General statements …simply do not justify the
conclusion that the speaker intends by them
to make a binding contract of employment.
For such a contract to exist, the employer
must unequivocally indicate a definite intent
to be bound not to terminate the employee
except under clearly specified circumstances.

54. EMPLOYEE HANDBOOKS
General comments that an
employee will not be discharged
as long as his work is
satisfactory do not in
themselves manifest such an
intent. Neither do statements
that an employee will be
discharged only for "good
reason" or "good cause" when
there is no agreement on what
those terms encompass.

55. EMPLOYEE HANDBOOKS
Without such agreement the employee cannot
reasonably expect to limit the employer's right to
terminate him. An employee who has no formal
agreement with his employer cannot construct one
out of indefinite comments, encouragements, or
assurances.
Montgomery County Hosp. Dist. v. Brown, 965 S.W.2d
501, (Tex. 1998)

56. EMPLOYEE HANDBOOKS
Handbooks are generally not binding on the
employer. They are nothing more than a
guideline. If the employer included a phrase
providing they are not contractual, then they
will not be binding. e.g., progressive discipline
provisions can be ignored if offense is serious.

57. EMPLOYEE HANDBOOKS
NLRB, however, frowns on too-broad at will disclaimers. e.g.:
“I further agree that the at-will employment relationship
cannot be amended, modified or altered in any way.”
NLRB thought that this language would cause employees to
conclude that the at-will language means that their at-will
status cannot be changed through collective bargaining.

58. EMPLOYEE HANDBOOKS
Here are some examples of issues that should
be in a handbook:
Acknowledgment of Receipt of Employee Handbook
Attendance Policy
At-Will Employment; Handbook not a contract
Company-Issued Credit Cards
Confidentiality of Information
Conflict of Interest
Driver Policy
Drug-Free Workplace Policy

59. EMPLOYEE HANDBOOKS
Discrimination, Harassment and Disrespect Toward
Others (including sexual harassment)
FMLA Policy
Fringe Benefits
Exempt/Nonexempt employees
Internet, E-Mail, and Computer Usage Policy
Limits on Leave Benefits
Medical Absence Warnings
Medical Information Confidentiality Policy
Neutral Absence Control Policy

60. EMPLOYEE HANDBOOKS
 Overtime
 Relationships Within The Workplace
 Request for Change in Employment Status
 Searches
 Smoking Policy
 Social Media Use Policy
 Vacation and Sick Leave
 Video Surveillance / Search Consent
 Wage Deduction Authorization Agreement
 Wage Overpayment/Underpayment Policy
 Work Schedules and Recording of Work Time

61. INDEPENDENT CONTRACTORS
So-called “misclassification” of workers as independent
contractors when they are really employees is a top
priority for the federal government. There are joint
working agreements between IRS, DOL/WH, TWC to
exchange info on employers who have a lot of
misclassified employees.

62. INDEPENDENT CONTRACTORS
Traditional common law test centered on
“control” over the details of the way the work
is performed, and Texas courts addressing
state law issues still focus a lot on control.

63. INDEPENDENT CONTRACTORS
USDOL and other
federal agencies, and
the federal courts,
look beyond control
to include other
factors.

64. DOL FACTORS
The extent to which the work performed is an integral
part of the employer’s business.
Whether the worker’s managerial skills affect his or her
opportunity for profit and loss.
The relative investments in facilities and equipment by
the worker and the employer.

65. INDEPENDENT CONTRACTORS
4) The worker’s skill and initiative.
5) The permanency of the worker’s relationship
with the employer.
6) The nature and degree of control by the
employer.

66. EMPLOYEE PRIVACY ISSUES

67. Non-consensual use of
employees’ name or likeness
Publication of Private
Information
Intrusion into Seclusion, i.e. searches of
person, property, medical exams, tests
TRADITIONAL PRIVACY
ISSUES

68. EMPLOYEE PRIVACY ISSUES
Searches
Key is to obtain
employee consent at
time of hire, and to
remove any reasonable
expectation of privacy
employee might have

69. Developing Privacy Issues
Medical Records
• ADA requires that
medical information
be kept in separate
files
• HIPPA does apply
to health insurance
plans, etc.; HOWEVER

70. EMPLOYEE PRIVACY ISSUES
Information received as an
employer record is not
protected by health privacy
rule. e.g.; FMLA health care
provider certification info.
But if employer is plan
administrator, Health
Privacy Rule applies.

71. Employer Monitoring of Electronic
Resources
• Give employees notice, get consent, get
acknowledgement
• Electronic Communications Privacy Act has
both civil and criminal sanctions for secret
monitoring, eavesdropping

72. Video Monitoring
If no audio, not
subject to ECPA
but can still be
invasion of privacy, so
give employees
notice, get consent,
get acknowledgement

73. EMPLOYEE PRIVACY ISSUES
Examples of video monitoring which got
employers into trouble:
• Employer put video cameras in women’s
restroom based on rumors of drug sales, but
kept them there two years
• Hooter’s franchise took secret videos of
applicants changing into proposed Hooter’s
uniforms

74. Lack of Comprehensive Immigration
Compliance Plan to Avoid Violations
and Claims
4

75. Investigates employers for compliance with
employment employer verification rules and removes
undocumented aliens from the United States.
http://www.ice.gov

76. Investigates and prosecutes charges of immigration-
related unfair employment practices
www.usdoj.gov/crt/osc
U.S. Department of Justice
Office of Special Counsel (OSC)

77. PM Packing ordered to
pay $27,200 (reduced
from $53,762) for
paperwork violations,
including failure to
prepare I-9 for 22
employees.

78. Golf International ordered to pay $57,650 (reduced
from $136,697) for paperwork violations, including
failure to sign section 2 for 110 employees.

79. Demand of Specific I-9 Documents Prohibited
RECENT CASES
Miami Dade County Public
Schools paid $90,000 penalty
and $125,000 for back pay
Yellow Cab Companies of
Nevada paid $445,000 in civil
penalties
Abercrombie paid
approximately $156,000 in
back pay

80. Immigration Compliance Plan

81. Recommended Policies and Procedures
I-9 procedures for hiring and re-verification
Anti-discrimination policies
Retention of I-9 forms
E-Verify procedures
Investigation of violations

82. Group training
Individual training
Sample training
Ongoing and periodic
Training and Supervision

83. Secure Recordkeeping
Separation Centralized Retention

84. Retention Calculation
Date of Hire__________+ 3 years =____________
Date of Separation ________+ 1 year = _________
Take the later date and enter it here:
_____________________________________
Retention Date

85. Consistency – do not treat workers differently because of
immigration status
No “citizen only” policy
Do not demand specific documents, e.g. “green card”
Do not re-verify “green card” when the card expires
Do not demand more documents than needed to complete I-9
Anti-Discrimination
Procedures

86. Violationsreportingandinvestigations
Consistency
Credible
reporting
Enforce, enforce, enforce!

87. Prepare for government audit
Identify errors
Identify training issues
Demonstrates good faith compliance
I-9 Self Audits

88. Conduct training
Ensure corrections are made
Review audit report and implement
procedural changes
Maintain ongoing project attitude
Post-Audit Implementation

89. ICE Enforcement Action

90. Responding to ICE Enforcement Actions
 Choose a point person
 Ask to see documents
authorizing the search
of premises or
employees (warrant)
 Make copy of the
warrant, notice of
inspection (NOI),
subpoena, etc.

91. Responding to ICE Enforcement Actions
 Ask about purpose
and scope of
inspection
 Accompany agents on
the search
 Comply with the
warrant but do not
volunteer information
not covered by
warrant

92. Responding to ICE I-9 Inspection
 If I-9 inspection, don’t waive
right to 3-day notice (ask for
extension)
 Separate I-9 forms from
personnel files
 Offsite review – make copies
of all documents submitted
 Onsite review – conference
room or somewhere
separate from work areas

93. Call an experienced attorney immediately
upon receipt of the NOI or initiation of
enforcement action and do not allow agents to
talk with employees before calling an attorney.

94. NO Annual Legal Review to
Uncover Hidden Risks and Reduce
Potential Losses
5

95. Legal Check-Up
• Diagnosis
• Treatment
• Prevention

96. Thank You
901 Main Street
Suite 3900
Dallas, Texas
75202
4965 Preston Park Blvd
East
Suite 320
Plano, Texas 75093
214-672-2000
www.cowlesthompson.com
info@cowlesthompson.com