Employee Amber Morgan (Morgan) filed a class action lawsuit against her former employer, United Retail Incorporated (United Retail), for violations of Labor Code section 226.

Labor Code section 226(a) provides, in pertinent part:

Every employer shall, semimonthly or at the time of each payment of wages, furnish each of his or her employees, either as a detachable part of the check, draft, or voucher paying the employee’s wages, or separately when wages are paid by personal check or cash,
an accurate itemized statement in writing showing:

(1) gross wages earned,
(2) total hours worked by the employee, except for any employee whose compensation is solely based on a salary and who is exempt from payment of overtime under subdivision (a) of Section 515 or any applicable order of the Industrial Welfare Commission,
(3) the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis,
(4) all deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item,
(5) net wages earned,
(6) the inclusive dates of the period for which the employee is paid,
(7) the name of the employee and his or her social security number, except that by January 1, 2008, only the last four digits of his or her social security number or an employee identification number other than a social security number may be shown on the itemized statement,
(8) the name and address of the legal entity that is the employer, and
(9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee.

On behalf of a class of herself and current and former non-exempt employees, Morgan alleged that United Retail’s wage statements failed to comply with section 226, subdivision (a) because they listed the total number of regular hours and the total number of overtime hours worked by the employee, but did not list the sum of the regular and overtime hours worked in a separate line. Morgan alleged that the separate line was required by Labor Code section 226(a)(2).

The trial court disagreed and dismissed the section 226 claims. The appellate court concluded that the trial court properly dismissed the claims because United Retail’s wage statements complied with the statutory requirements of section 226 by “showing . . . total hours worked.” The Court reasoned, in part, that the plain language of the statute did not specifically require two separate lines and that the paystubs used by United Retail provided the employees with the essential information for verifying that they were being paid for all hours worked. Morgan v. United Retail Incorporated (July 2010).

While the employer prevailed in this case, the case is a reminder of the strict requirements of Labor Code section 226. Employers must be sure that each and every paystub contains all of the required information to avoid liability. If you have any questions about this case, or other wage and hour issues, please feel free to contact Susan E. Bishop

Being a nonprofit organization is not the same as being a tax-exempt organization.  The two concepts are related, but are not the same. Almost all tax-exempt organizations are nonprofits, but not all nonprofits are tax-exempt. 

 To be considered a tax-exempt nonprofit organization in California, a nonprofit organization must meet certain legal and regulatory requirements.  If met, the Internal Revenue Service and Franchise Tax Board may grant recognition of tax-exempt status after the submission of proper applications and filing fees. 

Most tax-exempt organizations under the federal law are those that are described in Internal Revenue Code 501(c)(1)-(27).   Most charitable organizations (that is, organizations that operate primarily for charitable, educational, scientific, or religious purposes) must seek recognition of tax-exempt status from the IRS.  Requirements vary depending on the type of tax-exemption sought, but most charities must start by submitting Form 1023: Application of Recognition of Exemption Under 501(c)(3) of the Internal Revenue Code to the Internal Revenue Service. 

Typically, once recognition is granted from the IRS, a California nonprofit will submit Form 3500, Exemption Application or Form 3500A, Submission of Exemption Request to the Franchise Tax Board for its approval. 

 If you are interested in learning more about the process for gaining tax-exempt status in California, please contact Susan E. Bishop at (408) 369-0800

Attorney Elena Rivkin Franz was quoted for the Credit Union Times publication on the new Fannie Mae regulations lending to homeowners who have strategic defaults.  Read the article here:  http://www.cutimes.com/Issues/2010/July-7-2010/Pages/Fannie-Mae-to-Target-WalkAways.aspx

Does your company use independent contractors to sell your products in the wholesale market?  If so, your company must be aware of the Independent Wholesale Sales Representatives Contractual Relations Act of 1990. 

On June 24, 2010, for the first time, the Second District Court of Appeal of the State of California evaluated the “Independent Wholesale Sales Representatives Contractual Relations Act of 1990” (the Act).  The Act was designed to clarify the contractual requirements between manufacturers and their nonemployee sales representatives (independent contractors).  It applies primarily to independent sale representatives selling on behalf of wholesalers. 

 In Edwin Baker v. American Horticulture Supply, Inc., the Court held that the Act is designed to protect salespersons from both willful and nonwillful failures by companies to comply with the requirements set forth in the Act. 

A.        Written Contract.  The Act requires that the manufacturer and the sales representative enter into a written contract that includes the following: 

              1.  All details of the commission arrangement, including its rate and method of computation;

              2.  The time when the commission will be paid; and

              3.  The grounds for chargebacks, if any.  

B.        Signature and Acknowledgment.  Once the contract is signed, the representative must be provided with a signed copy of the written contract.  The representative must sign that he or she received the copy.

 C.        Commission Explanation.  When the business pays commission, the sales representative must be provided with details of the commission received, including the rate of commission on each order, the customer’s name and invoice number for which each payment is made, and information on any chargebacks. 

D.        Consequences.  The Act provides that any business covered by the Act who fails to pay commissions as provided in the written contract shall be liable to the sales representative in a civil action for compensatory damages or triple the damages proven at trial, depending on whether or not willfulness was found.  In addition, the prevailing party is entitled to recover reasonable attorneys’ fees and costs. 

If your business hires contractors to sell your products, this Act might apply to you.  We would encourage you to seek legal advice to ensure legal compliance, as the penalties for failing to comply may be significant.

Federal law provides substantial tax benefits to certain nonprofit organizations established as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.  However, even after the exempt-status has been established, the charity’s officers, directors, employees and volunteers still have ongoing responsibilities to ensure that the tax-exempt status can be maintained. 

In order to maintain its tax-exempt status, a public charity must limit its participation in certain activities and cannot participate in other activities. 

 LOBBYING

 Public charities may engage in lobbying activities only to the extent that they are not substantial.  A public charity that engages in substantial lobbying is likely to have its tax exemption denied or revoked. 

 There is no black and white formula for defining “substantial.”  The Internal Revenue Service (“IRS”) considers a variety of factors, including the extent of lobbying in relation to the percentage of total funds expended in a designated period of time.  Of course, the IRS may also simply look to the impact on a legislative process to make its determination.  The IRS looks at each situation on a case-by-case basis.        

In the alternative, most public charities may elect to use the “expenditure” test by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organizations to Make Expenditures To Influence Legislation.  This allows a nonprofit to engage in a certain amount of legislative activities by allowing a certain percentage of expenditures to be spent on lobbying, depending on the size of the organization. 

PRIVATE BENEFIT AND INUREMENT

A public charity may not allow more than an “insubstantial” accrual of private benefit to individuals or organizations.  This limitation is to ensure that the nonprofit serves a public interest, not a private one.  A private benefit can be many things, including the payment of unreasonably high compensation to a director or employee.  

 POLITICAL CAMPAIGN INTERVENTION

Public charities are prohibited from engaging in virtually all political activities.  This includes any political campaign on behalf of a candidate for public office.  If a public charity engages in any political campaigning, its tax-exempt status will be taken away and it must pay taxes that it would not otherwise been required to pay. 

 Nonprofits must work hard to maintain their tax-exempt status.  If you have questions about acquiring tax-exempt status or maintaining it, please contact Susan E. Bishop at (408) 369-0800.

Strategic default, that is, stopping payments on a mortgage for reasons other than an inability to make the payments, has become a trend nationwide for homeowners who own properties with values that have significantly decreased.  The consequences for walking away from your home vary depending on the state you’re located in and the type of loan you have taken out.  In California, generally, property owners who have taken out a purchase-money loan in a primary residence are not liable for a deficiency judgment by the lender.  The laws on deficiency judgments vary state by state. 

Although you can generally find out what your liability and tax consequences might be for walking away from your mortgage by contacting a real estate attorney and CPA, it is difficult to know what future effects the strategic default will have.  Specifically, will a homeowner be able to purchase a property again, and when. 

FannieMae has released two underwriting guidelines recently describing what waiting periods must be in effect after preforeclosure events, like short sales, a deed-in-lieu of foreclosure, or a foreclosure.  FannieMae has now altered their policy to encourage borrowers to work with their mortgage servicer to avoid foreclosure, and has instituted guidelines on how long Fannie Mae will wait before they might lend to a borrower who has a “credit event” like a foreclosure on their record.   FannieMae is encouraging borrowers to attempt modifications by communicating with their lenders.  Borrowers who have extenuating circumstances, and those who communicate with their lenders to work towards a modification solution, may be able to qualify for a FannieMae backed mortgage in as little as three years.  Borrowers who don’t will be penalized, as the current five year waiting period requirement has been increased to up to seven years. 

 Interestingly enough, FannieMae is also encouraging servicers to provide recommendations in the future on whether the borrower is a “strategic defaulter” and whether the borrower is a good candidate for a deficiency judgment. 

 A deficiency judgment is a judgment secured at the conclusion of a foreclosure lawsuit by your lender, for the difference between the mortgage and the amount received at the foreclosure sale.  The lender must file a lawsuit against you, where you receive notice and have the right to defend yourself.  If you do nothing, the lender will automatically receive a judgment.  If you are sued by your lender, it is important to contact a real estate attorney who can advise on whether the lender had the right to sue, and whether there are any statutory protections in place that you can use as a defense.  An attorney can also help you negotiate a settlement if you do not have a legal defense.