Time for a Corporate Audit?

If you own or operate a business, you are probably due for a corporate audit. Surprises and hassles that cost time and money are lurking. Here are some examples:

1. Employment agreements. There are hundreds of lawsuits in Wisconsin between employers and employees over terminations and employment agreements. Here are a few problem areas:

a. New Restrictive Covenants. Can you ask a current employee to sign an employment agreement with new restrictive covenants? Yes, but you will have to provide some consideration, either in the form of extra money or some other perk.

b. Non-Competition Covenants. Is a non-competition clause legal?

Yes. The Wisconsin Supreme Court recently stated that although non-competition agreements are "disfavored" by public policy (because they inhibit an employee's ability to find work), they will be enforced if they are carefully written and do not overreach.

  • Term. Is there a limit to the term of a non-competition provision? Generally, yes. It depends upon what's reasonable to protect the company. The term should be limited to six months to two years, depending on how strongly the company feels the employee could hurt them by working for a competitor. The shorter the term, the more enforceable the covenant.
  • Territory. Is there a maximum territory a company can protect with a non-competition provision? Yes, it's usually limited to the company's reasonable market area. A claim of nationwide territory by a company that does business only in southeastern Wisconsin is unenforceable.

Contacts With Former Customers. Can a departing employee be prohibited from contacting and soliciting business from the company's customers? Yes, but the restriction is most effective if it includes only customers who the departing employee directly contacted within the prior six to 12 months.

Recruitment of Co-Workers. Can a departing employee be barred from recruiting co-workers to his new company? Yes, but the term must be reasonable and limited to six to 12 months.

e. Prohibited Speech. Can the departing employee be restrained against making derogatory remarks about the company? Yes. But this is a two-way street. The company must guard against any bad-mouthing of the former employee.

f. Confidentiality Covenant. Can the company impose a gag order on a current or former employee not to reveal the company's trade secrets or its proprietary or confidential information? Yes, the company's policy on protecting its business information should be stated in the employment agreement, the non-competition agreement and the employee handbook.

g. At Will Employment. If Wisconsin is an at will employment state, can any employee be terminated at any time? Yes; Wisconsin is an at will state. But the termination of an employee who is older, has a handicap, has the heritage of a racial minority, cannot perform the job because of gender or has complained of discrimination should only be undertaken after counsel with an attorney.

2. Employee Handbook. Is an employee handbook a contract between the company and the employee? Yes. The Wisconsin Supreme Court has held the employee handbooks are contracts between the employer and the employees, and the handbook's provisions are enforceable by the employees. Beware what you put in the handbook.

a. Return of Company Property. Can the company require a departing employee to return all company-supplied equipment (e.g., smartphones), notes, documents, customer contract lists, price lists and other proprietary information? Yes; this company policy should be clearly stated in the Employee Handbook and in any employment agreement.

3. Minutes of Corporate Meetings. Do you keep minutes of your corporate meetings, and are they written, signed and stored by a corporate executive? If the answer is no, you could be headed for trouble. Your minutes can be terse, but they can become invaluable if you get sued. For example:

a. Ratification. Do the minutes for your annual meetings include a statement that the actions of the officers and executives of the company in the past year are approved and ratified? Every executive should insist on the inclusion of such a resolution for personal protection and peace of mind. (State law does not require LLCs to hold annual meetings. So how does a non-owner executive protect himself from liability?)

b. Election of directors and officers. Do your corporate minutes accurately reflect the elections, resignations and replacements of all officers? If not, the authority of an officer may be vulnerable to challenge — and contracts that the officer has signed could be tossed.

c. Key company actions. Have important actions of the company been duly authorized by the board of directors and then documented? The minutes should reflect board discussions and actions on key corporation actions, such as strategic plans, budgets, acquisitions, expansions, significant investments and the adoption or amendment of employee benefit plans. For example, when an employee benefit program is adopted, the minutes should include a statement that the board had reviewed a particular proposal, found it reasonable and had taken a specified action.

4. By-Laws. Are your corporate by-laws (or your LLC operating agreement) up to date?

a. Officer Titles. If you use titles like CEO or CFO, do your by-laws recognize those particular titles and endow them with authority? Most by-laws that come out of a form book do not mention titles like CEO or CFO, and these titles are not recognized by state law.

b. Indemnification. Do your by-laws indemnify and hold harmless your officers and key decision-makers for actions they have taken? Your key employees should be assured that they will not be held liable for corporate decisions they made (except where there is evidence of fraud, gross negligence or intentional misconduct).

5. Terms & Conditions (Ts & Cs). When your company purchases or sells supplies or services, it makes these transactions according to its Terms and Conditions. Your Ts & Cs are your boilerplate language that dictates how every transaction shall be done. Importantly, it includes a statement on what warranties your company expects or provides.

a. Purchase Order Form. Is your purchase order form integrated with your Ts & Cs? If not, this should be done. Your purchase order form should include a statement that all transactions are subject to your Ts & Cs.

6. Subpoena policy. Can you tell a deputy sheriff or process server to stay away from your employees while they are at work? In many cases, yes. Your HR office needs to be prepared. Some legal documents, like a wage garnishment, can be accepted on the spot. But a legal summons to an employee that announces a divorce action, a criminal investigation, a subpoena for a court appearance or a tax audit should be avoided. Service of those documents during work hours may seriously disrupt the office.

7. Job References. How should you answer questions about a former employee's job performance? Your answer should be terse, short and very limited. You should provide only (a) dates of employment and (b) job title and job description. Be very conservative. Offering subjective statements about a former employee is legally risky — and an invitation to a lawsuit for libel or slander.

8. Intellectual Property: Trademarks, Copyrights and Patents. How can I protect my company's intellectual property?

a. Trademarks. If you have successfully branded your company name or products, file an application for a trademark registration. It's relatively inexpensive. A federal trademark registration fee is only $275, and a trademark registration with the state of Wisconsin is just $15.

b. Copyrights. In some cases, software can be copyrighted — if you don't mind that it becomes a public record. Otherwise you'll find better protection for your proprietary data in a confidentiality agreement.

c. Patents. Patent applications usually call for expert patent counsel.