Getting back your security deposit

The most common legal dispute between residential landlords and tenants is over the withholding of deposit funds.

The purpose of the deposit is to secure the landlord in paying for repairs to the rented premises resulting from damage to the premises caused by the tenant, which is not the result of normal wear and tear.

Two of the most common concerns regarding tenants’ deposits are:

(1) Damage the tenant believes existed prior to their tenancy; and

(2) Damage the tenant believes is the result of ordinary wear and tear.

If the security deposit is retained to pay for pre-existing damages or ordinary wear and tear, that application of the deposit would be improper.

However, without a clear evidentiary record of pre-existing damage, personal memory is a notoriously unreliable source of evidence that is difficult to accurately rely upon.

With respect to ordinary wear and tear, there are common misconceptions about what constitutes ordinary wear and tear.

The best first step in protecting your deposit is to inspect the rented premises, then itemize and disclose all defects to the condition of the premises within three days of moving into the rental unit. Your landlord will usually provide you with a checklist that you can fill out and return.

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It is important to complete this checklist in a timely fashion. At the end of your tenancy, if you are charged for a piece of damage that is shown as already damaged on the checklist, you will have good evidence to protect you.

You might not remember when something in your rented premises was damaged during the tenancy, but after reviewing your move-in checklist you may be reminded that there was no damage when you took possession. This document protects both you and your landlord from mistakes.

Ordinary wear and tear is the unavoidable incremental damage that rental properties suffer from regular use.

However, just because damage was accidental does not mean it was a result of ordinary wear and tear.

A common example is with carpets. Just because you accidentally spilled red wine on the carpet does not mean that a large red wine stain is a result of ordinary wear and tear; you may be charged for cleaning or replacement of the carpet.

There may also have been wear and tear present prior to your use of the premises, but this does not mean that you won’t be held liable for further damage. If carpet was not new when you moved in, remember that carpet has an estimated useful life.

If you moved in to a rental with two-year-old used carpet and caused a need for the carpet to be replaced, you may be charged for the pro-rata value of the remaining useful life of the carpet.

Deposits are factually dependent and every incidence is different. Take photos when you move in and photos when you move out, and schedule a pre-move-out inspection with your landlord during the last week of your tenancy.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 20th, 2016. You can read it on the Register's website here: "Getting back your security deposit"

Holiday bonus - pros and cons

Dear Alex:

Our business has a long history of giving holiday bonuses to our employees.

We take pride in the care we have for our employees, and the tradition of bonuses is one of our favorite ways to show appreciation to them.

We used to do our own payroll, but this year we started using a company to do our payroll due to the complications that have grown over the years.

Now, our new payroll company has told us that we might be creating a problem with the bonuses, because of overtime rules.

How can this be?

Holiday bonuses are a great way to show appreciation to employees, engender good relations and loyalty and reward a job well done. I hope you will continue to keep this tradition alive.

Unfortunately, there is a possibility that holiday bonuses can result in several problematic situations for employers, including wage-and-hour liabilities for employers who aren’t careful.

The problem can arise when categorizing what you call a “bonus.”

If the bonus is not truly discretionary, then the bonus gets lumped into the employee’s regular rate of pay.

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For example, a bonus is not discretionary if it is promised as part of the employee’s compensation. This increase in calculating the regular rate of pay carries into the calculation of overtime wages.

Overtime wages are calculated based upon a multiplier of the employee’s regular rate of pay. So if you have undervalued the regular rate of pay by failing to include the bonus during the year, you may have liability for underpaid overtime wages.

Thankfully, if your bonuses are truly discretionary bonuses, they may not be considered a part of the employee’s regular rate of pay, and thus may not result in any change to calculating overtime.

To be truly discretionary, the employee cannot have a contractual right to a bonus, and the employer must have full discretion over whether a bonus will be paid at all, If a bonus is to be paid, the employer must have discretion over the amount to be paid.

This means that bonuses tied to objective metrics such as performance, attendance, or tenure, can be problematic.

Another area of potential unintended consequences for discretionary bonuses is in the equal and fair treatment of all employees.

Discretionary, subjective bonuses are ripe for a claim of discrimination for disparate treatment among employees.

If you award two employees of similar standing with different bonuses, rather than creating goodwill and loyalty among your employees this could become divisive, resulting in resentment, fracturing functional teams, and possibly claims of discrimination.

At a minimum, keep holiday bonuses consistent among job types, if not uniform among all employees.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 6th, 2016. You can read it on the Register's website here: "Holiday bonus - pros and cons"

Seasonal hiring pitfalls

Dear Alex: 


My retail shop is looking forward to the holiday shopping season. And in preparation we are planning on hiring a part-time seasonal employee, but we don’t want to make a mistake with the employment rules.

Is there anything we should know before we bring a seasonal employee on staff?

The holiday shopping season can easily make or break a retail store’s numbers for the year. The substantial increase in sales volume may call for extended holiday hours and additional staff to manage sales and inventory.

For smaller employers who aren’t accustomed to monitoring employee overtime rules, tracking hours, paid time off for sick leave, and general management of part time staff can be hazardous in terms of wage-and-hour law compliance.

The financial benefit an employer could gain from these seasonal personnel could be easily wiped out by an employee filing a claim with the California Department of Labor Standards Enforcement.

Your business may not be accustomed to extended store hours, which could result in inadvertently scheduling of your employees to work sufficient hours that they may be eligible for overtime.

Pay careful attention to the number of hours your employees are working per day, the number of consecutive days of work, and the weekly total of hours your employees are working.

In general, non-exempt employees must be paid overtime if they work in excess of 8 hours in any workday, 40 hours in any workweek, or work if they work more than 6 consecutive workdays.

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Overtime rights cannot be waived by the employee. Seasonal workers employed for more than 90 days will be entitled to accrue paid sick leave.

Many seasonal workers are young people. If you are hiring a minor under age 18, if that person is still in high school you will usually need to obtain a work permit from the employee’s school, signed by the employee’s parent or guardian.

Most teens may not work during regular school hours and may only work a reduced number of hours per school day depending upon age.

Teens 16 and older are generally permitted to work until 10 p.m., although younger teens aged 14 and 15 are restricted from working past 7 p.m. Minors under age 14 have much more restrictive employment rules, if they are permitted to work at all.

One area wrought with confusion is how these employees fit within obligations of the Affordable Care Act (ACA).

While most local retail businesses do not need to worry about this, if you have over 50 full-time-equivalent employees, your business is an Applicable Large Employer, and subject to shared responsibility and reporting requirements under the ACA.

Classification of the people who work for you as seasonal employees or seasonal workers is important in the calculation of those full-time-equivalent employees.

If your company is close in proximity to the Applicable Large Employer classification, be sure to research these rules carefully and consult an employment law adviser.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on November 22nd, 2016. You can read it on the Register's website here: "Seasonal hiring pitfalls"

Four end-of-year business compliance activities

Dear Alex:

The end of the calendar year is coming fast. Are there any legal compliance steps for my business that I should take to wind up 2016 and be ready for 2017?

It’s hard to believe that we’re already in the second week of November — I am always surprised by how fast the time between Thanksgiving and New Year’s Day passes.

Legal compliance activities can seem like a mystery, but in most instances they are fairly straight forward. Here are some important annual compliance measures that businesses should be aware of:

File your statement of information with the Secretary of State

This document serves as an update to the state of California concerning who the owners and executives of your company are.

Corporations are required to file this document annually, while Limited Liability Companies (LLCs) need to file only every other year.

There are late penalties for failing to file, and your due date is based on your entity’s filing date. E-filing is available online at the Secretary of State’s website.

Conduct an annual meeting

Your formation documents (corporate bylaws or LLC operating agreement) will give instruction on how to properly conduct an annual meeting of the company owners and company management.

The meeting can be as simple as affirming and approving the activities of the previous year, or if necessary, as complex as developing long-term planning strategies and discussing significant financial or structural changes to the business.

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This also provides a great opportunity for everyone to check in with one another on how things are progressing with the business.

Take minutes, write them down, add a copy of the minutes to your company’s minute book, and provide attendees and absentees with copies.

Employee evaluations

If you have not performed annual evaluations of your employees, while the holiday season may not be an ideal time to conduct those evaluations you may want to take use the milestone of the New Year to schedule performance evaluations.

Performance evaluation meetings are also an opportune time to award end-of-year bonuses, if your company offers those incentives.

Incorporate or form an LLC

Many sole proprietors or partnerships wonder when to form a limited liability entity.

The end of the year, and specifically the last two weeks of December, is an excellent time to form your new business entity.

If you form your entity too far in advance of the end of the year, you will owe franchise taxes to the State of California for the current year as well as the next year, but by waiting until the very end of the year, franchise taxes will not be assessed for the current year.

If you commence business operations under the new entity as of the first day of the New Year, you may save money by only operating as one entity type during the year, which means you should only have one tax return to file for the year.

If you wait, you may have to file two tax returns, which is an additional cost for your business.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on November 8th, 2016. You can read it on the Register's website here: "Four end-of-year business compliance activities"

Can landlord reject sublease?

Dear Alex:

I own a nail salon in a small retail shopping center.

Last year, we planned to expand our operation by opening a retail boutique in the space next door to our nail salon. We signed a lease for the space next door, but our plans didn’t work out and now the additional space is vacant.

We want to sublease that space to a masseuse, but our landlord won’t approve of the sublease. Can the landlord do that?

Many small businesses change their growth plans over time, and it is common for businesses to extend their overhead costs in anticipation of growth.

It is also common for plans to change. Many times, a business will never experience the growth that they anticipate, and will have to reduce overhead expenses to remain viable.

It is understandable that your nail salon would have difficulty supporting a vacant retail space next door, and it is reasonable that you would want to reduce your expenses by subleasing that space to another tenant.

Almost all modern commercial leases contain provisions regarding the tenant’s rights or restrictions on subleasing. If the lease permits subleasing at all, it is usually only permitted with the landlord’s prior consent, which may be withheld in the landlord’s discretion.

Many times, a tenant who wishes to sublease their space will propose a potential sub-tenant to the landlord, and become upset when the landlord rejects that sub-tenant.

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However, your landlord must consider many factors when approving a potential sub-tenant. You as the original tenant will become the “sub-landlord,” so you should also consider these factors, because your business will most likely have to guarantee the performance of the new sub-tenant under the sublease.

If the sub-tenant fails to pay the rent, you may be liable to pay for their default.

The potential sub-tenant must satisfy the landlord’s credit requirements.

A small business without much capital and without a long history of successful operations may be too risky of a tenant in the landlord’s opinion; in addition to the possibility of the tenant’s failure to pay the rent on time, the eviction process is time consuming and costly.

Those expenses are concerns of the landlord, and as the potential sub-landlord, they should be concerns of your business as well.

Tenant mix is also a significant concern of landlords, particularly in retail centers. The landlord may have granted exclusivity to other tenants on certain business types.

You wouldn’t want the landlord to allow another nail salon to move in next door, and other tenants may not want competing uses in the center either. Additionally, certain use types may be less desirable for family-oriented shopping centers.

For example, a landlord would probably not want a tobacco store to open next door to an ice cream parlor and toy store. Massage providers are a use type that landlords are historically cautious of permitting.

For all of those reasons and others, your proposed sublessee may not be a good fit for the space, and depending upon your lease terms, it is likely within the landlord’s discretion to reject the proposed sublessee.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on October 25th, 2016. You can read it on the Register's website here: "Can landlord reject sublease?"

Three ways your corporation might not protect you

Dear Alex:

I am the owner of a small interior decorating business with three employees.

When I began business in 2010 I formed a corporation to protect myself.

Recently, one of my employees accidentally bumped a client’s house with our work truck and caused damage to the building. The client has threatened to sue me personally.

Can they do that?

One of the first calls you should make when there is an incident of loss and damage should be to your insurance carrier. If you have sufficient insurance, this type of matter is most commonly resolved through the insurance carrier.

However, if you have gaps in coverage or have reached your policy limits, you or your business will be on the hook. If you accept that there was fault and there will be money damages in your case, your business will be exposed to that liability.

The question of whether your personal assets may also be exposed to these damages depends on the facts of the case and how you have operated your company in the past.

Often, people believe that once they form a limited-liability entity like a corporation, they do not need to take further steps to protect themselves personally from the business’s liabilities.

That assumption is often incorrect, and every business owner operating through a corporation should be aware that a business’s limited liability protection does have limitations.

When those limits are reached, a court can hold the shareholders (the owners) personally liable for business debts, which is known as “piercing the veil” of limited liability.

Here are three common ways limited liability protection of a corporation can be pierced:

Commingling of assets

“Commingling” occurs when the owner combines his business assets with his personal assets. This can happen in many ways, such as if the business owner keeps his business income in the same bank account as his personal bank account, or owner pays personal debts with corporate funds.

Not observing corporate formalities

A corporation must appoint officers, hold annual board and shareholder meetings, keep annual minutes, and file annual documents with the California Secretary of State. Failing to do so could disrupt the liability protection of the company.

Undercapitalization

Undercapitalization essentially means that the business does not have enough money or assets to cover its reasonably foreseeable liabilities. The adequacy of a corporation’s capital is determined on a case-by-case basis and depends on the type of business being conducted.

Fortunately, by keeping business assets separate from personal assets, properly documenting adherence to corporate formalities, as well as adequately capitalizing the business, a prudent owner can avoid these pitfalls and maintain the limited liability protection of their personal assets that a corporation offers.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on October 11th, 2016. You can read it on the Register's website here: "Three ways you corporation might not protect you"