Author: DAR Law

#MeToo: A New Perspective On Harassment Investigation

Posted on by DAR Law

In the wake of the #MeToo movement, there has been a surge in the number of sexual harassment charges filed with the Equal Employment Opportunity Commission (EEOC).

In October 2019, the EEOC reported its fiscal year 2018 statistics showing that sexual harassment charge filings increased by 13.6% over the previous year; reasonable cause findings increased by 23.6% to nearly 1,200; and the EEOC recovered nearly $70 million for the victims of sexual harassment through administrative enforcement and litigation, up from $47.5 million in 2017.

In connection with these statistics, the EEOC has ramped up its role as enforcer, educator and leader in preventing workplace harassment. Given the dramatic increase in sexual harassment filings – and the focused efforts of the EEOC – it is incumbent upon employers to create a workplace culture that encourages the reporting and investigation of sexual harassment complaints. By focusing on the identification and prevention of sexual harassment in the workplace, employers can reduce their exposure to liability, and foster a professional, safe and respectful workplace environment.

Embrace (don’t avoid) the sexual harassment investigation. 

When faced with a sexual harassment complaint, some employers make the mistake of failing to investigate or engaging in a perfunctory investigation, neither of which will protect the employer from liability. Under federal and state laws, certain affirmative defenses are available to employers who take reasonable steps to prevent and promptly correct sexual harassment in the workplace.

For instance, provided no adverse employment action has been taken against the complainant, the employer may assert such a defense if it conducts a prompt, thorough and impartial investigation of the sexual harassment complaint and takes appropriate remedial action, as necessary, to ensure that the complained-of conduct does not recur. Thus, depending on other factors, the investigation and the remedial action taken as a result of the investigation assists in forming a shield for the employer, which may ultimately insulate the employer from liability.

The investigation must be prompt, thorough and impartial. 

Employers who fail to properly conduct a prompt, thorough and impartial investigation may be prohibited from asserting such a defense. An investigation that is perfunctory in nature or a sham, i.e., “I’ll talk to Chuck (the accused) – I’m sure he didn’t mean anything by it,” will not meet the “thorough” and “impartial” requirement. One that is unnecessarily delayed for several weeks may not meet the “prompt” requirement. Additionally, certain situations compel the use of an independent investigator to ensure impartiality, such as when the accused is the company’s CEO and the complainant is his/her assistant. Other circumstances may also require an independent investigator, such as when multiple complainants are involved; when the allegations concern extremely egregious conduct, such as sexual assault; or when the conduct has gone unreported for long periods of time. Although there can be some variation in the investigation depending on the particular circumstances of the complaint, every investigation must be prompt, thorough and impartial.

What about the “troublemaker” employee? 

It is never acceptable for an employer to make a precursory, subjective determination that an employee alleging sexual harassment is lying or that such employee’s claim is otherwise unworthy of investigation. A common mistake made by employers is to determine, for example: “Bea has always been a troublemaker and complainer at TCorp. We didn’t investigate her complaint of sexual harassment because we knew it wasn’t true and didn’t want to waste company time and money.”

The employer may ultimately determine through investigation that Bea’s complaint was falsified or misconstrued, however, that determination should never be made prior to the investigation. On the other hand, the investigation could show that Bea was the third victim of the accused, a lower-level supervisor, who regularly grabbed the breasts of Bea and two other victims, rubbed his genitals against them as they worked, made sexually inappropriate comments and gestures to them on a daily basis, and threatened to terminate their employment if they reported his conduct.

In this scenario, assuming TCorp had no knowledge of the harassment prior to Bea’s complaint, by conducting a prompt, thorough and impartial investigation and taking appropriate remedial action (termination of the accused in this situation), TCorp may be able to avoid liability and limit damages if Bea were to file a lawsuit. Moreover, by investigating Bea’s complaint, TCorp demonstrates to employees that sexual harassment is not tolerated in the workplace, and fosters a workplace culture that encourages reporting and respect.

Alternatively, if TCorp does not investigate Bea’s complaint, and thereafter the accused harasses two additional employees, TCorp’s knowledge of Bea’s complaint combined with its failure to investigate could easily result in TCorp being found liable for the sexual harassment claims of all five victims, thereby potentially exposing it to a financially ruinous outcome.

But we only need to investigate claims that complainants want investigated, right? 

Other common mistakes made by employers include not investigating harassing behavior employers know of but has not been reported, and not investigating allegations of harassment based on the complainant’s desire to keep the matter confidential.

An employer is imputed with “knowledge” of harassment and is legally obligated to investigate it when a member of management observes the harassing conduct first hand or learns of it through a witness other than the complainant. Likewise, an employer is obligated to investigate if it receives a complaint of harassment but the complainant wants to keep it confidential and does not want an investigation. The defense of “we knew about it but she didn’t want us to investigate it” or “we saw it but no one ever reported it” does not relieve an employer from its legal obligation to protect employees from known harassment in the workplace.  Indeed, if employers were able to rely on such a defense and avoid liability, it would be completely contrary to an employer’s responsibility to create a harassment-free workplace that encourages reporting and investigation and fosters a workplace culture that supports a safe and respectful work environment.

Employers who fulfill these responsibilities can improve their workplace culture and reduce their potential risk of exposure to liability related to claims of sexual harassment.

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Janis L. Adams of Danbrook Adams Raymond PLC is an experienced employment law attorney and business owner. You can reach her at jadams@darlawyers.com

This article was featured in the November 2019 issue of the Traverse City Business News.

Background Check Compliance Check-Up:

Posted on by DAR Law

FCRA lawsuits against employers on the rise

The name of the Fair Credit Reporting Act (FCRA) elicits visions of “what’s your credit score” commercials and retail counter credit card pitches. In spite of its name, the FCRA governs the manner in which employers conduct certain background checks and make related adverse employment decisions. As a result of the misnomer, many employers overlook their FCRA compliance obligations and unwittingly subject themselves to potential liability each time they request a third party to conduct an employee or applicant background check.

Class-action lawsuits for noncompliance with the FCRA have been on the rise and companies are paying substantial sums as a result. In 2018, Petco and Frito-Lay Inc. both agreed to FCRA settlements totaling $1.2M and $2.4M, respectively. In February 2019, a federal court approved a $2.3 million settlement in an action brought against Delta Airlines by applicants who alleged that Delta did not properly disclose and obtain authorization for pre-employment background checks. Considering the above, it is important that employers understand their FCRA obligations when using employee or applicant background checks.

When does the FCRA apply?

The FCRA applies to employers using background checks or consumer reports from consumer reporting agencies to make employment decisions, including but not limited to hiring, retention, promotion, or reassignment. A consumer reporting agency is any third party company that is in the business of compiling background information. When compiled by such a company, employment background checks are generally consumer reports. Consumer reports can include information from a variety of sources, including, but not limited to, residential and employment history, and education and criminal records.

What does the FCRA require employers to do?

The FCRA requires employers to take certain steps before they obtain a consumer report, and before and after they take any adverse action based on that report. Before requesting a consumer report on an applicant or employee, the employer must do the following:

Disclosure: The employer must disclose to the individual in writing that the employer will procure a consumer report(s) and might use that information for employment-related decisions. This disclosure must be in stand-alone format and cannot be included in the employment application. The disclosure can include a brief description of the nature of the consumer report the employer will procure. Notwithstanding, the disclosure should not contain any other information that will detract from the disclosure, like release or waiver language. • Authorization: The employer must obtain written permission from the individual. The authorization form should clearly describe the type of consumer report being authorized and the frequency at which the report will be procured. For instance, if the employer will seek consumer reports throughout employment in advance of any promotion or reassignment, the authorization language should conspicuously state that. Otherwise, the employer will need to provide a disclosure and obtain authorization each time.

• Certification:

The employer is required to certify to the company who is preparing the report that the employer has complied with FCRA requirements, and that the employer will not discriminate or otherwise use the information in violation of applicable federal and state equal employment opportunity laws.

Before taking adverse action against an applicant or employee based on information in a consumer report (e.g. reject an application, terminate an employee, deny a promotion, etc.), the employer must provide a pre-adverse decision notice that explains what the adverse decision will be and includes:

• A copy of the consumer report relied upon to make the decision

• A copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” which the company furnishing the report should have provided to the employer or, if not, can be found on the Federal Trade Commission website (ftc.gov)

• An opportunity for the individual to review the report and correct any inaccuracies and/or explain information in the report.

Finally, if the employer ultimately takes adverse action against the individual based on information in the consumer report, the employer must provide an adverse decision notice that explains the decision and includes: The contact information (name, address, and phone number) of the company that provided the consumer report; an explanation of the individual’s rights to dispute the accuracy or completeness of the report and get an additional free report from the providing company within 60 days; and a statement that the company providing the report did not make the decision and cannot give specific reasons for it.

Employers who use investigative consumer reports that are based on personal interviews have additional obligations under the FCRA.

As evidenced above, failure to comply with the FCRA can be costly for employers. Noncompliance may result in actual damages, statutory damages, punitive damages, and attorney’s fees and costs. Thus, employers using background checks for applicants or employees should work with their legal counsel to assess current background check practices and, if need be, create compliant policies and documentation.

Lindsay Raymond represents employers in all aspects of employment-related matters and litigation.

This article was featured in the July 2019 issue of the Traverse City Business News.

 

From Vine To Pure Michigan Wine: How Growers, Producers And Retailers Are Regulated

Posted on by DAR Law

Our region’s gently rolling topography is spotted with endless rows of grape trellises winding toward the turquoise lakeshore. Each year, more of our agricultural landscape continues to be converted to grape production.

Why, you ask? You guessed it. Wine. Pure Michigan wine. It takes a lot of grapes to produce the roughly three million gallons of wine bottled here in Michigan. But, just how do all those grapes make their way into bottles of wine and who controls that?

The Michigan Liquor Control Commission (MLCC), in conjunction with the Alcohol and Tobacco Tax and Trade Bureau (TTB), is tasked with regulating the manufacture, import, possession, transportation and sale of liquor in Michigan. Michigan maintains a three-tier system of alcohol distribution consisting of manufacturers, retailers and distributors. Almost anyone in the business of manufacturing, importing, possession, transporting or selling alcoholic beverages in the state of Michigan must be licensed through the MLCC and the TTB. So where do our local vineyards, wineries and wine shops fit in?

Got Grapes?

Vineyards are where it all begins. The quality of wine produced depends heavily on the quality of grapes used in that wine. So, does the MLCC really regulate how grapes are grown? The answer is no, as long as the grape grower’s role is strictly limited to growing and selling grapes in their natural state. Since grapes on the vine have not yet been fermented, they are not considered “alcohol,” which keeps grape growers out of the purview of the MLCC and the TTB. (They are subject to other rules and regulations imposed by the Michigan Department of Agricultural and Rural Development.) Additionally, since wine producers want the highest quality product and demand certain grape varietals, agreements between the grape grower and the winery are put in place to lay out specific terms not only for the purchase of grapes, but also expectations for strict farm management practices.

So, You Want to be a Winemaker

Maybe being the mastermind behind crafting world-class wine is your calling. Becoming involved in the actual production of wine triggers licensing and regulation of your activities by both the MLCC and the TTB – unless it is only for your own consumption. Most winemakers in Michigan will produce less than 50,000 gallons of wine annually, and therefore fall into the small wine maker category. Obtaining a small wine maker license from the MLCC requires – among other things – compliance with local zoning, approval from the local governmental entity, fingerprinting and background checks, entity documentation, inspection of financial records and the licensed premises, as well as payment of applicable fees. A winemaker is also required to be licensed at the federal level with the TTB, including registration and approval of all wine labels. While a licensed winemaker will have authority to self-distribute to retailers or sell to licensed wholesalers, a separate permit is required for an on-premises tasting room or direct wine sales to consumers.

Have Wine, Will Travel

So vineyards are not your thing, and you do not want to spend hours checking pH and sugar levels during fermentation. Instead, you decide the sale and distribution of wine to licensed retailers (i.e., your favorite local wine shop) is what you’d like to do. Well, just because you are not producing the wine doesn’t mean you can just sell the wine out of the back of your van. The MLCC and the TTB require distributors of wine to be licensed. A wholesale license allows the distributor to purchase wine from a licensed manufacturer for the purpose of reselling that wine to a licensed retailer. Among other requirements, a wholesale licensee is required to be a Michigan resident for at least one year prior; they cannot sell directly to the consumer; all vehicles used to transport the wine require MLCC vehicle decals; and all individuals engaged in the sale, promotion or delivery of wine are required to have a salesperson license. Additionally, wholesalers must enter into written distribution agreements with the winemakers granting the wholesaler a certain sales territory where they can sell that specific brand of wine.

Just Sell It

If relying on Mother Nature to grow grapes stresses you out, you have no room for stainless steel fermenting tanks, and you do not want to drive around selling wine; perhaps selling wine directly to the consumer is right up your alley.  So, can you just start selling wine out of your storefront?  No. The MLCC regulates the retail sale of wine to the consumer, and requires a retailer to be properly licensed.  Convenience stores, grocery giants and specialty markets alike, all must hold certain on-premises or off-premises retail licenses in order to purchase wine from manufacturers or wholesalers for resale to the consumer.  The process for obtaining a retail license from the MLCC is similar to that of licenses in the other tiers; however, choosing the appropriate type of retail license depends on the activities conducted at the retail location.

From the vine, to fermentation, to bottling and careful placement on our favorite store’s shelves, each glass of Michigan wine should certainly be celebrated. The numerous regulations, laws and administrative rules of the MLCC and the TTB touch almost every aspect of winemaking and being able to navigate them is critical in obtaining and maintaining proper licensing. So, if you happen to run into one of our many local and talented grape growers, winemakers, distributors or retailers, please shake their hand. Thank them for continuing their dedication to this region’s economic stability, preservation of our region’s rich agricultural history, and of course for their contribution to the creation of some of the most delicious wines produced worldwide.

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Cortney Danbrook advises business clients on liquor licensing and regulatory compliance and provides specialized counsel to individuals, families and businesses in the areas of estate planning and administration. She can be reached at (231) 714-0163 or cdanbrook@darlawyers.com.

This article was featured in the June 2019 issue of the Traverse City Business News.

DOL Proposes To Increase Salary Threshold For OT Exemption … Again

Posted on by DAR Law

In March 2019, the U.S. Department of Labor (DOL) issued a proposed rule that would increase the salary thresholds that “white collar” and “highly compensated” employees must be paid to qualify as exempt from overtime requirements under the Fair Labor Standards Act (FLSA). Sound familiar? The DOL previously attempted to modify the salary thresholds in 2016, but was ultimately blocked by a permanent injunction in 2017. After requesting information for a new rule in 2017, the DOL has decided to try again.

Under the current rules, workers who perform certain “white collar” duties and earn at least $455 a week (or $23,660 a year) are exempt from overtime requirements. Further, employees earning at least $100,000 a year, including at least a $455 weekly salary, may be considered exempt from overtime requirements as “highly compensated” employees without having to satisfy each element of the stringent white collar duties tests (i.e., they must primarily perform office or non-manual work and regularly perform at least one of the exempt duties of the other white collar exemptions.)

According to studies performed under the Obama administration, only 8 percent of full-time salaried workers fall below the current white collar salary threshold. Further, the current white collar salary threshold falls below the poverty threshold for a family of four.

The 2016 Attempt at Change

Early in 2014, President Obama directed the DOL to update the FLSA regulations defining which white collar workers are protected by minimum wage and overtime standards. In May 2016, the DOL issued a final rule that more than doubled the salary threshold for the white collar exemptions, increasing it from the current $455 a week (or $23,660 a year) to $913 a week (or $47,476 a year). Thus, it would have extended overtime entitlement to millions of previously exempted workers.

Additionally, the 2016 rule would have raised the salary threshold for the highly compensated employee exemption from $100,000 to $122,148.

In response, 21 states filed a lawsuit seeking to block the implementation of the initial rule, challenging the process by which it was promulgated. In November 2016, a federal court in Texas granted a nationwide temporary injunction, preventing the rule from taking effect. A permanent injunction was issued in August 2017.

The New 2019 Proposed Rule

The new proposed rule does not make any changes to the white collar duties tests. However, similar to its 2016 rule, the DOL’s newly proposed rule significantly increases the minimum salary threshold. This time, the proposed rule raises the threshold to $679 a week (or $35,308 a year). Thus, if implemented, workers earning a salary of less than $35,308 a year will be entitled to overtime regardless of whether they meet the duties tests. While this increase is not as drastic as the amount issued in 2016, it would still extend overtime entitlement to an estimated one million additional workers.

Further, the proposed rule substantially increases the salary threshold for the highly compensated employee exemption, raising it from $100,000 to $147,414. This threshold is significantly larger than the threshold proposed in the 2016 rule, and is the equivalent of the 90th percentile of full-time salaried workers nationwide. Thus, if implemented, employees making less than $147,414 a year, including at least a $679 weekly salary, will be required to also meet a white collar duties test in order to remain exempt from overtime requirements.

Additionally, under the new proposed rule, employers would be able to use certain non-discretionary bonuses and incentive payments, which are paid annually or on a more frequent basis, to satisfy up to 10 percent of the salary threshold.

What Happens Next?

The newly proposed rule will not take effect until a final rule is published, which the DOL currently anticipates will be in January 2020 at the earliest. In the meantime, the DOL is accepting public comment on the proposed rule until approximately mid-May 2019.

Employers should work with their legal counsel to evaluate their workforces and determine what changes, if any, may be necessary should the newly proposed rule become final. Job descriptions and employee classifications may need to be revised; positions may need to be restructured; budgets may need to be reevaluated to accommodate any increased costs; and policies clearly restricting overtime may need to be implemented.

Lindsay Raymond specializes in employment law, represents employers in all aspects of employment-related matters, and defends employers in employment litigation matters. She can be reached at (231) 714-0161 or lraymond@darlawyers.com.

This article was featured in the April 2019 issue of the Traverse City Business News.

Five Steps to Mitigate Employment-related Exposure

Posted on by DAR Law

Starting a business is like navigating a vessel through unfamiliar waters. It requires courage, vision and direction. While courage and vision may or may not be within one’s control, start-ups can most definitely secure solid direction by assembling – before launch – a core team of advisors (including its business, financial, and/or legal consultants) who can provide guidance throughout the process. This will help increase potential successes and mitigate risks.

In Michigan, employers with at least one employee are generally covered by numerous laws governing the workplace, including (but not limited to) laws regarding discrimination, disability accommodation, wages and benefits, occupational safety and health, unemployment compensation, and workers’ compensation. Additional laws apply as employee numbers grow. Thus, it is imperative that every start-up, regardless of size, understands and complies with its legal obligations from the very first day of operation.

The following is a list of five steps a startup can take to protect the business and minimize its risk of potential employment-related exposure:

1. Be Prepared For the Selection Process

Actions taken during the hiring process (even before a single employee is hired) may subsequently expose a startup to potential liability. For example, an applicant who is not selected could claim that the job posting, application, and/or interview process screened him/her out based on a protected classification, like race, sex, age, national origin, religion and disability. Thus, a start-up should ensure that its communications with applicants are nondiscriminatory and compliant with applicable laws.

Business owners should work with legal counsel to prepare job postings and descriptions that accurately and objectively describe the essential functions and requirements of their positions. (These documents are helpful down the road for performance management.) Further, the job application should be reviewed to ensure that it requests necessary information without unlawfully eliciting protected information that is irrelevant to the selection process (e.g., misdemeanor arrests not resulting in convictions, marital status, number of dependents, etc.). Finally, the interview and selection process should be vetted to ensure compliance.

2. Be Prepared for Onboarding

Start-ups should work with legal counsel to prepare offer letters that do not contractually bind the business in unintended ways (e.g., certain language can arguably alter the at-will employment status and require just cause to terminate, etc.). If background checks are utilized, offers should be conditional and proper releases should be obtained. Start-ups should also properly complete I-9 employment eligibility verification documentation for each employee within three business days of hire in accordance with federal law. Finally, all requisite postings and trainings, safety or otherwise, should be completed.

3. Properly Pay Employees

Failure to properly pay employees for time worked exposes a business to potential liability every time a paycheck is incorrect or deficient. Accordingly, violations can quickly accumulate if timekeeping and payroll practices are non-compliant. Thus, businesses should work with legal counsel to ensure that they a) comply with minimum wage requirements; b) correctly classify workers as employees or independent contractors; c) properly classify employee positions as exempt or nonexempt in order to determine eligibility for overtime compensation, and d) make all deductions in accordance with applicable law.

4. Develop An Employee Handbook

Start-ups should work with legal counsel to develop an employee handbook that contains all policies necessary to protect their businesses and comply with applicable law. As an added benefit, the policy preparation process helps business owners work through important issues that may otherwise be overlooked until it is too late. Once finalized, the handbook should be used as a reference to guide employee and management action. Employees and management should be trained on handbook policies and should consult the handbook regularly as issues arise.

5. Use Employment, Non-Disclosure, and Non-Compete Agreements When Necessary

Michigan is an at-will employment state,meaning that employees and employers can terminate their employment relationships at anytime, with or without notice, for any lawful reason. There may be situations, however, where businesses would prefer to have an increased level of certainty to protect their investment in key employees. Additionally, start-ups may have valuable trade secrets and confidential information to protect. Thus, where appropriate, businesses should work with legal counsel to prepare employment and/or non-competition agreements for key employees, as well as non- disclosure agreements applicable to the entire workforce.

By taking these actions, start-ups can set out confidently, knowing that smooth sailing lies ahead.

Our start-up experience (Cortney Danbrook, Janis Adams and Lindsay Raymond):

With our former law firm leaving the northern Michigan area, Danbrook Adams Raymond PLC was launched in a total span of approximately two weeks. Our rapid pace did not permit us to dwell on fears or fret about the unexpected. We had trust and a shared vision that enabled us to conquer our tasks without wavering or looking back. We were conscious of who we chose as our professional advisors and service providers, knowing that their knowledge and expertise was crucial to our success. We also knew our approach to the legal profession would set us apart, not only because we are all women, but because we have years of experience in highly focused areas of the law, and we are authentic, down-to-earth and approachable. It is said that it takes a village to do most things in life, and starting a business is certainly one of those things. We simply could not have done it without each other and our staff, business partners, clients and this community.

Advice for the new business owner:

Be sure to partner with people whom you respect, who are like-minded in their dedication to providing the highest quality services to clients, and who hold a similar vision for the organization.

 

Lindsay Raymond specializes in employment law, represents employers in all aspects of employment-related matters, and defends employers in employment litigation matters. She can be reached at (231) 714-0161 or lraymond@darlawyers.com.

This article was featured in the December 2018 issues of the Traverse City Business News.

Creating Responsible Caretakers

Posted on by DAR Law

Recently, a client shared a story with me that I will never forget. While skiing out west, he rode a chairlift with a young woman in her mid-twenties. As they chatted, he asked her what she did for a living. She replied, “Travel and ski.” When he inquired (in a not so subtle way) how she could afford to travel the world, she replied, “My great-grandfather’s trust.” Curious to know more about this tycoon great grandfather who built wealth spanning generations, he asked, “What did your great-grandfather do for a living?”  Her reply? “I have no idea.”

Over the course of just a few generations, how could there be such a disconnect between the sacrifice it took to create wealth, and respect for being the recipient of wealth created by that sacrifice? Does the lack of respect or an obligation to carry it forward mean the demise of family wealth? Each generation strives to create a better life for the next. We work tirelessly to build a solid foundation for our children. To provide them with the resources and opportunities we never had, while sparing them the pain we endured. But can there really be appreciation for something without the sacrifice? Can someone really be grateful for something they have not earned? The answer is yes, but the responsibility may just be on the wealth creator, not necessarily the wealth recipient.

Share the Story

In order to appreciate something, you need to have respect for where it came from. A family’s wealth can be a centennial farm, a first generation business or “old money” passed through generations. Each was built with a story. Not just a story of success, but one of heartache, loss and failure along the way. Share the stories with the next generation – both good and bad. There is always something to be learned from success, but there is even more to be learned from failure.

To Disclose or Not to Disclose

If a child knows they will inherit wealth, are they less motivated to make something of themselves? The fear of creating entitled, non-productive members of society leads the vast majority of families to keep their wealth a secret. The problem?  Wealth cannot be managed responsibly by someone who doesn’t know it exists. Change how wealth is viewed within your family. Discuss wealth as a privilege, not something that is expected, but something that is earned. If earned, wealth becomes a resource that creates opportunity.

Introduce the Concept

Education and preparation precede every successful transition of a family’s wealth, property or business. Engage the next generation in the transition plan. Involve them in the day-to-day management of that wealth and slowly increase their responsibilities over time. Introduce the skills they will need, but don’t hold their hand. Give them the tools, but let them struggle with how to use them. Be a sounding board for advice, not a dictator of the process. The first time your family learns to manage wealth should not come when you are no longer there to guide them.

Foster Relationships

Generational wealth is built and maintained with the help of key advisors. The relationship between an individual and their accountant, financial advisor and attorney can span decades. Inherent in these relationships is institutional knowledge about business decisions, historical planning and family dynamics. Unfortunately, wealth often dissipates between generations when relationships between these advisors and the next generation are not well-established. Make the introduction between your family and key advisors early and allow those relationships to evolve naturally. It will take time to build trust and develop mutual respect between them.

Create Caretakers

Children should feel they are part of something bigger. Gratitude for what they received, but also a sense of stewardship of that wealth for the next generation. Communicate your expectations, but listen, too. Develop a family mission statement together. Incorporate intergenerational ideas, values and beliefs, allowing each family member to play a role in the family story. Ultimately, you will have to have faith that you successfully prepared the next generation to continue that story. After all, they will be the caretakers of the legacy you created.

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Cortney Danbrook advises business clients on liquor licensing and regulatory compliance and provides specialized counsel to individuals, families and businesses in the areas of estate planning and administration. She can be reached at (231) 714-0163 or cdanbrook@darlawyers.com.

This article was featured in the October 2018 issue of the Traverse City Business News.

Positioning the Family Cottage for Generations

Posted on by DAR Law

Northern Michigan summers are synonymous with family gatherings at the cottage. Whether it is pine paneled walls filled with decades of family photographs, a centennial farm or a newly purchased lake house; families flock to these idyllic places seeking to honor family members, reminisce and reconnect. There is something unique about “our happy place.” In the midst of organized family chaos, endless meal service and loads of laundry - time finally stands still, Mother Nature shines her brightest, and we remind ourselves what truly matters in life.

Our ancestors established homesteads to serve as a foundation for generations. Families lived and worked the land, generation after generation. In a world where family members are now spread out across continents, our cottages have become the modern day homestead. A place to bring everyone back together. However, without a family’s livelihood tied to the cottage and no family matriarch or patriarch to manage the familial chaos, how do we ensure the “homestead cottage” will survive? The reality is many don’t. Not for lack of trying or absence of sentimental attachment. Most simply do not survive because there was no plan. Life requires planning and our cottages are no different. Planning not only takes the emotion out of decision making, it creates a roadmap for a successful transition from one generation to the next. The process for creating that roadmap is as unique as our family units and the cottages where we congregate.

1. Initiate the Conversation

Life and financial circumstances differ between family members. While our wish is that everyone will share in ownership and enjoyment of the cottage, some family members may not share the same vision. Have a conversation with the next generation. Ask questions about their wishes, and tailor your cottage succession plan accordingly.

2. The Governing Instrument

The type of document used to manage a cottage depends on circumstances specific to each individual, their family and the property. While Michigan’s uncapping statute has been broadened substantially to eliminate the sudden rise of property taxes upon death, pitfalls remain. Current titling and proposed future
ownership structure must be analyzed as part of choosing the appropriate governing document.  Depending on circumstances, this could be a Tenants In Common Agreement, formation of a Limited Liability Company or development of a Cottage Trust.  Whatever the structure is, anticipate potential management and operational issues, clearly define the expectations of the next generation of owners and address how decisions will be made.  Understand that relationships and family dynamics will change over time, so be forward thinking on issues that could potentially affect the cottage or the ownership structure in the future.

3. Expect the Unexpected

Proper planning assumes there will be disagreements and provides clear instructions for resolution. Encouraging or mandating participation from all family members who will share the cottage helps everyone feel vested in the decisions being made. It can also encourage generative discussions on topics before they become an issue. How will ownership and voting rights will be weighted?  What happens to a family member’s share if they contribute additional funds or labor to a capital improvement on the cottage? Will decision making be centralized through appointment of a Manager or a Committee? What happens in the event of a deadlock?  How will the cottage be used and by whom? How are expenses allocated?  Should sale/transfer be restricted to lineal descendants?  What happens if a family member is unable to contribute their portion to the expenses?  Can a sale of a non-contributing family member’s share be forced? How and when will the decision be made to sell the cottage?  We can never anticipate every future issue, but we can establish a structure that is flexible enough to adapt to change over time.

4. Provide Time and a Financial Cushion

Grief consumes us physically and emotionally, and the process of grieving takes time. After a death, life takes time to normalize and immediate decisions regarding the cottage should be minimized. Include provisions in your plan to allow for self-management of the cottage after death for a set period of time. Fund an account that will pay cottage expenses and provide specific instructions for management and use of the cottage during that same time period. This will give family members time to plan personally and financially to successfully transition ownership and management of the cottage.

5. Include an Exit Strategy

At some point, circumstances or events in life may force one family member to withdraw or sell their share.  Whether it is disassociation/non- involvement, death, disability, divorce or bankruptcy, the exit strategy should be clearly laid out. Proper planning for exiting family members will eliminate the possibility of a third party inserting itself into the ownership structure. Will the other family members have a right of first refusal or an option to purchase – on what terms?  Will value discounts or alternative buyout terms be provided to allow another family member more flexibility in buying out the exiting family member’s share?  Can an ownership share be offered to a third party?  If the other family members cannot/do not buyout the exiting family member’s share, should a sale of the cottage be forced?  A clear exit strategy not only protects the cottage, it protects the interests of the remaining family members.

6. Leave a Legacy Letter

For a succession plan to be successful, future generations need to feel a connection to the cottage. They need to know its history and the story. Leaving a legacy letter is one way that story can continue to be told. It allows us to document and pass on our personal stories, beliefs, values, life’s lessons, etc. from one generation to the next. Incorporating a legacy letter into your succession plan ensures the origin, historical significance and nostalgia of the cottage is not lost with the passing of each generation. Cottages are a generational legacy. They are filled with memories, family traditions and stories of the sacrifice it took to create such a special place. It may be true that you can never  go home again, but a cottage should be a place for generations to come home to.

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Cortney Danbrook provides specialized counsel to individuals, families in the areas of estate planning and administration. She can be reached at (231) 714-0163 or cdanbrook@darlawyers.com.