REPORT FROM COUNSEL
SPRING 2001 ISSUE
Table of Contents
- NEW FEDERAL PRIVACY LAW TO IMPACT A WIDE SCOPE OF BUSINESSES
- OMAHA LIVING WAGE ORDINANCE TAKES EFFECT
- HOME IS WHERE THE BUSINESS IS
- STRETCH YOUR IRA
- EPA EXCESSES
NEW FEDERAL PRIVACY LAW TO IMPACT A WIDE SCOPE OF BUSINESSES
By Terrence P. Maher and Erin E. McCandless
A new law to protect consumer's privacy will affect a variety of businesses. The Gramm-Leach-Bliley Act (the Act) establishes extensive new obligations and rights with respect to consumer financial privacy. In general, the Act: (1) requires businesses to disclose their policies and practices regarding disclosure of private financial information; (2) prohibits the disclosure of private financial information to unaffiliated third parties, unless consumers are provided the right to "opt out" of such disclosure; and (3) requires the establishment of safeguards to protect the security and integrity of private financial information. According to regulations issued by the federal banking regulators and the Federal Trade Commission (FTC), the material provisions of the Act will take effect July 1, 2001.
Financial Institutions Subject to the Act
The new privacy provisions broadly apply to a "financial institution," which is defined as "any institution the business of which is engaging in financial activities as described in section 4(k) of the Bank Holding Company Act of 1956." The provision describes a wide range of financial activities in which a financial holding company may engage. This means the new privacy provisions will apply to many types of companies and not merely banks.
For example, property and life insurance companies, mutual funds, investment advisors, and securities broker-dealers would be considered financial institutions subject to the new privacy provisions. In addition, insurance agents, loan brokers, finance companies, mortgage companies, and check cashiers/money transmitters also are covered by the privacy requirements. In fact, under the literal definitions in the Act, any company whose business is engaging in an activity presently permitted for a bank holding company under the Bank Holding Company Act, or an activity that a bank holding company is currently allowed to conduct outside of the United States, may be a financial institution, and must comply with the privacy provisions of the Act.
Personal Information Protected by the Act
The privacy protections of the Act apply to nonpublic personal information (Personal Information), which is defined as personally identifiable financial information obtained by the financial institution. This includes information provided by the consumer, information resulting from any transaction with the consumer, and information obtained by any service provided to the consumer. The application to transaction information is especially important because many financial institutions have interpreted the federal Fair Credit Reporting Act as not applying to a financial institution's disclosure of such information under the so-called "experience information" exception. This will no longer be the case under the Act.
Disclosure of Privacy Policy
Financial institutions will be required to disclose their privacy policies to customers at the beginning of each customer's relationship with the institution and at least annually thereafter. This disclosure is required regardless of whether or not the financial institution will share Personal Information of a customer with unaffiliated third parties.
The disclosure generally must describe the financial institution's policies and practices with respect to: (1) disclosure of Personal Information to both affiliates and nonaffiliated third parties, including the categories of people to whom the Personal Information may be disclosed, (2) disclosure of former customer's Personal Information, (3) protection of a customer's Personal Information, and (4) the categories of Personal Information collected by the institution.
Consumer's Right to Opt-Out of Information Sharing
The Act generally prohibits a financial institution from sharing Personal Information with non-affiliated third parties, unless the institution has disclosed to the consumer that Personal Information may be provided to non-affiliated third parties, has given the consumer an opportunity to instruct the institution not to disclose the Personal Information, and has provided the consumer with an explanation of how to exercise this option. Importantly, the opt-out approach in the Act was adopted instead of the "consent" approach urged by some consumer groups. The consent approach would have required a consumer's affirmative agreement to the sharing of information.
The Act provides various exceptions to the opt-out provisions. For example, the opt out provisions do not prohibit financial institutions from sharing their customers' Personal Information with non-affiliated third parties that perform services, including marketing services, for the financial institution. It also does not prohibit the sharing of Personal Information between two or more financial institutions jointly offering financial products or services. However, the institution must disclose that it will share such information and the third party is contractually obligated to keep the Personal Information confidential.
There are additional exceptions that allow financial institutions to share customer's Personal Information without providing customers with the opportunity to opt out. In these situations, this is irrespective of any disclosure that the financial institution will disclose the information or any contractual commitment by the third party to keep the Personal Information confidential. The following are exemptions that generally permit disclosure of Personal Information: (1) as necessary to effect, administer, or enforce a transaction requested or authorized by a consumer, (2) in connection with servicing or processing a financial product or service requested or authorized by the consumer, (3) made to consumer reporting agencies, (4) necessary for security, fraud prevention, or risk control, and (5) made with the consent and at the direction of the consumer.
Obligation to Safeguard Information
The Act also contemplates new operational requirements for financial institutions to safeguard Personal Information of consumers. The federal banking regulators has just issued guidelines regarding appropriate standards for financial institutions relating to administrative, technical, and physical safeguards to insure the safety and confidentiality of customer records and information, to protect against any anticipated threats or hazards to the security and integrity of such records, and to protect against unauthorized access to or use of such records or information.
Enforcement of New Requirements
The Act does not expressly provide a private cause of action to consumers for violation of the privacy protections. The statute does not provide any civil money penalties or right to attorneys' fees for private enforcement. Instead, the Act contemplates the new privacy provisions will be enforced administratively by the federal banking agencies, the SEC, state insurance authorities, and the FTC under the relevant enforcement provisions of their respective statutes.
Preemption of State Laws
The Act provides that state laws are preempted only to the extent such laws are inconsistent with the federal law. State laws will not be considered inconsistent with the federal law to the extent that they provide consumers with greater protection than federal law. As an example, state laws that require a consumer consent to information sharing programs, that require additional disclosures, or that impose other consumer protections on financial institutions are not likely to be preempted by the Act.
Questions
The Gramm-Leach-Bliley Act has far reaching implications for many businesses. Abrahams Kaslow & Cassman LLP is working actively with clients to identify and address the impacts of the Act. Please contact Terrence P. Maher at tmaher@akclaw.com or Erin McCandless at emccandless@akclaw.com if you have questions or would like more information.
OMAHA LIVING WAGE ORDINANCE TAKES EFFECT
By Sara A. Juster
The Omaha Living Wage Ordinance took effect January 1, 2001. It requires contractors who provide services for the City in an amount equal to or greater than $75,000.00 during a 12-month period to pay their employees a wage not less than the hourly rate set forth in the ordinance. The ordinance also requires contractors to provide health insurance benefits to full-time employees.
The ordinance applies to "any person that enters into a service contract with the City in an amount equal to or greater than $75,000 or more in any 12-month period." In addition to contracts where the bidding process was initiated after January 1, 2001, the ordinance applies to contracts containing an escalation clause or amendment, where the escalation or extension is effective after January 1, 2001 and the compensation provided under the amendment is equal to or greater than the $75,000 in a 12-month period. It does not apply to contracts where services are "incidental to the delivery of products, equipment or commodities," to employers with fewer than ten employees for twenty or more calendar weeks in the year or preceding calendar year, or to "trainees" for up to a 90-day period.
The ordinance requires employers to pay their employees a minimum hourly wage of $8.19, if they provide health insurance benefits, or $9.01 if they do not provide such benefits. Employers are required to provide full-time employees -- those who work 2080 hours or more per year -- with health care benefits. Health insurance benefits means that the employer pays $1.25 per hour worked towards health care benefits for the employee and dependents which will be equal to insurance premiums of not less than the equivalent of $2,600.00 per year or $216.67 per month for a full-time employee. For part-time employees who are provided with health insurance benefits, the amount is to be calculated on a pro-rata basis based upon the number of hours worked. Although employers are not required to provide health insurance for part-time employees, they must pay the higher wage if such benefits are not provided.
The Ordinance also requires that employers inform employees earning less than $12.00 per hour of their possible right to Federal Earned Income Credit ("EIC") and make available the forms required to secure advanced EIC payments from the employer. Forms must be provided in English, Spanish and any other language spoken by a significant number of employees and provided to the employees within 30 days of their employment.
Finally, employers must provide written notice to each current and new employee at the time of their hire of their rights under the provisions of the Living Wage Ordinance. The notification must be provided in English, Spanish or any other language spoken by a significant number of employees and posted prominently in communal areas at the work site.
Employers who want to do business with the City must factor in both the direct and indirect costs of complying with the ordinance when preparing their bids. Indirect costs should include the cost of complying with all of the administrative requirements of the ordinance. Failure to include these costs may result in a bid that does not accurately reflect the cost of providing the service to the City.
HOME IS WHERE THE BUSINESS IS
The advantages of operating a business from your home need to be balanced against legal considerations that may not be as apparent. Attention to these matters at the outset of starting a home-based business can help you avoid legal pitfalls and can greatly enhance your prospects for success.
Business Organization
Your business may be a glorified version of a former hobby, but, as an ongoing business, the enterprise needs to take a legal form best suited to your circumstances. Factors such as tax issues, the number of employees (if any), and avoiding personal liability will influence the decision on a business's legal structure. The most common choices are sole proprietorship, partnership, corporation, and limited liability company.
Zoning and Building Codes
A plan for a home-based business will stall if local land-use regulations prohibit a business from being run on property that is zoned "residential." Just what qualifies as a "business use" under a zoning ordinance is not always clear, however, and home-based businesses may be permitted if certain restrictions or conditions are met. In a recent case, for example, a court ruled that a city ordinance allowed a professional office to be operated as a secondary use of a residence. As long as the business use of the property remained incidental to the dominant use of the property as a home, even other professionals or support personnel aside from the homeowner could work out of the residence.
When your home doubles as a business office, compliance with local building codes becomes a bigger issue. Features that may not apply to a residence can come into play, such as handrails or ramps for providing access for persons with disabilities. Your electrical system could need an overhaul in order to comply with the code, especially if the business requires computers or other technologies not typically found at home.
Insurance
Because a fledgling business is vulnerable to financial injury from lost or damaged business property or injury to a client, it is also in need of appropriate insurance. Simply continuing your homeowner's insurance without changes may not be sufficient when starting up an in-home business, especially since such policies generally are meant to cover personal property only. The simplest and least expensive solution may be to add a "rider" to an existing policy that covers business assets and liability. Another alternative is a new, separate policy covering anything related to the business.
The importance of having the right insurance is illustrated by a case in which homeowner's insurance did not cover the medical expenses incurred by an employee who was injured on the premises of a home-based business. A married couple lived on the second floor of their home while using the first floor to house their construction business. They used an adjoining garage to store personal belongings. When a company employee was searching in the garage for company records, he slipped and injured himself. An exclusion in the homeowner's policy for "business pursuits of any insured" meant that the injury was not covered under the policy.
STRETCH YOUR IRA
The Individual Retirement Account (IRA) has long been established as a retirement investment vehicle for those who may not be participants in, or who wish to supplement, employer-sponsored retirement plans. Two basic rules governing IRAs are: (1) an individual can contribute income to the IRA until age 70½ without paying federal income tax on the amount in the year of contribution; and (2) the individual must begin to receive distributions from the IRA by April 1 of the year following his or her attainment of age 70½ (income tax is payable on such distributions). Thus, the tax deferral under these rules is limited to the period of the individual's life.
There are rules that allow the tax deferral on the IRA to extend beyond the lifetime of the individual who created the account. An IRA having such an extended tax deferral period is known as a "multi-generational" or "stretch" IRA. There are variations on the structure of a stretch IRA, but the simplest example is for the individual to elect that, if he or she lives beyond age 70½, the payments from the IRA are to be made to a beneficiary following the individual's death. Typically, the beneficiary would be the individual's child. By naming a person from a younger generation as the beneficiary, the schedule of minimum payments is extended over the life expectancy of the beneficiary.
This will lower the amount of the distributions that the individual will be forced to take after reaching age 70½. More money will be left in the IRA in a tax deferred status for a longer period of time, thereby insuring that a greater amount will reach the individual's heirs.
A more complicated stretch IRA involves breaking up the IRA into several IRAs, each with its own beneficiary. The beneficiary under one of the new IRAs can be the individual's spouse (the tax deferral period of that IRA would, presumably, not be greatly extended because it would be measured by the joint life expectancies of the spouses). The other new IRAs could have the individual's children and grandchildren as beneficiaries, thus achieving significantly longer deferral periods on those accounts. It is extremely important that the desired structure of the stretch IRA be elected in a precise and correct manner. The election must be made by April 1 of the year after the individual turns 70½. Given that the popularity of this estate planning technique is recent, not all professionals are experienced in establishing stretch IRAs. Make sure to seek out someone who is experienced in such planning.
EPA EXCESSES
The federal government's criminal charges against a company and its owner for alleged violations of the Clean Water Act backfired. In an unusual ruling, a federal court held that the company was entitled to recover some of its attorney's fees and legal costs incurred in defending against the bad-faith prosecution.
The company made steel mesh for lobster traps. The waste water from its 150-employee plant emptied into a town's sewer system. In a much publicized action, the federal Environmental Protection Agency (EPA) accused the company and its owner of discharging highly acidic waste water into the public sewer. Later, the charges were dismissed after the prosecutor discovered that information that would have cleared the defendants had been left out of a search warrant application. Samples taken by the EPA not only failed to support the accusations but showed that there was no violation.
The omission of key information from the search warrant application was only part of a pattern of behavior by the government that the court described as "vexatious," that is, lacking good cause and calculated to harass. The overzealous actions by the government came to light when the company brought a claim under a federal law that allows exonerated defendants to recover legal costs if they can prove that the government's case against them was brought in bad faith. Recovery of such fees and costs is relatively rare. There is a heavy burden of proving that the government's pursuit of the case was without any reasonable cause or grounds or amounted to conscious wrongdoing.
Aside from withholding evidence, the EPA agents also altered evidence pertaining to the chemical makeup of samplings taken at the plant. They took samplings in the absence of company personnel, in violation of an agreement between the EPA and the company. The federal agents crossed the line from enforcement to harassment when, in the court's words, "a virtual `SWAT team' consisting of twenty-one EPA law enforcement officers and agents, many of whom were armed, stormed the [company] facility to conduct pH samplings."
