Regulatory Deadline Approaching for New Jersey Health Care Facilities

We are sending this alert to direct your attention to the fact that a little known regulatory deadline is rapidly approaching for all New Jersey licensed health care facilities.  Under the recently promulgated N.J.A.C. 8:43E-14.1 et seq., every health care facility must provide training to their personnel who have direct contact and/or interact with patients and/or patient visitors in recognizing and responding to suspected cases of human trafficking.  Additionally, all facilities must adopt certain policies and procedures that identify the workers who must receive training, require existing workers (regardless of status, job-type or compensation) to complete training by March 18, 2018 and require new staff (employed after September 18, 2017) to obtain such training within 6 months of their first day of employment. There are also record keeping requirements.

Happily, facilities need not struggle to create their own training materials.  The regulations mandate that workers take one of two alternative courses – the webinar “Recognizing and Responding to Human Trafficking in a Healthcare Context,” published February 2016, by the National Human Trafficking Resource Center (NHTRC) or the online or in person training “Stop. Observe. Ask. Respond to Human Trafficking (SOAR): A Training for Health Care and Social Service Providers,” published August 2016, by the United States Department of Health and Human Services.

In some instances, facilities may rely upon other entities to provide the training.  Facilities that contract with vendors to provide staff to the facility should consider amending such agreements to require that the vendors have properly trained their personnel and will provide evidence of such training to the facilities.  Alternatively, a facility may be able to rely upon the training provided by another licensed facility under a similar obligation.

Should you need further information, please feel free to contact Lisa Stewart Albright at (609) 580-3710 or lalbright@archerlaw.com or any member of Archer’s Health Care Group in any of our offices.

 

Buzzer-Beater Legislation Brings Changes to New Jersey Corporate Law

As Governor Christie’s final term came to a close on January 16th, he signed into law several bills proposed by the state Assembly relating to day-to-day corporate governance. The new laws impact mergers and consolidations and drafting considerations for corporate bylaws and certificates of incorporation, among other things, and amend portions of N.J.S.A. 14A as described in more detail below.

1. Plans of Merger and Consolidation: P.L. 2017, c.355 (N.J. A2161 and S 2237)
P.L. 2017, c.355 amends N.J.S.A. 14A:10-3 to specifically permit corporations to include a “force the vote” provision in any plan of merger or consolidation that it adopts. New section (9) of the law now provides that if a board of directors approves a plan, but determines subsequently that the plan is inadvisable, the corporation may nonetheless submit the plan to a vote of its shareholders if the plan of merger or consolidation requires this.
These types of provisions may deter, in acquisition transactions, potential third party acquirers since the target board cannot approve a third party offer until the target’s shareholders have voted on the initial proposed transaction. Accordingly, in determining whether to include a “force the vote” provision, due consideration must be given to balancing the need for deal certainty against the ability of the target’s board of directors to properly discharge its fiduciary duties if a superior offer is made prior to a required shareholder vote.
Further, a new section (10) allows a board of directors, in certain cases, to amend the plan after shareholder approval, but prior to the effective date of the merger or consolidation contemplated by the plan. This authority is limited, however, and a board must resubmit the plan for shareholder approval if the plan amendment would:
  1. alter or change the amount or kind of consideration to be received by the shareholders of the corporation;
  2. alter or change any term of the certificate of incorporation of the surviving corporation; or
  3.  unless the plan of merger or consolidation expressly provides otherwise, alter or change any of the terms and conditions of the plan, in a manner that would materially and adversely affect the shareholders of either corporation who are or were entitled to vote on the plan.
If a plan of merger or consolidation is amended pursuant to section (10), the revised plan must be submitted to the New Jersey Secretary of State for filing prior to the effective date of the proposed merger or consolidation.

2. Selection of New Jersey as Forum in Bylaws: P.L. 2017, c.356 (N.J. A2162 and S2234)
N.J.S.A. 14A:2-9 was amended to permit corporations to expressly include a forum selection provision in their bylaws. Under this law, bylaws may state that the New Jersey federal and state courts will be the sole and exclusive forum for certain actions, including derivative 2 actions, shareholder suits alleging a breach of a fiduciary duty by an officer or director, shareholder suits alleging a violation of the New Jersey Business Corporation Act by the corporation or its officers or directors, and “any other claim brought by one or more shareholders which is governed by the internal affairs or an analogous doctrine.”

In the event that such a suit is brought in contravention to the forum selection provision, the shareholder bringing such a suit may be liable for reasonable costs incurred in enforcing the provision.

3. Applicability of Law to Derivative Proceedings and Shareholder Class Actions: P.L. 2017, c.362 (N.J. A2970 and S2236)
Prior to the passage of this law, the New Jersey Business Corporation Act provisions relating to derivative proceedings and shareholder class actions, located at N.J.S.A. 14A:3-6.1 through 3-6.9, were applicable to a corporation only if the certificate of incorporation provided as such. Now, N.J.S.A. 14A:3-6.1 through 14A:3-6.6 are applicable by default, and these provisions may only be varied by the terms of a corporation’s certificate of incorporation.

The provisions, which will be applicable to a corporation now, unless modified in the corporation’s certificate of incorporation, relate to the conditions for commencing and maintaining a derivative or shareholder class action proceeding (14A:3-6.2), actions required prior to commencing a proceeding (14A:3-6.3), court stays of proceedings (14A:3-6.4), conditions for dismissal of a proceeding (14A:3-6.5), and the requirement for a court’s approval of any discontinuance or settlement of a proceeding (14A:3-6.6). Notably, however, the provisions of 14A:3-6.7 and 3-6.8 relating to the allocation of expenses after termination of derivative or shareholder class action proceedings and the requirement for security for reasonable expenses are still applicable only if contained in the corporation’s certificate of incorporation.
It is important to note that these statutory default provisions, unless properly modified in the corporation’s certificate of incorporation, will be applicable to any derivative action or shareholder class action brought against a New Jersey corporation whether such action is brought in a state or federal court located within or outside New Jersey. Practitioners, management, and founders of a corporation should carefully consider whether there is a need or desire to deviate from these default positions in the drafting of certificates of incorporation, as well as whether existing certificates of incorporation should be amended in light of such changes.

4. Electronic Transmission of Consents of Boards of Directors: P.L. 2017, c.363 (N.J. A2971 and S2235)
N.J.S.A. 14A:6-7.1 was amended to expressly permit directors to consent to action without a meeting via electronic transmission. This brings New Jersey into line with states like Delaware by expressly recognizing the validity of using technology to facilitate the process for obtaining unanimous board and board committee consents.

5. Permitted Limitations to Shareholder Nominations in Proxy Solicitations: P.L. 2017, c.299 (N.J. A2973 and S2239)
N.J.S.A Title 14A, chapter 5, has been supplemented, and now permits a corporation to impose conditions in its bylaws on the inclusion in the corporation’s proxy statements of materials pertaining to shareholder-nominated individuals for election to the corporation’s board of directors. The statute provides a non-comprehensive list of examples of such conditions or restrictions. These include:

  1. requiring the nominating shareholder to own a minimum level of beneficial ownership of shares in the corporation’s voting stock;
  2. requiring a minimum duration of ownership of such shares;
  3. limiting the nomination of previously-nominated individuals;
  4. limiting the number of shareholder-nominated directors for meetings in which directors will be elected; and
  5. requiring nominating shareholders to first submit certain specified information about the shareholder and the shareholder nominee.
Notably, for prospective nominating shareholders, corporations may now also include in their bylaws “provisions requiring that the nominating shareholder undertake to indemnify the corporation in respect of any loss arising as a result of any false or misleading information or
statement submitted by the nominating shareholder in connection with a nomination.”

6. Shareholder Access to Books and Records: P.L. 2017, c.364 (N.J. A2975 and S2238)
Acknowledging that documents may be disseminated more rapidly and easily in the information age, N.J.S.A. 14A:5-28 now allows corporations to “impose reasonable limitations or conditions on the use or distribution of requested materials provided to a demanding shareholder . . . .” It is not clear from the text what constitutes “reasonable limitations or conditions,” though a statement accompanying N.J. A2975 advised that the intent is not to deny shareholders access to information, but rather to acknowledge and permit an already-common practice among corporations of requiring shareholders to agree to confidentiality obligations as a condition to access to the materials.

If you have any questions or would like more information on the issues discussed in this Alert, please contact Greg Vogel, Esq. or Deborah A. Hays, Esq., or any other member of Archer’s Business Counseling Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, NJ, at (609) 580-3700, in Hackensack, NJ, at (201) 342-6000, in Philadelphia, PA, at (215) 963-3300, or in Wilmington, DE, at (302) 777-4350.

Pennsylvania Requires Income Tax Withholding on PA Source Lease Payments and Nonemployee Compensation Paid to Nonresidents

Beginning January 1, 2018, any person that makes annual payments of compensation or business income to a nonresident individual or a disregarded entity owned by a nonresident will be required to withhold and deduct from those payments tax at the rate in effect for the tax year (3.07% for calendar year 2018), if the payments are otherwise required to be reported on Form 1099-MISC and meet or exceed $5,000 for the year.  Certain government payors are exempt from these requirements.

Similarly, every lessee of Pennsylvania real estate who makes any lease payments to a nonresident lessor (that is an individual, trust or estate) in the course of a trade or business must withhold Pennsylvania personal income tax on those rental payments if the lessor receives from the lessee $5,000 or more during the tax year.

While the withholding requirements mentioned above are optional for payments to each nonresident that total less than $5,000 annually, if it at the time payments commence it is unclear whether this threshold will be met, it may be advisable to withhold tax from the outset since withholding is required on every dollar once the threshold is reached.

Any person required to withhold tax on payments will need to register for an account with the Pennsylvania Department of Revenue and make periodic filings and remittance of amounts withheld.

If you have questions about the applicability of, or compliance with, Pennsylvania reporting or withholding obligations, or if you are seeking assistance with any other aspect of Pennsylvania taxes, please contact Tiffany Donio, Esq., or any other member of Archer’s Tax Group, in Haddonfield, N.J., at (856) 795-2121, or in Philadelphia, PA, at (215) 963-3300.

 

Mergers & Acquisitions Alert: Changes to Hart-Scott-Rodino Preclearance Requirements

The Federal Trade Commission has recently announced revisions to the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 (the “HSR Act”), including increases to the “size-of-transaction” and “size-of-person” filing thresholds. The new thresholds will apply to transactions that close on or after February 28, 2018.

The HSR Act requires parties to certain transactions (like mergers, acquisitions, joint ventures and corporate or non-corporate formations) to file notice with the FTC and the Department of Justice when the jurisdictional filing thresholds for the transaction are met or exceeded (and no exemptions apply).  Parties required to provide notice must observe a statutory waiting period before closing the transaction.

Specifically, the “size-of-transaction” threshold was increased to $84.4 million (up from $80.8 million).  In that regard, if the aggregate amount of voting securities or assets acquired in the transaction is $84.4 million or less, then no HSR filing is required.

If the transaction is valued between $84.4 million and $337.6 million, it will be reportable under the HSR Act if no exemptions apply and the “size-of-person” threshold is met: where one party to the transaction has sales or assets of at least $16.9 million (up from 16.2 million) and the other party has sales or assets of at least $168.8 million (up from $161.5 million).

If the aggregate amount of voting securities or assets acquired in the transaction exceeds $337.6 million (up from $323.0 million), the transaction will be reportable (unless it is otherwise exempt).

Certain thresholds applicable to exemptions under the HSR Act will also increase, along with the thresholds for HSR filing fees; however, the filing fees themselves will not change.

If you have questions about the applicability of, or compliance with, the Hart-Scott-Rodino M&A preclearance requirements, or if you are seeking assistance with any other aspect of a merger or acquisition transaction, please contact Tiffany Donio, Esq. or Deborah A. Hays, Esq., or any other member of Archer’s Business Counseling Group, in Haddonfield, N.J., at (856) 795-2121, in Princeton, NJ, at (609) 580-3700, in Hackensack, NJ, at (201) 342-6000, in Philadelphia, PA, at (215) 963-3300, or in Wilmington, DE, at (302) 777-4350.

New Jersey’s NRD Program Likely to Ramp-Up Under Governor Murphy

The New Jersey Department of Environmental Protection and the Attorney General’s office did not initiate any lawsuits for natural resource damages (NRD) during Chris Christie’s two terms as governor.  That appears likely to change under Governor Phil Murphy’s new administration.  The gubernatorial transition team assembled by Governor Murphy and Lieutenant Governor Sheila Oliver recently released the final transition committee reports.  These reports, which follow substantive debate and discussion by committee members appointed by the Governor and his transition team, often provide insight into the new administration’s policy initiatives.  The Environment and Energy Transition Advisory Committee’s (“Committee”) report suggests six “priorities” for Governor Murphy, including “protecting New Jersey’s water and natural resources.”   As part of this priority, the committee recommends that the new administration “aggressively pursue natural resource damage cases and ensure settlement funds remediate local impacts.”

The Committee further recommended “that the DEP Commissioner and the Attorney General work together to aggressively pursue NRD cases, enforcement, and other litigation against polluters” and to “consider pursuing” NRD and other legal actions for impacts from Perfluorinated Compounds (PFCs).   During his confirmation hearing, New Jersey’s new attorney general, Gurbir Grewal, spoke approvingly of NRD lawsuits.  In response to a question from Sen. Bob Smith (D-Middlesex), Attorney General Grewal said that NRD lawsuits would be a “priority” and that the State “should use all available legal tools to hold polluters accountable.”

These statements come on the heels of a Constitutional amendment recently approved by New Jersey voters that obligates the State to use NRD litigation proceeds to repair and restore natural resources at or near the area impacted – rather than fill budgetary gaps.  These recent events indicate that the NRD program in New Jersey is likely to become much more active in 2018 and that the regulated community should take stock of their potential NRD liability.  Unlike the federal government, New Jersey has declined to enact regulations that govern NRD claims.  The State therefore pursues NRD on an ad hoc basis, which often leaves the regulated community unable to meaningfully assess or resolve potential liability.

The attorneys in Archer’s Environmental Law group have extensive NRD experience in New Jersey.  We have been instrumental in nearly all of the State’s landmark NRD litigation matters.  We have also helped clients resolve NRD claims without litigation, including cost-effective strategies that address NRD as part of the regulatory process.

If you have any questions or would like more information on these issues, please contact Marc A. Rollo or any member of Archer’s Environmental Law Group in Haddonfield, N.J. at 856-795-2121; Princeton, N.J. at 609-580-3700; Hackensack, N.J. at 201-342-6000; Philadelphia, Pa. at 215-963-3300, or Wilmington, Del. at 302-777-4350.

Immigration and Customs Enforcement To Increase Employer Enforcement in 2018

RAIDS; CRIMINAL INVESTIGATIONS; ICE AUDITS!

WILL ALLEGED IMMIGRATION VIOLATIONS BY EMPLOYERS BE THE NEW WHITE COLLAR CRIMES TARGETED BY THE TRUMP ADMINISTRATION?  WILL YOUR BUSINESS BE THE UNWITTING VICTIM OF AN I.C.E. STING?

The Trump Administration has prioritized worksite enforcement for 2018 and beyond as part of the “Make America Great Again” agenda to include punishing employers who employ unauthorized workers.  Thomas D. Homan, Immigration and Customs Enforcement (ICE) Deputy Director recently announced during a press conference in Washington D.C. that he wants “…to see a 400% increase in work site operations.  We are not just talking about arresting [only] the aliens at these work sites, we are also talking about employers who knowingly hire people who are unauthorized to work.”

Putting this stated priority into action, on January 10, 2018 ICE agents raided 987 7-Eleven franchise stores and arrested undocumented workers.  More raids are anticipated and as a result, employers should consider the potential penalties.  Civil penalties for knowingly employing undocumented workers can skyrocket to $21,916 per violation and criminal penalties can result in both additional monetary fines and jail time, even for employers.

As a preventative strategy, employers should review their current I-9 employment verification best practices including establishing an audit procedure that ensures compliance with the current immigration law requirements.  Equally important, employers should have an action plan in place to the extent that ICE raids the workplace.

These procedures and action plans are complicated and Archer’s White Collar Defense & Corporate Compliance and Immigration Groups routinely assist our clients both in establishing such compliance protocols.  Additionally, we regularly have provided a defense for our clients in the event of a government enforcement action.

Robert C. Seiger, of our Immigration Group has more than 20 years of experience guiding employers on immigration protocols, plans and compliance and Jeffrey M. Kolansky and other members of our White Collar Defense and Government and Corporate Compliance Group have for decades advised and defended employers and their employees in actions related to ICE and Homeland Security enforcement matters, on both preemptive and emergent bases.

Please contact Rob Seiger at 215.246.3104 or rseiger@archerlaw.com or Jeff Kolansky at 215.279.9693 or jkolansky@archerlaw.com for more information about our immigration and compliance practices.

 

Make Sure You’re Covered in 2018: The DMCA’s New Requirement to Qualify for Safe Harbor Protection from Copyright Infringement Claims

As of January 1, 2018, to qualify for protection under the Digital Millennium Copyright Act’s (DMCA) safe harbor provision, an online service provider (OSP) must register its designated agent, the individual responsible for receiving copyright infringement notices, in the U.S. Copyright Office’s new online directory.

What is the DMCA safe harbor provision and why is it important?

The DMCA includes an important safe harbor provision for OSPs that exempts them from copyright infringement liability arising from a third party’s actions. Specifically, the DMCA protects OSPs from liability where a third party stores or posts content on the OSP’s network or website, or where the OSP operates a search engine or other online directory linking to content.

Under the DMCA, OSPs include entities that provide online services or network access, or the operation of facilities therefore, such as content-sharing websites that permit users to upload or post comments, links, photos, or other content, and entities that transmit, route, or provide connections for digital online communications of online users, without modification to the content of the material as sent or received, such as Verizon, Comcast, and other ISPs.

To qualify for safe harbor protection under the DMCA, an OSP must have a designated agent to receive infringement notices. Contact information for an OSP’s designated agent must be on file with the U.S. Copyright Office and must also be available on the OSP’s website in a location accessible to the public. The designated agent information must be the same in the Copyright Office’s directory and the OSP’s website and must be kept up to date.

How does the new rule impact OSPs?

Under the new rule, all OSPs must register their designated agent using the U.S. Copyright Office’s new online directory, even if the OSP previously registered a designated agent in the Copyright Office’s old paper-based directory. If an OSP fails to register its designated agent using the new online system, it will lose its safe harbor protection under the DMCA.

The new online registration fee is low, just $6.00 compared to the old filing fee of $105.00, and designated agents must be re-registered every three years.

If you need assistance in registering your designated agent using the new online system or if you are unsure of whether you qualify for safe harbor protection as an OSP under the DMCA, we can help.

If you have any questions or would like more information on the issues discussed in this Alert, please contact Kate A. Sherlock, Esq. in Archer’s Haddonfield office at 856-673-3919.

The Tax Cuts and Jobs Act

The new tax bill was signed into law by the President on December 22. Unless noted otherwise, the changes apply to tax years beginning after December 31, 2017. Click on each title below to view a complete description of the changes for each topic.

Changes Affecting Individuals

    1. Tax Rates Generally
    2. Personal Exemptions and Itemized Deductions
    3. Credits
    4. New Deductions and Special Income Items
    5. Education
    6. Miscellaneous Individual Tax Issues
    7. Estate and Gift Taxes

Changes Affecting Businesses

H. Expensing and Depreciation
I. Deductions and Exclusions
J. Accounting Method Changes
K. Other Changes

Changes Affecting Partnerships

Changes Affecting S Corporations

Changes Affecting Tax-Exempt Organizations

Changes Affecting Electing Small Business Trusts

Changes Affecting Retirement Plans

Bond Provisions

Changes Affecting Individuals

A.  Tax Rates Generally 

Tax Rates and Brackets.  The new rates and brackets are these:
For joint filers and surviving spouses:

10% on the first $19,050 of taxable income

12% on taxable income from $19,050 to $77,400

22% on taxable income from $77,400 to $165,000

24% on taxable income from $165,000 to $315,000

32% on taxable income from $315,000 to $400,000

35% on taxable income from $400,000 to $600,000

37% on taxable income over $600,000

For singles:

10% on the first $9,525 of taxable income

12% on taxable income from $9,525 to $38,700

22% on taxable income from $38,700 to $82,500

24% on taxable income from $82,500 to $157,500

32% on taxable income from $157,500 to $200,000

35% on taxable income from $200,000 to $500,000

37% on taxable income over $500,000

For heads of household:

10% on the first $13,600 of taxable income

12% on taxable income from $13,600 to $51,800

22% on taxable income from $51,800 to $82,500

24% on taxable income from $82,500 to $157,500

32% on taxable income from $157,500 to $200,000

35% on taxable income from $200,000 to $500,000

37% on taxable income over $500,000

For marrieds filing separately:

10% on the first $9,525 of taxable income

12% on taxable income from $9,525 to $38,700

22% on taxable income from $38,700 to $82,500

24% on taxable income from $82,500 to $157,500

32% on taxable income from $157,500 to $200,000

35% on taxable income from $200,000 to $300,000

37% on taxable income over $300,000

For trusts and estates:

10% on the first $2,550 of taxable income

24% on taxable income from $2,550 to $9,150

35% on taxable income from $9,150 to $12,500

37% on taxable income over $12,500

Capital Gains.  Capital gain rates remain unchanged – – 15% or 20%, depending on one’s level of income.  The 3.8% tax on net investment income continues unchanged.

The Kiddie Tax.  The taxable income of a child which is attributable to earned income will be taxed using the rates for singles, while that which is attributable to unearned income will be taxed at the trust and estate rates – – the child’s unearned income will no longer be taxed at the parents’ rates.

Alternative Minimum Tax (AMT).  The AMT on individuals has been retained, but one change was made in the method of computing it.  AMT applies only to the excess of “alternative minimum taxable income” over an exemption amount.  The Act significantly increased the exemption amount, which should result in fewer taxpayers being subject to the AMT.

Back To Top

B. Personal Exemptions and Itemized Deductions

Personal Exemptions.  Deductions for personal exemptions are no longer allowed.

Standard Deduction.  In lieu of the itemized deductions which have been eliminated or limited (discussed below), the standard deduction has been increased to $24,000 for joint filers, $18,000 for heads of household and $12,000 for all others.  There is no change to the current-law additional standard deductions for the blind and elderly.  Additionally, the standard deduction is increased by a person’s “net disaster loss.”

Limit on Medical Expense Deductions.  Historically, unreimbursed medical expenses were allowed as itemized deductions to the extent they exceeded 10% of one’s AGI (7.5% of AGI for certain taxpayers).  For years beginning after December 31, 2016 and ending before January 1, 2019, the limit is 7.5% of AGI for all taxpayers.

State and Local Tax Deductions.  Itemized deductions for property taxes and state and local income taxes (or sales taxes in lieu of income taxes) are now limited to an aggregate of $10,000.  Foreign real property taxes may not be deducted.  That being said, property taxes (including foreign property taxes) and state and local sales taxes (but not income taxes) are deductible if paid or accrued in carrying on a trade or business.

Mortgage and Home Equity Indebtedness.  Interest paid on home equity indebtedness is no longer deductible.  The deduction for mortgage interest is limited to the interest incurred on up to $750,000 (previously, $1 million) of qualifying acquisition indebtedness incurred after December 14, 2017.  The $1 million limitation continues to apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 31, 2017, so long as the indebtedness resulting from the refinancing does not exceed the amount of the refinanced debt.

Charitable Contribution Deductions.  For cash contributions to public charities and certain private foundations, the amount of the deduction has historically been limited to 50% of one’s “contribution base.”  The new law allows those deductions up to 60% of the contribution base.

Contributions in Return for College Athletic Seating Rights.  Charitable contribution deductions are no longer allowed for payments to institutions of higher education in exchange for which the donor receives the right to purchase tickets or seating at an athletic event.  (Prior law allowed a deduction for 80% of the amount of such a contribution.)

Casualty and Theft Losses.  Deductions for these types of losses are no longer allowed, except for casualty losses sustained in a federally-declared disaster.

Miscellaneous Itemized Deductions.  Deductions are no longer allowed for miscellaneous itemized deductions (e.g., tax preparation expenses).

The Overall Limit on Itemized Deductions.  Prior to the Act, higher-income taxpayers were subject to a limitation on the amount of their itemized deductions.  Under the Act, this limitation no longer exists.

Back To Top

C. Credits

Child Tax Credit.  This credit has been increased from $1,000 to $2,000 per qualifying child under the age of 17.  The credit historically began to phase out when AGI exceeded $110,000, $75,000 and $55,000 for joint filers, singles and marrieds filing separately, respectively.  Those income limits have been substantially increased (making the credit available to many more people):  $400,000 for joint filers and $220,000 for all others.  In addition, a $500 credit is now permitted for certain non-child dependents.

Back To Top

D. New Deductions and Special Income Items

Alimony.  For divorce or separation agreements executed after December 31, 2018, or executed before that date but “properly” modified after it, alimony is no longer taxable to the recipient or deductible by the payor.

Deduction for Income from Pass-Through Entities.  This one is not as simple as some have made it sound.  In over-simplistic terms, 20% of pass-through income (i.e., income from sole proprietorships, partnerships, LLCs and S corporations) may be deducted by non-corporate taxpayers.  The deduction is limited for persons whose taxable income exceeds certain levels ($315,000 for joint filers and $157,500 for others) – – their deduction is limited by the amount of wages paid by the flow-through entity and sometimes by the unadjusted basis of the business’s tangible depreciable property.  The deduction is not available for income earned in certain service business including medical, legal, accounting and consulting (though it is available for engineering, architecture and businesses that consist of investment-type activities).

Excess Business Losses.  This is another new concept altogether – – it amounts to one more limitation on the ability to deduct losses.  If an individual or other non-corporate taxpayer has an “excess business loss” (defined as the excess of aggregate deductions attributable to the taxpayer’s trades or businesses over the sum of aggregate gross income or gains from the trades or businesses plus a threshold amount), the excess is carried forward and treated as part of the taxpayer’s net operating loss.  The threshold amount is $500,000 for joint filers and $250,000 for others.  This limitation applies after the application of the passive loss rules.

Deferral Election for Qualified Equity Grants.  Generally, an employee who receives employer stock in connection with the performance of services must recognize income in the year in which his/her right to stock is transferable or is not subject to a substantial risk of forfeiture.  Effective with respect to stock attributable to options exercised or restricted stock units settled after December 31, 2017, a qualified employee may elect to defer recognition of the amount of income attributable to qualified stock received.  If the election is made, the income must be included in the employee’s income at the earliest to occur of five different events.  The election is available for “qualified stock” attributable to a stock option, in which case, the option is not treated as a stock option, and the rules relating to stock options and related stock do not apply.  In order for deferral to be available, stock of the employer corporation cannot be readily tradable on an established securities market, and the corporation must have a written plan under which not less than 80% of its employees who provide services in the United States are granted stock options or restricted stock units – – the latter requirement may negatively impact the utility of this election.

Back To Top

E. Education

ABLE Accounts.  These accounts allow individuals with disabilities and their families the ability, subject to an annual limit, to fund a tax-preferred savings account to pay for qualified disability-related expenses.  The Act increases the limit for contributions by the designated beneficiary (i.e., the person with a disability), allows the designated beneficiary to claim the saver’s credit for contributions made to his/her ABLE Account, imposes recordkeeping requirements and permits distributions from Section 529 Plans to be rolled into ABLE Accounts without penalty.

529 Plans.  Section 529 Plans have historically been limited to providing benefits for certain costs of attending colleges, vocational schools and other postsecondary schools.  Under the Act, these Plans may now be used to pay for costs of attending elementary or secondary public, private or religious schools, up to a $10,000 limit per year.

Student Loans Discharged.  Gross income generally includes the discharge of indebtedness of the taxpayer.  An exception exists for the forgiveness of certain student loans.  The Act adds an additional exception for discharges of certain student loans where the discharge is on account of the death or total and permanent disability of the student.

Back To Top

F. Miscellaneous Individual Tax Issues

Qualified Bicycle Commuting Exclusion.  Prior to the Act, employees were allowed to exclude up to $20 per month in qualified bicycle commuting reimbursements.  The exclusion has now been eliminated.

Moving Expense Reimbursements.  Historically, employees have been allowed to exclude qualified moving expense reimbursements from income.  That exclusion has now been repealed (meaning the reimbursements will now be taxable), except for reimbursements paid to members of the Armed Forces on active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.

Moving Expense Deduction.  Traditionally, taxpayers have been permitted to claim a deduction for moving expenses incurred in connection with starting a new job if the new workplace was at least 50 miles farther from a taxpayer’s former residence than the former place of work.  That deduction has now been eliminated, other than for members of the Armed Forces meeting the requirements in the preceding paragraph.

Combat Zone Treatment.  Members of the Armed Forces serving in combat zones are afforded a number of tax benefits (e.g., exclusion of certain pay and special estate tax rules).  Under the Act, combat zone benefits are extended for services provided on or after June 9, 2015 for the Sinai Peninsula of Egypt.

Qualified 2016 Disaster Distributions.  The 10% tax on early withdrawals from qualified retirement plans will not apply to the first $100,000 of “qualified 2016 disaster distributions.”  The latter are defined as distributions from an eligible retirement plan made on or after January 1, 2016 and before January 1, 2018, to an individual whose principal place of abode at any time during 2016 was located in a 2016 disaster area and who sustained an economic loss by reason of the events that gave rise to the Presidential disaster declaration.  Additionally, the income attributable to the distribution may be included in income ratably over three years, and the amount of the distribution may be recontributed to a retirement plan within three years.  The Act permits retroactive plan amendments if certain requirements are met.

Self-Created Property Not Treated as a Capital Asset.  Under the new law, capital asset status is not allowed for patents, inventions, models or designs (whether or not patented) and secret formulae or processes which are held either by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property.

Due Diligence Required for Claiming Head of Household Status.  Paid return preparers are now subject to a $500 penalty for failure to exercise due diligence in determining a taxpayer’s eligibility to file as head of household.

Carried Interest.  In order for certain gains allocable to partnership interests received in connection with the performance of services to be taxed as long-term capital gains (rather than ordinary income), the assets giving rise to the gain must have been held for more than three years (rather than the traditional one year requirement).  This rule applies to partnership interests of entities which conduct on a regular, continuous and substantial basis the activity of raising or returning capital and either (i) investing in specified assets, or (ii) developing specified assets.  Specified assets means securities, commodities, real estate held for rental or investment, cash or cash equivalents, options or derivative contracts with respect to any of the foregoing.

Back To Top

G. Estate and Gift Taxes

For estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026, the estate and gift tax exemption doubles from $5.6 million to $11.2 million.

Back To Top

Changes Affecting Businesses

Corporate Tax Rate.  For tax years beginning after December 31, 2017, the corporate tax rate will be a flat 21%.

Dividends Received Deduction.  Corporations that receive dividends from other corporations are entitled to a deduction for dividends received.  Congress has now reduced the amount of the deduction.  If the corporation owns at least 20% of the stock of another corporation, the dividends received deduction is reduced from 80% to 65%, and the historic 70% deduction for all other corporations is reduced to 50%.

Alternative Minimum Tax.  The AMT for corporations has been repealed.

Foreign Earnings.  A dividend exemption for 100% of foreign-source dividends from foreign subsidiaries will apply to 10% U.S. shareholders.  In addition, a one-time tax of 15.5% or 8% (depending on how the foreign earnings are held) will be imposed on accumulated foreign income of most foreign corporations in which a U.S. person owns a 10% voting interest, regardless of whether those earnings are repatriated or not.

Back To Top

H. Expensing and Depreciation

Section 179 Expensing.  The maximum amount a taxpayer may expense under Section 179 is increased to $1 million, and the phase-out threshold is increased to $2.5 million.  Additionally, the definition of Section 179 property has been expanded to include certain depreciable tangible personal property used predominantly to furnish lodging or in connection with furnishing lodging.  Finally, the definition of qualified real property eligible for Section 179 expensing has been expanded to include the following improvements to nonresidential real property after the date the property was first placed in service:  roofs, HVAC property, fire protection and alarm systems and security systems.

100% Cost Recovery Deduction.  In the past, an additional first-year bonus depreciation was allowed equal to 50% of the adjusted basis of qualified property, the original use of which began with the taxpayer, placed in service before January 1, 2020.  Under the new law, a 100% first-year deduction for the adjusted basis of property is allowed for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023.  This deduction is available for both new and used property.

Luxury Automobile Depreciation.  For passenger automobiles placed in service after December 31, 2017, in tax years ending after that date, for which additional first-year depreciation is not claimed, the maximum amount of allowable depreciation is increased to:  $10,000 for the year the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year and $5,760 for the fourth and later years in the recovery period.

New Farming Equipment.  For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence or other land improvement) used in a farming business, the original use of which begins with the taxpayer.  Additionally, the use of the 150% declining balance depreciation method for property used in a farming business (for 3-, 5-, 7-, and 10-year property) has been repealed.

Recovery Period for Real Property.  The cost recovery periods for most real property has been 39 years for nonresidential real property and 27.5 years for residential rental property.  The more notable change made by the Act is that qualified improvement property (QIP) is now entitled to a 15-year recovery period (down from 39.5 years), straight-line depreciation and a 20-year ADS recovery period.  QIP is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service.  QIP does not include any improvement which constitutes an enlargement of the building, an elevator or escalator, or the internal structural framework of the building.

Replanting Citrus Plants Lost Due to Casualty.  The Act allows the costs of replanting citrus plants lost or damaged due to a casualty to be deducted by persons other than the taxpayer if certain conditions are met.

Back To Top

I. Deductions and Exclusions

Deduction of Business Interest.  Every business, regardless of its form, is now generally subject to the disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income.  Adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization or depletion and without the former Code Section 199 deduction (which has been repealed).  Exception:  this rule does not apply to taxpayers (other than tax shelters) with average annual gross receipts for the three-tax year period ending with the prior taxable year that do not exceed $25 million.  Exceptions also apply for certain public utilities and electric cooperatives, real property trades or businesses that elect out, farming businesses that elect out and floor plan financing.

Net Operating Loss Deductions. For NOLs arising in years ending after December 31, 2017, the two-year carryback period has been repealed, except for those engaged in the business of farming.  For losses arising in tax years beginning after December 31, 2018, the NOL deduction is limited to 80% of taxable income, and the NOL can be carried forward indefinitely.

Domestic Production Activities Deduction (DPAD).  For tax years beginning after December 31, 2017, the DPAD is repealed for non-corporate taxpayers.  For tax years beginning after December 31, 2018, the DPAD is repealed for C corporations.

Like Kind Exchanges.  Effective for transfers after December 31, 2017, like kind exchange treatment is allowed only for real property that is not held primarily for sale.  A transitional rule allows personal property to be exchanged tax-free for a short time if the relinquished property was disposed of, or the replacement property was acquired, on or before December 31, 2017.

Research and Experimentation (R&E) Expenses.  For amounts paid or incurred in tax years beginning after December 31, 2021, “specified R&E expenses” must be capitalized and amortized ratably over a five-year period (15 years if conducted outside the U.S.).  Specified R&E expenses include expenses for software development (with certain limitations) and exploration expenses incurred for ore or other minerals (including oil and gas).

Meals, Entertainment and Transportation.  Deductions for entertainment expenses will not be allowed for amounts incurred or paid after December 31, 2017.  The current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or on the premises of the employer.  Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are no longer allowed, but the exclusion from income for those benefits remains in effect.

Fines and Penalties.  For amounts paid after December 22, 2017, no deduction is allowed for amounts paid or incurred to, or at the direction of, a government or certain other entities in relation to the violation of any law or the potential violation of any law.  Amounts paid as restitution or remediation, however, are deductible.

Sexual Harassment.  Effective for amounts paid or incurred after December 22, 2017, no deduction is allowed for any settlement, payout or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

Employee Achievement Awards.  Employee achievement awards are excludable from the employee’s income.  To qualify for exclusion, the awards must take the form of “tangible personal property.”  The Act clarifies that tangible personal property does not include cash, gift cards, gift certificates, vacations, meals, lodging, tickets for theater or sporting events, stock, bonds and the like.

Excessive Employee Compensation.  It has long been the law that compensation paid to a covered employee of a publicly-traded corporation is limited to no more than $1 million per year.  There are exceptions for certain forms of compensation (e.g., commissions and stock options).  The Act repeals the exceptions – – those forms of compensation must now be taken into account in determining whether the $1 million limit has been exceeded.

Lobbying Expenses.  Prior to the Act, no deduction was allowed for lobbying and political expenditures with respect to legislation and candidates for office.  An exception existed for lobbying expenses incurred with respect to legislation before local government bodies – – those expenses were deductible.  The Act repeals the exception, effective for amounts paid after December 22, 2017 – – those costs are now not deductible.

Orphan Drug Credit.  In the past, a drug manufacturer could claim a credit equal to 50% of qualified clinical testing expenses.  Under the Act, that percentage is reduced to 25%.

Rehabilitation Credit.  The 10% credit for qualified rehabilitation expenditures with respect to a building placed in service before 1936 has been repealed, and a 20% credit is provided for qualified rehabilitation expenditures with respect to a certified historic structure which can be claimed ratably over a five-year period beginning when the structure is placed in service.

Employer-Paid Family and Medical Leave.  A new general business credit was created under the Act.  The credit is equal to 12.5% of the amount of wages paid to qualifying employees during any period in which the employee is on FMLA if the rate of payment is 50% of the wages normally paid to an employee.  The credit increases as the rate of payment exceeds 50%.

Back To Top

J. Accounting Method Changes

Taxable Year of Inclusion.  Taxpayers are now required to recognize income no later than the tax year in which such income is taken into account as income on an applicable financial statement.  The Act also codifies the current deferral method of accounting for advance payments for goods and services provided in Rev. Proc. 2004-34.

Cash Method of Accounting.  Under pre-Act law, corporations and partnerships with a corporate partner (other than qualified personal service corporations) were allowed to use the cash method of accounting only if their average annual gross receipts over a three-year period did not exceed $5 million. Under the Act, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test.

Accounting for Inventories.  Historically, businesses that are required to use an inventory method must generally use the accrual method of accounting (an exception existed for certain smaller businesses).  Under the new law, taxpayers that meet a $25 million gross receipts test are not required to account for inventories, but may use an accounting method for inventories that either treats inventories as non-incidental materials and supplies or conforms to the taxpayer’s financial accounting treatment of inventories.

UNICAP Rules.  The uniform capitalization rules generally require certain costs associated with real or tangible personal property manufactured by a business to be included in either inventory or capitalized into the basis of the property.  Businesses with gross receipts over a three-year period of $10 million or less were not subject to the UNICAP rules.  Under the Act, the $10 million gross receipts threshold is increased to $25 million.

Accounting for Long-Term Contracts.  An exception from the requirement to use the percentage-of-completion method of accounting for long-term contracts has existed for construction companies whose gross receipts did not exceed a $10 million threshold.  Generally, that threshold has been increased to $25 million for contracts entered into after December 31, 2017.

Back To Top

K. Other Changes

Rollover of Publicly Traded Securities.  The Act repeals the election available to corporations and individuals to roll over tax-free capital gains realized on the sale of publicly traded securities to the extent of the taxpayer’s cost of purchasing common stock or a partnership interest in a specialized small business investment company.

Investment in Qualified Opportunity Zones.  Effective on December 22, 2017, the Act provides a temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.  The Act allows for the designation of certain low-income community population census tracts as qualified opportunity zones.

Back To Top

Changes Affecting Partnerships

Section 708(b)(1)(B) Terminations.  This Code provision has long provided that a partnership is considered to be terminated if, within any twelve-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.  This provision has been repealed.

Foreign Person’s Sale of a Partnership Interest.  A foreign person who is engaged in a trade or business in the United States is taxed on income that is “effectively connected” with the conduct of that trade or business.  Partners in a partnership are treated as engaged in the conduct of a trade or business within the U.S. if the partnership is so engaged.  Partially in an effort to resolve a difference between an IRS position and that of the U.S. Tax Court, for sales and exchanges on or after November 27, 2017, gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively-connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange.

Withholding on the Purchase of a Partnership Interest.  Under the Act, the transferee of a partnership interest must withhold 10% of the amount realized on the sale of a partnership interest unless the transferor certifies that the transferor is not a nonresident alien individual or foreign corporation.

Definition of “Substantial Built-In Loss” Modified.  Partnerships generally do not adjust the basis of partnership property on the transfer of a partnership interest unless a Section 754 election is in effect or unless the partnership has a substantial built-in loss immediately after the transfer.  Going forward, the present law definition of a substantial built-in loss continues to apply, but in addition, a substantial built-in loss exists if the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical disposition by the partnership of all of its assets in a fully taxable transaction for cash equal to the assets’ fair market value immediately after the transfer of the partnership interest.

Charitable Contributions and Foreign Taxes Included in Determining a Partner’s Share of Loss.  Partners may deduct partnership losses to the extent of the basis of their partnership interests.  In a private letter ruling, the IRS took the position that a partner may deduct his share of partnership charitable contributions even if the amount of the deduction exceeded the basis of his/her partnership interest.  Additionally, the regulations dealing with this limitation do not address whether foreign taxes are impacted by the basis limitation.  Congress has now addressed these two items.  Under the Act, charitable contribution deductions and foreign taxes paid or accrued are included in determining the partnership’s loss for purposes of this rule – – meaning that the basis limitation negatively affects a partner’s ability to deduct his/her share of the partnership’s charitable contributions and foreign taxes.

Back To Top

Changes Affecting S Corporations

S Corporations Which Convert to C Corporations.  Distributions by a former S corporation during its “post-termination transition period” have traditionally been treated as nontaxable distributions out of the S corporation’s accumulated adjustments account (AAA), rather than as C corporation distributions (the latter would often result in taxable dividend treatment).  Now, though, for distributions made after December 22, 2017, distributions from “eligible terminated S corporations” are treated as paid out of AAA and from its C corporation earnings and profits account on a pro rata basis – – so, those distributions are now part tax-free, part-taxable.  An eligible terminated S corporation is any C corporation which (i) was an S corporation on the date before enactment (December 21, 2017), (ii) revoked its S election during the two-year period beginning on December 22, 2017, and (iii) had the same owners on December 22, 2017 and on the revocation date (in the same proportion).

Back To Top

Changes Affecting Tax-Exempt Organizations

Excise Tax on Executive Compensation.  Under the Act, tax-exempt organizations are now subject to a tax at the corporate rate (21%) on the sum of (i) the remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization, and (ii) any excess parachute payment paid by the organization to a covered employee.  A covered employee is an employee (or former employee) of an applicable tax-exempt organization if the employee is one of the five highest compensated employees of the organization for the tax year or was a covered employee of the organization (or a predecessor) for any preceding tax year beginning after December 31, 2016.

Excise Tax Imposed on Certain Colleges and Universities.  An excise tax equal to 1.4% will be imposed on the net investment income of private colleges and universities with at least 500 tuition-paying students, more than 50% of the tuition paying students of which are located in the United States, and with assets (other than those used directly in carrying out the school’s exempt purpose) of at least $500,000 per student.

New UBTI Computation.  Historically, tax-exempt organizations which conduct multiple trades or businesses have been permitted to aggregate the income from all trades or businesses and subtract therefrom all of the deductions from all trades or businesses in determining its unrelated business taxable income.  As a result, organizations have been allowed to use a loss from one unrelated trade or business to offset income from another, thereby reducing total UBTI.  Going forward, this will not be allowed – – losses from one unrelated trade or business may not be used to offset income derived in another.

Back To Top

Changes Affecting Electing Small Business Trusts

Beneficiaries of an ESBT.  Electing small business trusts (ESBT) have been permitted to be shareholders of an S corporation for a number of years.  The eligible beneficiaries of an ESBT have included individuals, estates and certain charitable organizations.  Effective on January 1, 2018, nonresident alien individuals may be beneficiaries of an ESBT.

Charitable Contribution Deductions of ESBTs.  The new law provides that the charitable contribution deduction of an ESBT will be determined by the rules applicable to individuals, not by the rules generally applicable to trusts.  This is a complete about-face.  Thus, the percentage limitations and carryforward provisions applicable to individuals apply to charitable contributions made by the portion of an ESBT which holds S corporation stock.

Back To Top

Changes Affecting Retirement Plans

Rollover Period for Plan Loan Offset Amounts Is Extended.  A retirement plan may provide that when an employee terminates service, his obligation to repay a plan loan is accelerated, and if the plan loan is not repaid, the plan loan shall be cancelled and, in turn, the amount of the employee’s plan account balance is offset by the amount of the unpaid loan balance.  This offset amount (equal to the unpaid loan balance) is called a “loan offset” and is treated as an actual distribution from the plan.  A loan offset amount is eligible for a tax-free rollover to another eligible retirement plan.  Under prior law, the loan offset amount had to be rolled over to another retirement plan within a 60-day period (following the date of the loan offset).  Under the new Tax Act, a loan offset can be rolled over to another retirement plan so long as that is done by the due date (including extensions) for filing the tax return for the tax year in which the loan offset occurred.

Repeal of the Rule Allowing Re-characterization of IRA Contributions.  Under the prior law, an individual was permitted to elect to re-characterize an IRA contribution (i.e., the individual could treat a contribution made to a traditional IRA as made to a Roth IRA).  Under the Act, re-characterization cannot be used to unwind a Roth conversion.  For example, an individual may make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the new Act now precludes the individual from later unwinding the Roth conversion through a re-characterization.

Length of Service Award Programs for Public Safety Volunteers.  Under prior law, any plan that solely granted length of service awards to bona fide volunteers (or their beneficiaries) was not treated as deferred compensation.  This rule applied only if the length of service award for any year did not exceed $3,000.  Under the Act, the aggregate amount of the award is increased to $6,000.

Back To Top

Bond Provisions

Advance Refunding Bonds.  For advance refunding bonds issued after December 31, 2017, interest on a bond issued to advance refund another bond is no longer exempt from tax.

Credit Bonds.  For bonds issued after December 31, 2017, the authority to issue tax-credit bonds and direct-pay bonds is prospectively repealed.

*          *          *          *

We hope this is helpful.  We realize some of this is of a more technical nature, but we’ve tried to present a complete summary of the Act to a broad range of readers.

If you have any questions, do not hesitate to contact Gordon F. Moore, who chairs our Tax Group, or any of your other contacts here at Archer.

DISCLAIMER: This client advisory is for general information purposes only. It does not constitute legal or tax advice, and may not be used and relied upon as a substitute for legal or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified attorney or tax practitioner licensed to practice in the jurisdiction where that advice is sought.

Back To Top

Attention Employers: Pennsylvania Legislators Seek an End to Non-Compete Agreements

As states consider the future of non-compete agreements, some members of the Pennsylvania legislature have introduced a Bill that is decidedly against the interest of employers.

On November 27, 2017, Assembly Members Thomas R. Caltagirone, Anthony M. DeLuca, Michael J. Driscoll and David H. Zimmerman introduced a Bill to the House Labor & Industry Committee that would weaken Pennsylvania employers’ ability to enforce non-competes.

Bill No. 1938 seeks to make all non-compete agreements unenforceable, unless they involve business owners that sell their businesses, or the dissolutions or disassociations of partnerships or limited liability companies. Further, if an employee is successful in litigation against an employer related to the enforcement of a non-compete agreement, the employee would be entitled to attorneys’ fees and punitive damages.

If it becomes law, the Bill will not impact valid non-compete agreements already in effect. However, those non-competes may not be able to be renewed.

This Bill is the latest recent attempt by a state legislature to curtail the enforcement of non-compete agreements, and reflects a backlash against these agreements that stems from the Obama administration. Recently, both Massachusetts and New Jersey have introduced legislation limiting the scope of non-competes.

Passage of this legislation would be a blow to employers throughout the Commonwealth.   While the Bill is a long way from passage, it could result in a fundamental shift in the law.

If you or your business have any questions about how Bill No. 1938 may affect your business or employees, please contact Jonathan Rardin at (215) 963-3300 in our Trade Secret & Non-Compete Practice Group.

Proposed State Senate Bill Would Substantially Change Restrictive Covenant Law in New Jersey

(Click here for printable PDF)

On November 9, 2017, New Jersey State Senator Robert Gordon introduced Senate Bill 3518, which would make significant changes regarding the presentation and enforcement of restrictive covenants, such as non-compete and non-solicitation agreements, in New Jersey. While the bill was just introduced, if passed, would represent a seismic shift in the ability of New Jersey employers to utilize restrictive covenants.

Under the proposed new law, restrictive covenants would not be enforceable at all for the following categories of workers: (1) non-FLSA-exempt employees; (2) undergraduate or graduate students undertaking internships or short-term employment; (3) apprentices; (4) seasonal or temporary employees; (5) employees whose employment is terminated without good cause; (6) employees who are laid off; (6) independent contractors; (7) employees under the age of 18; (8) “low-wage” employees (using statewide weekly average remuneration); and (9) employees whose period of service is less than one year.
For those employees who do not fall into the categories above, the bill proposes a substantial number of new requirements in order for a restrictive covenant to be effective, including the following:
  • If provided at the commencement of employment, the employer must provide the agreement to the employee at least 30 business days in advance of the employment start date;
  • If provided during the term of employment, the agreement would not become effective until 30 days have expired;
  • If the employee resides or works in New Jersey, the agreement cannot contain a choice-of-law provision that would apply any other state’s substantive law;
  • The agreement must be signed by both the employer and the employee;
  • The agreement must state that the employee has the right to consult with counsel;
  • The duration of the restriction must be no more than 12 months;
  • The bill prohibits agreements that “restrict an employee from providing a service to a customer or client of the employer, if the employee does not initiate or solicit the customer or client;” and
  • The bill requires that, in order for the agreement to be effective, the employer “shall pay the employee an amount equal to 100 percent of the pay which the employee would have been entitled for work that would have been performed during the period prescribed under this section, and continue[] to make whatever benefit contributions would be required in order to maintain the fringe benefits to which the employee would have been entitled for work that would have been performed during the period prescribed under this section.”
The proposed bill also provides remedies to the employee if the employer violates the statute, including the right to file suit to have the agreement declared void, liquidated damages of up to $10,000, lost compensation and attorney’s fees.

Importantly for employers, however, the bill states that, if passed, “This act shall take effect immediately, but shall not apply to any agreement in effect on or before the date of enactment.”  This means that all employers who currently use, or are considering using, restrictive covenants should take action now to have their contracts reviewed and, if necessary, renewed or presented to their employees before the bill becomes law.

We will monitor the progress of the bill and update you as warranted. In the meantime, if you have questions regarding restrictive covenants, we are here to assist you.  Please call us if you need assistance.  If you have questions about the potential new law and how it may affect you, please contact Mark J. Oberstaedt at 856-354-3072 or moberstaedt@archerlaw.com or Thomas A. Muccifori at 856-354-3065 or tmuccifori@archerlaw.com or any member of Archer’s Trade Secret Protection Group in Haddonfield, N.J., at (856) 795-2121, in Princeton, N.J., at (609) 580-3700, in Hackensack, N.J., at (201) 342-6000, in Philadelphia, Pa., at (215) 963-3300, or in Wilmington, Del., at (302) 777-4350.