This document contains chapters 16 to 19 Chapter 16 Law and Business Associations-I Introduction Chapter Sixteen addresses these questions: • What factors influence a business manager’s choice of organizational form? • What are some of the common forms of business organization in the United States? • What are the specialized forms of business associations? • What are some of the global dimensions of business associations? Chapter Sixteen is significant because the choice of organizational form has a significant impact on the amount of regulation to which a business is subject. Also, different forms create different rights and responsibilities for owners. Business students are interested in understanding the form of association that employs them. They are also interested in the law of business associations because many of them will consider starting their own company at some point in their lives. Achieving Teaching Excellence Generating Classroom Controversy This chapter of the Instructor’s Manual stresses the importance of using controversy as a teaching tactic. First, it presents information about the use of controversy in class. Second, it suggests a paper assignment that is consistent with using controversy in class. M. Neil Browne and Mary L. Keeley-Vasudeva presented important information about classroom controversy that will help instructors see why they should care about this topic. In their article, “Classroom Controversy as an Antidote for the Sponge Model of Learning,” Browne and Keeley-Vasudeva urge college teachers to use controversy “to help bridge the gap between the stated importance of critical thinking and the actual classroom use of critical thinking.” They encourage professors in all disciplines to “find open-ended questions about which reasonable people disagree, possess knowledge used in controversial ways, and report conflicting evidence.” The law offers seemingly endless possibilities. Once instructors identify controversies, these controversies will motivate students. Students will be interested in learning and engaging in critical thinking because they will be active, and controversies make the content come alive. Students will be forced to struggle with engaging in reasoning about positions different from the ones they prefer. Browne and Keeley-Vasudeva offer an important reminder. Bringing controversies into the classroom is not enough. Instructors must encourage students to engage in critical thinking, not just memorize and repeat alternative perspectives. They ask instructors to use controversy to encourage students to elevate their goals above the sponge model of education. “Critical thinking is the antithesis of the sponge model.” Charles S. Green, III and Hadley G. Klug describe an assignment that is consistent with the advice offered by Browne and Keeley-Vasudeva. Green and Klug, sociology professors, describe an assignment in which students used a debate format for their papers. The professors gave students a choice of five debate topics, and assigned students randomly to the “pro” and “con” sides of their debate topics. Of course, they gave students detailed handouts that contained directions for research, and suggestions for coordinating their efforts for oral in-class debates and the written versions of their arguments. Green and Klug found that their students were interested in the assignment as the assignment brought the content to life. Students also practiced enhancing their critical thinking skills. They had to find the best arguments and evidence in support of their position on the controversy, and they practiced finding flaws in their own arguments, and the opponents’ arguments. The legal environment of business class is especially appropriate for this kind of assignment. At this point in the semester, students have practiced critical thinking enough to write in a debate format. Some public law chapters present some challenging, interesting issues, so instructors might want to start preparing an assignment now. For instance, instructors could have students debate whether preferential programs should be abolished? Or, should the Americans with Disabilities Act be reconsidered? Does it impose too many burdens on businesses? Instructors can think of many debate topics! This text raises many interesting issues in the text. Good luck on creating new, exciting, controversial topics for students to consider. One more step toward achieving. Teaching Excellence References • M. Neil Browne & Mary L. Keeley-Vasudeva, "Classroom Controversy as an Antidote for the Sponge Model of Learning," COLLEGE STUDENT JOURNAL 368 (September 1992). • Charles S. Green, III & Hadley G. Klug, "Teaching Critical Thinking and Writing Through Debates: An Experimental Evaluation," 18 TEACHING SOCIOLOGY 462 (1990). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Chapter Sixteen outlines some of the common forms of business associations, including simple proprietorships, partnerships, and specialized associations (joint stock, joint venture, and franchises). Additionally, global dimensions of some of these business associations will be examined here. This chapter includes much information business students need to know. Instructors should make sure that they ask students what they have learned in the instructor’s other classes so that the instructor can avoid being repetitive. Most students learn about the factors used to decide which form of business association to adopt, so instructors can often skip this material and concentrate more on the cases in the chapter and the critical thinking questions. Discussion questions that follow the topic outline come from throughout the chapter. Topic Outline I. Factors Influencing a Business Manager’s Choice of Organizational Form II. Some Common Forms of Business Organization in the United States A. Sole Proprietorships B. General Partnerships Creating a Partnership In re KeyTronics Relationship between Partners Enea v. Superior Court of Monterey County Terminating a Partnership C. Limited Partnerships and Limited Liability Limited Partnerships Limited Liability Limited Partnerships III. Specialized Forms of Business Associations A. Joint Stock Company B. Syndicate C. Joint Venture D. Franchising Laws Governing Franchising Internet Franchising IV. Global Dimensions of Business Associations A. Outsourcing V. Summary Discussion Questions for Chapter Sixteen 1. Explain relationships between sole proprietorships and partnerships. Several relationships between the two exist. One relationship between the two is that the sole proprietorship involves a person going into business on his or her own, while the partnership is a voluntary association of one or more person. Another relationship between the two is that the profits of the business are taxed to individuals. Even in partnerships, the business profits are divided among the partners, who pay taxes as individuals. 2. Explain why someone might think this statement is true: The law protects people who do not have written partnership agreements. Sometimes, people who work in partnerships do not have a written partnership agreement. When they do not have a written agreement, the Uniform Partnership Act is applied. It sets out the basic rules for partnerships. People who do not have written agreements can rely on this law to set out the basic rules by which the partnership will operate. 3. Evaluate: The partnership form is best if people are concerned about tax liability. This statement is flawed because the partnership form is not always the best if people are concerned about tax liability. Taxes on partnership profits must be paid by the partners even when those profits are not distributed but instead are reinvested in the partnership business. Also, one must consider tax rates, and whether the law currently has higher rates for individuals or corporations. In order to follow-up, instructors could ask students to analyze the statement above, rather than evaluate it. 4. Explain why someone might think this statement is true: The concept of indemnification is important. Indemnification means the payment of expenses or damages from the legally responsible party. This concept is important for partners. The rules of agency render each partner liable for the damages resulting from the torts of another partner committed within the scope of partnership business. However, if other partners are forced to pay a portion of the damages caused by another partner’s tortious act, they can seek indemnification from that tortfeasor. 5. Why are people more careful in regulating limited partnerships than other forms of partnerships? People regulate limited partnerships more because the limited partner gives money, but does not have control over business decisions. This separation of ownership from control urges people to protect the owner of limited partner interests more carefully. 6. Evaluate this statement: Once a business has chosen a particular form, it should stick with its choice indefinitely. This statement is flawed. This text reminds its readers that once a particular form is selected, it need not be retained for the life of the business. Astute business managers frequently review the several factors and reconsider the best form of organization. 7. Explain relationships between cooperatives and franchises. A cooperative is a not-for-profit organization formed by individuals to market products. A franchise is a relationship based on a private agreement between a franchiser who owns a trade name or trademark and the franchisee, which sells or distributes the goods using the trade name. Both are forms of business associations. One difference is that the franchising relationship is “bigger business” than the cooperative, which is not for profit, and relies on individuals. Have students think of other differences. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. One general comment is that people expect more personal service from a sole proprietor or a partner in a partnership than they do from a major corporation. Students could say that they get a haircut at a salon which may be a partnership. Such a business may be small and they could expect personal attention. They might buy groceries at a national chain which may be incorporated. They could expect good service, but cannot expect personal attention. Because of the absence of a personal relationship with a corporation, they could make sure that they look out for themselves when interacting with agents of a major corporation. Instructors could ask students what they expect from different forms of business. 2. Joan appreciates freedom. She wants to act without restriction from rules imposed by others. 3. A person who wants a sole proprietorship probably wants freedom. Vanessa wants to be her own boss, free from restrictions placed on her by others. She probably values justice. She wants to receive the product of her labor. With a sole proprietorship, all gains and losses flow through her personal income. She does not have to give shareholders dividends. She does not have to answer to shareholders. Case Summary—In re KeyTronics This case focuses on testing partnership existence. Willson and King worked together to create a key dispenser-revalue station for carwashes and to set up a business called “Secure Data Systems” but the business ideas were never carried through. No written agreement was signed by the two men, but Willson sued King and alleged a partnership had been formed. The court found in favor of King because there was no “specific agreement” to warrant a partnership. Willson appealed. The appellant court reversed the trial court’s ruling because Willson and King’s relationship did fall under the definition of a partnership. Both men were working together toward creating a business and planned to share the profit, which makes their relationship a partnership. Case Summary—Enea v. Superior Court of Monterey County The Daniels family created a partnership called 3-D, with the sole asset being an office building. The building housed the law office of William Daniels and was also leased to Claudia Daniels. There was no stipulation that the spaced had to be rented at fair market price. Enea, a client of Daniels’ purchased his brother’s third of the partnership. Years after the purchase, Enea questioned Daniels about the rent and Daniels was disassociated from the partnership. Enea brought a suit against Daniels claiming that he used the partnerships property for significantly less than the market price. The Court denied the defendants summary judgment, ruling that they did in fact breach the partnership laws by not collected fair market rent. Suggested Answers to Critical Thinking about the Law Questions 1. The Court is saying that the defendants would have had to specifically state that the purpose was to rent space at a lower price than the market dictated. This would also have to be open to all lessees. If that were the case, then the defendants would have received summary judgment on the basis of adhering to the partnership contract. 2. There are certain duties dictated by law that a partnership must follow. For the most part, these laws are those that govern all other business dealings, regarding fraud and other white-collar crimes. In this case, the Daniels were taking advantage of the partnership at the expense of the partnership. Answers to Review Questions 16-1. The primary difference between limited and general partnerships is that in a limited partnership the limited partner invests money, but takes no part in its management so the limited partner will not incur unlimited liability. However, general partners share the management, and the risks. 16-2. Anyone starting a business has multiple factors to consider when trying to determine what form of business to use to establish a going concern. For instance, the framework for taxation, the pattern of control of the organization, who is liable when, ability to transfer rights and responsibilities of ownership, and the length of time that the firm will be alive and functioning are all matters that need to be analyzed before going into business because they differ considerably dependent on which form of business organization is chosen. However, the principal factors influencing the choice of organizational form include the following factors: • Tax ramifications • Control considerations • Potential liability of the owner(s) • Ease and expense of formation and operations • Transferability of ownership interests • The projected life of the organization 16-3. The answer is based on the probability that a partnership is not going to be immediately profitable. In other words, it will not have any way to use its possible losses as a tax break for the partnership as an organization. But because partners can use the losses as a deduction from their ordinary income, the partnership form does have advantages for the partners. Had they chosen to organize as a sole proprietorship, the same tax advantage would not have been available to them. 16-4. A limited liability company has one very important tax advantage. The firm itself does not pay taxes; instead, taxes on the firm’s profits are allocated to each member of the firm. 16-5. Liability for LPs is greater for a general partner than it is for a limited partner, while liability for LLLPs is the same for a general partner as for a limited partner. This is because in a general partnership all the profits are usually divided equally among the partners, and all partners have unlimited personal liability for partnership debts. 16-6. When individuals, partnerships, or corporations make a private agreement to finance, produce, and sell goods, securities, or commodities for a limited purpose and/or a limited time, they have formed a joint venture. Joint ventures are a popular way for developing nations to attract foreign capital. Answers to Review Problems 16-7. No, Elliot would not be liable for the debt incurred. Tracy Peoples had committed fraud by including Elliot’s name in the credit application as a partner of the company, when he wasn’t. For this reason, there is no question of an existence of a contract and for this reason he cannot be held liable. 16-8. The limited partners would not be liable to pay all the claims to the suppliers as they did not take part in management or control of the partnership. This is because under the 2001 revision of the Revised Uniform Limited Partnership Act, a limited partner cannot be held liable for the partnership debts even if he or she participates in the management and control of the limited partnership. 16-9. According to the definition of partnership, which is the association of two or more persons to carry on as co-workers of a business for profit, a partnership did exist between Clark and Bird. In re KeyTronics also confirms this interpretation of the definition of partnership. 16-10. Yes, Dunn will be held liable. He had enough control over the management of the business to be considered a general partner. This case is similar to the Pitman case, in which the court similarly held that someone who helped secure financing was a general partner, not a limited one. 16-11. No, Bron and Arthur cannot legally compel David to account for the profits of the partnership because all three men have created an illegal business by bribing boxers. A partnership can allow for a wide variety of profit-sharing and operational arrangements, as long as the operation or arrangement is not illegal. 16-12. Charles made a mistake. He could continue or just to wind up the affairs of the partnership. Upon Hugo’s death, the partnership dissolved, and Charles must face reality and dissolve, and then reorganize. He must be responsible for all losses, now that Hugo has passed away. Answers to Case Problems 16-13. Both the trial and appellant courts ruled in favor of Mack. Defining a partnership as an association of two or more persons to carry on as co-owners a business for profit and finding that a partnership contract can be either express or implied, the court decided that Charlie and Mack had a partnership. Mack had worked for Charlie ever since he was a child, he was responsible for making bank deposits for the business, and there was an understanding between him and his father that they were partners and Mack would take over the business after his father’s death. 16-14. The court ruled in favor of Ferguson and granted him insurance from Consumer Finance Co. The contract between Ferguson and Consumer Finance created their relationship. The court found that the motorcycle was covered under the contract because it was a covered auto that was intended for resale. Ferguson was covered if his damages resulted from bodily injury sustained by him as a result of an accident with an uninsured motor vehicle. This is what happened, so the court found that Consumer Finance had to cover Ferguson’s medical expenses. 16-15. Because there was no stipulation to the continuation of the partnership, it was to be ended. However, the surviving member did have a fiduciary responsibility during the winding-up of the partnership. Therefore the responsibility existed between the surviving member and the legal representative. 16-16. The indications of a partnership include the parties’ intent to enter into a partnership and the sharing of profits. However, the fact that Design88 acted on its own and that there was no joint ownership suggests that there was no partnership. The court recognized that there was a “Master Partnership Agreement” but found that the parties did not act as a partnership. 16-17. The Court did rule in Guzman’s favor, finding that the company was liable for fraudulent misrepresentation. This is because, as part of the franchise agreement, the cleaning company promised that at least one new account would be active after 120 days. When that did not happen, the contract was breached. Also, because it was determined that the company could not live up to the terms of the agreement with Guzman, they were found in violation of the franchising agreement. Thinking Critically about Relevant Legal Issues 1. Perhaps as his business partner, Ed has some ethical responsibility to tell Jack about the new opportunity, but overall Ed is not responsible for telling Jack about the mall development. Ed and Jack have a business partnership to improve and operate the office building but Ed is not obligated to tell Jack about his other potential business investments. Ed only has to tell Jack information pertaining to the office building. 2. It does not matter where business discussions originate because until they are acted upon, they are just ideas. It would be more professional for Ed and James to make formal arrangements in public, though, so Jack knows he is not being cheated. 3. Ed should be allowed to leave the partnership as long as he goes through the dissolution and winding-up process. This process will prevent a new business from taking place and will tie up loose ends, including completing unfinished transactions, paying off debts, dividing the remaining profit and distributing any assets. Once this process is complete, Ed will be free to make more risky and profitable investments, like participating in the mall development. Chapter 17 Law and Business Associations—II Introduction Chapter Seventeen addresses these questions: • What is a corporation? • How are corporations classified? • How are corporations created? • How are corporations financed? • How do corporations operate? • What are limited liability companies? • What are some global dimensions of corporations? Chapter Seventeen is important because it focuses on corporations and what power they have in the business world. Limited liability companies (LLCs) are a valuable part of business associations because as a hybrid, they incorporate aspects of various organizations. Business students will be interested to learn about the different types of corporations and how they operate because corporations may be their future employers. Achieving Teaching Excellence One of the most valuable lessons instructors can pass along to their students is a love of asking questions. Instructors ask questions, not because it is just a habit, but rather because every answer they have seem to contain within it a set of unanswered questions, which are just waiting to be explored. One of the strongest forms of questions is to regularly be curious about context. Many of the facts in a fact pattern for a legal case are crucial to understanding the case because those facts provide the needed context for examining the extent to which a legal principle applies. One of the strongest things about the study of the law is its recognition that specifics matter. If the facts change just a bit, the case becomes quite different and has a totally different implication. Good luck on encouraging students to experience the joy and the developmental advantage of regularly asking questions. One more step toward achieving Teaching Excellence! Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter’s primary focus is on how corporations are classified, created, operated, and financed. Most business students already understand what a corporation is so instructors may want to focus on the more complex sections, such as fiduciary obligations and its cases. LLCs are also an important part of the chapter, and are a topic students are less familiar with. Instructors should encourage students to compare these associations with ones they learned about in Chapter Sixteen. The discussion questions are meant to incorporate different topics that are brought up throughout the chapter. Topic Outline I. The Corporation II. Classification of Corporations A. Closely Held Corporation B. Publicly Held Corporation C. Multinational or Transnational Corporation D. Subchapter S Corporation E. ROBS Corporation F. Professional Corporation G. Nonprofit Corporation III. Creation of Corporations IV. Financing of Corporations A. Debt Financing B. Equity Financing Classes of Stock C. Consideration V. Operation of Corporations A. The Role of the Shareholders B. The Role of the Board of Directors In Re Abbott Laboratories Derivative Shareholders Litigation C. The Role of the Officers and Managers D. Fiduciary Obligations of Directors, Officers, and Managers Beam v. Stewart Smith v. Van Gorkom A. VI. Limited Liability Companies A. The Uniform Limited Liability Act B. LLC Characteristics C. Creating a Limited Liability Company D. Duration of the LLC E. Financing of the LLC F. Control Considerations G. Tax Ramifications VII. Global Dimension of Corporations: A “Big Fat Greek” Bailout II and III VIII. Summary Discussion Questions for Chapter Seventeen 1. Evaluate this statement: The corporate form of business association is the most common form. This statement is flawed. The partnership form is the most common form. However, the dominant form in terms of the total dollar value of business transacted and assets owned is the corporate form. 2. Explain relationships between publicly and privately held corporations. Publicly held corporations are those corporations whose stock is traded on the national exchanges. They have numerous shareholders who are simply investors. Real control of the publicly held corporation lies in the hands of officers and managers, who rarely own controlling amounts of stock. Closely held corporations are much different. The stock is not traded on national securities exchanges. Stock is usually held by a small group of persons, often family members or friends. The shareholders serve as directors, officers, and managers of the corporation. They take an active role in operating the business. 3. Explain relationships between subchapter S corporations and limited liability corporations. The subchapter S corporation is a type of closely held corporation. It is a hybrid of the corporation and partnership. It is organized and operates as a regular business corporation, but for tax purposes it is treated similarly to a partnership. A limited liability corporation (LLC) is a new form of business that allows entrepreneurs and small business owners to limit personal liability similar to a holder of shares in a corporation while retaining their status as a partner in a partnership. One relationship is that both are hybrids between corporations and partnerships. Another relationship between the two is that each stresses the advantage of a different form of business association. The subchapter S corporation stresses the tax advantages of the partnership. The LLC stresses the limited liability feature of the corporation. 4. Explain relationships between closely held and subchapter S corporations. The subchapter S corporation is a type of closely held corporation. 5. Evaluate this statement: Professional corporations enjoy limited liability. The professional corporation is new, and is used by professionals such as doctors and lawyers. They are allowed to incorporate so that they may obtain tax advantages of deductions for health and pension plans that are allowed under the corporate form. However, the professional corporation is different from other corporations in that the owners are not accorded limited liability for professional acts. Public policy considerations preclude limited liability for the negligence of professionals. 6. Why should the corporate form of business associations be studied carefully? The text explains that corporate activities have a great impact on society. Also, corporations are subject to greater regulation than are other forms of business. 7. Explain relationships between debt financing and equity financing. Debt financing means taking out loans in the form of notes, bonds, and debentures. Equity financing is not based on loans. It involves raising capital through the sale of equity securities, also called shares of stock. Debt financing offers tax advantages to corporations, which equity financing generally does not. 8. Would an investor rather own common or preferred stock? Why? An investor would rather own preferred stock because it carries less risk of loss than common stock. Common stock has no preferential rights. Preferred stock is given special preferences as to either payment of dividends or the distribution of assets. In general, preferred stock carries with it more rights for the shareholders. 9. How does the law of agency relate to this chapter? Agency law outlines the duties partners owe to one another, and the duties shareholders owe to the corporation. Partners are agents, and owe duties to one another. Shareholders are not agents of the corporation, and cannot act on its behalf. Their control is limited to exercising their right to vote at shareholders’ meeting. 10. Explain relationships between the corporate opportunity doctrine and the business judgment rule. Both are common law rules that protect the corporate form of business association. The first protects the corporate from unethical acts by those in powerful positions in corporations. The second protects those in power from liability for situations in which they made a poor decision, but did so in good faith. The corporate opportunity doctrine precludes corporate officers and directors from taking personal advantage of an opportunity that, in all fairness, should have belonged to the corporation. The business judgment rule is a rule that says corporate officers and directors are not liable for honest mistakes of business judgment. 11. Explain relationships between the business judgment rule and piercing the corporate veil. The business judgment rule says that corporate officers and directors are not liable for honest mistakes of business judgment. Piercing the corporate veil is a legal doctrine used by courts when the corporate form is misused. Sometimes, the court disregards the existence of the corporation and holds the shareholders liable for the corporation’s debts and obligations. Both are common law rules. Both protect the corporate form of business association, but in different ways. The business judgment rule comes into effect when officers and directors are showing good faith, but have made a mistake. Piercing the corporate veil is relevant when someone is not acting in good faith and is instead abusing the corporate form. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. No. Because Drill Baby Drill’s number one priority, as required by law, is to pursue profits, it is easy to assume that the corporation would use its money to elect politicians that would best help the corporation. Drill Baby Drill would want the politicians to have the corporation’s interest uppermost in their minds. The corporation could argue that these politicians consider the long-run health of the nation their first priority because it depends on how “the long-run health of the nation” is defined. Perhaps “the long-run health of the nation” is reliant on Drill Baby Drill’s success; Drill Baby Drill could lower unemployment rates, improve foreign relations with Saudi Arabia, or lower the cost of oil. But there are other ways to define “the long-run health of the nation” that Drill Baby Drill’s success would not help and could even hurt, such as a more equal distribution of wealth, improved healthcare, welfare, and education systems, and national security. 2. Most corporations are seeking to represent different interests than the average citizen, such as maximizing their profit or helping their interests internationally (in the case of MNCs). Corporations are also considerably more powerful than the average citizen. If corporations had the long-run health of the nation as their number one priority, considering them citizens might not be a problem. However, many corporations’ interests hinder the long-run health of the nation. In the case of MNCs, the corporation’s allegiances may lay with other countries, not the United States. 3. Corporations are conglomerates of many individuals who already have the right to vote. Allowing corporations to have political equality would give some individuals the ability to, in a sense, vote twice. Also, corporations have much more money and influence than the average citizen. Money and power hold weight within the United States and those people (or corporations) with money or power’s voices are heard more than other citizens’. Case Summary—In Re Abbott Laboratories Derivative Shareholders Litigation This case deals with the role of the board of directors. Abbott Laboratories, an Illinois corporation, was fined for a civil violation of Food and Drug Administration (FDA) regulations. The FDA regulated Abbott to take off 125 types of medical diagnostic test kits, destroy inventory, and make certain corrective changes in the manufacturing procedures. Even after repeated warnings Abbott failed to implement the changes following which its shareholders filed a suit against the directors for its repeated non-compliance with regulations and quality control violations. This case was dismissed by the district court and the plaintiffs appealed. Case Summary—Beam v. Stewart This case deals with fiduciary responsibility. Beam brought suit against Martha Stewart, the director, founder, and CEO of Martha Stewart Living Omnimedia (MSO). The image of the company is tied to that of Stewart as a media personality and if her name were to be tarnished, the value of the company would plummet. Stewart and former CEO of ImClone, Samuel Waksal traded reciprocal stock advice through a shared broker. A day before a rejection of an ImClone product by the FDA, Waksal and Stewart sold their shares in the company. MSO stock plummeted amid allegation and investigation. Beam alleged that both the company and Stewart breached their fiduciary responsibilities to the stockholders. The Court sided with Stewart, ruling that Stewart’s actions regarding the stock of another company were not tied to MSO and therefore no fiduciary responsibility was breached. Case Summary—Smith v. Van Gorkom The chapter includes this case to highlight the issue of a director’s duty of care. In this case, a shareholder, Smith, became a plaintiff after he and other shareholders discovered that a board of directors allegedly failed to give due consideration to a merger offer. A lower court held in favor of the defendant director Van Gorkon, but the appellate court reversed. The board did not scrutinize the deal offered to the Board by Van Gorkon. Consequently, they breached their duty to shareholders. The lower court was too lenient with the Board, inappropriately relying on the business judgment rule. Suggested Answers to Critical Thinking about the Law Questions 1. Two examples of ambiguous words are “fairness” of the $55 price per share, and “reasonable,” as used in the phrase “whether the directors informed themselves as to all the information that was reasonably available to them.” 2. The court’s decision making is conclusory. The decision jumps right from the issues to the conclusion without stating how the court got from one to the other. Answers to Review Questions 17-1. Notes are short-term loans, bonds are long-term loans, and debentures are unsecured long-term corporate loans. 17-2. The primary kinds of corporations are as follows: • Closely held corporations—the stock of these corporations is not traded on any of the national securities exchanges. • Publicly held corporations—corporations whose stock is traded on the national securities exchanges. • Multinational or transnational corporations—do not restrict their production to a single nation and generally maintain worldwide distribution sites. • Subchapter S corporations—this type of closely held corporation is best described as a hybrid of the corporation and the partnership. • Subchapter C corporations—corporations that organize and operate as domestic business but for tax purposes are treated like partnership. • Professional corporations—it is a fairly new form of business organization intended for doctors, lawyers, dentists, accountants, and other professionals who were once unable to incorporate legally. • Nonprofit Corporations—formed for purposes other than making a profit. • Rollover business start up (ROBS) corporations—e-corporations which the IRS recognizes under certain conditions. • Limited liability company— hybrid corporation-partnership, similar to the Subchapter S corporation but with far fewer restrictions. 17-3. A closely held corporation is a corporation whose stock is not traded on the national securities exchanges but is privately held by a small group of people. 17-4. The text reminds the students that if a business is going to be paying its net profits to the owners, the partnership formed prevents the double taxation problem of the corporate form. Also, it is anticipated that the business will lose money in the first few years, the partnership form is probably the most desirable from a tax standpoint because the losses may be deducted from the owner’s income during the year in which they occurred. 17-5. It is misleading because liability insurance protects people in all forms of business association. Also, potential creditors of a corporation are well aware of the limited liability of the corporation’s shareholders, so they might ask for a personal guarantee from one or more of the shareholders. This decreases the unlimited liability advantage. 17-6. The LLC is federally taxed, not as a corporation, but as a partnership, so taxes are paid personally by members of the LLC. Answers to Review Problems 17-7. No, the defendant will end up being liable. If necessary, the court will pierce the corporate veil and hold the defendant personally liable. People who own businesses are not allowed to shift assets to avoid liability. 17-8. Before the court pierces the corporate veil and goes after Jones, it will have to decide how much both corporations are simply extensions of Jones. How much control did he have over each corporation? The trial court will be given much discretion to rule on the facts. The court will be reluctant to pierce the corporate veil. 17-9. The shareholder’s agreement is enforceable. Alder and Shaw cannot sell the business without including Svingos in the decision-making process. 17-10. In this case Mr. Jones sold the ski shop franchise to Mr. Hamilton. Following that Mr. Jones took a loan Union Bank. For this reason, Mr. Jones would not be liable to make a payment as the two of them had never entered into a partnership. 17-11. Even in the absence of proper documentation the partnership agreement was valid as there was an implied agreement. Therefore, the trustees could collect the debt from the limited partners. Answers to Case Problems 17-12. The court ruled in favor of the defendants as the directors of the corporation did not owe any fiduciary duty to the corporate creditors. Additionally, they were not related to the personal liability that the creditors had alleged with regard to the breach in contract. 17-13. The court had to decide whether the directors were careless and not acting in the shareholders’ best interest when they created the formula for issuing stocks. If the court applies the business application law to this case lightly, whether the directors were careless would not matter too much. The ruling would mainly depend on whether the directors had the power to make such a formula and because the directors do have this power, the court would most likely rule in the directors’ favor. If the court is like the ones that judged this case, though, and it takes the application of the business application law very seriously, the verdict may differ. The appellant court, in this case, agreed with the trial court and ruled in favor of the directors on the first issuance of compensatory shares but in favor of Baldwin on the second issuance. The directors were acting responsibly the first time because the WMI was having serious financial trouble and something drastic needed to be done. However, the directors acted carelessly when they did not reevaluate their formula the second time when the company was doing much better and, therefore, they violated their duty to Baldwin and the other shareholders. 17-14. The Court sided with Stoker, ruling that a breach of contract and fiduciary responsibility occurred. Members of an LLC have to act in good faith and in concert with one another. This means that one member of the group cannot use the group’s assets to compete against the independent company of one of the members, as what happened here. An LLC’s larger assets cannot be used against one of the members. 17-15. As the manager, Hoaas was responsible for the debt Grand Casino incurred from the missing money and owes Griffiths that money. Griffiths, on the other hand, was responsible for withholding profits and selling the casino without informing Hoaas. He owes Hoaas his share of the profits and assets. The Supreme Court of South Dakota ruled that, to a degree, both parties breached their duties to one another but Griffiths was most to blame for withholding profits and selling the casino without his partner’s consent or acknowledgement. Hoaas owed Griffiths the debt money and Griffiths owed Hoaas his share of the profits and assets. Thinking Critically About Relevant Legal Issues 1. The author concluded that corporations should be made illegal. To back that up, he cited information that links corporations to unhappy workers, pollution, and sweatshops. He argued that it goes against traditional capitalism. 2. The author is only addressing large corporations that operate, many times, in many countries. He categorizes all corporations as evil and all partnerships and sole proprietorships as “mom and pop” stores. This is not an accurate representation. 3. The opposite view would include an account that corporations are the evolution of the “mom and pop” and fall right into capitalism. To maximize profits, owners band together to create a product and service and sell it so they receive the most profit for the least amount put in. One could also argue that corporations are not people and therefore cannot be governed as such. There are different expectations. Lastly, one would argue that corporations help the consumer because they provide product at low costs. Chapter 18 The Law of Administrative Agencies Introduction Chapter Eighteen addresses these questions: • What is administrative law and what are administrative agencies? • How are administrative agencies created? • What are the functions of administrative agencies? • What laws limit the power of administrative agencies? • How are the state and local administrative agencies created and regulated? • What are the global dimensions of administrative agencies? Chapter Eighteen is significant because administrative agencies affect daily lives of people. They also affect businesses by placing limits on what businesses can do. Administrative agencies also provide help and assistance to businesses. Achieving Teaching Excellence The Importance of “Why” Questions If instructors want to modify their teaching style to demonstrate Teaching Excellence, one major change could yield significant results in the classroom. This major change requires instructors to ask students why they believe their particular conclusion is correct. Many students have strong views about particular legal issues. For example, some students feel strongly that we must change the legal system so fewer people can sue. Other students feel strongly that insider trading should be illegal. No matter which conclusions students cherish, instructors must be prepared to ask them why. Instructors must expect students to present reasons to show why they prefer a particular conclusion. In Asking the Right Questions, M. Neil Browne and Stuart M. Keeley remind instructors that “[i]t is the mark of a rational person to support his or her beliefs by adequate proof, especially when the beliefs are of a controversial nature.” Instructors should ask their students, “Why do you say that?” Browne and Keeley also remind instructors to ask why, no matter whether they agree or disagree with the conclusion the student prefers. Instructors’ goal should be to see whether students’ reasons are strong, weak, or somewhere in between. Instructors will not know until they identify students’ reasons. Depending upon a particular student’s past learning experiences, he or she might be surprised when instructors ask why questions. Surprisingly, many are not used to the professor asking them to explain their reasons. Instructors should make sure that they practice their wait time with why questions. Additionally, instructors should explain their behavior to students. Instructors should expect students to ask the objective behind asking the why questions. In the long run, some of the students will appreciate the instructors’ demand that they identify reasons to support their conclusions. In this chapter, and throughout the term, instructors should ask many why questions. They should expect students to ask why questions too. If this kind of questioning environment is created, instructors can demonstrate their interest in achieving Teaching Excellence. References • M. Neil Browne & Stuart M. Keeley, ASKING THE RIGHT QUESTIONS: A GUIDE TO CRITICAL THINKING (Seventh Edition). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview The impact of administrative agency regulations on business and society is a primary focus of this text. Although the text emphasizes the role of federal administrative agencies, each of the 50 states, the District of Columbia, and Puerto Rico, as well as counties, cities, and some towns, have administrative agencies that also regulate business and societal conduct. This chapter defines administrative law and administrative agencies and discusses the reasons for their growth, how they were created, and their functions. It also explores the federal administrative agencies’ relationship to the executive, legislative, and judicial branches of government, as well as the institutions and laws that limit the power of administrative agencies. The chapter ends with a brief consideration of the global dimensions of administrative agencies. This chapter presents important information for managers. It helps managers understand the process by which administrative agencies regulate the businesses they manage. It also helps them see how administrative agencies are a source of help and guidance. The discussion questions that follow the topic outline come from throughout the chapter. Topic Outline I. Introduction to Administrative Law and Administrative Agencies A. Administrative Law B. Administrative Agencies Types Reasons for Growth II. Creation of Administrative Agencies III. Functions of Administrative Agencies A. Rulemaking Formal Rulemaking Informal Rulemaking Hybrid Rulemaking Exempted Rulemaking Judicial Review of Rulemaking Massachusetts v. EPA B. Adjudication Investigation and Complaint Formal Complaint and Hearing Initial or Recommended Decision Appeal to the Full Commission Judicial Review of Adjudicative Proceedings Fox Television Stations, Inc. v. Federal Communications Commission C. Administrative Activities IV. Limitations on Administrative Agencies’ Power A. Statutory Limitations B. Institutional Limitations Executive Branch Legislative Branch Judicial Branch V. State and Local Administrative Agencies Vonage Holdings Corp. v. Minnesota Public Utilities Commission VI. Global Dimensions of Administrative Agencies VII. Summary Discussion Questions for Chapter Eighteen 1. Explain relationships between procedural and substantive rules. A procedural rule affects the way administrative agencies function, whereas substantive rules define the rights of parties. 2. Explain relationships between administrative agencies and alternative dispute resolution. The two share a goal of preventing overcrowding in courts. In the absence of administrative agencies, people would seek redress through courts. Administrative agencies take burdens off courts. Similarly, alternative dispute resolution methods take burdens off courts. (This question would be a good midterm or final exam question because it asks students to relate material from one part of the course to another.) 3. Explain why someone might think this statement is true: Administrative agencies are not really a “fourth branch of government.” Although administrative agencies are important, they are not independent enough to call them a fourth branch of government. The legislative, executive, and judicial branches of government have a considerable amount of control over administrative agencies, so administrative agencies are not on the same level to consider them a fourth branch of government. 4. Explain relationships between informal and hybrid rulemaking. Informal rulemaking requires the agency to give prior notice of a proposed rule by publishing it in the Federal Register, providing an opportunity for all interested parties to submit written comments, and publish the final rule with a statement of its basis and purpose. The final rule is published in the Federal Register. Hybrid rulemaking combines some of the aspects of formal and informal rulemaking. It is similar to informal rulemaking in that it requires notice. Hybrid rule making is different in that it requires a period for public comments and a public hearing. 5. How is adjudication in administrative agencies similar to civil litigation? How is it different? Hearings under adjudication are similar to civil litigation in that there is a complaint, a judge, discovery, presentation of evidence with direct and cross-examination of the witnesses, motions, and arguments. However, adjudication is more informal. No jury is present, and the judge asks questions about the facts. The proceedings are less adversarial and more inquisitorial. 6. Evaluate this statement: In administrative agencies, the burden of proof is the same as the burden of proof in a criminal case. This statement is incorrect. The burden of proof is the same as in a civil case. This burden of proof is the preponderance-of-evidence standard. 7. Explain why someone might think this statement is true: Some of the most important functions that administrative agencies serve are helpful to businesses. This statement is true because many of the services administrative agencies provide to businesses help them maximize their efficiency. For instance, administrative agencies give advice to businesses. They also conduct studies that help businesses make decisions. Administrative agencies also provide information to businesses, grant licenses, and manage property. 8. Explain relationships between the Freedom of Information Act (FOIA) and the Federal Privacy Act (FPA). One relationship is that FOIA requests are exceptions to the FPA. The FOIA requires agencies to let the public know how to get information from the agency. It also requires agencies to make certain documents available for copying. The FPA prevents agencies from disclosing any record in a system of record to any person or agency without the written authority of the individual. One exception to the FPA is that the agency can give information to meet an FOIA request. 9. Evaluate this statement: Politics does not affect the work of administrative agencies. Politics does affect the work of administrative agencies. The President appoints the heads of agencies, and some lower-level heads of departments and divisions. Presidential appointees usually share the same political beliefs as the President. Thus, the President has influence over both independent and executive agencies. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. The critical thinking question that could be applied to this disagreement is, “What does the word law mean?” Only Congress can pass statutes, but administrative regulations are also laws. 2. Some individuals may argue that the creation of regulations by administrative agencies promotes unfair restrictions on business. The ethical norm that seems to be behind this thought is freedom. Freedom means to act without restriction from rules imposed by others. If people want to maximize freedom, they are likely to view administrative rules as unfair. 3. Matt would not want to fund administrative agencies. Why fund an agency that cannot make a difference? Matt might also be in favor of privatization. Matt might make the assumption that private companies could do a better job in some areas than federal agencies. Case Summary—Massachusetts v. EPA This case illustrates the use of judicial review on administrative agencies’ actions. The Environmental Protection Agency rule makers decided the Clean Air Act did not give them the authority to regulate certain greenhouse gas emissions from new motor vehicles. Massachusetts, other states, and private organizations filed a suit to challenge the EPA’s denial. The Supreme Court ruled in favor of Massachusetts because the EPA was responsible for determining whether greenhouse gas emissions should be regulated under the Clean Air Act. Greenhouse emissions clearly fell under the Clean Air Act’s definition of “air pollutants” and, therefore, the EPA is required to decide whether these gas emissions contribute to global warming and should be regulated. Case Summary—Fox Television Stations, Inc. v. Federal Communications Commission Demonstrating the importance of judicial review of adjudicative proceedings, this case is about a new definition of “indecent speech” created by the Federal Communication Commission. Fox Television Station appealed to the court to have the new FCC order reviewed. The court found in favor of Fox because the FCC did not have a logical reason to change the already existing definition of “indecent speech.” The FCC declared that even nonliteral uses of “the F-word” could be considered sexual and the court stated that this assertion was false considering the word could be used in a manner that no reasonable person would believe referenced sexual activities. Therefore, the court decided the FCC needed to reevaluate its definition of “indecent speech.” Case Summary—Vonage Holdings Corp. v. Minnesota Public Utilities Commission This case deals with the power of a state agency. Vonage is a private phone company that uses the Internet to route calls. Traditional phone companies use a switchboard. The company has about 500 customers in Minnesota. They were investigated regarding a claim that they did not have the proper licenses to provide phone services in Minnesota. The Minnesota Public Utilities Commission filed suit stating that Vonage had to comply with state statutes regarding telephone service. Vonage counterclaimed, seeking an injunction. The Court ruled in favor of the Commission, citing that because Vonage users make phone calls, it is a telecommunications system and therefore must be regulated as such. Answers to Review Questions 18-1. Congress created administrative agencies because it didn’t have time to regulate everything, and wanted administrative agencies to develop expertise in particular areas so they could regulate effectively. So administrative agencies take some of the regulatory burden off Congress, and the agencies do their work well because of their expertise. 18-2. The two major functions of administrative agencies are rule making and adjudication. It means that they may have legislative power to make rules for an entire industry, judicial power to adjudicate (decide) individual cases, and executive power to investigate corporate misconduct. Examples of such independent federal administrative agencies include the EPA, the FCC, and the FTC. 18-3. Independent administrative agencies are headed by a board of commissioners who are appointed for a specific term of years by the President with the advice and consent of the Senate. Each of the commissioners can be removed before serving his or her full term only for causes defined by Congress and not at the whim of the President. However, the President has more control over executive agencies. Heads and members of these boards serve at the pleasure of the President with no fixed term. They can be removed by the chief executive at any time. 18-4. Courts can curb excesses of the administrative agencies’ rule making and adjudication functions by reversing or modifying such actions. Additionally, there are certain federal statutes that limit the power of administrative agencies and their officials. 18-5. Administrative agencies have proliferated rapidly since the late 1890s for the following reasons: • Flexibility—unlike the court proceedings, administrative agency hearings are not governed by strict rules of evidence. • Need for expertise—the staff of each of the agencies has technical expertise in a relatively narrow area, gained from concentrating on that area over the years. • Prevention of overcrowding in courts—if administrative agencies did not exist, the United States’ highly complex, often litigious, society would have to seek redress of grievances through the federal and state court systems. • Expeditious solutions to national problems—after the 1929 stock market crash and the ensuing Depression, Congress sought to give investors confidence in the securities markets by creating the SEC in 1934. When the public became concerned about the deterioration of the nation’s water, land, and air, Congress created the EPA to implement air, water, and waste regulations. 18-6. Section 553(c) of the APA requires formal rulemaking when an enabling statute or other legislation states that all regulations or rules must be enacted by an agency as part of a formal hearing process that includes a complete transcript. This procedure provides for: • An agency notice of proposed rulemaking to the public in the Federal Register • A public hearing at which witnesses give testimony on the pros and cons of the proposed rule, each witness is cross-examined, and the rules of evidence are applied • The making and publication of formal findings by the agency As provided by Section 553 of the APA, informal rulemaking applies in all situations in which the agency’s enabling legislation or other congressional directives do not require another form. The APA requires that the agency: • Give prior notice of the proposed rule by publishing it in the Federal Register • Provide an opportunity for all interested parties to submit written comments • Publish the final rule, with a statement of its basis and purpose, in the Federal Register Informal rulemaking is the model most often used by administrative agencies because it is efficient in terms of time and cost. No formal public hearing is required, and no formal record need be established, as in formal rulemaking. Answers to Review Problems 18-7. IBM cannot be held accountable for Cubbage’s statement as the transaction tool place between the franchise and the customer. The franchise had the power to take its own decisions as long as it was within its operational area and did not conflict with IBM’s policies. The court would have ruled in IBM’s favor. 18-8. The EPA probably won this one. They had scientific evidence, so their behavior was not arbitrary and capricious. Plus, the court will be reluctant to second guess the EPA because the EPA has expertise in regulating gasoline additions. 18-9. Sabo & Zahn acted on behalf of Holabird & Root and for this reason they can be considered to be agents. They had signed a binding contract regarding this as well. This means that the principles of law would be applicable to both of them equally. 18-10. The DOT’s findings must be sustained if they are supported by substantial evidence on the record viewed as a whole. This rule was learnt from the Warner Lambert case. The DOT will probably win, as long as their decision was supported by substantial evidence. The DOT is a little confused about the standard (it is not that they win unless there is substantial evidence to the contrary), but even under the correct standard they will win if they have substantial evidence. 18-11. Probably not. The court will be reluctant to tell the FTC that they must resolve disputes in a particular manner. It was not an arbitrary decision that the FTC does not want to include 513 bottlers in a case. The court is likely to rely on the FTC’s judgment. 18-12. In theory, the ICC has jurisdiction to regulate CEO pay. However, this agency’s work has been significantly curtailed by deregulation, so it is unlikely that the ICC would take action on this topic. Answers to Case Problems 18-13. The court denied the agents motion for a summary judgment. However, the U.S. appeals court reversed this judgment in favor of the agents. The court stated that privacy of the wastewater was not a reasonable expectation. For this reason, Riverdale and James Knott could not evoke the fourth amendment act. Therefore, anyone would have the right to inspect this wastewater. 18-14. No, the court won’t rule in favor of ITAC as it was unable to prove evidence of prejudice. Apart from that clarifications were made but it did not constitute to be improper discussions as it pertained to the government’s decision making process. 18-15. Ethyl Corp. won this case because the EPA could not delegate fuel efficiency tests. Those tests have to be controlled by EPA regulations and standards. If each company comes up with a test, then there will be many variations on fuel economy. 18-16 Informal rulemaking is the model most often used by administrative agencies because it is efficient in terms of time and cost. The APA requires that the agency • Give prior notice of the proposed rule by publishing it in the Federal Register • Provide an opportunity for all interested parties to submit written comments • Publish the final rule with a statement of its basis and purpose, in the Federal Register The missing steps here are the notice and comment steps. Here, the court ruled in favor of the Chamber of Commerce. 18-17 The main issues of this case are whether the EPA has the right and knowledge to declare that global warming affects human health and well-being and that certain states and industries will be greatly affected economically by the EPA’s regulations regarding greenhouse gases. The court found in favor of the EPA. The EPA’s research was considered sufficient and the states and industries were unable to prove that their harm is certain or is a direct result of the EPA’s regulations. 18-18 The court granted Lion Raisins its bid proposal costs because the court did consider the USDA’s immediate suspension of Lion Raisins arbitrary and capricious. The USDA was obligated by law to make an affirmative finding of responsibility before awarding a contract and ordering a suspension without providing a reason was unreasonable. Thinking Critically About Relevant Legal Issues 1. The author is very pro-democracy and believes in equality. All people should have a say in all the ways they are governed. Equality is very important to the author because she believes it is the basis of American democracy. Agencies are no different than elected ruling bodies. The author is not concerned with efficiency. The author would much rather sacrifice efficiency for the sake of making agencies more democratic. 2. The author ignores the fact that agencies, especially local ones, are made up of citizens, not politicians. These agencies enforce regulations and laws established by elected officials. And any powers the agencies have are given to them by the officials. If there are any problems, then a voter can vote for a representative who will change the stance on agencies. 3. Basically, the opposition would talk about what the author ignored. The opposition would argue that in a large democratic country, efficiency is very important. Without it, many problems would continue unabated. The opposition would argue that elected bodies control the agencies and that their power can be taken away by a vote. In that regard, they are an extension of democracy. Chapter 19 The Employment Relationship Introduction Chapter Nineteen addresses these questions: • What obligations do wage and hour laws place on employers? • How and when can an employee get unemployment compensation? • How does the Consolidated Omnibus Budget Reconciliation Act of 1985 benefit the employees? • How do worker’s compensation laws benefit employees and employers? • What requirements does the Family and Medical Leave Act of 1993 impose on employers? • What is the goal of the Occupational Safety and Health Act of 1970? • What are employees’ privacy rights in the workplace? • What are the global dimensions of employment relationship? Chapter Nineteen is significant because it explains major pieces of legislation that affect the employer–employee relationship. The laws this chapter explains limit the employers’ freedom to make whatever deal they want with their employees. Federal and state laws limit employers’ freedom, and ensure the security and safety of employees. Achieving Teaching Excellence Perry’s Scale At this point in the semester, it might be worthwhile to introduce an additional model of learning. Instructors have already used Bloom’s taxonomy, and are encouraging a critical thinking model. This chapter of the Instructor’s Manual introduces the Perry’s Scale of Intellectual Development and Explanation. This scale is important as students become critical thinkers because instructors do not want their students to think that everything is relative or that “anything goes”. Instructors discover that once students start to get good at evaluating arguments presented by others, some of them start to exaggerate and think “All arguments are worthless.” Perry’s scale is important because the final stages encourage students to take charge of their learning. The lower part of Perry’s Scale explains that lower levels of intellectual development find students who see issues as black or white, right or wrong. Eventually, students start to view situations as having answers that are relative. They might say, “My answer is as good as yours.” Many students get stuck at this level of intellectual development. Critical thinking, when done correctly, encourages them to move to higher levels of intellectual development. Ideally, instructors want their students to know that answers and arguments are relative, but some are better than others. Students should choose the best answers and arguments from among the flawed choices. Most arguments are flawed. Writers do not have the time or the space to present virtually perfect arguments. Instructors should train their students to know how to identify a good argument, and a better argument. What can instructors do in class and with this text to encourage their students to move toward higher levels of intellectual development on Perry’s scale? Instructors do not want students to despair and start to believe that all judicial opinions are worthless. Some are better than others from a critical thinking perspective. Instructors should ask students to compare one case to another. Instructors should ask students, “What does Judge X do in the A case that shows stronger critical thinking skills than what Judge Y does in the B case?” By encouraging students to move toward higher levels on Perry’s scale of intellectual development, instructors are moving toward achieving Teaching Excellence. References • Donald R. Woods, “Nurturing Intellectual Development,” 19 JOURNAL OF COLLEGE SCIENCE TEACHING 250 (1990). • Donald R. Woods, “Models for Learning and How They’re Connected—Relating Bloom, Jung, and Perry,” 22 COLLEGE SCIENCE TEACHING 250 (1993). Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter explains many of the conditions that the government imposes on employment relationships. The first five sections focus on the laws that affect employee wages and benefits—wage and hour laws; unemployment compensation legislation; the Consolidated Omnibus Budget Reconciliation Act of 1985; state workers’ compensation laws; and the Family and Medical Leave Act. The sixth and seventh sections shift the focus to protection of worker safety and health and privacy rights. The final section discusses the international dimensions of the employment relationship. One of the primary strengths of this chapter is that it gives a good overview of the employment relationship before students learn about labor law and employment discrimination law. Organizationally, it makes sense to consider the relationship between employers and employees before specific problems are considered. The cases in this chapter are interesting and timely. Topic Outline I. Wage and Hour Laws II. Unemployment Compensation Cassandra Jenkins v. American Express Financial Corp. III. Consolidated Omnibus Budget Reconciliation Act of 1985 IV. Workers’ Compensation Laws A. Coverage B. Recoverable Benefits C. The Claims Process D. Benefits of the Workers’ Compensation System V. The Family and Medical Leave Act of 1993 A. Major Provisions Rachael Schaar, Appellant v. Lehigh Valley Health Services, Inc.; Lehigh Valley Physicians Business Services, Inc. B. Remedies for Violations of the FMLA C. The Future of the FMLA VI. The Occupational Safety and Health Act of 1970 A. Occupational Safety and Health Administration Standard Setting Enforcement Inspection Procedure Penalties Public Education State Plans B. Occupational Safety and Health Review Commission C. National Institute for Occupational Safety and Health D. Implementation of the OSH Act VII. Employee Privacy Rights A. Electronic Monitoring and Communication Brian PIETRYLO and Doreen Marino, Plaintiffs, v. HILLSTONE RESTAURANT GROUP d/b/a Houston’s, Defendant. B. Drug Testing C. Other Testing VII. Global Dimensions of the Employment Relationship VIII. Summary Discussion Questions for Chapter Nineteen 1. Analyze: Federal and state laws place limits on employers’ freedom. This question allows students to present an overview of the material in the chapter. What are employers not allowed to do? Employers are not allowed to pay workers less than a specific wage. They are not allowed to opt out of the unemployment compensation system. They are not allowed to fire workers who take family or medical leave. They are not allowed to maintain an unsafe workplace. Employers are not allowed to violate employees’ privacy. 2. Evaluate: Everyone who loses his or her job is entitled to unemployment compensation. There are some eligibility requirements that must be set, with most states requiring, at minimum, that employees who are fired for just cause or who voluntarily quit are not eligible for unemployment compensation. 3. Analyze: It is important to know whether one is an employee or an independent contractor in case the person is injured at work. The statement is true because worker’s compensation laws protect employees, but not independent contractors. The key fact in determining whether someone is an employee or an independent contractor is the degree of control the employer exerts over the worker. The more control, the more likely it is the person is an employee rather than an independent contractor. 4. Evaluate this statement: Workers’ compensation legislation considers fault. This statement is flawed because the worker’s compensation statute is generally a no fault statute. Recovery does not depend on a showing that the injury was caused by an employer’s error. The system is a form of insurance system. 5. Explain why someone might think this statement is true: The worker’s compensation system is not always beneficial to workers. This statement is true because some employees would receive more compensation if they were allowed to sue their employers in a personal injury case. Worker’s compensation statutes usually state that the worker’s compensation system is the employee’s exclusive remedy. These exclusivity provisions are especially harmful to employees who could prove extensive damages and receive high award in a regular civil case. 6. After reading the cases that raise issues under the Family and Medical Leave Act (FMLA), make a generalization about why employers contest employees’ claims that the FMLA should provide protection to them. Employers generally believe employees are seeking leave when they are not seriously ill. Employers want to fire employees who are frequently absent so they can replace the employees with more dependable employees. 7. Explain relationships between the Occupational Safety and Health (OSH) Act and worker’s compensation. One relationship is that the OSH Act is federal legislation that applies the same way in all states, whereas worker’s compensation statutes are state laws that vary from state to state. Another relationship is that if the OSH Act works well, workplaces are safer, and workers do not need to rely on the worker’s compensation system because they have fewer injuries. 8. Analyze: We need the Occupational Safety and Health (OSH) Act less now than we did ten years ago. As the American economy has shifted toward service industries, employees are much less likely to be injured on the job. Fewer employees are worried about whether they will lose a body part (e.g., a toe) or a sense (sight or hearing) than they were when jobs were more industrial and dangerous. 9. How is the National Institute for Occupational Safety and Health (NIOSH) related to the Occupational Safety and Health Review Commission (OSHRC)? The NIOSH is a research facility; the OSHRC is a review body that hears claims by employers that their penalty under the OSH Act is inappropriate in some way. Both agencies provide support to OSHA, whose general mandate is to promote workplace safety. 10. Why are workplace privacy concerns more important today than they were ten years ago? When workers had industrial jobs, they had lower privacy expectations. Employees were not likely to have their own offices and were seldom on the phone. Now, employees have their own areas, and they expect some measure of privacy to make phone calls and to have personal belongings close to them during the working day. 11. Explain why someone might think this statement is true: It would be desirable to have uniform labor laws among all industrialized nations. Some people believe there are certain inherent rights workers should enjoy no matter where they live and work. Another argument in support of the statement is that uniformity would make it easier for multinationals that operate in many countries to know their rights and responsibilities. Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1. The employer is upset because he or she does not want to train a new employee or suffer from the loss of Mike’s work while he takes time off to adjust to parenthood. The employer values efficiency. It is expensive to get a replacement for an employee who goes on leave. 2. The employer’s statement shows he or she would be unlikely to grant leave if he or she were in a position to choose. That means someone else (the government) has to step in to protect the rights of workers. 3. The additional information that would help the students’ thinking are: • Will Mike get full or partial pay during the leave? • Will the pay be subsidized by the government? • How long can the leave last? • Will mothers and fathers get the same amount of paid leave? Case Summary—Cassandra Jenkins v. American Express Financial Corp. This case deals with unemployment compensation. Jenkins, who worked as an insurance specialist, was sentenced to prison for assault. She was to serve 30 days, but she had work-release privileges. She notified her supervisor, who assured her that she could continue her employment. However, when she got to the workhouse, her employment had not been verified. She appealed and was told that she had been terminated for misconduct. Her appeal went all the way to the Minnesota Supreme Court. The Court reversed the prior rulings and found in favor of Jenkins, citing that because the misconduct did not have anything to do with her job, she was unfairly terminated. The court held that Jenkins’ absence from work was not misconduct that disqualified her from receiving unemployment benefits and that it could not be used to fire her. Case Summary—Rachael Schaar, Appellant v. Lehigh Valley Health Services, Inc.; Lehigh Valley Physicians Business Services, Inc. This case deals with a medical leave from work. Rachael Schaar worked for Lehigh Valley. After visiting a Lehigh Valley doctor, Schaar took a few days off from work. Lehigh Valley fired Schaar for missing work due to being sick and other employment indiscretions. Schaar filed a suit claiming interference and discrimination in violation of the FMLA. The appellant court ruled that Schaar’s illness could qualify as a valid excuse to miss work under the FMLA and remanded the case back to a trial court for further processing. Suggested Answers to Critical Thinking about the Law Questions 1. The crucial facts are: • Schaar was an eligible employee • Lehigh Valley was a covered employee • Dr. Twaddle wrote a note saying Schaar was incapacitated for two days and Schaar testified that she was ill for more than three days which the court ruled was enough evidence to prove Schaar suffered from a “serious health condition” • Schaar gave Lehigh Valley adequate notice of her illness 2. The FMLA protects the personal rights of employees who are suffering from an illness and employers’ rights to fire employees who do not meet their employers’ expectations. Case Summary—Brian PIETRYLO and Doreen Marino, Plaintiffs, v. HILLSTONE RESTAURANT GROUP d/b/a Houston’s, Defendant Pietrylo and Marino, employees in a restaurant, created a group on MySpace that was password protected. This group was called Spec-Tator, where former and current employees of the restaurant vented their feelings. None of the managers were extended an invitation to join the group. However, on hearing about this group a manager forced an employee who had access to this group to disclose the password. Consequently, after reading the discussions on the group the manager fired Pietrylo and Marino. They sued the manager for invasion of privacy and violations of the federal Stored Communications Act. The jury awarded compensatory damages and punitive damages to the plaintiff. However the jury found that no invasion of privacy took place. Answers to Review Questions 19-1. The Fair Labor Standards Act requires employers to pay a minimum wage, and pay time and a half for work more than 40 hours per week (unless exemptions apply). This specified amount is periodically raised by Congress to compensate for increases in the cost of living caused by inflation. 19-2. Employees enjoy guaranteed recovery for on-the-job injury, do not have to hire a lawyer, and enjoy a no-fault system. On the other hand, employers benefit because employees cannot bring negligence claims against them (which could provide much higher awards). Employers’ protection from large judgments means they do not have to invest as much into ensuring workplace safety. 19-3. As per the Family and Medical Leave Act, employers must formulate and publish a family leave policy, and provide eligible employees with up to twelve weeks of leave during any twelve-month period for family related occurrences (e.g., birth of a child, care of a seriously ill family member, a serious health condition that renders the employee unable to perform any of the essential functions of his or her job). 19-4. If an employer violates the Family and Medical Leave Act, employees may recover damages for unpaid wages or salary, lost benefits, denied compensation, and actual monetary losses up to an amount equivalent to the employee’s wages for twelve weeks. Plus, plaintiffs may bet attorney fees and court costs. If the employer shows bad faith, double damages may be awarded. The employee may be entitled to reinstatement or promotion. 19-5. NIOSH is a research facility that helps OSHA identify occupational and safety problems, develops controls to prevent occupational accidents and diseases, and disseminates findings. 19-6 Employers should make employees aware of limitations on their privacy. Employees need to know that their expectations of privacy must be reasonable. Policies must exist for good business reasons. Policies should be clear. Answers to Review Problems 19-7. Robert will not be able to collect unemployment compensation. Employees who quit voluntarily, as Robert did, are not eligible. Robert should have waited to get laid off. 19-8. Worker’s compensation is a no-fault system. It is irrelevant that Mandle ignored company safety policies. She was at fault, but she was entitled to receive compensation as per the no-fault rule. 19-9. The key issue is whether Caroline Williams had a reasonable expectation of privacy. She did not. She knew her company was monitoring telephone calls. Plus, she was not supposed to use the phone for personal calls. The employer should not have stayed on the line, but was in his or her legal rights to do so. 19-10. Here, Michael Meuter had an expectation of privacy. He used an extension phone, so he probably did not know the employer could listen in. Plus, the employer did not make it clear to employees that their calls could be monitored. 19-11 The employer can probably use a drug test. Employees have few rights before they are hired. As long as the testing method is not unduly intrusive, it is probably okay. The lie detector test will not be allowed. Generally, employers are not allowed to use lie detector tests. Here, the trade secret issue is probably not important enough to warrant an exception. Answers to Case Problems 19-12. The Court reversed the Special Workers’ Compensation Appeals Panel’s decision and affirmed the trial court’s decision to grant 40 percent permanent partial disability to each hand and temporary total disability benefits for the time Trosper spent recuperating. The Court found that Trosper’s osteoarthritis pain worsened when his work duties became more manual. The change in work duties caused his increased arthritic pain. 19-13. The appellant court reversed the trial court’s decision and found in favor of Krenzke. To file a suit under the FMLA, Krenzke had to prove she provided notice to Lindsey Lexus that she needed a leave of absence due to an illness. Because Krenzke did notify Lindsey Lexus, the burden then shifts to the employer to prove that the request is viable. Lindsey Lexus did not make any inquiries into the note provided by Krenzke’s doctor and, therefore, Lindsey Lexus did violate the FMLA. 19-14. The Court affirmed the judgment in their favor because they were not defense contractors. The defense exemption to the rule that disallowed the second test applied only to contractors. Because the employees worked in the mailroom, they did not fall under the exemption and therefore did not have to take the second test. 19-15. Yes, there is an issue of material fact because it is unclear whether Indergit was entitled to overtime pay. Rite Aid claims the company did not owe Indergit overtime pay because Indergit’s employment fell within the executive exemption. The court ruled, however, that Indergit’s claim that the majority of his job responsibilities were the same as those performed by nonexempt employees need to be further investigated because it created an issue of material fact. For the court to rule that Indergit’s job responsibilities made him exempt from the overtime requirements, Rite Aid would need to prove that Indergit’s primary duties were managerial in nature. 19-16. In this case, the district ruled in favor of the plaintiff and awarded a summary judgment. However, this decision was reversed by the appeals court based on the fact that a jury would have to deliberate whether the employer had in fact violated the employee’s FMLA leave. 19-17. The court ruled in favor of the defendant, Mission Linen Supply. Even the court of appeals reaffirmed this judgment. Thinking Critically About Relevant Legal Issues 1. The issue is an alternative to the present form of workplace drug testing. The saliva swab is the answer. The author still believes that drug testing is a good idea; it just needs to be implemented in a way that is not only fast, but also less invasive. 2. The new test is apparently “faster” then the old ones. This is ambiguous because there is no source. Although they do say how fast it is, they do not give any factual indication of how reliable the test is. It is confusing whether the test is fast, accurate, both, or neither. There is no real indication. 3. The sources are missing. This would be much stronger if there was a name for the test and if there were stats from the two states. One needs to know more about this drug test before any conclusions can be drawn. The author leaves out too many important details about the test, such as the name, maker, how exactly it works, the probability for a false positive, and so on. 4. The opposition could take two approaches: • The opposition could write about how drug tests are too invasive and infringe on the right to privacy, regardless of how they are administered. Employers have to trust employees, and if one’s work is not up to par, then questions can be asked, or the employee can be fired. There is no need for a test if the work is steady and of good quality. • The opposition could write that this new test is not proven and leaves too much room for error. Until it has been lab-tested and approved, employers should stick to the old methods. Speed should not be an issue; reliability is the key. Solution Manual for The Legal Environment of Business: A Critical Thinking Approach Nancy K. Kubasek, Bartley A. Brennan, M. Neil Browne 9780133546422, 9780134074030
Download
Close
Close
