Authored by Mark Lobb
Welcome to the September version of The Lobb Report. The California legislative session ended on September 14. There have been major changes in employment laws but no major new tax laws. There are three separate ballot initiatives which are significant when it comes to tax increases which I will discuss in future Lobb Reports. Also, there is a senate bill (SB 770) which could move the state toward a single payor healthcare system with significant future tax ramifications for businesses.
This month’s edition focuses on new entity federal filing requirements along with some key new California employment laws.
Corporate Transparency Act: The effective date of the Corporate Transparency Act (CTA) is January 2024. Affected entities should be aware of the CTA requirements and begin preparing for the new reporting rules.
The stated goal of the CTA is to establish a central registry of beneficial owners of legal entities to provide transparency and combat money laundering and illicit financial activities by those who control smaller unregulated businesses. It is estimated the CTA will affect more than 32 million entities.
Domestic entities that are subject to reporting include C and S corporations, limited liability companies (LLCs), and other entities formed by the filing of a document with a Secretary of State or similar office. Foreign entities that are registered to do business in any state or tribal jurisdiction are also subject to the reporting requirements.
Certain entities are exempt from the definition of a “Reporting Company.” Exempt entities include:
- Large operating companies which are defined as entities with more than 20 full-time US-based employees.
- A US office which means an entity which regularly conducts its business at a physical location in the United States that the entity owns or leases, and more than $5 million in US-source gross receipts or sales.
- Subsidiaries of “large operating companies” may also be exempt.
Most all LLCs formed to hold real estate, intellectual property, or other property will be subject to reporting. Furthermore, although trusts are not currently subject to reporting, trusts that own or control at least 25% of a Reporting Company, and trustees who exercise substantial control over a Reporting Company are subject to reporting.
If a trust owns an interest in a Reporting Company, depending on the language of the trust, it may be necessary to disclose the trustee, the beneficiary, the grantor, or some combination of the foregoing.
Reporting Companies must disclose the legal name of the entity, any trade name associated with the business, the business address, certain jurisdiction information, and the US Internal Revenue Service taxpayer identification number associated with the entity.
Reporting Companies must also disclose certain personal information of the following:
- Each “beneficial owner” which is defined as any individual who exercises substantial control over the Reporting Company or who owns or controls a 25% ownership interest, and
- Any company created or registered to do business in the United States on or after January 1, 2024, must file an initial beneficial ownershipinformation report within 30 days after receiving actual or public notice that its creation or registration is effective.
The required disclosures for beneficial owners and company applicants include legal name, date of birth, current address, and an image of an identification document with a unique identifying number such as a passport.
As stated above, Reporting Companies created or registered before January 1, 2024, must file the initial BOI reports by January 1, 2025. Forming a non-exempt entity before the end of 2023 will result in not having to report until January 1, 2025.
The following is a checklist of considerations as we approach 2024:
- Determine if any entity formed by you or in which you have an interest is a Reporting Company.
- Consider restructuring entities to take advantage of available exemptions.
- Identify and verify the beneficial owners of each Reporting Company.
- Obtain the unique identification number from FinCEN, called a FinCEN Identifier.
- Calendar compliance dates.
Sara and David in our office can assist you in pulling the information together and making sure your filing is compliant.
California Minimum Wage Increase to $20 an Hour: Most California employers think the minimum wage is going to go from $15.50 in 2023 to $16 an hour in 2024. In part, that thought process is correct from a technical standpoint. However, AB 1228 which I discussed in my last Lobb Report has been negotiated by the Unions and Fast-Food Industry Representatives. The result is that the minimum wage for fast-food employees is to be raised to $20 an hour effective 2024. The Assembly and Senate immediately passed the legislation and Governor Newsome will soon sign the bill into law.
If fast-food employees receive a minimum wage of $20 an hour it is logical to conclude that all entry level employees who normally earn a minimum wage will receive $20 an hour. There is no reason to believe that an entry level person will work at a job other than in the fast-food industry if the wage is $4.00 an hour more in the world of fast-food. The fast-food representatives cut the deal with the Union representatives to avoid other draconian measures in the proposed AB 1228 which measures were negotiated out of the final version of the bill. The Unions have effectively taken control of decision making in Sacramento and leveraged one industry to affect all employers in California.
Employee Non-Compete Agreements: On September 1, 2023, California passed a new law which provides that any contract that is void under California law is unenforceable regardless of where and when the employee signed the contract.
In California, non-compete agreements with California employees are typically void. California Business and Professions (“B&P”) Code Section 16600 provides “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
In B&P section 16600.5 the new law states that “Any contract that is void under this chapter is unenforceable regardless of where and when the contract was signed.” The new code section goes on to include the following rules:
* An employer or former employer shall not attempt to enforce a contract that is void under this chapter regardless of whether the contract was signed, and the employment was maintained outside of California.
* An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this law.
* An employer that enters a contract that is void under this chapter or attempts to enforce a contract that is void under this law commits a civil violation.
* An employee, former employee, or prospective employee may bring a private action to enforce this law for injunctive relief or the recovery of actual damages, or both.
* Prevailing employee, former employee, or prospective employee in an action based on a violation of this law shall be entitled to recover reasonable attorney’s fees and costs.
The law is effective January 1, 2024. If your company has non-compete agreements in place, you should consider rescinding them immediately.
There is another bill which is waiting for the Governor’s signature. California AB 1076 voids all employment non-compete agreements no matter how narrowly tailored. This bill includes a notice requirement. Employers will be required to notify current and former employees in writing by February 14, 2024, that any noncompete clause or agreement they had entered are void.
It will now be common for plaintiff lawyers to add a claim in employee lawsuits alleging a violation of the new non-compete ban to trigger the attorney fees provision. Out-of-state employers will be disinclined to hire California employees. Furthermore, California employers will not be able to enforce out-of-state non-compete agreements.