Michigan’s New Business Hybrid Offers Benefits of Non-Profit Status With Reduced Regulatory Structure

Michigan is one of only six states that currently offers a new, legal form of business entity: the low-profit limited liability company, or L3C. The new structure is gaining momentum nationwide, yet many have never heard of the advantages afforded by this hybrid between a non-profit and for-profit venture. The designation was created in Michigan in 2009 to help spur business and advance socially beneficial ventures.

Designed specifically to bridge the gap between for-profit and charitable sectors, the L3C is similar to a traditional limited liability corporation, or LLC. However, its primary purpose is not to make a profit, but to achieve a socially beneficial objective. (Though making a profit is allowed.) The L3C must follow these requirements:

• The company must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed but for its relationship to the accomplishment of such purpose(s);
• “No significant purpose of the company is the production of income or the appreciation of property” (though the company is permitted to earn a profit); and
• The company must not be organized “to accomplish any political or legislative purposes.”

Importantly, these three requirements closely mirror those of the IRS rules for “Program Related Investments,” making L3C businesses eligible to receive PRIs – a distinct advantage designed to spur economic growth. However, L3C entities do not qualify as charities and therefore are not exempt from taxes, nor are investments in an L3C tax deductible, as they would be for a 501c3 non-profit.

The L3C legal structure is similar to the LLC in many ways:

• The L3C offers a flexible ownership structure, wherein each member’s management responsibility and financial stake may vary according to individual needs.
• The L3C’s members enjoy limited liability for the actions and debts of the company.
• The L3C is classified as a “pass-through entity” for federal tax purposes, like a partnership or sole proprietorship, so no federal income tax is imposed on the L3C itself.

Of the many advantages an L3C offers, perhaps the most attractive is that it offers the operating efficiencies of a for-profit along with a reduced regulatory structure. As an LLC, it can bring together foundations, trusts, endowment funds, pension funds, individuals, corporations, other for-profits and government entities into an organization designed to achieve social objectives while also operating according to for-profit metrics. Importantly, a foundation or business owner retains ownership and management rights, as opposed to the board-managed, non-profit operating status requirements.

What types of businesses would best qualify as an L3C? It may provide a new structure for museums, concert halls, recreational facilities and the hundreds of thousands of nonprofits that perform service for the government under contract. It may possibly help the flagging newspaper industry as well, as the designation is tested under this arrangement.

In Michigan, the L3C legislation was introduced by Traverse City Republican State Senator Jason Allen on July 24, 2008. Senate Bill 1445 was signed into law on January 16, 2009 as an amendment to the Michigan Limited Liability Company Act by Governor Granholm. The bill was supported by the Council of Michigan Foundations and the Michigan Department of Labor and Economic Growth.

For more information on the L3C designation, contact Peter Gojcaj at pgojcaj@beierhowlett.com.

Anti-Bullying Law Requires School Policy by June

Under Matt’s Safe School Law, HB 4163, public, charter and Intermediate school districts will have six months from the law’s effective date to adopt anti-bullying policies. Michigan was one of only three states without an anti-bullying law before this legislation was enacted in early December 2011.

Controversial language exempting the prohibition of “a statement of a sincerely held belief or moral conviction” of a student or school worker was not included in the final legislation. The law now demands that bullying is equally prohibited without regard to its subject matter or motivating animus.

Under Matt’s Safe School Law, a school’s policy must not only prohibit bullying, but also work to ban retaliation against a witness, informant or target of the bullying. Along with required reporting, publicizing and investigation procedures, the proposed law also demands that schools identify who at the school is responsible for ensuring policy implementation. Additionally, schools must notify the parents of the perpetrator of bullying.

The law stops short of mandating that boards require any type of staff training for the prevention of bullying, but does encourage boards to include the following in their policies:

• Provisions to form bullying prevention task forces, programs, teen courts, and other initiatives involving staff, pupils, clubs/groups, volunteers, parents, law enforcement and the community.
• A requirement for annual training for admins, employees and volunteers who have significant contact with pupils to prevent, identify and respond to bullying.
• A requirement to establish educational programs for pupils and parents.
• Immunity from a cause of action for damages arising out of the reporting itself or any failure to remedy the reported incident, excluding the school official designated for remedying the bullying.

Off-Premises and Telecommunications

It is important to note that the law defines “at school” to include buses, school sponsored activities off-premises, and conduct using a telecommunications access device or service provider if the device/provider is under control of school district. Students using school email addresses to send messaged intended to harm another pupil would be included under this law.

Bullying is defined as “any written, verbal or physical act, or electronic communication, that is intended or that a reasonable person would know is likely to harm 1 or more pupils either directly or indirectly by doing the following:”

• Substantially interfering with educational opportunities, benefits or programs of 1 or more pupils.
• Adversely affecting the ability…to participate in education /activities by placing the pupil in “reasonable fear of physical harm or by causing substantial emotional distress.”
• Having actual and substantial detrimental effect on a pupil’s physical or mental health.

Schools must report on status of the implementation of the policies one year later.

Matt’s Safe School Law is named after Matt Epling, a freshman from East Lansing who killed himself after a bullying incident by upperclassmen in 2002.

Beier Howlett attorneys have the expertise and experience in school law to draft a comprehensive anti-bullying policy which will comply with the new proposed law. For details, please contact one of the following Beier Howlett attorneys or call (248) 645-9400:

Tim Currier
Mike Gibbons
Peter Gojcaj

This publication is distributed with the understanding that Beier Howlett, P.C. is not rendering legal or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. Forward your comments, change of address, or additions to our mailing list at feedback@beierhowlett.com.

“Last In, First Out” No Longer the Norm

Last summer, Gov. Snyder signed into law a bill that substantially amends the Teacher Tenure Act.  According to the Governor, “the new law will end the ‘Last In, First Out’ practice through which school districts make staffing decisions based solely on seniority, in favor of a new system that requires administrators to consider demonstrated effectiveness in the classroom.”

Previously, discharge or demotion of a teacher could only be accomplished if it was “reasonable and [for] just cause, making it difficult – if not impossible – for school administrators to dismiss an ineffective teacher.  Under the amended Tenure Act, the new standard for discharging a teacher is much lower.  The amendment allows that “discharge or demotion of a teacher on continuing tenure may be made only for a reason that is not arbitrary or capricious.” 

The new law changes the standard for demoting or discharging a teacher from a “reasonable and just cause” standard to “a reason that is not arbitrary or capricious.” Consistent and fair performance evaluations which illustrate ineffective teaching are not expected to be perceived as arbitrary or capricious under examination.

Retaining Effective Teachers

Another change in the law is that a school district shall not adopt a policy that provides that length of service or tenure status is the primary or determining factor in making personnel decisions. Further, the law provides that school district policies shall ensure that all personnel decisions (elimination of positions, reduction in teacher staff, recalls in teachers, hiring of teachers) are based on retaining effective teachers.

A teacher who has been rated ineffective under a performance evaluation system is not given any preferences that would result in that teacher being retained over a teacher who is evaluated as “minimally effective.” Individual performance shall be the majority factor in making the decision.

“Making staffing decisions based on merit and performance encourages good teachers to keep doing what they are doing and helps ensure students receive the highest quality education,” Snyder said. “This long overdue reform will protect outstanding teachers who are enthusiastic about the material and able to connect with students in a way that makes them want to learn.”

Tenure Tied to Ongoing Ratings

Under the new law, it will now take five years for a teacher to qualify for tenure, up from four. However, teachers who are rated “highly effective” three years in a row may earn tenure in less time. During the initial probationary period a teacher may be dismissed at any time.

Even after a teacher earns tenure, he or she will have to continue earning effective ratings in order to keep it. In the coming years, school districts will have to notify parents in writing if their child is taught by a teacher who is rated ineffective.

The dynamic of public employers’ negotiations with their unions shifted with the passing of Public Act 54 on June 8, 2011. The Act essentially freezes wages and benefits for unionized employees of Michigan public employers after a collective bargaining agreement expires. No increases in wages or wage steps are permitted until a successor agreement is in place, providing new incentive for unions to reach an agreement quickly.

Additionally, the Act prohibits employers from paying any increases in medical benefit costs to those insured. Employees will bear any “increased cost of maintaining those benefits” (health, dental, vision, prescription, or other insurance benefits) that occur after the after the expiration date of the collective bargaining agreement.” To that end, schools are authorized to make payroll deduction necessary to pay the increased costs of maintaining those benefits.

The new law also prohibits unionized employees from bargaining for, or an arbitration panel from ordering, retroactive wage or benefit increases. This is in an effort to avoid compounding fiscal problems during negotiations.

The Act was also interpreted to extend to a freeze on promotional wage increases, as in the case of Central Michigan University and its Faculty Association. In an article from Central Michigan Life, CMU President George E. Ross commented on the sponsoring lawmaker’s intent by noting, “While I respect that this may not have been [the] intent, the law is nevertheless clear that any wage increase (regardless of its reason) is prohibited under PA 54. We do not believe PA 54 is ambiguous, nor are we aware of any pending legislation to repeal or amend it.

“To reiterate, since PA 54 applies to CMU as a public employer and prohibits any wage increases after the expiration of a collective bargaining agreement, CMU is prohibited from paying any wage increases related to promotions to FA members. PA 54 simply does not provide any exceptions or exclusions that would allow us to do so,” Ross concluded.

For more information, contact Peter Gojcaj at Beier Howlett, P.C. (248) 645-9400.

Personal Emails By School Employees To Remain Confidential

As a teacher or school administrator, many of your official communications are subject to scrutiny by the public under the Freedom of Information Act (FOIA). However, the Michigan Court of Appeals ruled, in a precedent-setting case, that certain personal emails by public body employees are to remain confidential.

According to the Michigan Court of Appeals, these “personal emails” serve no “official function,” and therefore are not subject to the FOIA and cannot become public record.

In Howell Education Association MEA/NEA v. Howell Board of Education, the Court of Appeals noted, “There is nothing about the personal emails, given that by their very definition they have nothing to do with the operation of the schools, which indicates that they are required for the operation of an education institution. Unofficial private writings belonging solely to an individual should not be subject to public disclosure merely because that individual is a state employee.”

“Absent specific legislative direction to do so, we are unwilling to judicially convert every email ever sent or received by public body employees into a public record subject to FOIA,” the Court added.

The Freedom of Information Act (FOIA)

The Michigan Freedom of Information Act is similar to the U.S. Freedom of Information Act (“FOIA”). FOIA is a law ensuring public access to government records. FOIA carries a presumption of disclosure; the burden is on the government – not the public – to substantiate why information may not be released. Upon written request, agencies of the state and federal governments are required to disclose those records, unless they can be lawfully withheld from disclosure under one of the specific exemptions in the FOIA.

In a recent column by Ron Dzwonkowski, associate editor of the Detroit Free Press, he contends that the Court of Appeals decision “certainly offends the clear spirit of the FOIA, a post-Watergate law intended to assure that citizens could keep an eye on their government. The it’s-all-public standard may sound onerous, but it’s no more burdensome than what private-sector employees are subject to in using company e-mail systems and phones. The company owns it, the company can monitor it, and if the company doesn’t like what you are doing with it, it can fire you,” Dzwonkowski added.

“Further, it does not, to me, take a great leap of legal logic to see somebody trying to extend this decision to, say, text messages sent on government-issued phones with a declaration that they were “just personal,” Dzwonkowski said. “(Too late for former Detroit Mayor Kwame Kilpatrick, undone by his text messages; but the court said his case wouldn’t be covered anyway because it involved millions of dollars in public money.)”

The case, Howell Education Association MEA/NEA v. Howell Board of Education, began last January when the MEA/NEA (Union) filed a reverse FOIA declaratory judgment complaint seeking to keep certain emails between officers of the Union private because they were not “public records” as defined by FOIA. The Court of Appeals reversed the trial court’s decision indicating that “’mere possession of a record by a public body’ does not render the record a public document. Rather, the use or retention of the document must be ‘in the performance of an official function.’”

Recently, on Dec. 29, 2010, the Supreme Court voted 4-3 not to review the Court of Appeals decision denying public access to e-mails that Howell Public Schools employees sent on the district’s computer system. The Michigan Supreme Court’s decision not to review the intermediate court’s ruling renders the Michigan Court of Appeals’ decision binding. The Michigan Court of Appeals did call upon the Legislature to address this issue because the FOIA statute was adopted in 1977 (and last amended in 1997) prior to “today’s ubiquitous email technology.”

According to the Court of Appeals, it found itself “in the situation akin to that of a court being asked to apply the laws governing transportation adopted in a horse and buggy world to the world of automobiles and air transport.”

For more information regarding asset protection or any business matters, contact Peter Gojcaj by email at pgojcaj@bhlaw.us.com or call (248) 645-9400.