Recent Changes to the Washington Limited Liability Act: A Broad Overview


By Whitny L. Norton

Recently, the Washington State Legislature enacted legislation that overhauls the existing Washington Limited Liability Act (“Act”). Beginning on January 1, 2016, changes to the Act go into effect. The following represent some of the more significant changes to the Act. 

Oral LLC Agreements

While the best practice is to have a written LLC agreement, an LLC agreement no longer needs to be in writing. It may be “oral, implied, in a record, or in any combination.” Therefore, like partnerships in Washington, a limited liability agreement may arise by implication. Keep in mind that while LLC’s may be entered into orally, the entity must still file a certificate of formation with the Washington Secretary of State. 

LLC Agreements

LLC agreements structure and regulate the relationship between the LLC and its members subject only to the LLC Act. An LLC agreement may limit a member or manager’s duties to the LLC (including fiduciary duties) so long as the modifications or limitations are not inconsistent with the law and do not eliminate or limit: 

(a) The duty of a member or manager to avoid intentional misconduct and knowing violations of law, or violations of RCW 25.15.231; or
(b) The implied contractual duty of good faith and fair dealing.

Conversions/Mergers

Washington LLCs and corporations may convert into other entity types in Washington or other states. Thus, entities formed as corporations prior to Washington’s enactment of the original LLC Act in 1994, may convert into an LLC by following the statutory process.

If a member of a converting/merging LLC will have personal liability with respect to the surviving entity, then the member must sign a separate written consent to become subject to such liability. 

Manager-managed or Member-managed

LLCs no longer have to designate whether it will be manager-managed or member-managed in its certificate of formation. The LLC agreement will determine whether the LLC is manager-managed or member-managed. If the LLC agreement is not express, the LLC will be considered manager-managed if the LLC agreement vests management of the LLC in one or more managers, otherwise the LLC will be considered member-managed.

Apparent Authority

Consistent with the deletion of the manager-managed/member-managed distinction in the certificate of formation, the new Act does away with the statement of a managing member’s apparent authority for matters in the ordinary course. Common law agency rules will apply to third parties dealing with LLCs.

Board as Manager

The new Act allows a manager to be “a person, or a board, committee or other group of persons” named or designated by an LLC agreement as a manager of the LLC. If the manager is a board, the fiduciary standards of conduct apply to each person on the board. Furthermore, if an LLC’s manager is a board or other group of persons, the members of that board or group will not have authority, individually, to act on behalf of the LLC by virtue of their membership in the group or on the board.

Standards of Conduct

The new Act specifically defines the manager’s or managing member’s fiduciary duties of loyalty and care.

Voting

The new Act’s default voting rule for actions requiring member approval, requires a majority of the members – per capita voting. The Act mandates that some actions require unanimous member approval. For example, unanimous approval is required to amend the limited liability company agreement; authorize withdrawal of a member; sell, lease, exchange, or otherwise dispose of all, or substantially all, of the LLC’s property, other than in the ordinary course of the LLC’s business; or undertake any act outside the ordinary course of the LLC’s activities.

Records

Like the Business Corporation Act, the new Act creates a right for members to access certain LLC records. The member seeking the records must provide a written demand setting forth a purpose reasonably related to the member’s interest in the LLC and the records requested must be directly related to the member’s purpose. The LLC may impose reasonable restrictions on the member’s use of the information.

Allocations of Profit and Loss

The new Act provides a default rule for distributions, based on the agreed value of contributions, but provides no default rule for allocating profits and losses. 

If you have any legal issues or disputes regarding your entity or questions regarding the changes to the Washington Limited Liability Act contact the knowledgeable and experienced attorneys at Piskel Yahne Kovarik, PLLC, at (509) 321-5930.

Computation is Key: Overtime Calculations on Public Works Projects Under Federal and Washington State Law

By Whitny L. Norton

The federal Department of Labor and the Washington Department of Labor and Industries investigate and fine employers for failing to properly calculate overtime wages. When an employee works over 40 hours in a workweek, and in some cases, more than 8 hours in a day, the employee is entitled to overtime wages. 

What is the appropriate wage rate for construction employees who work overtime hours on both private and public works projects during the same workweek?

When an employee works on both a private construction project and a public works project in the same workweek and that employee works over forty combined hours, the employee is entitled to overtime. To determine the rate of overtime, use a weighted average. The total earnings for that workweek are computed, including earnings at all wage rates, then the total earnings for the workweek are divided by the number of hours worked at all jobs during that workweek. On a federal project, an example of how the hours are calculated follows: 

Regular Rate Calculation:

10 x $15.00 = $150.00
40 x $20.00 = $800.00

Total wages for workweek: $950.00
Total hours for workweek: 50

$950/50 = $19.00 regular rate

Overtime Calculation:

Overtime hours: 10
Regular rate: $19.00

10 x $19.00 = $190.00
$190.00 x .5 = $95.00

Additional overtime pay: $95.00

Under federal law, each hour of overtime work performed on a federal public works project must be paid at the Davis-Bacon rate. Overtime hours for work performed on private projects is calculated using the regular rate.

However, in Washington, as set forth below, when an employee works over eight hours in a single workday and the employer and employee do not have an agreement for the employee to work 4-tens, the calculation would be made as follows: 

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Straight time total earnings: $1,847.84/54.75 (total hours worked) = $33.75 weighted average hourly rate

Weighted average regular hourly rate: $33.75/2 (1/2 the regular hourly rate) = $16.88 overtime rate for hours in excess of 40 

Weekly hours in excess of 40: 14.75 – 7.25 (premium pay hours calculated separately) = 7.50 over 40 overtime hours

Over 40 overtime hours: 7.50 x $16.88 (OT rate = ½ the regular hourly rate) = $126.60 overtime total due for hours in excess of 40 for the workweek

Amount due for workweek:            $1,847.84    Straight time earnings total
                                                         $   126.60    Overtime total for hours in excess of 40 for the                                                                                   workweek
                                                          $   189.88    Over 8 in a day premium pay total
                                                          $2,164.32    TOTAL DUE FOR WORKWEEK

Agreements Regarding Overtime

Federal law allows an employer and employee to enter into an agreement prior to performance of the work for computation of overtime based on one and one-half times the hourly rate in effect when the overtime work is performed so long as the agreement is entered into prior to performance of the work. The employer must keep detailed records showing when the overtime work was performed and how the overtime pay was calculated.

Eight-Hour Workday

In Washington, the workday for public works projects is 8 hours. If an employee works more than 8 hours on a public works project, that employee is entitled to overtime. However, an employer and employee may enter into an agreement, prior to performance of the work, for a 10-hour workday so long as the employee agreement is for no more than 4 10-hour workdays in a single workweek.

Neither the Davis-Bacon Act nor the Contract Work Hours and Safety Standards Act have a similar limitation. On applicable federal public works projects, employees must be paid overtime for hours worked in excess of forty in a given workweek.

If you have questions regarding wage rate calculations, agreements regarding overtime, or any other construction or employment related issues, contact the knowledgeable and experienced attorneys at Piskel Yahne Kovarik, PLLC, at (509) 321-5930.

The foregoing information regarding wage and overtime calculations on public works projects under federal and Washington state law is current as of December 11, 2015. 

Termination for Convenience on a Private Construction Contract: Advantages to the Savvy Contractor and Pitfalls for the Uninformed Subcontractor

By:  Whitny L. Norton

     Across the nation, few courts have addressed the validity and application of termination for convenience clauses in private construction contracts. Today, termination for convenience clauses have made their way into most private construction contracts. These clauses allow for one party, usually the owner or general contractor, to terminate its contract with a general contractor or subcontractor solely for that party’s convenience. For such a seemingly one-sided clause to be upheld, it must be supported by adequate consideration. This consideration may vary from notice alone, to the following: payment for work in proportion to the amount of work completed, overhead and profit for work not completed, and reasonable notice. Such clauses may be used to greatly benefit owners and general contractors and can leave general contractors and subcontractors terminated from a job without recourse. Prior to entering into a private or public construction contract, it is important to discuss not only termination for convenience clauses, but the construction contract as a whole, with a competent legal professional. 

     In a case of first impression for the state of Washington, Division I of the Washington Court of Appeals recently upheld a termination for convenience clause in a private construction contract. In SAK & Assoc., Inc. v. Ferguson Constr., Inc. (No. 72258-1-I, 2015 WL 4726912, Wn. App. Aug. 10, 2015), a contractor and subcontractor entered into a fixed sum contract under which the subcontractor was to provide concrete materials and paving services. The subcontract contained the following termination for convenience clause: 

In addition to the rights listed above, Contractor may, after providing Subcontractor with written notice, terminate (without prejudice to any right or remedy of Contractor) the Subcontract, or any part of it, for its own convenience and require Subcontractor to immediately stop work. In such event, the Contractor shall pay the Subcontractor for the work actually performed in an amount proportionate to the total Subcontract price. Contractor shall not be liable to the Subcontractor for any other costs, including anticipated profits on work not performed or unabsorbed overhead. 

     Per the terms of the parties subcontract, a general contractor gave the subcontractor written notice of immediate termination and paid the subcontractor the contract amount in proportion to the amount of work completed through the date of termination. After being terminated from the job, the subcontractor filed suit against the contractor, alleging that the contractor breached the contract by unilaterally terminating it without cause. The trial court granted summary judgment in favor of the contractor, finding that the contractor properly terminated the subcontract agreement for convenience. The subcontractor appealed. The main issue on appeal was whether partial payment was adequate consideration to support the termination for convenience clause.  

     The appellate court found that completion of 24 percent of the work was not a nominal amount of work and proportionate payment was adequate consideration to support the termination for convenience clause. The court also explained that the implied covenant of good faith and fair dealing does not trump express terms or rights of a contract. Thus, Washington courts are likely to uphold express and unambiguous termination for convenience clauses that are supported by adequate consideration. 

     In Washington, we can now expect that once a subcontractor has completed more than a nominal amount of work, a contractor may utilize a clear and unambiguous termination for convenience clause upon notice to the subcontractor and payment in proportion to the amount of work performed through the date of termination. Importantly, the implied covenant of good faith and fair dealing is unlikely to restrict a party from asserting its contractual rights under an express and unambiguous termination for convenience clause. 

     Notably, commonly used form construction contracts contain varied methods of consideration to support termination for convenience clauses. For example, the American Institute of Architects (AIA) form A201 (2007) provides compensation for work performed and for overhead and profit on work not completed. On the other hand, the Design-Build Institute of America document 530 (2d ed. 2010) provides for one fee to be paid prior to work commencement and another fee to be paid after work commencement. 

     In addition, some termination for convenience clauses provide only for proportionate payment for work performed through the date of termination. However, in some instances, notice of termination alone may provide adequate consideration in support of a termination for convenience clause. While the enforceability of such clauses depends on the circumstances, generally, the more generous the consideration supporting the termination for convenience clause, the broader the termination for convenience rights. 

     Ultimately, in Washington, notice and payment for work performed up through the date of termination will likely constitute adequate consideration to support a termination for convenience clause in a construction contract for work on a private project. Termination for convenience clauses are often negotiated during contract drafting. Whether you are in the process of drafting a construction contract or have a contract dispute, it is important to discuss the contractual language and implementation of contract terms with a competent legal professional.

     If you need professional legal services regarding a construction contract, or other construction law related issues, contact the attorneys at Piskel Yahne Kovarik, PLLC.  

TIMELY FILING AN ACTION IN A CONSTRUCTION CONTRACT CASE: DETERMINING WHETHER AND WHEN A CLAIM IS BARRED

By:  Benjamin J. McDonnell

     Division II of the Washington State Court of Appeals recently addressed whether a construction defect case was timely commenced. In Dania, Inc. v. Skanska USA Building Inc., the appeals court reversed the trial court’s dismissal of a construction defect claim, finding that the lower court erred in ruling the claim was barred under the statute of repose because factual issues existed that required resolution at the trial court.

        In this case, Dania, Inc. (“Dania”) contracted with Skanska USA Building Inc. (“Skanska”) for the construction of a warehouse in Dupont, Washington.  Skanska subcontracted with McDonald & Wetle, Inc. (“M&W”) to perform work on the Warehouse roof system.  Substantial completion occurred in January of 2006.  However, M&W completed installation of a mineral cap sheet on the roof in June of 2006.  After Dania discovered that the roof was leaking, on April 4, 2012, it sued Skanska and M&W and alleged to have suffered damages of nearly $400,000.

      Skanska filed for summary judgment dismissal. It argued that the statute of repose, RCW 4.16.310, barred Dania’s claim. Under this statute, a construction defect action is barred if it fails to accrue within six years of the later of substantial completion of construction or termination of services. The trial court granted Skanska’s motion for summary judgment.  It reasoned that the statute of repose began to run from the date of substantial completion, not the later date of installation of the mineral cap sheet because, it explained, there was insufficient evidence that the cap sheet installation was related to the leaks that gave rise to the action.

      On appeal, the court refocused the inquiry from the statute of repose to RCW 4.16.326(1)(g).  This statute creates an affirmative defense in construction contract cases.  Specifically, it terminates a construction contract claim on the later of six years after substantial completion or termination of services such that any claim must both accrue and be filed within this time frame or be subject to dismissal.

      Thus, the issue on appeal was whether Dania timely filed its lawsuit. Dania argued that the critical date was June 2006, when Skanska finished installing the mineral cap sheet on the roof. Skanska argued, however, that the critical date was January 2006, the date of substantial completion. Skanska contended further that the June 2006 date was inapplicable because, it argued, there was no evidence of any nexus between the services performed after substantial completion, installation of the mineral cap sheet, and the leaking giving rise to Dania’s construction defect claim.

     The appeals court disagreed with Skanska and ruled that a factual dispute existed as to whether there was a nexus between the final mineral cap installation work performed and the leak that gave rise to the lawsuit.  The appeals court, therefore, concluded that the trial court’s summary dismissal of Dania’s claim was improper and remanded back to the trial court for further proceedings.

     If you are in need of professional legal services regarding a construction defect claim or defense, contact the attorneys at Piskel Yahne Kovarik, PLLC.

Courts Enforce Clear Contract Language: The Importance of Unambiguous Lien Waivers, Releases, and Reservation of Claims on Construction Projects

By:  Benjamin J. McDonnell

       The importance of unambiguous lien waivers and releases on construction projects cannot be overstated. Reserving claims is likewise important when executing waivers and releases for work performed.  A recent unpublished decision from Division III of the Washington State Court of Appeals reminds us that courts will enforce the plain language of these contract documents. 

       In Exterra, LLC v. Cle Elum Gateway Property, LLC, Division III of the Washington State Court of Appeals upheld the trial court’s dismissal of a subcontractor’s lawsuit to foreclose a materialmen’s lien arising from an alleged failure to pay for construction services.  In doing so, the appeals court agreed with the trial court’s enforcement of waivers and releases that the subcontractor signed in connection with receiving progress payments.   

       The subcontractor argued on appeal that the trial court should not have dismissed its lien foreclosure claim because, the subcontractor asserted, an ambiguity existed in the waiver language. Applying common law contract principles, the appeals court rejected this argument and enforced the plain language of the contract documents.  In affirming the trial court, the appeals court noted that the waivers contained a space for the subcontractor to identify any claims it retained but that the subcontractor failed to identify in that space any claims.  Accordingly, the lien foreclosure action was dismissed.

       If you need legal assistance with respect to drafting, enforcing, or defending against lien waivers and releases, contact the attorneys at Piskel Yahne Kovarik, PLLC.

When Making Employment Decisions, Motives Matter: Proving the Pre-Text Prong of the McDonnell Douglas Framework

By: Whitny Norton

      Plaintiffs relying on circumstantial evidence to prove age discrimination are not limited to proving discrimination by establishing the defendant employer’s stated purpose was a pretext for a discriminatory purpose. Such plaintiffs need only show that discrimination substantially motivated the employer, not that the employer’s decision was a pretext for a discriminatory purpose. In a recent Washington Supreme Court decision, Scrivener v. Clark College, Clark College hired two instructors under 40 years of age for tenure track faculty positions rather than Scrivener, a 55-year-old temporary English instructor and long time Clark College employee, qualified for the position. The college made these hires after its President stated that there was a glaring need for younger faculty and mocked Scrivener with a reference to The Daily Show, indicating he wanted candidates that displayed youthfulness. That year, the college ultimately hired more faculty members under 40 than those over 40. Scrivener sued Clark College alleging age discrimination.

      When a plaintiff lacks direct evidence of age discrimination, Washington courts use the McDonnell Douglas burden-shifting framework. See McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S. Ct. 1817, 36 L.Ed. 2d 668 (1973). The Scrivener Court clarified that under McDonnell Douglas a plaintiff relying on circumstantial evidence to overcome summary judgment may satisfy the pre-text prong by: (1) showing the employer’s decision was pretextual by presenting evidence that the articulated reason (a) has no basis in fact, (b) was not really a motivating factor for the decision, (c) lacks a temporal connection to the decision, or (d) was not a motivating factor in the employment decisions for other employees in the same circumstances; or (2) showing that discrimination was a substantial factor motivating the employer. The Scrivener Court explained an employer may be motivated by multiple purposes, both legitimate and illegitimate, when making employment decisions and still be liable under the Washington Law Against Discrimination due to the presence of an illegitimate purpose. Ultimately, the Court overturned the trial court’s grant of summary judgment in favor of Clark College which was affirmed by the Court of Appeals, Division II, holding that Scrivener presented sufficient evidence to create a genuine issue of material fact regarding whether age was a substantial motivating factor in the college’s decision not to hire her.

      If you are experiencing any employment issues, contact the attorneys at Piskel Yahne Kovarik, PLLC. 

Ryan Yahne recognized as a 2014 Rising Star by Super Lawyers magazine.

Ryan D. Yahne has been recognized as a 2014 Rising Star in Washington by Super Lawyers magazine. Super Lawyers lists the top 5 percent of attorneys by state or region based on peer recognition and professional accomplishment.

Super Lawyers, is a research-driven, peer influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement.

Rodent Infestation...breach of the warranty of habitability

Division I of the Washington Court of Appeals determines that rodent infestation is a potential safety hazard.  Importantly, the Court also formed rule for what is a safety hazard for a residential leasehold. It held that the standard of habitability is whether the condition creates an actual or potential hazard to the occupants.