Mid-Year Legal Audit: Ensuring Your Business is Compliant
As a business owner, maintaining compliance with legal requirements is crucial to ensure the smooth operation and longevity of your enterprise. Regular legal audits are an essential part of this process, helping to identify and rectify potential issues before they become significant problems. A mid-year legal audit is an excellent opportunity to review your business practices and ensure that all aspects of your operations comply with current laws and regulations.
California’s legal environment is particularly complex and dynamic, with numerous state-specific regulations that businesses must navigate. The state is known for its stringent labor laws, environmental regulations, and consumer protection statutes, making compliance a critical concern for businesses operating within its borders.
Reviewing Corporate Governance
Importance of Verifying Your Business Structure
The foundation of any business is its legal structure, whether it be a Limited Liability Company (LLC), corporation, partnership, or sole proprietorship. Each structure has distinct legal and tax implications, and it is vital that your chosen structure is correctly documented and registered.
- Legal Compliance: Proper documentation ensures that your business is recognized as a legal entity, protecting your personal assets from business liabilities and providing a clear framework for operations.
- Tax Implications: Each business structure has different tax obligations. Verifying your structure ensures you are meeting all tax requirements and taking advantage of any potential benefits.
- Operational Clarity: Clear documentation of your business structure delineates the roles and responsibilities within your organization, reducing confusion and potential conflicts.
Ensuring Proper Filing with the California Secretary of State
If there have been any changes to your business structure, such as a transition from a partnership to an LLC or changes in ownership, these must be properly filed with the California Secretary of State.
- Updated Records: Ensure that the Secretary of State’s records reflect the current status of your business. This includes filing necessary documents such as Articles of Incorporation, Articles of Organization, or amendments to these documents.
- Compliance Requirements: Regularly review your filings to ensure compliance with California's periodic reporting requirements, such as the Statement of Information.
Board Meetings and Minutes
For corporations, maintaining accurate records of board meetings is not just a best practice but a legal requirement in California. These records provide a formal account of the decisions made and the rationale behind them.
- Legal Protection: Well-documented minutes can protect your business and its directors by providing evidence that decisions were made in good faith and with due diligence.
- Accountability: Meeting minutes serve as a record of board actions and decisions, promoting transparency and accountability within your organization.
Employment Law Compliance
Employee Classification
Misclassification of employees as independent contractors can lead to significant legal and financial repercussions. California’s AB-5 legislation, which came into effect in January 2020, has tightened the criteria for classifying workers as independent contractors.
- Understanding AB-5: AB-5 codifies the “ABC test” for determining whether a worker is an independent contractor. According to this test, a worker is considered an employee unless:some text
- (A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- (B) The worker performs work that is outside the usual course of the hiring entity’s business.
- (C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
- Reviewing Worker Roles: Conduct a thorough review of all worker roles and responsibilities to ensure correct classification. This may involve reclassifying some independent contractors as employees if they do not meet the ABC test criteria.
- Updating Contracts: Ensure that contracts for independent contractors clearly outline the nature of the work, the contractor’s independence, and compliance with the ABC test. For employees, ensure contracts reflect their status accurately and include all necessary legal protections and benefits.
Wage and Hour Laws
California’s wage and hour laws are more protective than federal standards, with specific requirements for minimum wage, overtime, and breaks.
- Minimum Wage: Ensure compliance with California’s minimum wage laws, which vary by employer size. As of January 1, 2022, the minimum wage is $15.00 per hour for employers with 26 or more employees and $14.00 per hour for employers with 25 or fewer employees.
- Overtime: California law requires overtime pay for non-exempt employees who work more than eight hours in a day or 40 hours in a week. Ensure that overtime pay is calculated correctly and paid promptly.
- Meal and Rest Breaks: California mandates that employees are entitled to a 30-minute meal break if they work more than five hours a day and a second meal break if they work more than 10 hours. Additionally, employees must receive a 10-minute rest break for every four hours worked. Monitor compliance with these requirements and address any violations immediately.
Workplace Policies
Reviewing and Updating Employee Handbooks and Workplace Policies
Regularly reviewing and updating your employee handbook and workplace policies ensures that they remain compliant with current laws and reflect best practices.
- Handbook Review: Conduct a comprehensive review of your employee handbook to ensure that all policies are up-to-date and compliant with California laws. This includes policies on harassment, discrimination, leave, and workplace safety.
- Policy Updates: Update workplace policies to reflect changes in the law, such as new requirements for paid sick leave, family and medical leave, and anti-discrimination protections. Ensure that all employees are aware of and understand these policies.
Ensuring Compliance with California-Specific Regulations
California has several specific employment regulations that must be adhered to, including:
- Paid Sick Leave: Ensure compliance with the California Healthy Workplaces, Healthy Families Act, which mandates paid sick leave for employees. Verify that accrual and usage of sick leave meet state requirements.
- Anti-Discrimination Laws: Update policies to comply with California’s Fair Employment and Housing Act (FEHA), which provides broader protections against discrimination than federal law. This includes protections based on gender identity, sexual orientation, and other characteristics.
- Harassment Training: Ensure that all employees receive required harassment prevention training. California law mandates training for supervisors and non-supervisory employees within six months of hire and every two years thereafter.
Tax Compliance
Verifying That Your Business Is Up-to-Date with All California State and Local Tax Obligations
California businesses are subject to various state and local taxes. It is essential to verify that all taxes are correctly calculated, reported, and paid on time.
- State Taxes:some text
- Franchise Tax: California levies an annual franchise tax on businesses operating in the state. Ensure your business has filed and paid this tax, which is based on income and/or a minimum fee.
- Income Tax: Corporations and LLCs taxed as corporations must file state income tax returns. Verify that your business income is reported accurately and taxes are paid accordingly.
- Local Taxes:some text
- Business Licenses: Some cities and counties in California require businesses to obtain local business licenses and pay associated fees. Ensure your business has the necessary licenses and is compliant with local regulations.
Ensuring Proper Filing and Payment of Sales Tax, Use Tax, and Employment Taxes
California has specific requirements for sales tax, use tax, and employment taxes. Proper filing and timely payments are essential to maintain compliance.
- Sales Tax: If your business sells tangible goods, you must collect and remit sales tax to the California Department of Tax and Fee Administration (CDTFA). Ensure that sales tax is accurately calculated, collected from customers, and reported on your sales tax returns.
- Use Tax: Use tax applies to purchases made outside of California for use within the state, where sales tax was not collected at the time of purchase. Ensure that any applicable use tax is reported and paid to the CDTFA.
- Employment Taxes: Employers in California are required to withhold state income tax, disability insurance (SDI), and unemployment insurance (UI) from employee wages. Additionally, employers must contribute to the Employment Training Tax (ETT). Ensure that all employment taxes are withheld, reported, and paid on time to the California Employment Development Department (EDD).
Environmental Regulations
Environmental Impact Assessments
The California Environmental Quality Act (CEQA) requires state and local agencies to identify and mitigate the significant environmental impacts of their actions. Compliance with CEQA is essential for businesses involved in projects that might affect the environment.
- Understanding CEQA: CEQA applies to public and private projects requiring discretionary government approval. It mandates an environmental review process to identify potential environmental impacts and outline mitigation measures.
- Conducting Environmental Reviews: Businesses must conduct an Initial Study to determine whether a project may have significant environmental effects. Depending on the findings, they may need to prepare either a Negative Declaration (if no significant impacts are identified) or an Environmental Impact Report (EIR) if there are potential significant impacts.
- Mitigation Measures: If significant impacts are identified, businesses must implement mitigation measures to reduce or eliminate these impacts. This may include changes in project design, operational modifications, or other actions to protect the environment.
Waste Management
Reviewing Waste Disposal Practices and Ensuring Compliance with State and Local Regulations
Proper waste management is essential for environmental compliance. California has strict regulations for the disposal of various types of waste, including hazardous materials.
- Waste Segregation: Ensure that waste is properly segregated into recyclable, non-recyclable, and hazardous waste categories. Proper segregation helps in effective waste management and compliance with recycling laws.
- Disposal Practices: Review your waste disposal practices to ensure they comply with state and local regulations. This includes using licensed waste disposal services and following proper procedures for the disposal of hazardous waste.
- Waste Reduction Programs: Implement waste reduction programs to minimize waste generation. This can include recycling initiatives, composting organic waste, and reducing single-use plastics.
Proper Documentation and Reporting of Hazardous Waste Management
Businesses that generate hazardous waste must comply with specific documentation and reporting requirements to ensure safe and legal disposal.
- Hazardous Waste Identification: Identify all hazardous waste generated by your business. Common hazardous wastes include chemicals, batteries, electronic waste, and certain industrial byproducts.
- Documentation: Maintain detailed records of hazardous waste generation, storage, transportation, and disposal. This includes keeping manifests, shipping papers, and disposal receipts.
- Reporting Requirements: Comply with state and federal reporting requirements for hazardous waste. In California, businesses must submit hazardous waste reports to the Department of Toxic Substances Control (DTSC). These reports typically include information on the types and quantities of hazardous waste generated and how it was managed.
- Employee Training: Ensure that employees handling hazardous waste are adequately trained on safe handling procedures, emergency response, and regulatory compliance. Regular training helps prevent accidents and ensures adherence to waste management protocols.
