PACIFIC COUNSELOR TM (Spring 2005)

A Law Bulletin from

TERAOKA & PARTNERS LLP

A Brief Message from Steven Teraoka . . .

This Spring our law firm is pleased to announce that Catherine M. Gormley has become a partner of Teraoka & Partners LLP. Catherine has been associated with our law firm for 13 years, and many of you have had the pleasure of working with Catherine on corporate, labor, licensing, real estate and business related matters. Catherine’s father, the late Frank Gormley, Esq., was a very distinguished maritime lawyer with the United Nations, stationed in Taiwan. Catherine grew up from ages 12 to 18 in Taipei, Taiwan, where she learned to speak Mandarin. Catherine also lived for a short period in Mogadishu, Somalia, where her mother, Mrs. Barbara Gormley, was stationed while serving with the United States Department of State. Catherine graduated cum laude with a BA from the University of San Francisco and obtained her Master’s Degree from the University of California at Los Angeles and her juris doctor degree from University of California Hastings College of the Law in 1986. After receiving top honors from Hastings, she was associated with the San Francisco law firm of McCutchen, Doyle, Brown & Enerson in its corporate group for 6 years and then joined our law firm in 1992. After 19 years of practice, Catherine has mastered her areas of expertise. She also brings an international and global perspective to our law firm. We are pleased that she will be involved long-term in the development of our firm’s client services.

At Teraoka & Partners LLP, we remain committed to providing high quality and timely legal services at reasonable cost. We are viewed within the Bay Area legal community as a seasoned law firm with very experienced attorneys. We draw upon the expertise of our “of counsel” attorneys, who strengthen and broaden the services that we provide. We have always considered it a privilege to be called upon to assist our clients with the many challenges they face, some routine and some critical to economic viability. We do not take this responsibility lightly, and we continue to make every effort to advocate our clients’ positions aggressively and with integrity. We look forward to continuing to serve you.

Steven Teraoka

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MANDATORY SEXUAL HARASSMENT TRAINING NOW THE LAW

On the last day of the 2004 legislative session, California Governor Schwarzenegger signed into law Assembly Bill 1825, which requires certain California employers to provide sexual harassment training to supervisors every two years starting in 2005.

California employers who have 50 or more employees on their payroll will have to commence providing mandatory two-hour, interactive sexual harassment training to their supervisory staff starting after July 1, 2005. By January 6, a rolling, on-going training program must be fully implemented for both existing and new supervisory staff.

Is My Company Affected?

Employers must count all staff on payroll, including temporary service employees and independent contractors, in determining whether they have 50 employees. Employees who work outside California must also be included in that calculation.

Who Must I Train?

Not every employee is required to receive harassment training; the new law only requires companies to train those employees who have “supervisory authority.” For this law, supervisors include any staff (1) who have the authority to hire or make other employment decisions about employees, (2) who have the discretion and power to direct the work of other employees or address their grievances, or (3) who have the power to recommend any of the foregoing actions to upper management.

Employers will want to review their grievance policies and job descriptions, among other things, in determining which of their managerial staff come within the definition of having “supervisory authority.”

When Must We Start?

Starting this year, those employees of affected companies who have a supervisory position as of July 1, 2005 must receive two hours of sexual harassment training before January 1, 2006. Any supervisor who is hired or promoted into that position after July 1, 2005 must complete the two-hour training within six months of the hire or promotion. A second phase commences January 1, 2006: Supervisors who take that position after January 1, 2006 must receive harassment training within six months of taking that position. Thereafter, every supervisor should have at least two hours of anti-harassment training every two years.

We Already Circulate a Brochure and a PowerPoint Program – Isn’t That Enough?

It will not be sufficient to hand each supervisor a videotape or a brochure about sexual harassment. Of course, the training must include the basic practical information about federal and state sexual harassment laws, how to prevent such harassment, how to address issues of harassment, and the remedies that are available to victims. In addition, the training must be interactive. Accordingly, a training program that includes role-playing, discussion and other interactive components are the only types of training that will comply with this law.

Will This Keep My Company Out of Court on Harassment Claims?

Providing this legally required training, by itself, will not provide an absolute defense to a sexual harassment claim. Compliance with the new law, however, will provide evidence of the employer’s good faith efforts to prevent harassment, and thus can help in defending such a claim. Moreover, failure to comply may be grounds for punitive damages in sexual harassment litigation.

So What Do I Do Now?

Human resource professionals will already be calculating the most efficient way to begin implementation of this program. Obviously, for larger companies with an already established supervisory staff of significant size, substantial efforts to launch implementation must be undertaken between July 1, 2005 and January 1, 2006. Companies with seasonal business (such as retailers facing the holiday shopping season) will want to plan ahead to accommodate thoseseasonal pressures. In addition, an ongoing list will need to be created of supervisory staff and the dates of their training, so that the ongoing two year compliance can be tracked and met. Finally, each company must find and adopt an interactive training program that is accessible to its supervisory staff.

Planning for and implementing a program that complies with the requirements of AB1825 can be tricky. Each employer should contact its legal counsel to determine whether or not it comes within the scope of this new law and, if so, how to select and implement the type of training program that is both compliant and best fits its company’s needs.

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NEW U.S.-JAPAN INCOME TAX TREATY

On March 30, 2004, the Governments of the United States and Japan ratified the new income tax treaty signed by the two countries on November 6, 2003. This treaty significantly revised the former treaty, which entered into effect on July 9, 1972. The new withholding provisions of the Treaty took effect on July 30, 2004. The treaty’s remaining provisions became effective on January 1, 2005. The following highlights some of the more important features of the new treaty.

WITHHOLDING TAXES

Most significantly, the new treaty reduces the withholding tax rates on certain cross-border payments.

DIVIDENDS

The old treaty provided general withholding rates on cross-border dividend payments. The new treaty reduces the withholding rates where, among other things, the beneficial owner of the dividend owns at least 10% of the voting stock of the company paying the dividends. The new treaty reduces the 15% rate to 10% and the 10% rate to 5%. In addition, the new treaty provides for a zero withholding rate with respect to dividends paid if the beneficial owner of the dividend is a company that owns more than 50% of the voting stock of the dividend paying company for a period of 12 months preceding the date the dividend is declared. To be entitled to the zero withholding rate, the company receiving the dividend must meet one of three following conditions:

(1) Its principal class of shares are publicly traded or at least 50% of each class of shares is owned by five or fewer residents whose principal class of shares are publicly traded;
(2) (i) At least 50% of each class of shares or other beneficial interests of the company is owned by residents that are either individuals, publicly traded companies or certain other entities and (ii) less than 50% of its gross income must be paid or accrued to persons who are not residents of the United States or Japan in the form of payments that are deductible in computing its taxable income and (iii) it is engaged in the active trade or business in its resident country; or
(3) Eligibility of the zero withholding rate is determined by applicable government agencies.

INTEREST

Under the new treaty, the prior rate of 10% generally continues to apply on interest payments. However, several important exceptions are provided under which interest paid is exempted from taxation. The first exception is the interest paid to a bank, an insurance company, a registered security dealer or similar financial institution that is a resident of the other treaty country. Interest earned by pension funds is also entitled to the exemption provided that such interest is not derived from the carrying on of a business by such pension fund. Furthermore, interest paid with respect to indebtedness arising as a part of the sale on credit of equipment or merchandise by a resident of the other country is also exempt.

ROYALTIES

The new treaty eliminates withholding taxes on royalties arising in one county and paid to a resident of the other country. This exemption does not apply if the royalties are attributable to a permanent establishment of the recipient in the source country.

TRANSFER PRICING

The new treaty contains three new provisions with regard to transfer pricing audits. First, the new treaty authorizes a maximum of seven years after the end of a taxable year to begin an audit, except in cases of fraud or willful default. This is intended to provide greater certainty for taxpayers and reduce their compliance and record-maintenance obligations.

In addition, the Protocol contains an understanding reached with regard to factors to be taken into account in applying the arm’s length prices. These factors are: (i) the characteristics of the property or services transferred; (ii) functions of the enterprise and the enterprise associated with it, taking into account the assets used and risks assumed by each; (iii) the contractual terms; (iv) the economic circumstances; and (v) the business strategies pursued by each. Furthermore, the note exchanged in conjunction with the new treaty requires both countries to undertake to conduct transfer pricing examinations of enterprises in accordance with the Transfer Pricing Guidance for Multinational Enterprises and Tax Administration of the Organization for Economic Cooperation and Development.

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FEDERAL LAW ALLOWS EMPLOYERS TO SEARCH WORKER'S E-MAILS

The Third Circuit recently broadened an employers’ abilities to monitor its employees’ workplace behavior. In a unanimous decision, that court held that the Electronic Communications Privacy Act of 1986 (“ECPA”) does not prohibit employers from searching employees’ private e-mail that is stored on the employer’s system.

In Fraser v. Nationwide Mutual Insurance Co., the Third Circuit was asked to decide whether an employer’s search of an independent contractor’s e-mail account on the employer’s system violated the ECPA. In this case, defendant Nationwide terminated its agent’s agreement with plaintiff Richard Fraser after discovering evidence of Fraser’s disloyalty. Specifically, Nationwide became aware of two letters from Fraser to its competitors inquiring whether the competitors would be interested in acquiring Nationwide’s policyholders. Although the two letters were not sent, Nationwide became concerned about Fraser’s possible disclosure of company secrets to its competitors. In response to its concerns, Nationwide searched its main file server – on which all of Fraser’s e-mail was lodged – for e-mail to or from Fraser demonstrating similar improper behavior. The e-mail search confirmed Fraser’s disloyalty, and based on the two letters and the search, Nationwide terminated Fraser’s agreement.

Fraser argued that the e-mail search was a violation of both Title I and Title II of the ECPA. Title I prohibits “intercepts” of electronic communications, including e-mail. See 18 U.S.C. § 2510(4). Agreeing with the Fifth, Ninth and Eleventh Circuits, the Third Circuit held that an “intercept” must occur contemporaneously with transmission. Because Fraser’s e-mails were in storage, Nationwide’s search of them did not occur when they were transmitted, and thus Nationwide did not “intercept” the electronic communication in violation of Title I.

Title II of the ECPA creates civil liability for individuals or entities gaining unauthorized access to service provider facilities and who “obtain, alter or prevent authorized access to a wire or electronic communication while it is in electronic storage in such system.” 18 U.S.C. §2701(a). An exception to the statute allows seizures of e-mail authorized “by the person or entity providing a wire or electronic communications service.” 18 U.S.C. § 2701(c)(1). The Third Circuit, citing Bohach v. City of Reno, 932 F. Supp. 1232 (D. Nev. 1996), held that this exception applies to all searches by communications service providers. Because Nationwide had and administered its own system, the Third Circuit held that Nationwide fell within the exception and could not be civilly liable for its search of Fraser’s e-mail.
This decision reflects the growing trend, since September 11, toward increased employer monitoring of employee behavior. California employers should bear in mind that this state’s constitutional right to privacy will probably limit the extent to which a company may rely on Fraser in searching its employees’ electronic mail communications.

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PAYROLL TAX HOLIDAY FOR BIOTECH COMPANIES IN SAN FRANCISCO

San Francisco is serious about attracting biotech business. The City has recently prevailed over stiff competition to house the California Institute for Reproductive Medicine, commonly known as the stem cell institute. In addition, the San Francisco Board of Supervisors passed legislation last August giving certain eligible biotech companies an exemption from payroll tax over the next ten years if they relocate to San Francisco. For more information to determine whether your company falls within the scope of eligibility, contact your business attorney or tax advisor.

THE INFORMATION DESCRIBED ABOVE IS FOR GENERAL INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE OR LEGAL OPINION ON SPECIFIC FACTS OR CIRCUMSTANCES. EACH COMPANY HAS PARTICULAR SITUATIONS, CIRCUMSTANCES AND ISSUES. YOU SHOULD CONSULT WITH YOUR LEGAL AND/OR TAX EXPERTS IN ORDER TO DETERMINE WHAT IS SUITABLE FOR YOUR BUSINESS.