Records retention policies for Small and Mid-Sized Businesses: What do you need to know? A multi-part feature.

 Management of records including creation, retention, access, and destruction, has been a major concern for businesses. This is mainly due to the growth in volume of records (especially electronic data) and the lingering fear of litigation. Once a business is named as a party to suit, high scrutiny is placed on litigants in order to prevent spoliation of evidence that may be relevant to prosecution or defense of the lawsuit. Development and execution of an effective document retention policy is critical as the alternative may result in unfavorable discovery, loss of critical information, unnecessary expenses and adverse judgments. This two part Blog post endeavors to provide small and mid-sized businesses a few an overview what document retention policies are and things to consider when creating an internal document retention policy.

We are frequently asked by clients about what must go into an effective document retention policy, what records must be maintained and for low long those records should be maintained. Unfortunately, statutory and case law is not entirely clear and there is no one right answer to any of these inquiries. Drafting a document retention policy involves consideration of federal and state regulations, contractual duties, statutes of limitations, statutes of repose and industry standards. These various legal requirements must then be harmonized with business concerns and operational burdens. What follows are common sense answers to questions any growing business should be asking itself.

Frequently Asked Questions

What is a document retention policy?

A document retention policy standardizes how long the company retains both paper and electronic records and the proper procedures for documents that could aid during litigation, known as a “litigation hold.” Document retention policies should detail what documents are to be retained, what documents are to be destroyed, and the period of time that the documents are to be kept for. Document retention policies are created and enforced by the individual company. Typical document retention policies preserve records such as memorandum, e-mail, contracts, correspondence, accounting books and records and many other things. Many laws require companies to maintain certain types of corporate records, usually for a specified period of time. Failure to retain those records for those minimum periods could subject the company to penalties and fines, cause the loss of rights, obstruct justice, spoil potential evidence in a lawsuit, place the company in contempt of court, or seriously disadvantage the company in litigation.

A preferred document retention policy will organize the documents so they are readily accessible and legible. Document retention policies should also clearly detail what the proper procedures are if the company is involved in litigation or potential litigation, known as “litigation holds.” Litigation holds typically state that if a corporation is involved in litigation or potential litigation, then all documents that relate to that litigation will be preserved. A preferred document retention policy will detail who is in charge of informing the company’s employees if there is litigation, so that they may preserve any documents that they have pertaining to that litigation. Typically, a company’s legal department is in charge of this notification. It is the legal department’s responsibility to determine when the records that are relevant or potentially relevant to litigation may be destroyed. An optimal document retention policy will also be carefully enforced to ensure that all employees are aware of the policy and abide by its terms.  Additionally, a sound document retention policy will designate an employee or department who is in charge of the policy and its enforcement. This individual should be someone who has access to the entire office and all of its employees; typically, the office manager.

Why should businesses have a document retention policy?

Businesses should have a document retention policy because it standardizes company policy, ensures compliance with the law, and may shield the company during litigation.

Who should have a document retention policy?

Any company that produces records should have a document retention policy. A record can be any company document, including memorandum, emails, files, receipts, accounting ledgers, video surveillance footage, graphs, charts, photographs and even desktop calendars or appointment books. Florida Rules of Civil Procedure § 1.350 lays out the scope of documents which may be requested and must be produced during the discovery period of litigation.

How long should documents be maintained?

There is no specific law or statute that requires how long general records must be maintained. Sometimes, federal or state law mandates how long records should be kept. The only common law duty to retain documents and records is when a company is on notice of pending litigation. Thus, document retention policies vary from industry to industry and case to case. Please note that the suggested retention periods shown are not offered as final authority, but as guideposts against which to compare your needs. There may be several situations, for historical or reference purposes, for example, that necessitate longer periods than legally required. In addition, many specific industries require retention periods that are different than noted here for specific terms. In most cases, the period of retention listed in this post provides a more conservative retention period.

Tax records

Before finalizing an entity’s taxation record retention procedures, it is recommended that the IRS regulations, state and local government retention requirements and the AICPA’s Filing and Record Retention Procedures Guide be reviewed. The Massachusetts Society of Public Accountants provided a records retention guide that sets forth retention guidelines for specific accounting records, including accounting systems, human resources, legal documents and corporate records. Tax records include, but may not be limited to, documents concerning payroll, expenses, proof of deductions, business costs, accounting procedures, and other documents concerning the company’s revenues. Tax records should be retained for at least six years from the date of filing the applicable return. The Internal Revenue Service has also specified how long tax records should be kept. The IRS has published a simple guide for small businesses that pertain to records retention guidelines for returns.

Human Resources

State and federal statutes require businesses to keep certain recruitment, employment and personnel information. The retaining company should also keep personnel files that reflect performance reviews and any complaints brought against the company or individual employees under applicable state and federal statutes. The retaining company should also keep all final memoranda and correspondence reflecting performance reviews and actions taken by or against personnel in the employee’s personnel file. Employment and personnel records should be retained for seven years. Employee’s benefits, corporate policies and insurance documents should also be kept for seven years.

Corporate documents

Corporate documents should be kept indefinitely. These records include, among other things, articles of incorporation or partnership agreements, bylaws, stock records and board of directors’ minutes.

Board and Board Committee Materials

Meeting minutes should be retained in perpetuity in the company’s minute book. A clean copy of all Board and Board Committee materials should be kept for no less than four years by the company.

Legal Files

Legal counsel should be consulted to determine the retention period of particular documents, but legal documents should generally be maintained for a period of ten years.

Marketing and Sales Documents

The retaining company should keep final copies of marketing and sales documents for the same period of time it keeps other corporate files, generally four years. An exception to the three-year policy may be sales invoices, contracts, leases, licenses and other legal documentation. These documents should be kept for at least five years beyond the life of the agreement.

Development/Intellectual Property and Trade Secrets

Development documents are often subject to intellectual property protection in their final form (e.g., patents and copyrights). The documents detailing the development process are often also of value to the retaining company and are protected as a trade secret where the company:

(i) derives independent economic value from the secrecy of the information; and

(ii) the company has taken affirmative steps to keep the information confidential.

The retaining company should keep all documents designated as containing trade secret information for at least the life of the trade secret.

Contracts

Final executed copies of all contracts entered into by the retaining company should be retained for at least five years beyond the life of the agreement, and longer in the case of publicly filed contracts.

Electronic Mail or other salient communications

E-mail that needs to be saved should be either: (ii) printed in hard copy and kept in the appropriate file; or (ii) downloaded to a computer file and kept electronically or on disk as a separate file. The retention period depends upon the subject matter of the e-mail, and should be addressed elsewhere in the corporate document retention policy. The length of time emails should be retained depends entirely on the scope and subject matter of the email. As a general proposition, emails or other salient communications should be retained for at least 5 years and at most 10 years.

It stands to reason that certain records will need to be maintained longer than others, particularly those that are industry related. Though case law can provide an analysis based solely on the facts and circumstances of the specific action, federal and state regulations are a useful tool for further guidance. Below are just a few examples of record keeping regulations provided by federal and local law:

  1.  The U.S. Equal Employment Opportunity Commission (“EEOC”) requires personnel and employment records to be maintained for one (1) year. Payroll records must be kept for a period of three (3) years.
  2. The U.S. Internal Revenue Service (“IRS) requires that records supporting an item of income or deductions on a tax return until the period of limitations for that return runs out. Employment tax records should be kept for at least four (4) years after the date the tax becomes due or is paid, whichever is later.
  3. The Securities and Exchange Act requires SEC-regulated companies such as financial institutions to maintain emails for at least three (3) years.

Small and mid-sized businesses may also want to be aware of the statute of limitations and statutes of repose. In Florida, there are certain time periods in which a case may be filed for damages pursuant to contracts, liens, equitable claims and negligence among other things:

Professional Malpractice: 2 years from the date of the act giving rise to injury, or within two years from the date the injury was or should have been detected, but no malpractice action may be commenced more than four years following the act giving rise to the injury.

Personal Injury: 4 years.

Fraud: 4 years.

Libel / Slander / Defamation: 2 years.

Injury to Personal Property: 4 years.

Product Liability: 4 years.

Contracts: Written, 5 years; Oral, 4 years. Actions for specific performance must be commenced within one year.

In Florida, a lawsuit based on construction defects must be brought within four years of the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction (if construction is not completed), or the date of completion or termination of the contract between the association and an engineer, architect, or contractor (whichever date is latest).  When an action involves a latent defect, however, the time begins to run from the time the defect is discovered or should reasonably have been discovered. In no event may a lawsuit be brought after 10 years.  This 10 year limitation period is known as the “statute of repose.”

Fla. Sta. § 95.11 (2013).

Thus, one can infer that if a breach of contract claim can arise within five (5) years of its execution, it may be good practice to maintain all contracts for at least five (5) years. Knowledge of the statute of limitations (minimum liability period) and the statute of repose (maximum liability period) affecting your business will help you tailor your document retention policy.

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