Posted in Employment Litigation Employment Policies

Wellness Program Wars

This should be easy.  Like motherhood and apple pie, everybody should be in favor of encouraging more wellness.  But, in 21st century America, nothing is ever easy; mothers baking apple pies beware.

There are two fronts in the wellness program wars. The first has been playing in court for several years.  The second arises from the Equal Employment Opportunity Commission’s (“EEOC”) new rules on wellness programs issued on May 17, 2016, under the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”).

Let’s begin with a brief overview.  In general, there are two types of wellness programs.  Health-contingent programs require employees to meet a specific health outcome such as reaching a target cholesterol level, weight, or blood pressure.  Participatory programs simply support healthy lifestyles with incentives such as reimbursement for gym memberships (and, as a result, duck under many of the ADA/GINA potential problems).

A.  The Litigation Front

The EEOC began challenging health-contingent wellness programs in 2014.

  • In a lawsuit against Orion Energy Systems, the EEOC claimed Orion’s program violated the ADA because it required employees to complete a health-risk questionnaire and screening. EEOC v. Orion Energy Systems, Inc., No. 1:14CV01019 (E.D. Wis. filed Aug. 20, 2014). Orion has argued that its wellness program does not violate the ADA because it is protected by a “safe harbor” provision that shields such programs from liability if they are connected to a health insurance plan. That case is still pending.
  • The EEOC also sued Flambeau, Inc. after the company discontinued an employee’s health insurance when he refused to take a health risk assessment or a biometric test as part of Flambeau’s wellness program. The district court ruled in Flambeau’s favor, holding that the company’s wellness program fell under the ADA’s safe harbor. The EEOC appealed. EEOC v. Flambeau, Inc., 131 F. Supp. 3d 849, 856 (W.D. Wis. 2015), appeal docketed, No. 16-1402 (7th Cir. Feb. 25, 2016).
  • In another action, the EEOC sued Honeywell International. EEOC v. Honeywell Int’l, Inc., No. 14-4517 ADM/TNL, 2014 U.S. Dist. LEXIS 157945, at *14 (D. Minn. Nov. 6, 2014). There, it requested a temporary restraining order to enjoin Honeywell’s wellness program, which required employees to complete biometric screenings and refrain from tobacco use. After the district court denied a preliminary injunction, there was a voluntary dismissal.

A core issue in these lawsuits has been the ADA’s safe-harbor provision, which exempts employers from the restrictions of the ADA if their wellness plan is associated with a voluntary insurance program. The EEOC’s new regulations take the position that this safe harbor is subject to its regulations and has declared that its new regulations (effective in January 2017) will eliminate that safe-harbor. 29 C.F.R. § 1630.14 (d)(6). This far exceeds the traditional use of administrative power to interpret statutory law via regulation; it is questionable whether courts will acquiesce in the EEOC’s novel claim of a power to amend statutes via regulation.

B.  The Regulation Front

Under the new EEOC regulations, there are five key compliance concepts:

  1. Wellness Programs Must Promote Health Or Prevent Disease. Wellness programs must be “reasonably designed to promote health or prevent disease.” 29 C.F.R. § 1630.14 (d)(1). Employers cannot simply collect health-related data without providing advice, counseling, or follow-up information to employers. For example, it’s a non-starter for companies to merely use health-related data to estimate future healthcare costs.
  2. Wellness Programs Must Be Voluntary. Employees cannot be forced to participate in a wellness program or be penalized for abstaining from one. Intimidating or threatening employees to join a wellness program violates this “voluntary” mandate. 29 C.F.R. § 1630.14 (d)(2).
  3. Wellness Programs Must Comply with the EEOC’s Limitations on Incentives. The general rule is that if employees must be enrolled in a specific health plan in order to participate in the wellness program, companies may offer financial incentives up to 30 percent of the total cost of self-only healthcare coverage. 29 C.F.R. § 1630.14 (d)(3). There are, however, a number of situation specific variants of that ceiling.
  4. Notice Rules Must Be Honored. If a wellness program asks medical information or includes any disability-related inquiries, companies must provide written notice to the employees describing what medical information will be collected, the purpose of collecting the information, how such data will be used, who will receive it and how the company will prevent unauthorized disclosure of sensitive data. 29 C.F.R. § 1630.14 (d)(2)(iv). The EEOC has published a sample notice for company-sponsored wellness programs to help employers comply with the ADA.
  5. Medical Information Must Be Kept Confidential. Employers must ensure compliance with the requirements under the Health Insurance Portability and Accountability Act (“HIPAA”). 29 C.F.R. § 1630.14 (d)(2)(iv) (C). More to the point, managers deciding the future of any given employee should be firewalled from access to their medical information.

C.  The Practical Front

Employers still considering wellness plans may want to hold off until the litigation dust clears. Employers with existing plans need to gear up to meet the additional requirements outlined in the EEOC regulations (which become effective January 1 of 2017).  But, let’s go beyond both fronts to consider some practical advice.

Like everything else in employment, the duty to reasonably accommodate employees applies equally to wellness plans. For example, accommodations should be made for a hemophiliac if a wellness program requires a biometric screen involving a blood draw.  Additionally, employers may need to provide educational materials in different formats—like large print, braille, or offer sign language—to allow individuals with visual and hearing impairments to participate in the program.

Wellness programs, despite complying with every line in the EEOC regulations, are not immune from disparate impact claims under Title VII and the ADEA. Remember that certain conditions (such as obesity, diabetes and hypertension) may disproportionately affect certain protected groups, but that ought not be a problem: i.e., properly structured wellness plans do not create the requisite adverse employment action.

So, weigh [pun intended] the potential costs as well as the potential benefits in considering, adopting, and managing wellness plans.

Posted in Employment Policies International Employment Law Union Organizing

The Globalization of Labor Disputes

My colleagues saw a line item in the advance sheets and said “this must be wrong, Joe; some reporter has obviously misunderstood.”  The report was simple: a local labor dispute at the El Super grocery stores in several southern California locations is now an international legal issue.  Worse, it was totally true.

El Super, a small chain of 50 supermarkets had a routine labor dispute with Local 770 of the United Food & Commercial Workers (UFCW). Despite twenty-plus bargaining sessions,  the parties failed to reach agreement, and the union resorted to boycotts and a strike.

But this time, the dispute did not take its normal course under the NLRA. El Super found itself embroiled in an international incident.  How could this happen in a small town in Los Angeles County?  Let’s segment that process because it is certain to recur.

First, the UFCW filed a complaint with the U.S. Department of Labor against El Super’s Mexican parent under the “labor side-agreement” to NAFTA. This complaint alleged that the parent’s use of so-called “protection contracts,” which are a lawful part of Mexican labor law, violated employees’ rights to freedom of association.

Second, the unions filed a complaint with the U.S. State Department under OECD Guidelines for Multinational Enterprises. This alleged that El Super engaged in an “aggressive, multi-year campaign of coercion” against workers and of interfering with workers’ rights to freedom of association by threatening,  interrogating, spying on, disciplining and discharging employees because of union activities.

Veterans of U.S. labor relations will see that those might be routine allegations to be litigated at the National Labor Relations Board (which, for all its flaws, looks more advantageous than the alternatives El Super now faced). With these NAFTA and OECD complaints, this local labor dispute had become an international PR nightmare and political football.

This moved from the bargaining table to global PR talking points; similarities to legal strategies for any other labor dispute in the history of Los Angeles County disappeared. Former UFCW President Ricardo Icaza cried out that “an international solution is necessary to this international problem.”

In July, the U.S. Department of Labor (DOL) found that the unions failed to establish that the Mexican government was responsible for allowing the alleged labor law violations but simultaneously expressed “its serious concerns regarding issues raised in the submission.” For its part, the State Department concluded its investigation on the OECD complaint by noting that the allegations were “both material and substantiated.”

Put simply, two separate Cabinet departments publicly condemned this grocery store under international law – and without a trial – due to a local labor dispute at one store in California. There was no sanction other than being pilloried: El Super is now the Hester Prynne of American labor law burdened with the scarlet letter of adverse publicity.

This is emblematic of a growing trend. Businesses increasingly are finding themselves subjected to a huge supra-national labor regulatory regime.  The 2011 publication of the UN Guiding Principles on Business and Human Rights (the Ruggie Principles) has accelerated the process.  By the way, these Principles alone span 127 pages, 35 pages of guidelines and 92 pages of interpretive guidance.

Internationalist views are also infiltrating U.S. labor law enforcement. For example, the International Labor Organization (ILO) considers permanent strike replacements an interference with the right to strike.  Despite the fact that this has long been permitted by the Supreme Court,  the NLRB inched closer to the ILO’s position, limiting the right of an employer to hire replacements if it acted for an “independent unlawful purpose” (a standard purposely ill-defined).

American industrial relations has crossed the Rubicon.  Every labor dispute in the smallest town (Santa Fe Springs, California, where this all began has a population of less than 17,000) is now subject to the same battle cry as at El Super: “an international solution is necessary to this international problem.”

Navigating these “internationalizations” (which is my personal passion) is more than can be fit within this blog post, but let me leave you with three thoughts based on too many nights addressing such attempted “internationalizations” of labor disputes:

  1. Understand that the aspirational statements of today will become the obligations of tomorrow.  A regulatory system is developing, one created primarily through treaty obligations, loan documents, and global union agreements. Many obligations arise from company’s own statements of good corporate citizenship.
  2. Choose words carefully.  What may be commonly understood locally may have different meaning globally. For example, U.S. companies frequently adopt Corporate Social Responsibility or Human Rights policies subscribing to “Freedom of Association.” Yet, according to the ILO, that would require relinquishing the right to hire permanent replacements.
  3. Filter the noise.  It is in the interests of many activists, particularly unions, to magnify the issues, obligations, and problems in pursuit of an unrelated agenda, one which may not always be obvious.  Pay attention to the man behind the curtain.
Posted in International Employment Law

Global RIFs: A Checklist Approach

Global RIFs require careful planning and implementation.

What can be achieved in a day (or a couple of months if WARN applies) in the US can take months (and yes, sometimes years), once taken global. What in the US can  be implemented at no cost or with separation payments that can be enshrined in releases is often far more expensive due to statutory obligation internationally.

But, global RIFs are manageable if carefully planned.  Here is a checklist to guide that planning.

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Posted in Employment Policies International Employment Law

A Movie Review And A Legal Critique: Two Days, One Night

Today’s authors are summer college interns from DLA’s Chicago office. 

Two Days, One Night is an award winning film set in Belgium that revolves around an employment dilemma. Here’s the premise:

Sandra is scheduled to return from sick leave on Monday but discovers on the preceding Friday that she is being terminated from her position with a solar panel manufacturer in Belgium. The reason? The boss decided that 16 workers could do the work of 17 so he gave the rest of the employees the option of either taking 1,000 Euro bonuses, or keeping Sandra on the payroll.

With the aid of her friend who chairs the works council at this company, the boss agrees to rerun the vote on Monday. Sandra has only the weekend – 60 hours = two days and one night — to track down her 16 coworkers and persuade them to forfeit a bonus so she can keep her position: a job that Sandra needs not only for the family economy but also for personal stability.

Can employers actually do such a thing?

We interviewed DLA employment attorneys around the world to find out.

Johnathan Exten-Wright, who practices in the United Kingdom, believes legality here depends on the answer to the following question: “is the job redundant or is Sandra targeted for ill health?” If Sandra’s position is redundant, the employer may prove how and why she should be terminated. If Sandra is targeted for her mental health, however, she will likely prevail in a discrimination suit.

Repeatedly, attorneys cautioned that redundancy statutes in their countries place the burden on employers to show that the termination is the best economic option. For example, Hélène Bogaard, who practices in the Netherlands, noted that her country has stringent redundancy statutes in place to protect the employees, like Sandra.

When approaching termination, redundancy laws from Germany to Hong Kong require that the decision meet a standard of “reasonableness.” According to Julia Gorham of DLA’s Hong Kong office, leaving a redundancy decision to a vote, as Sandra’s employer does, would foreclose meeting the standard of reasonableness and render the termination illegal.

While most countries use redundancy statutes to ensure fair treatment of employees, Japan believes that redundancy statutes are… well… redundant. Lawrence Carter, who practices there, referred to Japan as an “employee’s paradise”; Sandra would have been 100% safe in keeping her job if only her film was set in Japan.

Countries without redundancy laws evaluate motives.  Washington, D.C. attorney Joseph Turzi noted that there is nothing unlawful in the U.S. about 16 employees deciding whom to fire but that this delegation makes it difficult to prove that the motive wasn’t to punish Sandra for taking leave (which would violate the Family Medical Leave Act).  “Without a rational explanation,” Turzi cautioned, “a jury will find an illegal one.”

In the United Kingdom, employers are better safe than sorry.  According to Kate Hodgkiss in Edinburgh, “the safest way here is procedural.”  A fair process involves either eliminating a unique job position or using objective criteria (i.e., documented performance).  Kate adds that often employers there utilize settlement payments to sidestep that process — a common practice in the U.S. as well.

Although Two Days, One Night’s employment problem faced legal setbacks elsewhere around the world, what about in Belgium, since the film takes place there?  Even there, it is compelling drama but totally unreal. Soetkin Lateur, counsel with DLA Piper’s Brussels Office, presented no fewer than three different ways in which the film’s scenario was contrary to Belgian law:

  1. firing someone straight off of sick leave suggests illegal discrimination;
  2. incentivizing her co-workers to dump Sandra could constitute an abuse of employer’s prerogatives; and
  3. failing to give Sandra twelve weeks of notice before termination is a separate problem.

Sandra’s employer should have called Soetkin.  Two Days, One Night’s producers should have too but that would have killed the drama in their project.  There is little drama in watching veteran lawyers guide their clients around complicated employment laws.  Yet, for employers with businesses that span the globe who want to run those businesses smoothly – without drama – the stars each should cast is clear:

Soetkin Lateur in Brussels

Kate Hodgkiss in Edinburgh

Joe Turzi in D.C.

Julia Gorham in Hong Kong

Lawrence Carter in Tokyo

Hélène Bogaard in Amsterdam

Jonathan Exten-Wright in London

Each gets:

Posted in Employment Litigation Employment Policies

Kvetching Toward Living With EEO-1 Compensation Data Demands

Nobody remembers I.F. “Izzy” Stone (1907-1989) but everybody should; he was a reporter who did deep-dive readings of the handouts, the press releases, and the public documents.  Izzy would love the EEOC as a target.  While the EEOC did not include its proposed EEO-1 form in its updated Final Comment Request, you can find it (just as Izzy would have found it and devoured it).

Reading the EEOC’s conclusion that the cost of including pay data is only $416.58 per employer suggests that it is necessary to read the form itself (and very carefully).  The requested additional data is merely 1,512 cells to be filled in twice: once with numbers of employees and once with hours.  That is for one establishment; if an employer has 10 establishments, that is 30,000+ cells to calculate, populate, double-check, and then certify that “These reports are accurate and were prepared in accordance with the instructions.”  All for $416.58?

Swamped by the numbers?  Let’s go back slowly.  There are 12 salary bands on which the EEOC wants data; it demands that data separately for each of the 9 EEO-1 job categories (professionals, technicians, craft workers, etc.) and for each of the 14 traditional race/sex categories.  So, 12 x 9 x 14 = 1,512 for the number of employees and the same for the aggregate hours.  Izzy (were he still alive) would note the irony of the EEOC complaining about “the complexity” of its “burden” in explaining how this is consistent with the Paperwork Reduction Act.

But, wait, it gets better.  The EEOC states that its current EEO-4 report (for state and local government employers) requires compensation data – albeit with not quite so many cells.  It then  points out that for those EEO-4 forms “on average approximately 7% of the cells on the reporting form are actually used by an employer to report data” and, thus, it anticipates that “[t]he overwhelming majority of the cells [will be] left blank.”  Izzy would ask “why bother at all then?”

If you are curious why the EEOC is bothering, its updated explanation of how it will use this data is set out at pp. 41-46 of this Final Comment Request.  That, however, is a long-term focus.  Inquiring readers today prefer the short-term focus: i.e., what has changed from the EEOC’s initial proposal to its revised proposal?

Let’s turn to what is changed.  Precious little:

  • compensation reporting is now W-2 only: no employer options;
  • EEO-1s with compensation data will not be due until March 31, 2018;
  • the employer choice of when to take the “snapshot” of its workforce has now narrowed to the 4th quarter only; and
  • hours worked are FLSA hours for nonexempts and for FLSA exempts either a default of 40 (which will be used almost always) or actual hours if available.

Beyond promising no burden, the EEOC’s “Final Comment Request” also does a deep dive into confidentiality and data security to reassure the world that what is reported will not be spilled. From those same wonderful folks who promised that all of this reporting can be done at a cost of only $416.58, this is truly reassuring.  Regrettably, Izzy would not be so reassured: “Every government is run by liars and nothing they say should be believed.”

Izzy, however, did not promise a world free from such governments.  Prudent employers can merely begin planning early (which is far more practical than cursing).  Let’s stake out what employers need to look at to be ready for the initial EEO-1 with compensation data.

First, HR information systems (with the demographics) will need to sync with payroll systems.  Otherwise, the matching of demographic information with hours and with W-2 wages will be overwhelming.  Let’s prove Izzy wrong here in writing that “[t]he only thing God didn’t do to Job was give him a computer.”

Second, if the computers are synced, then do a test run with 2016 year-end data.  Izzy too believed that practice improves performance: “You have to take the long view…. it’s like pissing on a boulder.  For the first few thousand years, you don’t see any effect.  But after that, you start to see a definite impact.”

Finally, study (but only in a framework that is subject to attorney client privilege) how the EEOC will use the data to decide what measures may be taken (but be careful of reverse discrimination) and what explanations will bear up under scrutiny.  Izzy offers the following guidance on  explanations: “I sought … the overlooked fact, the buried observation which illuminated the realities of the situation.”

PS: The fate of regulatory reforms that do not take effect before a change in Presidential administrations — so-called “midnight regulations” — is another subject altogether.  While “midnight regulations” know no party boundaries, loyalists of the party not in the White House always aspire to relief from such regulations.  There is even a pending bill in Congress entitled the Midnight Regulation Relief Act.  Fantasy fictions of “what if …” , however, are beyond the scope of this blog.

Posted in Employment Litigation Employment Policies

Space, Time, and Taxes: How The Theory Of Special Relativity Applies To Settling An Employment Claim

taxSpecial thanks to Taylor Carico for contributing to this post.

Tax implications of employment settlements bedevil everyone. Even Albert Einstein famously stated that “the hardest thing in the world to understand is the income tax.”

There are lots of reasons for confusion but the complication between what is taxable income and what is taxable wages may be the right place to start. If you win the lottery, it is taxable income but it is reported on a 1099 rather than a W-2 because it is not wages.  Simple in theory but complicated in practice.

Charting it out may help.

Knowing these basics is significant.

First, it permits cheaper settlements.  If settlement proceeds are gross income but non-wages, a plaintiff receives the time-value of money and an employer profits by reducing its unemployment and other payroll tax payments.  Put concretely, every dollar shifted from a W-2 report to a 1099 report will save an employer more than 10% of that dollar in payroll taxes (as well as increase the satisfaction of the payee for more cash in hand).

Second, it avoids tax penalties. Mishandling reporting triggers penalties.  If an employer fails to file the required 1099 or W-2 and/or reports incorrect amounts, it is subject to penalties of $250 for each return.  If an employer willfully and intentionally disregards such requirements, it may be liable for a penalty equal to 10% of the settlement amount (but that high standard is satisfied where the employer acts “voluntarily in withholding required information, rather than accidentally or unconsciously.” Purser Truck Sales, Inc. v. United States, 710 F. Supp. 2d 1334, 1339 (M.D. Ga. 2008)).

Finally, it facilitates bullet-proof settlements.  Knowing the tax consequences allows allocating the settlement and spelling out that allocation in the agreement itself.  Because both the employer and employee have joint liability on the taxes due,  allocating the nature of the claims and their corresponding dollar figure within the settlement agreement serves both.   Further, the IRS will usually defer to an arms-length, good faith allocation among the various categories of potential damages; conversely, a failure to allocate will cause the IRS to treat the entire settlement as taxable wages. See, e.g., Bagley v. Comm’r, 105 T.C. 396, 406 (1995), aff’d 121 F.3d 393 (8th Cir. 1997); Morabito, Fedinand A., TC Memo 1997-315 (July 9, 1997).

Let’s look at an example.

Al Einstein is a theoretical physics and mathematics professor at the California Institute of Technology (Caltech). His annual salary is $200,000.  Everyone agrees that Al is one of the most promising academics in the field.  This past year, Al made three business trips to New York, London, and Munich presenting on novel issues in the field.  Al submitted his expenses for reimbursement promptly after each trip.  Caltech still owes Al $10,000 for those business expenses.  Recently, Al published the groundbreaking theory of relativity overturning Sir Ike Newton’s law of universal gravitation.  However, as Provost of Caltech, Ike was quite embarrassed that someone on his own faculty undermined his life’s work.  As an assertion of authority, Ike demoted Al to associate professor and decreased his salary by $50,000.  Further escalating the issue, Ike made some off-hand remarks about Al being a communist at the Caltech Board Meeting.

Al was furious. Due to related stress and anxiety, Al suffered a mild heart attack.  The hospital bill was $100,000.  Embracing the American way, Al threatened to file a lawsuit against Ike and Caltech for slander, breach of contract, emotional distress, and unlawful discrimination.  Rather than risk trial, Caltech decided to pay Al $1 million to settle the claim a year later.

During negotiations, Al, Ike, and Caltech set out to properly allocate the settlement proceeds. Let’s look at the break down:

  • Back pay – Here, Al’s base annual salary before the demotion was $200,000. The decreased salary was $150,000. Thus, the amount allocated to back pay is $50,000. This payment is classified as taxable wages subject to deductions and reported on Al’s W-2.
  • Front pay – Al had plenty of universities offering him higher paying positions after leaving Caltech. Accordingly, there is no allocation for front pay. If there had been such an allocation, it is handled just like back pay.
  • Medical expenses and emotional distress – The hospital bill (beyond insurance) for the heart attack was $100,000. This amount is not taxable income. In addition, the parties allocated another $200,000 for emotional distress related to case of Al’s heart attack. Again, there is no withholding requirement for this payment because it is not taxable income: this is the exceptional case; but for the physical illness/injury, ordinary emotional distress is taxable income subject to a 1099 form.
  • Expense reimbursement – The $10,000 owed to Al for his business trip expenses is not considered taxable income because it was incurred according to an accountable plan: i.e., a plan, policy, or practice covering expense reimbursements (1) paid or incurred while the employee is performing services as an employee and (2) adequately accounted to the employer within a reasonable time.
  • Interest – The parties designated part of the settlement proceeds as interest accrued over the year. Accordingly, this portion is paid without payroll deductions and reported as income only on a 1099 form.
  • Attorney fees – $400,000 has been allocated to attorneys’ fees and will be paid directly to Al’s counsel. Nonetheless, this is reported on 1099 forms to both Al and his attorney; Al may then claim this expense on his tax return to lower his tax burden on the rest of his taxable settlement.
  • Punitive damages – The parties designated the remaining $240,000 (minus interest) as punitive damages, which (like interest) is paid without payroll deductions and reported as income only on a 1099 form.

As you can see, tax aspects of an employment settlement can be tricky, even for Einstein. Before finalizing an employment settlement, make sure you consider the tax implications of the payments.  Both the employer and employee will be happy that you did.  And who knows, you might even find that the formula holds true: in Employee settlements = Money Counts.

Posted in Employment Policies

An Apple a Day Will Not Keep Paid Leave Away

Take two aspirin before reading further because apples won’t help. Keeping up with the ever-expanding paid leave laws is enough to give any employer a headache. Let’s start with those currently effective – 4 states, Puerto Rico, Washington D.C., and 22 other cities or counties:

Take two more aspirin and look ahead.

• The U.S. Department of Labor (“DOL”) is currently working on regulations mandating paid family and medical leave policies for all government contractors; those regulations are expected later this year.

• New York is set to phase-in the nation’s broadest paid leave policy starting in 2018. There, employees will be eligible for 8-12 weeks (as the plan is phased-in) of partially paid family leave (50%-67% of average weekly wages).

• Other states and localities have legislation in the pipeline.  For example, Plainfield, New Jersey and Los Angeles, California passed paid sick time laws which go into effect July 2016.  In Maryland, the Montgomery County Council passed a paid sick time law which will go into effect on October 1, 2016 while San Diego’s expanded paid sick time law was approved on June 7, 2016.  Effective January 1, 2017, employers with employees in Santa Monica, Spokane, and Vermont will need to comply with the corresponding paid sick leave ordinances. San Francisco is adding paid parental leave,which will also be phased-in (according to number of employees) starting January 1, 2017. Chicago, Illinois has also enacted paid sick time which will go into effect July 2017.

For employers fortunate enough to be outside the realm of government contracting and with business operations confined to a single city (or at least a single state), the aspirin alert passes quickly. For those employers with a national scope, there is a dilemma: a single policy based on the most generous current law or a headache inducing manual with upwards of 25 (for today with that number increasing month by month) separate policies for each local facility.

Let’s consider what such a single policy approach might look like:

1. Front-load the maximum number of hours of sick time accruable into employees’ accounts on January 1.

a. This eliminates accrual method and carryover calculation discrepancies across jurisdictions.
b. Leave should be available for immediate use by current employees.

2. Front-loading 72 hours (9 workdays) of paid sick time generally complies with the highest required amount of paid leave. [NB: 96 hour requirements for the hotel industry due to certain city laws imposing more on those employers].

3. This policy must apply to full-time, part-time, and temporary employees. New hires are eligible to use paid sick leave on the 90th day of employment or upon 680 hours worked, whichever occurs first. This, however, works only for businesses that are not in either Puerto Rico (which requires only a 2 month waiting period before sick leave may be used) or Long Beach and SeaTac (which each allow employees to use paid sick leave as accrued).

4. Leave should apply to caring for a child, a parent, a spouse, a domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship who has a serious injury/illness or is otherwise in need of care; victims of: domestic violence, sexual assault, or stalking, or to relieve family pressure while a family member is called to active military service.

5. Payout of unused sick leave at years’ end (before front-loading the required amount of leave on January 1 for the next year) is required.

6. Accrued sick time can be used in the smaller of hourly increments or the smallest increment the employer’s payroll system uses to account for other absences or use of time.

7. Accrued but unused sick time is lost upon termination but must be reinstated for immediate use by an employee who is rehired within 1 year after separation.

Are you saying “where is that industrial-strength aspirin?” A single policy is no panacea. Indeed, implementing such a uniform policy, based on the most generous amount of sick time required, may also be cost prohibitive — providing 72 hours of paid sick leave up-front for even part-time and temporary employees upon their first day is too expensive a price for administrative convenience.

With the illusion shattered and with balancing too many local laws inducing migraines, you can write to your Senators and members of Congress. This explosion of local laws concerning paid leave perhaps begs for a federal solution: a single law that pre-empts all state and local laws. Interestingly, the U.S. is the only developed country without national legislation mandating paid leave.

Posted in Employment Litigation Employment Policies

How to use the new trade secrets act: tips for employers

US businesses lose $300 billion annually in stolen trade secrets; employees can steal thousands of documents with the push of a button; and the FBI acknowledges it cannot stop this hemorrhage on its own. In response, Congress just enacted the Defend Trade Secrets Act (DTSA) to give private litigants powerful new tools to combat this problem.

What’s the import of these tools in practical terms?

Federal court options: the game changer

DTSA gives potential plaintiffs (but only plaintiffs) access to federal courts. Thus, businesses seeking to enforce trade secrets will now automatically have a choice of forums: state court or federal court. Apart from the enhanced remedies available under DTSA, there will often (but not always) be reasons to select federal court: the single-judge docket system in federal court; the law clerks available to federal court judges for cases that are brief-intensive; and uniform rules of procedure and evidence for a business policing trade secrets from coast to coast.

This entry to federal court will permit more than trade secret claims: employee non-competition and non-solicitation cases – generally the province of state court – may be eligible for supplemental federal jurisdiction. This is especially significant in jurisdictions where state and federal courts interpret state law at variance. For example, in California, federal courts more readily enforce restrictions against soliciting employees than state courts there. Similarly, in Illinois, federal courts have been reluctant to adopt the Illinois Appellate Court’s holding in Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327 that requires consideration other than employment to support a non-competition or customer non-solicitation restriction. (See our coverage of this case here.)

This opportunistic use of supplemental jurisdiction also works in other ways. For example, DTSA does not permit injunctions based solely on “inevitable disclosure.” Yet, many states do. Inclusion of such state law trade secret claims permits achieving in federal court what DTSA alone will not permit for such “inevitable disclosure” cases.

Remedies: new and old

DTSA adds a remedial innovation; it allows private parties to seek a court order instructing law enforcement officials to seize stolen trade secrets and to obtain such orders ex parte: i.e., without notice to or allowing the purported thief an opportunity to appear in court.

This is a powerful remedy, likely aimed at the most egregious theft, like the trading code worth $500 million recently stolen by a financial institution’s employee, the design system specifications worth $50 million recently stolen by a manufacturing company’s employee, or the organic light-emitting diode chemical process worth $400 million recently stolen by a chemical company’s employee.

Seizure is not for everyday cases but for “extraordinary circumstances.” Indeed, the threshold for such ex parte orders is purposefully high: (1) the plaintiff must show the defendant would not comply with an ordinary injunction and (2) the plaintiff must show imminent irreparable harm, among other elements. Even if granted, where a seizure proves to be “wrongful or excessive,” the defendant can countersue for damages caused by the seizure.

Aside from ex parte seizure, DTSA’s remedies adopt the remedies available under the Uniform Trade Secrets Act (UTSA). Like UTSA, DTSA provides for injunctive relief (although not for cases of inevitable disclosure); damages caused by misappropriation as well as alternative options for royalties or unjust enrichment caused by the misappropriation; and both exemplary (double) damages and attorney’s fees for willful and malicious misappropriation.

Defining trade secrets: status quo

DTSA still defines a “trade secret” the same way as UTSA: it is information that (a) is the subject of reasonable efforts to maintain its secrecy and (b) derives independent economic value because it is kept secret from those that could profit from it.

As a refresher:

This continuity in definition may be especially significant with respect to patent-related information. While patent claims require a plaintiff to demonstrate it uses the invention in question, the US Court of Appeals for the Federal Circuit holds that is not so for trade secret claims, at least in the international trade context. TianRui, supra. Further, trade secret cases also have a broad jurisdictional reach and can enjoin importation of products made with misappropriated trade secrets, even if the misappropriation occurred outside the US. Id. at 1324. With DTSA’s automatic option for federal court and for ex parte seizure of their trade secrets, trade secret claims will supplement (and perhaps may supplant in some instances) patent claims for that category of cases.

Notice provisions: why care?

To be eligible for exemplary damages (a statutory doubling of damages awarded) or attorneys’ fees in connection with a suit for theft of trade secrets, employers must include language to the following effect in any contract with any employee or consultant regarding confidentiality or trade secrets:

An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that—

(A) is made—

(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and

(ii) solely for the purpose of reporting or investigating a suspected violation of law; or

(B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Such disclosures are automatically protected under DTSA regardless of whether this clause is included. Further, this language parallels enforcement policies concerning potential whistleblowers that the SEC, EEOC, NLRB and FINRA have already been emphasizing. As suggested in an alert last year, businesses should already be including language like the following in their non-disclosure, proprietary information, severance and other agreements with their employees and consultants: “nothing in this agreement will limit [employee’s/consultant’s] ability to provide truthful information to any government agency regarding potentially unlawful conduct.” That perhaps deserves to be expanded with this DTSA language but what if it isn’t?

With DTSA and UTSA both providing identical remedies and no pre-emption under DTSA, there are issues to be resolved in future litigation on the integration of both state and federal statutes. For example, envision an employer who failed to include this whistleblower notice: isn’t that employer nonetheless entitled (if the misappropriation was willful and malicious) to claim exemplary damages and attorney’s fees under state law even though barred from seeking such damages under DTSA?

Conclusion: the never-ending story…

DTSA is the beginning of more legislation on trade secrets, not the end. DTSA mandates that the US Attorney General deliver in one year a report to the judiciary committees of the House and Senate with further recommendations to improve trade secret protection. Meanwhile, concurrent with DTSA, the European Union has just adopted its own Trade Secrets Directive, with a definition of trade secrets that is virtually identical to the definitions in DTSA and UTSA.

Since both sides of the Atlantic now agree trade secrets are safe only where employers have made reasonable efforts to protect that information, perhaps you should put this alert down and check to see how well your business is protecting its trade secrets. Here are some benchmarks to understand what’s adequate for now, and what may be required in the not-too-distant future, given the pace of technology:

See our alert on ramifications of the DTSA for IPT companies here.

Posted in Employment Litigation Employment Policies

Dealing with the new FLSA salary tests in ruby slippers

This article first appeared as an Employment Alert on our firm’s website.

News releases echoing the famous mantra from The Wizard of Oz – “lions, and tigers, and bears … Oh my!” – suggested that the Department of Labor (DOL) has issued an army of flying monkeys. Not so. The DOL merely finalized new dollar thresholds for the salaried jobs exempt from overtime under the Fair Labor Standards Act. Thus, effective December 1, 2016, the new salary test will be $47,476 ($913 per week) for executive, administrative, and professional employees.

Growing up with Dorothy and her friends teaches many things, including “never panic.” There is always a solution, whether for witches, flying monkeys, or government regulations (as Dorothy illustrated nicely in getting into the Emerald City, which is worth re-watching now).

What questions would Dorothy ask in the face of the new DOL salary standards?

1. Do the jobs on my team that pay less than $47,476 per year have truly exempt duties?

To qualify as overtime exempt, executive, professional, and administrative jobs must clear a double hurdle: the duties test and the salary test. The DOL’s new rules increase the salary threshold but leave the duties test unchanged.

Often, jobs have been classified as exempt in the past without revisiting whether a given job – as it exists today – meets the duties test. There is no point increasing compensation to meet the new salary test unless the duties test can also be satisfied: that is simply throwing money away.

Templates for checking exempt status can easily be built from the regulations or found on the internet if you Google “FLSA exempt questionnaire.” That is the easy part. Sitting down to determine actual job content (not merely what is in the job description) requires more effort.

2. For those jobs with the requisite duties, can I meet the $47,476 test by counting bonus or commissions?

This is the good news in the new salary test. For the first time, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary level, so long as such incentive payments are paid on a quarterly basis or more frequently. In those cases, the actual minimum salary can be as low as $42,728.40 (i.e., $821.70 per week, almost $100 under the standard $913 per week).

Some states, however, may not allow bonuses, commissions, and other incentive compensation to count toward the minimum salary requirement under state law (e.g., California). As you will recall (with tears), the FLSA mandates complying with both state and federal law; so, where state law is more favorable to the employee, it must be followed.

3. For jobs that still fall short, should I increase compensation or convert those jobs to nonexempt?

This is a business calculus that will be unique to each employer. Let’s think out loud.

There are three key factors:

• Is the job performed on premises or off premises (line of sight rule)?
• Is the job one that likely has high volumes of overtime?
• Is the current salary close or far from the new threshold?

If a job is paid far less (e.g., below $40,000), conversion is probably more economical. If the job is within striking distance, the amount of anticipated overtime and the ease of accurately counting/controlling that overtime ought to be dispositive. For close calls, the line of sight rule is the tie-breaker; jobs performed outside the line of sight of management are often difficult to manage as hourly jobs.

4. Where I am choosing to increase compensation, have I planned to address the ripple effect (e.g., the potential need to increase compensation for higher ranking jobs to maintain internal equity)?

Compensation compression is a problem on multiple levels. First, it is a morale problem. Second, it is a recruiting problem, Third, it is a potential equal pay problem. It is a problem that demands consideration before bumping a job paid at $42,000 per year to $48,000 to maintain exempt status.

Here too, the answers will be unique to each business. Assume assistant managers will go to $48,000 on December 1, 2016. What will need to be done with compensation for the managers to whom those assistant managers report? And, then, what about the general managers? This is the hidden burden in upping salaries to meet the new salary test.

5. For jobs that are being converted, how do I announce/explain that without demotivating my Scarecrows and Tin Woodsmen?

This is art, not law. It is also the most difficult piece of this compliance adventure.

(A) There is a school of thought that employees derive prestige from being salaried. To that extent, there is a temptation to finger point (“twasn’t us; this is because of those damn pointy-headed bureaucrats”). Resist. Your organization had the last clear chance: you chose to convert to hourly rather than increase salary to $47,476 (which your Munchkins will soon enough figure out).

(B) If possible, you can sell this as an upside: more money because you are now eligible for overtime in those weeks where extra efforts are required. But, don’t say that if your goal is to set an hourly rate (see no. 7, infra) to make this whole conversion “cost neutral” to your budget.

(C) Where cost neutral is the goal, then that is the message: i.e., “this won’t reduce your annual compensation but it is required so that we can comply with both state and federal payroll laws by tracking hours worked.” In this context, be very careful that the message is not mistranslated into a guarantee of automatic pay for X hours of OT (which would create a separate nightmare by inflating the regular rate) or into a warning that time worked and reported cannot exceed Y hours (which walks you into serious issues of off-the-clock violations and lawsuits).

6. For jobs that are being converted, should I attempt to take advantage of half-time overtime under the fluctuating workweek (FWW) regulations?

This is far cheaper than the normal overtime (50 percent of the regular rate vs. 150 percent of the regular rate). FWW is permitted if (A) the employee is paid a fixed salary each week that does not vary based on the number of hours worked; (B) the company and the employee have a “clear mutual understanding” that the employer will pay this fixed salary regardless of the number of hours worked; (C) the fixed salary must be sufficiently large to provide compensation that at least equals the minimum wage for all hours worked; (C) the employee’s hours must fluctuate from week to week; and (D) the employee receives a 50 percent overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week. 29 C.F.R. § 778.114.

Why doesn’t everybody use it? It is complicated for payroll administration (because the overtime rate changes with each week’s hours: salary/total hours in that week = regular rate). It also requires guaranteeing a salary. Finally, it doesn’t work in every state; some (e.g., California, New Mexico, and Pennsylvania) decline to recognize it for purposes of their state versions of the FLSA.

7. For jobs that are being converted, can I set a lower hourly rate?

Let’s put this in numbers. Assume a current salary of $40,000 in a job that is being converted to nonexempt. Dividing that salary by 40 hours per week and 52 weeks per year generates an hourly rate of $19.23 per hour. In short, converting at that rate will increase labor costs for every hour of overtime (which will be paid at $28.85 per hour).

Assume that this job averages 5 hours of overtime per week. Assigning an hourly rate of $16.50 makes the conversion almost cost neutral: total annual compensation of $40,755. But, is that legal and is that practical? Reducing an employee’s hourly rate pay is perfectly permissible; DOL openly advertises that employer right. The problem is morale. But see no. 5, supra on how to handle announcements.

* * * * *

For Dorothy Gayle, getting home to Kansas was a fraught journey, but she persevered. Your journey to adjusting to the new DOL salary standards may be too, but you can follow Dorothy as a role model: it is okay to be afraid, but not to quit (and it is easier to keep going if you have really, really good shoes).

Posted in Employment Policies International Employment Law

Global Trends: Mandated Reports Regarding Equal Pay

Pay equity is a hot-button issue in the US. The EEOC and OFCCP have announced plans to begin collecting detailed pay information from US employers. Seven states have also passed legislation in the last twelve months changing the paradigm from equal pay for equal work, to equal pay for similar or comparable work. These states have also stripped away the affirmative defense under the Equal Pay Act permitting pay disparities based on any factor other than sex, to requiring that employers show a disparity is warranted by business needs.

This increasing focus on equal pay for women is not exclusively a US phenomenon. For example, both the UK and Australia are now addressing public reporting on gender pay gap for private-sector employers. Simply stated, equal pay is a global issue now and requires some strategic thinking across borders. A quick look at those countries in comparison to the US on the requirements for data collection and disclosure on pay equity is instructive:

Multi-national corporations need a three-step approach to equal pay compliance:

1. Monitor the developments (and emerging deadlines) on gender pay gap issues around the world. More is coming; there is no denying it. The EU and Japan have taken actions with respect to gender compositions in managerial positions and company boards; regulatory requirement in those jurisdictions may be more “when” than “if” propositions.

2. Determine whether gender pay reporting in individual countries may have any cross-border impact, either practically or legally (especially given that gender pay information in the UK and Australia will be made public), and whether — given the uncertainties around cross-Atlantic data privacy issues — mandated reporting obligations are better handled locally or at headquarters for better control of this issue.

3. Ask whether it is appropriate to self-evaluate or audit internally to identify potential issues of a gender-driven wage gap. There are pros and cons to either approach but the threshold issue is whether this can be done subject to attorney-client privilege or otherwise be safe from compelled disclosure in all jurisdictions.

PS:  For more information on equal pay obligations in more countries, see DLA’s Gender Pay Survey encompassing 23 countries. 

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