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Labor & Employment and Benefits Seminar June 22, 2016
That’s Not My Employee! Understanding and Applying The New Joint Employer Standard Lindsey Hogan, Associate Tom Posey, Partner
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What Does It Mean to Be a Joint Employer?
If you and another company are joint employers, then each of you:
►Can be held liable for the other company’s unfair labor practices (including unlawful discipline or discharge of employees under the NLRA)
►Could be obligated to bargain with a union representing the other company’s employees
►Could lose “secondary boycott” protection
What is a Joint Employer?
The definition created by the NLRB is intended to reach independent companies that:
►Share control/co-determine employment terms of another company’s workers
►Exercise that control in a manner that is “immediate and direct”
►Does not apply where the companies aren’t legitimately separate legal entities (“single employer” doctrine)
What Relationships May Give Rise to a Joint Employer Finding?
►Franchisor/Franchisee ►Contractor/Subcontractor ►Primary employer and staffing agency (or PEO) ►Parent corporation and subsidiary
Image found: https://www.dlapiper.com/en/us/insights/publications/2014/12/are-you-a-joint-employer/
Overview of Standard ►Up until this point, there have been about 30 years of unbroken NLRB
jurisprudence which held that two entities were “joint employers” only when they share direct and immediate control over the same employees (demonstrating some type of control over the terms and conditions of employment).
►Now, however, the NLRB has changed this standard to include indirect control or even potential control!
►Recent ruling in Browning-Ferris established the new standard and pending cases against McDonald’s will shape it further.
Image found: http://www.usw.org/news/media-center/articles/2013/national-labor-relations-board-launches-mobile-app
NLRB Complaints Issued Against McDonald’s
Images found: http://www.chicagotribune.com/business/ct-mcdonalds-joint-employer-1220-biz-20141219-story.html
What Happened? ► November 2013: NLRB regional offices investigate Unfair
Labor Practice charges filed against McDonald’s and its franchisees as joint employers.
► December 2014: NLRB issued 13 complaints naming the franchisor, McDonald’s
USA, as a joint employer. The complaints indicated that the company retaliated against employees of multiple franchisees who participated in demonstrations protesting working conditions and demanding higher pay.
► McDonald’s opposed the position that it was a joint employer and argued that the franchisees, not the franchisor, controlled the essential elements of the relationship.
► But, McDonald’s allegedly did retain a certain element of control. In particular, it provided software to its franchisees to be used in daily operations, including scheduling and staffing.
► The Board concluded that “the allegations in the complaint were sufficient to put McDonald’s on notice that the General Counsel is alleging joint employer status based on McDonald’s control over the labor relations policies of its franchises.”
Image found: http://thehill.com/regulation/labor/252124-obama-administration-issues-controversial-labor-ruling
Now What?
►The decision by the General Counsel to authorize complaints against McDonald’s as joint employer is consistent with its previous request to expand the test used to determine joint employer relationships.
► If the NLRB ultimately finds McDonald’s, as franchisor, to be a joint employer of some or all of the 19,000 employees of its franchisee restaurants, McDonald’s could be responsible for any unfair labor practices of its franchisees and could also be required to bargain on a franchisor level with unions.
Image found: http://www.govdocs.com/labor-law-liability-blurs-mcdonalds-case/
Now What?
►McDonald’s has stated that it will oppose the decision for it to be named a joint employer and has stressed that its franchisees control all decisions regarding wages, hours and other working conditions for their employees.
►Although the McDonald’s matter is still in its litigation phase, the NLRB has administered an advice memorandum and issued a decision in a different matter in the interim (Browning Ferris) which corresponds with their efforts and begins to further define this new standard.
Image found: http://www.govdocs.com/labor-law-liability-blurs-mcdonalds-case/
Are Franchisors or Franchisees Considered Joint Employers?
Image found: http://empowerkit.com/blog/franchisee-websites-build-or-buy/
California Supreme Court Holds Franchisors are Not Automatically Joint Employers (August 2014)
►Patterson v. Domino’s Pizza, LLC ► Franchisee operated a Domino’s franchise in CA ► An hourly employee was allegedly harassed by a manager ► Sued the employer and Domino’s arguing it had agency
relationship with the franchisee and an employment relationship with the manager.
► CA Sup. Ct. disagreed ► Domino’s lacked requisite level of control ► Uniform marketing and operational plans cannot
automatically impose liability
April 2015 – NLRB Advises that Franchisors are Not Automatically Joint Employers
► The NLRB issued an advice memorandum dated April 28, 2015 that indicated that not all franchisor and franchisee relationships will be treated as co-employment situations.
► In In Re Nutritionality the franchisee agreement expressly disclaimed any involvement in the franchisee’s employment & labor related practices. Although the agreement provided the franchisee the right to use Freshii’s business system, methods, standards, employee handbooks, etc., it did not require its franchisees to comply with these standards and rather offered them as guidance and/or samples.
► Since Freshii did not have any meaningful impact over the franchisee’s hiring, compensation, scheduling, discipline, or ongoing supervisions, the NLRB concluded that they were not joint employers.
August 2015 – NLRB Creates a New Joint Employer Standard in Browning -Ferris
►Introduction to Browning-Ferris Industries of California, Inc.
► On August 28, 2015, the NLRB decision in Browning-Ferris established a far more labor-friendly definition of companies.
► This decision followed the NLRB’s General Counsel’s July 2013 decision to treat McDonald’s as a joint-employer of workers at franchised restaurants.
“[W]here, under the totality of circumstances, including the way the separate entities have structured their commercial relationship, the putative joint employer wields sufficient influence over the working conditions of the entity’s employees such that meaningful bargaining could not occur in its absence.”
Image found: http://www.latimes.com/opinion/editorials/la-ed-contractors-20150906-story.html
Image found: http://edenprairieweblogs.org/scottneal/post/163/
What Happened? ► In Browning-Ferris, the company contracted with Leadpoint Business Services
staffing firm to supply employees to manually sort materials at a Browning-Ferris Industries (BFI) recycling center.
► A temporary labor services agreement governed the relationship between BFI and Leadpoint ► The agreement indicated that Leadpoint was the sole employer of the
personnel it supplied, but, the terms also stated that Leadpoint was required to ensure its personnel had “the appropriate qualifications…consistent with all applicable laws and instructions from BFI.”
► BFI also had the right to request that employees “meet or exceed” BFI’s own standard selection procedures.
► Leadpoint was to make “reasonable efforts” not to refer any workers who were previously employed by BFI and deemed “ineligible to rehire.”
Image found: https://www.flickr.com/groups/1858934@N20/
What is the New Standard / Test?
Under the new test set forth in this decision, if a company has “indirect control,” or “potential control,” over employees’ terms and conditions of employment, the two companies are considered a joint employer of a single workforce even if such control is not exercised by the second company.
Image found: https://en.wikipedia.org/wiki/Browning-Ferris_Industries
Implications of the New Standard…
►Staffing agency clients and franchisors risk being held responsible for unfair labor practices and other labor and employment law violations that might be committed by staffing agencies or franchisees, and vice versa.
►Expected to cause some franchisors to feel obligated to become more actively involved in controlling the personnel practices of franchisees, making the mere fact of owning a franchise less desirable.
According to the Dissent in the Browning-Ferris Decision:
“This change will subject countless entities to unprecedented new joint-bargaining obligations that most do not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts and picketing.”
Image found: http://www.teaparty.org/conservative-mandate-puts-focus-nlrb-abuses-77801/
What Happens Now?
►An appeal!
►Action in Congress to attempt to overrule the decision is also expected.
►Nevertheless, staffing companies and franchisors should heed with caution in the interim. Especially since even though a court can/may overturn the decision, the recent standard adopted by the board would still be intact.
Image found: http://franchiseinsider.quarles.com/2015/11/nlrb-finds-no-joint-employment-relationship-in-first-test-since-browning-ferris/
Joint Employer Issue Not Limited to the NLRA
►Wage & Hour Violations ►Occupational Health & Safety Administration ►Affordable Care Act ►Blacklisting in Federal Contracting ►Civil Rights Act of 1964 ►Americans with Disabilities Act ►Equal Employment Opportunity Commission
21
In the Meantime…the DOL Has Issued Some Guidance…
► DOL memo issued in January 2016 addresses who is employer under the FLSA and MSPA. It also reflects existing policy and includes examples of how WHD considers joint employment in its enforcement of laws.
► The possibility of joint employment should regularly be considered in FLSA and MSPA cases, particularly where (1) the employee works for two employers who are associated or related in some way (horizontal joint employment); (2) the employee’s employer is an intermediary or otherwise provides labor to another employer (vertical joint employment).
► Although the NLRB is an independent agency and its decisions are based on a different statute with a different standard for joint employment, this guidance can still be wholly beneficial to employers who are trying to avoid violations.
The DOL’s Interpretation of Joint-Employment
Image found: http://www.dol.gov/whd/flsa/Horizontal_Joint_Employment.pdf Image found: http://www.dol.gov/whd/flsa/Vertical_Joint_Employment.pdf
Vertical Joint Employment
Horizontal Joint Employment
Suggestions to Limit (and Hopefully Avoid) Joint Employer Liability
►Consider taking actions now to minimize liability in contractual language
►Reconsider the value of outsourcing certain functions, particularly in industries susceptible to unionization
►Give as much control to the third party as you can accept, in an effort to protect yourself
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Lindsey Hogan, Associate +1 312 212 6589
Questions?
US. 106757486
Tom Posey, Partner + 1 312 212 2338
Page Fleeger, Partner
In-House Counsel, Attorney-Client Privilege and the Fiduciary Exception
Agenda
► In-House Counsel & ERISA ►The attorney-client privilege ►The “fiduciary exception” to the privilege ►The limits to the fiduciary exception ►The problems with the exception ►Practical steps in-house counsel can take to minimize the disruption
caused by the fiduciary exception ►Arguments against the exception
27
In-House Counsel & ERISA
► Plan sponsors often delegate responsibility for administration of the company’s ERISA Plans to committees of employees
► Committee members are generally ERISA fiduciaries, subject to ERISA fiduciary duties
► Committees often supervise investment (or select investment funds) for millions of dollars of plan assets
► ERISA-based lawsuits are common ► 5,000+ cases on Federal bench with an ERISA claim
► Fees ► Selection of investments ► Employer stock
► Attorneys fees ► ERISA fiduciaries have personal liability for ERISA violations
28
In-House Counsel & ERISA
►Employers should appoint responsible and knowledgeable people to these committees
► In-house counsel are often named to these ERISA committees; good committee member qualities: ► Intelligence ► Judgment ► Ability to navigate complex rules ► Attention to detail
►But…
29
In-House Counsel & ERISA
►Competing legal/ethical duties ► Duties to company ► Duties to plan participants
►Attorney-Client privilege ► Fiduciary exception
30
Purpose of the Attorney-Client Privilege
►“the oldest of the privileges for confidential communications known to the common law”
►“recognizes that sound legal advice or advocacy serves public ends”
►“such advice or advocacy depends upon the lawyer’s being fully informed by the client.”
Upjohn Co. v. United States, 449 U.S. 383, 389 (1981); see also United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2318 (2011).
31
Fundamentals
►Upjohn Co. v. United States, 449 U.S. 383 (1981) ► Attorney-Client Privilege applies when:
► the person who sought or received legal advice was (or sought to become) a client of the attorney;
► the person to whom the communication was made was a qualified attorney or an attorney’s subordinate acting on the attorney’s behalf;
► the communication at issue related to the securing or rendering of legal advice; and
► the communication was confidential.
32
Is the Privilege Governed by State or Federal Law?
► In cases arising under federal law, “[t]he common law … governs a claim of privilege.” Fed. R. Evid. 501.
► ERISA cases arise under federal law.
►“[S]tate law governs privilege regarding a claim or defense for which state law supplies the rule of decision.” Fed. R. Evid. 501.
► would govern the privilege in cases involving non-ERISA plans. ► for example, non-electing church plans and governmental plans.
33
The “Fiduciary Exception” to the Privilege
►The troublesome “fiduciary exception” in ERISA cases ► Imported from the common law of trusts, which says
► “when a trustee obtains legal advice related to the exercise of fiduciary duties … the trustee cannot withhold attorney-client communications from the beneficiary of the trust.”
United States v. Jicarilla Apache Nation, 131 S. Ct. 2313, 2318 (2011); see also Restatement (Third) of Law Governing Lawyers § 84 (2000).
► An “ERISA fiduciary is disabled from asserting the attorney-client
privilege against plan beneficiaries on matters of plan administration.” Becher v. Long Island Lighting Co., 129 F.3d 268, 272 (2d Cir. 1997).
34
The “Fiduciary Exception” to the Privilege
►The exception has been expanded to DOL audit and enforcement proceedings. ► DOL is acting on behalf of plan participants See, e.g., Solis v. Food Employers Labor Relations Ass’n, 644 F.3d 221, 229-30 (4th Cir. 2011); United States v. Doe, 162 F.3d 554, 557 (9th Cir. 1998); U.S. v. Mett, 178 F.3d 1058, 1064 n.9 (9th Cir. 1999); Martin v. Valley Nat’l Bank, 140 F.R.D. 291, 325-26 (S.D.N.Y.1991).
►Upshot: fiduciary communications not privileged with respect to:
► plan participants, and ► the DOL.
35
Two Rationales Underlie the Exception
►Two rationales for the fiduciary exception: 1. “Real” Client: Any advice the trustee gets relating to the administration
of the trust is for the benefit of the beneficiary, and thus the beneficiary is the “real” client of the attorney’s advice, and entitled to see that advice.
2. “Fiduciary Duty to Disclose”: A trustee has a fiduciary duty to disclose information about the administration of the trust to a requesting beneficiary, so that the beneficiary can police the actions of the trustee, and this duty to disclose is so powerful that it trumps the attorney-client privilege.
36
The Potential Limits of the Fiduciary Exception
►Fiduciary exception does not sweep up every communication between fiduciary and attorney.
►The exception does not apply if: ► Advice is sought for reasons other than to aid in the administration of the
plan or
► No longer an identity of interests between the fiduciary and the participants
►There are three commonly-recognized limits to the exception.
37
The Potential Limits of the Fiduciary Exception
1. Settlor capacity. If someone who is otherwise a fiduciary is seeking advice about a non-fiduciary “settlor function,” then that person is not acting in a fiduciary capacity when seeking that advice, and the advice falls outside the scope of the fiduciary exception.
See, e.g., Bland v. Fiatallis N. Am., Inc., 401 F.3d 779, 788 (7th Cir. 2005); In re Long Island Lighting Co., 129 F.3d 268, 271-72 (2d Cir. 1997).
► Includes: ► design ► amendment ► termination of the plan
See, e.g., Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 444-45 (1999); Lockheed v. Spink, 517 U.S. 882, 890 (1996).
► “Settlor vs. fiduciary” factor ► Line can be difficult to draw ► It is not unusual for a single conversation or a single document to jump back and
forth between both fiduciary and settlor considerations
38
The Potential Limits of the Fiduciary Exception
2. Potential Personal Liability. ► the fiduciary exception does not apply where the fiduciary “had reason to
seek advice in a personal rather than a fiduciary capacity.” Jicarilla, 131 S.Ct. at 2326.
“When an ERISA trustee seeks legal advice for his own protection, the legal fiction of ‘trustee as representative of the beneficiaries’ is dispelled, notwithstanding the fact that the legal advice may relate to the trustee’s administration of the trust.” U.S. v. Mett, 178 F.3d 1058, 1063 (9th Cir. 1999).
► The reason that the fiduciary sought the advice is a key determinant of the privilege.
► But difficult for a court to determine whether the fiduciary is seeking legal advice for his or her own protection, or for the benefit of the participants in the plan?
39
The Potential Limits of the Fiduciary Exception
3. Divergence of interests. This comes up most commonly in cases involving claims for benefits. ► Plan administration is generally viewed as a fiduciary function
► So fiduciary exception can apply to legal advice regarding benefit claims
► At some point, however, the relationship between claimant and plan
administrator becomes adversarial ► ex. The plan administrator is seeking legal advice to protect the plan’s
assets (and the interests of the other participants) from what it views as a meritless claim.
► But when does the relationship turn sufficiently adversarial so that the fiduciary exception ceases to apply?
40
Problems with Applying the Fiduciary Exception
1. Biggest problem with the fiduciary exception? It can be very difficult to apply. ► The limits are not bright-line rules = Unpredictable outcomes
►Cases are all over the map ► Many refuse to adopt a bright-line test in favor of a “content and context”
determination made by a judge after-the-fact. ►Relationship between the plan administrator and the claimant is
always somewhat adversarial ► Plan administrator has an overarching fiduciary duty to protect the
assets of the plan (and the other participants)
41
Problems with Applying the Fiduciary Exception
2. Even if the documents turn out to be privileged, they have already been seen by the ultimate factfinder. ► Court reviews contested documents in camera and determines which
documents (or parts thereof) are privileged, and which are not.
► ERISA cases are tried to the court (no jury trial)
► Where the ultimate factfinder has seen all of the privileged documents, does the privilege still exist in any meaningful sense?
42
Problems with Applying the Fiduciary Exception
3. It is difficult for the parties to know whether a particular communication is going to be privileged. There is always a risk that it might be discoverable. ► “[F]or the attorney-client privilege to be effective, it must be predictable.”
Jicarilla, 131 S. Ct. at 2328.
► The parties have to know “with some degree of certainty” whether their
discussions are privileged. Upjohn, 449 U.S. at 393.
► “An uncertain privilege … is little better than no privilege at all.” Id.
►ERISA has turned into the poster child for an uncertain privilege.
43
Problems with Applying the Fiduciary Exception
4. Unfair to saddle ERISA fiduciaries with such a second-rate attorney-client privilege. ► ERISA is complicated.
► Fiduciaries wear multiple, often confusing hats. ► Risk of liability is large. ► Need to be able to communicate candidly with their lawyers about all of
their roles.
► “An entity’s ability to secure confidential legal advice should not be at its lowest when complex legal obligations are at their highest.”
Wachtel v. Health Net, Inc., 482 F. 3d 225, 237 (3d Cir.2007); cf. Upjohn, 449 U.S. at 392 (noting that corporations have a strong need for confidential legal advice because of the complicated legal rules confronting them).
44
Practical Steps for In-House Council to Minimize the Disruption Caused by the Fiduciary Exception
1. Keep lawyers off the ERISA committee/from being ERISA fiduciaries ► If counsel on committee, may be precluded from advising the company
on any fiduciary based litigation ► Avoids questions of attorney’s role
► Lawyer ► Client
► Litigating these issues is a self-inflicted wound 2. In-house counsel should make sure that the plan fiduciaries
understand: ► Multiple hats
► Distinction between their “settlor” and “fiduciary” hats
45
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
3. In-house counsel should explain the fiduciary exception to the privilege. ► Some communications with in-house and external counsel may not be
privileged
► Difficult to know at time of communication
► Note that some plan committees, such as a plan investment committee, act almost entirely in a fiduciary capacity. ► Need to assume that the vast majority of their communications with counsel
will fall within the exception
46
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
4. Everyone involved should try to write with the expectation that what they are writing could be read by a judge or by the other side in a lawsuit.
► Among other things:
► Try and provide the appropriate context where possible.
► Be professional. ► Don’t make jokes. ► Don’t be cavalier or disrespectful. ► Don’t be inflammatory. ► Stick to the facts.
47
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
5. Think about trying to “compartmentalize” communications to the extent possible. ► Example:
Consider dividing committee meetings or written communications into a “settlor” portion and a “fiduciary” portion.
► Example: Begin certain communications with an introductory statement that the fiduciaries are concerned about their potential exposure to a lawsuit.
► Compartmentalizing can be difficult to do as a practical matter.
48
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
6. Be especially careful with respect to communications regarding participant claims for benefits, or appeals of claim denials. ► Case law is a mess.
► Many courts have not been very protective of the privilege.
► Virtually all cases hold that the fiduciary exception requires the production of attorney-client communications about initial claims.
► Many cases go even further, and require production of attorney-client communications about a participant’s appeal of a claim denial.
49
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
7. Where appropriate, use separate lawyers. ► Example:
A claim in litigation gets sent back to the plan administrator for additional findings.
► Probably not a good idea to have the litigation attorneys advise the administrator with respect to the additional claims processing ► Creates the impression the administrator is biased ► Causes potential problems under the fiduciary exception to the privilege
► Either use different firms or, if the same firm is going to handle both, create a “ethical wall” separating the two groups of attorneys. ► Similar to the “ethical wall” firms use in other conflict-of-interest situations
► Think about a similar wall at the in-house counsel level.
50
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
8. Make sure that all legal fees are paid by the plan sponsor directly, and are not paid out of the assets of the plan. ► Paying the legal fees out of plan assets creates a strong presumption
that the advice was for the benefit of the plan participants. See Jicarilla, 131 S. Ct. at 2326.
► Don’t pay in-house attorney’s salary from plan. 9. Make sure that the privilege is not inadvertently waived through
other actions. ► A large body of case law dealing with the attorney client privilege in
general must be understood and respected. ► Courts will not treat communications as confidential if the parties
themselves did not treat them as confidential. ► May need to educate co-workers on this.
51
Practical Steps for In-House Counsel to Minimize the Disruption Caused by the Fiduciary Exception
This means: ►Don’t allow third parties* to be present when privileged matters are
discussed** ► *such as actuaries, investment advisors, third-party administrators,
consultants, brokers, etc. ► **unless their presence is necessary to enable the attorney to render
legal advice See, e.g., Hill v. State Street Corp. 2013 WL 6909524 (D. Mass. Dec. 30, 2013)(privilege waived where third party’s presence was not needed to assist in provision of legal advice); Cottillion v. United Refining Co., 279 F.R.D. 290 (W.D. Pa. 2011) (privilege applied even though actuarial consultant was included).
52
Arguments That the Fiduciary Exception Should Not Apply in ERISA Cases?
►Are there arguments that the exception should not apply in ERISA cases? ► Yes.
►The ERISA cases adopting the fiduciary exception are based on a
false premise that the fiduciary exception is a well-settled rule under the common law of trusts
► Not true ► There are only a handful of states where the fiduciary exception has been
expressly adopted as a common law rule ► Many state court cases have rejected the exception in private trust context
53
Arguments That the Fiduciary Exception Should Not Apply in ERISA Cases?
► In several states where the fiduciary exception was adopted, it was overruled by statute.
See, e.g., N.Y.C.P.L.R. § 4503(a)(2) (“for purposes of the attorney-client privilege . . . no beneficiary of the estate is, or shall be treated as, the client of the attorney solely by reason of his or her status as beneficiary”); S.C. Code Ann. § 62-1-110 (“[t]he existence of a fiduciary relationship between a fiduciary and a beneficiary does not constitute or give rise to any waiver of the privilege for communications between the lawyer and the fiduciary.”); Fla. Stat. §§ 90.5021,733.212, 736.0813 (amending evidence, probate and trust codes).
►Fiduciary exception no longer exists in those states.
54
Arguments That the Fiduciary Exception Should Not Apply in ERISA Cases?
►The Supreme Court has negated the exception in a similar, but non-ERISA case
►United States v. Jicarilla Apache Nation, 131 S. Ct. 2313 (2011). ► Facts:
► Natural resources on reservation land were developed ► U.S. held the proceeds in trust for the tribe pursuant to a federal statute –
the American Indian Trust Fund Management Reform Act of 1994.
► Tribe sued the United States for mismanagement of those funds.
► Tribe sought discovery of communications between the United States and its attorneys regarding the trust.
55
Arguments That the Fiduciary Exception Should Not Apply in ERISA Cases?
► Trial court went through the fiduciary exception analysis ► Ordered the government to produce a large number of attorney-client
communications ► The Court of Appeals affirmed.
The Supreme Court reversed, holding that the fiduciary exception did not apply at all to this situation. ► All of the legal advice obtained by the United States was protected by
the attorney-client privilege. ► Including the advice regarding the administration of the trust
► None of it was discoverable. ►Decision reads like a treatise on the fiduciary exception, and is
required reading for anyone who has to litigate this issue.
56
Will These Arguments Prevail?
►Who knows? ►A fairly large body of case law has accumulated under the federal
common law recognizing the exception in ERISA cases. ► In her dissent in Jicarilla, Justice Sotomayor noted that “the fiduciary
exception is now well recognized in … ERISA enforcement actions.”
► Id. at 2332-33 (containing cites).
►Most circuits have applied the fiduciary exception in an ERISA case. ►No case has picked up on the argument that the fiduciary exception is
not well-established under the common law of trusts. ►Maybe some day ….
57
David Weinstein, Partner
Protecting Privilege in Internal Investigations by the Legal Department
Only Privilege Protects Against Disclosure
►Counsel’s communications concerning the internal investigation are protected from disclosure only if the communications are subject to the attorney-client privilege. Counsel’s notes concerning the internal investigation are protected from disclosure only if the notes are subject to the work product privilege. ► Ill. Sup. Ct. R. 201(b)(2): “All matters that are privileged against
disclosure on the trial, including privileged communications between a party or his agent and the attorney for the party, are privileged against disclosure through any discovery procedure.”
► Fed.R. Evid. 501: “in a civil case, state law governs privilege regarding a claim or defense for which state law supplies the rule of decision.”
Elements of Attorney-Client Privilege
►The attorney-client privilege protects communications: “(1) where legal advice of any kind is sought, (2) from a professional legal advisor in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence, (5) by the client, (6) are permanently protected, (7) from disclosure by himself or the legal advisor, (8) except the protection be waived.” Illinois Educ. Ass’n v. Illinois State Bd. of Educ., 204 Ill. 2d 456, 467 (2003).
Fact Investigations Must be for Purposes of Rendering Legal Advice
► In re Kelly Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), finding in-house counsel’s notes and communications protected by attorney-client privilege because at least one “primary purpose” of the internal investigation was to render legal advice for regulatory compliance.
►U.S. Bank Nat. Ass’n v. PHL Variable Ins. Co., No. 12-877 (JRT/TNL), 2016 U.S. Dist. LEXIS 42670 (D. Minn. Mar. 30, 2016), finding most of counsel’s report of internal investigation not subject to privilege because: (i) company managers had announced to staff that the investigation was done to “review our current procedures” and counsel’s report was referred to as a “business plan”; and (ii) in camera review showed the report “was not ‘mapping litigation strategy’.”
Legal Advice Must be for the Client: Who is the Client?
► Illinois law - - the client is an organization’s “control group.” Consolidation Coal Co. v. Bucyrus-Erie Co., 89 Ill. 2d 103 (1982), focusing “on the status of the employee within the corporate hierarchy.”
►Federal law - - the client of an organization is determined by the “subject matter” for which an attorney is consulted. Upjohn Co. v. United States, 449 U.S. 383 (1981), protecting communications within the scope of employees’ corporate duties for purposes of the corporation obtaining legal advice - - even if the employees are not part of the control group.
Both Illinois and Federal Law Require Privileged Communications to Originate in Confidence
►Rounds v. Jackson Park Hosp. & Med. Ctr., 319 Ill. App. 3d 280, 285-86 (1st Dist. 2001), finding that a privileged communication must be shown to have “originated in confidence that it would not be disclosed,” made to an attorney “for the purpose of securing legal advice,” and the communication “remained confidential.”
►Sandra T.E. v. South Berwyn Sch. Dist. 100, 600 F.3d 612, 618 (7th Cir. 2010), finding that a communication protected by the attorney-client privilege must be “made in confidence . . . by the client.”
How to Show the Privileged Nature of Internal Investigation Notes and Reports
►Document the purpose of the investigation at its inception. ►For outside counsel, engagement letters can help evidence the
privileged purpose of an investigation. But see Sandra T.E. v. South Berwyn Sch. Dist. 100, 600 F.3d 612, 617 (7th Cir. 2010), noting that “an engagement letter cannot reclassify non-privileged communications as ‘legal services’ in order to invoke the attorney-client privilege.”
►For in-house counsel, “Upjohn Letters” can help establish the privileged nature of an investigation.
►Mark all investigation notes and reports as “Attorney-Client Communication Privileged” and/or “Attorney Work Product Privileged.”
Key Components of an Effective Upjohn Letter
►The Upjohn Letter (or memo) must be from the client to in-house counsel.
►The Upjohn Letter should state: ► the client’s direction to counsel to investigate ► the primary purpose of the investigation is to facilitate counsel providing legal
advice to the client ► the specific matter(s) on which the client seeks legal advice ► any extent to which the legal advice concerns pending or potential litigation ► the client’s direction that the investigation – including fact/evidence finding,
analysis, conclusions and recommendations – be kept confidential ► any subsequent decision as to possible voluntary waiver of privilege will be
made solely by the client
When Silence Is Not So Golden: In-House Counsel’s Obligation To Report Misconduct by Colleagues
Statutory Reporting Obligations
►Section 307 of the Sarbanes-Oxley Act of 2002 requires “an attorney to report evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the issuer up-the-ladder within the company . . .” SEC’s summary of its final rule at 17 CFR 205.
►U.S. Department of Justice encourages in-house lawyers to make “voluntary self-disclosure and disclosure of individual wrongdoing” prohibited by the Foreign Corrupt Practices Act. (DOJ Press Release, “Criminal Division Launches New FCPA Pilot Program,” April 5, 2016).
Reporting Attorney Misconduct
► Ill. R. Prof. Conduct Rule 8.3(a): “A lawyer who knows that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority.”
► In re Himmel, 125 Ill. 2d 531 (1988), upholding one-year suspension of attorney for failing to report unprivileged information that a client’s former lawyer had converted the client’s settlement funds.
Himmel Report Triggers
► Illinois attorneys’ obligations to make a “Himmel Report” are triggered when ALL of the following occur:
1. Actual knowledge 2. Of a violation of the Rules of Professional Conduct 3. That raises a substantial question about a serious offense 4. Concerning a lawyer’s honesty, trustworthiness (i.e., involvement in
fraud, misrepresentation, deceit, moral turpitude, etc.), or fitness as a lawyer
►The Report must be made to the ARDC; merely contacting ARDC’s Ethics Inquiry Program is not a “Report” nor sufficient to discharge R. 8.3(a) obligations. Skoinick v. Altheimer & Gray, 191 Ill.2d 214, 219 (2000).
ARDC’s 2015 Data
►9.4% of the grievances received by the ARDC in 2015 were from an attorney’s Himmel Report
►Only 3% of the 5,648 grievances received by the ARDC in 2015 resulted in issuing formal disciplinary charges (i.e., 170 charges issued in 2015)
►39% of the formal disciplinary charges issued by the ARDC in 2015 were the result of an attorney’s Himmel Report (i.e., 67 charges in 2015 arose from a Himmel Report).
No Himmel Obligation to Report
►Otherwise reportable misconduct disclosed in a privileged communication (ISBA Op. No. 91-23)
►Hearsay or rumor (ISBA Op. No. 90-28) ►Threatening criminal prosecution to gain an advantage in a civil case
(Rule 1.2(a) violation) (ISBA Op. No. 90-36) ►Malpractice not involving the integrity deficiencies listed in Rule 8.3(a)
(ISBA Op. No. 90-8) ►“Merely negligent misrepresentation” Ill. R. Prof. Conduct Rule 1.0,
Comment 5
Himmel Obligation to Report
►Reportable misconduct even if approved by the client. In re Himmel, 125 Ill. 2d 531 (1988)
►Criminal conduct involving theft, drug dealing, obstruction of justice, bribery, or perjury. Thomas P. Sukowicz, The Himmel Duty: Observations by an ARDC Lawyer, 11 CBA Record 16, 18 (1997)
►Unauthorized endorsements on settlement checks and suppression of evidence or creation of false evidence. Sukowicz, Id.
►Certain material misrepresentations to opposing counsel. See Robison v. Orthotic & Prosthetic Lab, Inc., 2015 IL. App. (5th) 140079, ¶¶15-16, where appellate court reports plaintiff’s attorney who failed to disclose his client’s death until after an oral settlement agreement had been reached in products liability case
Wage & Hour Issues: Compliance in 2016 and Beyond Gregory P. Abrams, Counsel Sylvia Bokyung St. Clair, Associate
Continued Increase in FLSA Litigation
Source: Lexology.com
2015: 8959
2015
Industries Hit with Wage and Hour Lawsuits
Damages and Settlement Ranges
►Under the FLSA, a plaintiff may recover back pay, liquidated damages (in an amount equal to the amount of back pay), attorneys’ fees, and litigation costs.
► In the last 12 months, settlements ranged from $1 to $100M: ► $100M, undetermined number of drivers allegedly misclassified as
independent contractors (CA and MA); ► $5.5M, 160 call center employees (NY); ► $1.09M, 159 pharmacy employees allegedly misclassified as exempt;
from overtime pay (AZ); and ► $1.5M, 1,350 certified public accountants (CA).
Recent Issues
►DOL’s Overtime regulations
► New “White Collar” Exemption Regulations (effective Dec. 1, 2016)
► Off-The-Clock Work
► Remote Work
► Employee / Independent Contractor Classification
►Unpaid Interns
►Class Action Waivers
DOL’s Overtime Regulations
Exemptions
►Executive ►Administrative ►Professional ►Computer Employee ►Highly Compensated
Current “White Collar” Exemption Regulations
►Current regulations: ► Generally must meet certain criteria related to job duties ► Be paid on a salary basis of at least $455/week (for Computer, if
hourly, no less than $27.63 per hour)
Exemptions: Executive, Administrative, Professional
►Executive: Managing the enterprise, or managing a customarily recognized department; Customarily and regularly direct the work of at least two or more other full-time employees; Have authority to hire or fire other employees . . .
►Administrative: Performance of office or non-manual work directly related to management or general business operations; Use of discretion and independent judgment with respect to matters of significance . . .
►Professional: Work requiring advanced knowledge; predominantly intellectual in character . . .
Exemptions: Computer and Highly Compensated
►Computer : Employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field; Primary duty must be related to consulting, design, development, documentation, analysis, creation, testing…
► BUT not manufacture or repair of computer hardware and related equipment
►Highly Compensated: Total annual compensation of $100,00 or more (includes at least $455 per week paid on a salary basis); Primary duty is office or non-manual work (e.g., exempt executive, administrative or professional)
New Minimum Salary Rule: DOL’s Initial Proposal
►March 2014: President Obama signed an executive order directing the DOL to revise its rules
►July 6, 2015: DOL issues proposed regulations ► Increase the minimum salary from $455 per week ($23,660 per year) to
$970 per week ($50,440 per year) ► Increase the minimum total annual compensation amount for highly
compensated employees from $100,000 to $122,148 ►60-day comment period ►More than 270,000 comments
The Final New Minimum Salary Rule
► Issued May 18, 2016 ► Effective December 1, 2016 ► Includes hundreds of pages of commentary
► Increases the minimum salary from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) ► 40th percentile of full-time salaries in the lowest-wage Census region
(the South) ► Increases the minimum total annual compensation amount for highly
compensated employees from $100,000 to $134,004, which includes at least $913 per week paid on a salary basis
►Minimum salary amounts will increase every three years, beginning January 1, 2020
Non-Discretionary Bonuses or Incentive Payments
►Up to 10% of the minimum salary amount can be satisfied by payment of non-discretionary bonuses
►Bonuses (which are announced to employees to induce them to work more steadily or more rapidly or more efficiently or to remain with the firm) are regarded as part of the regular rate of pay ► Attendance bonuses, individual or group production bonuses, bonuses
for quality and accuracy of work ► If an exempt employee does not earn enough in non-discretionary
bonuses or incentive payments in a quarter, then the employer has one pay period to make a “catch-up” payment at the end of the quarter or the employee becomes eligible for overtime for that quarter ► No “catch-up” payments are permitted under the highly compensation
employee exemption
The Final New Rule – no changes
►No changes to any of the duties tests ► No adoption of a “50% rule” (like the requirement under California law)
►No changes to the outsides sales employee exemption ►Since the New Rule was introduced, GOP Senators seek to block
DOL overtime rule
Exempt / Non-Exempt Classification: Best Practices
Analyze positions classified as exempt for accuracy Review job descriptions, and update as needed Identify current exempt positions that pay less than the new minimum
weekly salary and decide what to do
Complying with the New Regs: Best Practices
Develop a communication and implementation plan Determine whether any policies should be revised Train managers who do not have experience managing non-exempt
employees and overtime issues (e.g., off-the-clock, on-call, travel and telecommuting time)
Train newly classified non-exempt employees with respect to time recording, taking meal and rest breaks, etc.
Off-the-Clock Work
Off-the-Clock Work: What is Compensable Time?
►Any time that you “suffer or permit” employees to work. ►Liability if the employer knew or should have known (actual or
constructive knowledge) ►Examples:
► Starting work early ► Working through lunch/breaks ► Working at home ► Travel between jobs ► Training ► On call time
Off-the-Clock Work: Recent Examples
►A department store and employees asked a court to approve a $750,000 settlement to resolve claims that employees performed off-the-clock work (Jan. 2016)
►A court approved a $674,500 settlement between an electronics retailer and 194 employees who claimed they had performed off-the-clock work (Jan. 2016)
►A proposed class of servers for a popular arcade-dining restaurant chain asked the court to approve a $2.1M settlement for 2,350 employees who claim that the chain did not pay overtime wages, compensate for work performed off the clock, and provide meal and rest breaks for the servers (June 2016)
Off-the-Clock Work: Best Practices
►Procedure to record and report hours worked outside normal work hours
► Implement (and communicate) a procedure under which non-exempt employees must record and report any hours worked outside their normal work hours
► If non-exempt employees perform unauthorized off-the-clock work, discipline them, but pay them for the time worked
►Caution with automatic deductions ►Caution with productivity/efficiency objectives ►Supervisor training ►Meal breaks away from work area ►Restricting access to work area until after shift start
Remote Work
Remote Work
►Due to the growing use of remote devices such as laptops and smartphones, employees are increasingly performing remote work ► According to the Bureau of Labor Statistics (BLS), in 2014, 23% of
employed persons performed some work remotely, an increase from 19% in 2003.
► In Dec. 2015, the Northern District of Illinois held that the Chicago PD did not violate the FLSA by failing to pay police officers for off-duty time working on their employer-issued BlackBerrys, applying a two-pronged test: ► 1. Did they perform compensable “work” for which they were not paid? ► 2. Did the employer have actual or constructive knowledge that the
employees performed work without compensation?
Remote Work: Best Practices
Procedure to record and report any work performed outside normal working hours
If possible, limit issuance of remote devices and bring your own device connections to exempt employees and limit use of remote devices to exempt employees
Electronic systems curfew Monitor access to and use of the employer’s electronic systems Limit communications to normal working hours Discipline but pay
Independent Contractors
Independent Contractors
►Top priority to the DOL under the Obama Administration ►FLSA: “Economic realities test”: considers control, opportunity for
profit/loss, investment, economic dependency, among other factors.
►2015, DOL issued its interpretation of the FLSA’s “Suffer or Permit” Standard in identifying employees who are misclassified as independent contractors
Independent Contractors: Factors
►Factors – no one factor is determinative: ► Is the work an integral part of the employer’s business? ► Does the worker’s managerial skill affect the worker’s
opportunity for profit or loss? ► How does the worker’s relative investment compare to the
employer’s investment? ► Does the work performed require special skill and initiative? ► Is the relationship between the worker and the employer
permanent or indefinite? ►What is the nature and degree of the employer’s control?
Independent Contractors: Recent Examples ►The DOL announced that it had obtained a judgment against a
security guard company requiring the company to pay $166,764 in backpay and liquidated damages to 243 employees misclassified as independent contractors (Dec. 2015)
►Uber was hit with another lawsuit in NJ for $5.4M (damages and attorney fees) on behalf of 100 drivers who claim they were misclassified as independent contractors and under paid overtime (May 2016)
► Lawsuits in IL and IN filed in the last 30 days, several weeks after the $100M settlement of the CA/MA lawsuits was announced
►Fourth Circuit affirmed a verdict and final judgment for $265,000 on behalf of a group of exotic dancers who alleged the owners of two nightclubs under paid them after they were improperly classified as independent contractors (June 2016)
Unpaid Interns
Unpaid Interns
►Law is uncertain ►Different courts have different tests for whether an intern is an
“employee” under the FLSA ►Tests:
► DOL six-factor test ► Totality of circumstances ► Primary Benefit
►Glatt v. Fox Searchlight Pictures, Inc., 811 F.3d 528 (2d Cir. 2015): decided on July 2, 2015 but amended on Jan. 25, 2016
Unpaid Interns: Best Practices
Pay interns minimum wage? Structure as educational experience Limit use of interns to situations where “work” activities serve as an
extension of a students’ academic program, rather than an obvious benefit to the employer (i.e., no coffee runs!)
Class Action Waivers
Class Action Waivers
►Growing number of employers are using arbitration agreements with class action waivers to protect their businesses from costly and protracted lawsuits
►Law is uncertain – Circuit split ► Fifth Circuit: arbitration agreements and class actions waivers were fully
enforceable, D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013). ► Seventh Circuit recently held that collective and class waivers violate the
NLRA, reasoning that private contracts requiring employees to relinquish their Section 7 right to engage in concerted legal activity over their terms and conditions may be found unlawful and unenforceable, Lewis v. Epic Sys. Corp., No. 51-2997, 2016 WL 3029464, at *1 (7th Cir. May 26, 2015).
Gregory P. Abrams, Counsel +1 312 356 5047
Questions?
US. 106757486
Sylvia Bokyung St. Clair, Associate + 1 312 356 5029
Benefit Nightmares…and How to Sleep Soundly Michael J. Nader, Partner
Section 409A
What is it and what to do about it
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Section 409A
► Non-qualified Deferred Compensation Arrangements may include: ► SERPs ► Change in Control Agreements ► Employment Agreements ► Long-term bonus plans ► SARs
► Distribution Triggers include: ► Termination ► Change in control ► Disability
► Exceptions: ► Short-Term Deferral ► Severance
► Penalties include 20% tax assessed against individual
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HIPAA Privacy is Still With Us and So Are the Auditors
HIPAA
►Eliminated evidence of insurability requirements
► Imposed nondiscrimination rules ► Careful with referenced-based pricing for medical plans
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HIPAA (cont.)
► In addition, regulations issued under HIPAA created: ► Transaction & Code Sets Rule ► Security Rule ► Privacy Rule
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General Privacy Rule
►“Covered Entities” may not use or disclose
►“Protected Health Information” except . . .
115
Key Definitions
►Covered Entity
►Health Plan
►Protected Health Information
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“Covered Entity”
►Health plans
►Health care clearinghouses
►Health care providers
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“Health Plan”
►Group Health Plans, including: ► comprehensive medical plans ► dental and vision plans ► health FSAs
118
“PHI”
►Health information
► Individually identifiable
►By or for a Covered Entity
►Not employment records ► FMLA requests ► Fitness for duty reports ► Worker’s Comp records
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The Wall . . .
►Plan sponsors
►Plan administrators
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Bending the Rules of a Plan Document, a/k/a “No Good Deed Goes Unpunished
Bending the Rules of a Plan Document
►For any number of reasons, employers make exception to plan eligibility rules, especially for: ► New hires ► Severance continuation
►Expose employer to risk of “self-funding” benefits
122
Bending the Rules of a Plan Document
Common exceptions include: ►Waiving eligibility for new hire (usually on executive) ►Continuation while on disability ►Continuation during severance payments ►“Bridge” to retirement
123
Alternatives
►Use of COBRA
►Exchange or Marketplace ► Employer should provide taxable stipend rather than directly pay
premium
124
Why Stop-Loss Reinsurance is Not Insurance
Why Stop-Loss Reinsurance is Not Insurance
►Stop-loss insurance for self-funded plans is not like traditional insured plans
► Incurred and paid – what does it mean?
►High exposure situations ► Mid-year termination ► The end of contract period, especially if changing carrier ► Conversion to insured ► Sale of business ► Questionable claims
126
Know Your Fiduciaries
Know Your Fiduciaries
►Settlor vs. Fiduciary
►Named fiduciaries and fiduciaries-in-fact ► Discretionary authority
►Must act in exclusive interest of participant/beneficiary
►Erosion of Attorney-Client Privilege
►Conflict of Interest Rules
128
Affordable Care Act Becomes More Complex
Affordable Care Act – Pay or Play
►New reporting obligations starting with 2015 ► Form 1094-C and Form 1095-C ► Good faith ► These forms will play part in assessment of penalties
►Penalty Nightmares
► Sledgehammer ► Tack hammer
►Misclassification of workers
►DOL is also auditing ACA compliance
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EEOC Wellness Regulations
Wellness Plans: EEOC vs. DOL
►ACA increased level of awards/penalties (30%/50%)
►DOL regulations allow for awards/penalties based on level of coverage (family or single) and did not count non-contingent award against thresholds
►EEOC ► Lost recent case ► Finalized regulations and rejected court decision ► Modified threshold ► Confidentiality
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Other Pitfalls to Avoid
Other Pitfalls to Avoid
►The missing COBRA notice
►Late deposits of 401(k) deferrals
►Employee premiums deemed to be plan assets
►Thirty-day response period to provide ERISA information
►Conflict of Interest Rules
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