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Welcome to the AMM Law Blog, a tool to help you keep up to date on current legal developments over the broad spectrum of our practice areas.  We welcome your comments and suggestions to create a dynamic forum that will be of interest to readers and participants.

PENNSYLVANIA’S PROPOSED RULEMAKING UNDER THE PENNSYLVANIA MINIMUM WAGE ACT

Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.

In 2016, the United States Department of Labor proposed changes to regulations regarding exemptions from the overtime and minimum wage requirements of the Fair Labor Standards Act (“FLSA”).  The proposed changes nearly doubled the salary requirement to qualify for these exemptions.  Employers hurried to change policies and reclassify employees in order to meet the December 31, 2016 deadline to comply with the new salary requirement.  In late 2016, a federal court imposed an injunction on the imposition of those rules, and there the new regulations died (more at the hands of the Trump administration than as a result of legal challenges). Among other observations, the federal district court for the Eastern District of Texas concluded that the injunction was necessary because the new salary requirement was so high that it rendered the duties test “irrelevant.” 

The proposed change was dramatic, and would have required significant policy and personnel changes.  Now, Pennsylvania is taking on those salary requirements in a less dramatic, but no less significant way. 

It is not unusual for business owners such as manufacturers and their suppliers and consultants to enter into joint ownership in the pursuit of mutual business goals.  Those pursuing this strategy should consider that such entanglements can lead to costly future litigation should circumstances change and interests of the parties diverge. In a recent case, a dispute arose between owners of a custom manufacturing limited liability company in which AMM’s client (and a supplier to that same LLC) possessed 33 1/3% of the issued and outstanding ownership interests.   The firm’s client also owned 100% of the stock in a separate business entity which supplied materials to the jointly owned custom manufacturer. 

When the owners had a falling out, an issue arose with regard to the payment of outstanding invoices generated by the supplier for materials provided to the jointly owned custom manufacturer.  When a resolution could not be reached, AMM, on behalf of the supplier, commenced litigation.   During the litigation, the majority member of the jointly held custom manufacturer transferred all of the inventory and other assets to a newly formed entity, owned entirely by him, without the payment of consideration, that is to say, without compensating the supplier entity.  The transfer of assets left the jointly held entity with insufficient assets to meet its’ liabilities; including the liabilities to the supplier.   As a matter of strategy, the controlling member of the jointly owned entity allowed default judgment in favor of the supplier and against the jointly held custom manufacturer.  The newly created entity went about doing business utilizing the inventory transferred without regard to the liability to the supplier.

The transfers gave rise to new and additional claims under the recently adopted Uniform Fraudulent Conveyances Act and claims of breach of fiduciary duty; all of which had to be litigated while the newly formed company operated a separate business. Clearly, a small business owner can no longer simply set up shop as a new entity when things go bad and debt accumulates. However, the complexity of ownership structure and relationship between the various entities made judicial intervention very difficult.   In the end, the newly formed entity was forced to file a general assignment for the benefit of creditors; the majority owner lost his interest in all of the respective entities and eventually filed for personal bankruptcy. 

The above is just one of many “war stories” encountered in attempting to unwind jointly owned business enterprises.  Business owners and potential investors should think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future.    

The take away for business owners and potential investors is to think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future. 

 The sale or merger of a business often uncovers employment problems that may scuttle the transaction, or impact the value of the business.  In my employment law practice, I’ve seen a pattern of common employment issues businesses face when they are contemplating a transaction, or that emerge during due diligence.  Below are the five most common of those issues:

1. Classification of employees as “exempt” or “nonexempt” under federal and applicable state law; and time clock and hourly pay policies, and compliance with federal and state overtime rules;

2. Classification of workers as independent contractors or employees;

3. Evaluation of benefit plans to ensure compliance with plan documents and federal benefits law, and evaluation of policies related to unregulated fringe benefits, such as vacation pay or sick pay;

4. Evaluation of whistleblower and harassment and discrimination complaint procedures;

5. Evaluation of employment contracts and restrictive covenants to ensure that the restrictions included therein will protect the seller and will inure to the benefit of the buyer.

 A thorough review of employment policies and procedures and contracts will eliminate trouble in the process.  AMM attorneys have experience guiding employers through these issues as part of our clients’ transactions.  We can help employers address the crisis when it emerges as part of due diligence.  More importantly, we can help employers improve their policies and contracts to maximize value and streamline transactions. 

Employers work very hard to retain senior, key and talented employees.  In the past, we’ve discussed how workplace culture helps to retain talent, and we’ve seen an increased employer focus on those programs.  But the truth is that often what causes an employee to stay, and complicates an employee’s exit, are basic compensation programs:  competitive salaries, reasonable health insurance, and stock options or other compensation programs that vest over time.  These are difficult issues regardless of the reason for the highly compensated employee’s exit. 

Of course, any executive is reluctant to walk away from a competitive salary.  For executives who resign, this becomes the main bargaining chip with a new employer, and the main area of risk if they are retiring or starting a new business.  But, when an executive is involuntarily terminated, our first goal in representing those executives is protecting those benefits.  Executives are often eligible for severance programs that will continue their salary for a period.  We examine whether the executive is eligible given the circumstances surrounding the termination, and the amount of severance due.    Where there is no formal severance program, an executive should consider negotiating a severance package, depending on the circumstances of the termination.  For example, most actionable cases of age discrimination occur at these levels, because the more highly compensated employees are also the oldest employees.  This may provide some leverage to negotiate a severance. 

Health insurance and other benefits are often included in those severance programs.  However, if there is no severance program, all employees are entitled to continuation of health insurance under the statute commonly known as “COBRA.”  This coverage is available at the employee’s cost unless the employee is terminated for “gross misconduct”.  While this coverage is expensive, it does provide a way to continue coverage for up to eighteen months. 

The most complicated of these issues, though, is the issue of stock options and other compensation that vests over time.  Especially after a long period of employment, executives may find themselves with valuable stock options that vest three or four years in the future.  When this executive is terminated, the loss of those unvested options can represent the loss of significant funds.  Rarely do such plans allow an employee to vest if he is no longer employed, so there is little room for negotiation on this point.  Similarly, when resigning, the executive must consider his timing, calculate what he is leaving “on the table” and perhaps negotiate this loss with a new employer. 

AMM has experience navigating these complicated exit issues for executives.  We can help a terminated employee protect some of these benefits, and work with resigning employees to navigate an exit in a way that makes economic sense. 

As a business owner, you are routinely asked to “sign on the dotted line.” The document could be a purchase order, an equipment lease, or a bill of sale. Often, these documents are in fact contracts that impose obligations on the parties, even if they don’t say “Contract” or “Agreement” at the top of page one.  I can’t overstate the importance of knowing what you are signing – i.e., being able to recognize a contract when you see one, as well as understanding the components of a contract and how they impact your business. I often say “think before you sign; review before you renew.”

Over the years, I have worked with many business owners who discover a little too late that they have signed a document that does not align with their intentions and may have costly consequences. For this reason, and under the theory that knowledge is power,  I have put together the attached infographic to try to demystify and define the essential elements of a contract. In the coming weeks, I will be writing a series of informational blogs on each of the identified sections of this schematic to offer guidance for business owners as they approach the documents which are so essential to the health and profitability of their enterprise. 

 

 

Reprinted with permission from the June 25th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.

The Supreme Court settled a disputed question regarding arbitration clauses as they apply to class and collective actions in Epic Systems Corp. v. Lewis, 584 U.S. ___, (2018).   The matter before the Court included three disputes that raised the same issue, but the Court focused on the facts of Ernst &Young LLP v. Morris, a collective action under the Fair Labor Standards Act (“FLSA”), in its opinion.  Justice Gorsuch’s opinion for the 5-4 majority professes to focus only on the law, and the opinion chides Justice Ginsberg, writing for the minority, for a focus on policy over precedent.  However, both the majority and dissenting opinions reflect a policy dispute:  the preference in the law to enforce arbitration clauses versus the historic view of certain employment-related statutes as remedial in nature.  One need only reflect that this Court, in Encino Motorcars LLC v. Navarro, rejected the notion that remedial statutes such as the FLSA are subject to any special treatment to know where the Court would land on this particular policy dispute.  The Court’s holding that arbitration clauses in employment agreements are enforceable even if they result in a waiver of the right to bring a class or collective action is a blow to employee’s rights under the FLSA.  The case also provides a drafting lesson for practitioners.    

Morris was an employee of Ernst & Young, and entered into an employment agreement that included an arbitration provision.  The arbitration provision stated that it applied to any disputes that might arise between employer and employee; that the arbitrator, chosen by the employee, could grant any relief that could be granted by a court; and that disputes pertaining to different employees would be heard in separate arbitration proceedings. 

After his employment ended, Morris sued Ernst & Young, claiming a violation of the FLSA.  Specifically, Morris claimed that Ernst & Young misclassified him as exempt under the professional exemption, and that he was therefore owed overtime pay.  Morris also sought to state his claim as a “collective action” under the FLSA, as permitted by 29 U.S.C. § 216(b).  Predictably, Ernst & Young filed a Motion to Compel Arbitration, and the motion was granted.  The Ninth Circuit reversed, and Morris appealed to the Supreme Court.

At issue in the appeal are three statutory schemes:  the FLSA “collective action” provision; the National Labor Relations Act, 29 U.S.C. § 151 et seq. (“NLRA”); and the Arbitration Act, 9 U.S.C. § 2.  The FLSA permits a “collective action” for violations of the Act.  An aggrieved employee may file the action on behalf of himself, and “other employees similarly situated,” provided those other employees provide and file their consent to join the action.  The NLRA, relevant to this matter, prohibits an employer from barring employees from engaging in “concerted activity”, as that term is defined in the statute.  29 U.S.C. § 157.  The Arbitration Act requires courts to enforce arbitration agreements as written, but, relevant to this matter, includes a “savings clause.”  9 U.S.C. § 2.  The savings clause permits a court to refuse to enforce an agreement to arbitrate upon such grounds as exist at law or in equity for the revocation of any contract.   Morris argued that the court could not enforce the arbitration agreement under the savings clause of the Arbitration Act.  The argument goes that, when applied to this FLSA collective action, the agreement to arbitrate violates the NLRA because it bars the concerted action of pursing claims as a collective action.  More generally, the employees argued that the enforcement of an arbitration provision in this context results in a waiver of the right to bring a class or collective action. 

Some background informed the Supreme Court’s treatment of these three disputes:  in 2010, the National Labor Relations Board expressed the opinion that the validity of agreements to arbitrate “did not involve consideration of the policies of the NLRA.”  In 2012, the NLRB expressed a different view, arguing that the NLRA “nullifies” the Arbitration Act in these types of cases.  Thereafter, some circuits followed the NLRA’s 2012 view, while the Solicitor General took an opposite view in these cases before the Court.  The Supreme Court granted certiori “to clear the confusion.”

However, the Supreme Court’s opinion, authored by Judge Gorsuch for the majority, recognizes little confusion on the issue.  The Court held that the Arbitration Act’s savings clause does not permit a court to refuse to enforce an agreement to arbitrate, and that there is no conflict between the NLRA, the FLSA and the Arbitration Act. Indeed, the Court noted that the problem with the employees’ argument was “fundamental”:  the savings clause applies only to defenses that apply to any contract, and not to defenses that apply only to arbitration.  Morris’ argument was not that his entire employment agreement required revocation on grounds of illegality or unconscionability, but that the arbitration provision required revocation.  Because Morris’ gripe was with the arbitration clause itself, and not the entire agreement, says the Supreme Court, the savings clause does not apply. 

The Supreme Court also rejected Morris’ argument on the basis that, when confronted with two federal statutes addressing the same topic, the Court is not “at liberty to pick and choose” between them, and must find a way for the statutes to live together.  The NLRA, the Court noted, does not mention class or collective actions, and does not refer to the Arbitration Act at all, which was enacted prior to the NLRA. 

Judge Gorsuch notes that the employees’ choice not to argue that the FLSA’s “collective action” provisions require the application of the Arbitration Act’s savings clause demonstrates the flaw in the employees’ position.  Judge Gorsuch notes that the Supreme Court has already held that the FLSA collective action provisions do not prohibit individualized arbitrations, and that every circuit to consider the question has agreed. 

The Court does not stop there:  it offers arguments under the predecessor to the NLRA, takes on the issue of deference to agency determinations, and chides the dissent for its focus on policy over precedent.  Justice Ginsberg notes in a dissent that the majority’s decision is “egregiously wrong.”  In short, neither side recognizes any confusion in the issue, and they arrive at completely different conclusions based on a policy preference.  And, practically speaking, both sides are correct about the stakes for employees.  As Justice Ginsberg notes:  “individually their claims are small and scarcely of a size warranting the expense of seeking redress alone.”  For employees, collective actions provide a way to address FLSA violations in a meaningful and cost-effective way.  For employers, such actions are expensive and disruptive.  The threat of such claims is an incentive to comply scrupulously with the FLSA.  The case thus includes a simple but important lesson for those of us who prepare and review employment agreements.  The arbitration agreement at issue in the Morris case, for example, included a requirement that disputes pertaining to different employees would be heard in separate arbitration proceedings.  Given the Supreme Court’s clear approval of such arrangements, this becomes a powerful clause in an employment agreement.  An agreement that eliminates that risk is valuable to employers, a blow to employees’ rights under the FLSA, and now, unquestionably enforceable.

Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com.  

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