Automotive Industry in 2016: Record Sales! But…

Car Shopping, keys As has been reported all over, it looks like the Automotive Industry will set some sales records in 2016 (see here, here, and here for example). As summarized by JD Power, “The full-year sales forecast of 17.5 million units would surpass the total from 2015 by about 5,000 units. Light trucks figure into the upsurge, along with higher incentives—eclipsing $4,000 per vehicle for the first time on record—as automakers clear out 2016 model-year vehicles.” When read that way, this news is less encouraging than it appears on its face.

Setting sales records is almost never bad. However, if they are set with huge incentives, discounts, and an intention to clear out inventory, that is obviously not any reason to anticipate further growth in 2017. In fact, a deeper dive into the numbers shows some slightly less favorable statistics. For example, the Wall Street Journal reports that “Retail sales, which strip out sales to fleet buyers, such as rental-car companies, were expected to reach 14.1 million units for the year, a 1.2% decline from 14.2 million units in 2015.”

What will 2017 bring?

There is no reason to think that sales will set another record. The Automotive industry is very cyclical and higher incentives, higher inventories and deeper discounts may sell more vehicles in the short run, but often leads to educed profitability and lower sales in the long run. Is your company planning for potential slower sales in 2017? What have you done with your supply chain and customers? If you have not already planned for the second half of 2017, or even that start of 2018, you are likely already behind.

© 2016 Foley & Lardner LLP

President Obama Authorizes Additional Sanctions on Russian Individuals and Entities: Executive Order 13964

Originally, EO 13964 focused on cyber-enabled malicious activities that harmed or significantly compromised the provision of services by entities in a critical infrastructure sector. This included significant disruptions to the availability of a computer or network of computers, or causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.

In light of Russia’s recent use of cyber means to undermine democratic processes, the president has amended the EO to cover additional activities, authorizing sanctions on individuals/entities who tamper with, alter, or cause misappropriation of information with the purpose or effect of interfering with or undermining election processes or institutions. Under this authority, the president has sanctioned nine entities and individuals, including two Russian intelligence services (the GRU and the FSB), four individual officers of the GRU and three companies that provided material support to GRU’s cyber operations.

These new sanctions highlight the importance of regular and diligent screening of transactions, as well as the need to periodically review existing screening practices to ensure that they are up to date. It is critical to remember that an individual who may have been an acceptable business partner one day may be on a sanctions list the next.

©2016 Drinker Biddle & Reath LLP. All Rights Reserved

2016 Tax Court Opinions – A Year In Review

tax court opinionsSeveral notable tax court opinions were issued 2016 dealing with a variety of substantive and procedural matters. In our previous post –  Year in Review: Court Procedure and Privilege – we discussed some of these matters. This post addresses some additional cases decided by the court during the year and highlights some other cases still in the pipeline.

Transfer Pricing

Transfer pricing remains a hot topic in litigation. As discussed here, here and here the Tax Court accepted and rejected taxpayer arguments in several high-profile cases.

We have also written frequently on the 3M case, which involves whether the Internal Revenue Service’s (IRS) blocked income regulations are valid. That case has been submitted fully stipulated to the Tax Court and all briefs have been filed. For prior coverage, see here, here, and here.

Point: Transfer pricing is a point of emphasis with the IRS. Given that slight changes to a taxpayer’s transfer pricing methodologies can produce substantial adjustments, taxpayers need to continue to monitor judicial developments in the area. This includes not only how courts view the arm’s length standard, but also taxpayer challenges to the IRS’s rulemaking authority.

The Administrative Procedures Act and Deference to IRS Interpretations

Following the Supreme Court’s 2011 Mayo opinion, taxpayers have increasingly turned to the Administrative Procedures Act (APA) to challenge IRS actions. In addition to the posts linked above regarding APA challenges in transfer pricing cases, we have written about the QinitiQ and Ax cases dealing with whether an explanation provided in a notice of deficiency is insufficient under the APA. See here and here]. Additionally, the Supreme Court provided guidance in a non-tax case regarding the proper application of the APA in the analysis of the validity of agency regulations.

Another area we have frequently posted on is the level of deference afforded to IRS interpretations. Discussions of general deference principles and cases decided in 2016 can be found here, here, here, here, and here]. Additionally, as we noted here, the Supreme Court recently granted certiorari to decide the limits of Auer deference.

Practice point: Whether the IRS’s position in published or unpublished guidance is afforded deference, and, if so, the appropriate level of deference, is important to taxpayers both in planning their transactions and defending them before the IRS and the courts. This area continues to evolve, particularly in the area of Auer deference, and taxpayers need to be aware of new developments.

Information Reporting Requirements

The IRS’s Offshore Voluntary Disclosure Program remains a tool for noncompliant taxpayers to come to the IRS to resolve outstanding tax reporting matters. For an update on this subject, see here. The release of the Panama Paper in April 2016, which we wrote about here received considerable attention. A recent opinion out of a district court in California also provided more guidance on the willful standard for failure to file foreign information reporting forms. See here.

Practice point: OVDP remains open, but it could be closed by the IRS at any time. Noncompliant taxpayers need to consider all options in this area, and should consider which option might be best depending on their specific situation.

Penalties

The IRS has been increasingly asserting penalties in cases. We recently discussed here some of the penalty procedural rules at issue in the Graev case. We also discussed the substantial authority defense, as applied by the Fifth Circuit in Chemtech Royalty Associates. See here.

Point: Taxpayers who are facing penalty determinations and assessments should consider whether they may have any procedural challenges to the IRS’s method of approval and assessment of penalties, in addition to considering the more standard, substantive defenses like reasonable cause and substantial authority. It is important to adequately document your position prior to taking a tax return position to avoid any initial assertion of penalties by the IRS.

Golden Leash Rule, Say-on-Pay, Form 10-K Summaries: Proxy Season Guide to 2017

SEC proxy seasonAs another year comes to a close, it is time for public companies to become acquainted with the securities law and business developments of the past year to position themselves for success in 2017. Below is a summary of current and anticipated changes that may impact reporting requirements and disclosure regulations for the upcoming 2017 proxy season, along with a review of the 2016 proxy season.

NEW FOR 2017

Frequency Votes for Say-on-Pay

After Jan. 21, 2011, public companies were required to hold an advisory vote regarding the frequency of which say-on-pay votes would occur, which could not be in excess of every six years. Therefore in 2017, many companies will need to include an agenda item for the frequency vote at their annual meeting. Following the vote, companies will need to include the results of the frequency for which say-on-pay votes will be held in their Form 8-K under Item 5.07(b).

SEC Approves NASDAQ’s “Golden Leash Rule”

In July 2016, the SEC approved NASDAQ’s “Golden Leash Rule.” This rule requires listed companies to disclose material terms of any agreement between a director or director nominee and any entity or person other than the company, regarding any amount of compensation or payment related to the director’s service on the board or the director nominee’s candidacy. The “Golden Leash Rule” requires annual disclosure in the companies’ proxy or on its website. The “Golden Leash Rule” became effective Aug. 1, 2016.

Form 10-K Summaries

In July 2016, the SEC issued an interim final amendment to the Fixing America’s Surface Transportation Act, creating Item 16 on Form 10-K allowing companies the option to include a summary of the information included in the Form 10-K. While no previous rule prohibited summaries, most issuers simply included a table of contents with hyperlinks to items in their reports. This rule provides issuers some flexibility when preparing the Form 10-K.

CEO Pay Ratio Disclosure Rule

For the first fiscal year beginning on or after Jan. 1, 2017, companies will need to comply with the SEC’s long-anticipated final rule implementing Section 953(b) of the Dodd-Frank Act, which requires all public companies to disclose the pay ratio between their CEO’s annual total compensation and the annual total compensation of the companies’ “median” employee. However, companies will not be required to include pay ratio disclosures in their proxy statements until 2018. With the exception of smaller reporting companies, emerging growth companies, foreign private issuers, and registered investment companies, all reporting companies will have to disclose their pay ratio. The pay ratio disclosure must be included in any filing that requires executive compensation disclosure under Item 402 of Regulation S-K, which includes registration statements, proxy and information statements, and annual reports on Form 10-K. Even though uncertainty may loom around the viability of Dodd-Frank with President-elect Donald Trump’s transition underway, companies should continue to prepare pay ratio disclosures in anticipation for the 2018 proxy season. The Final Pay Ratio Disclosure Rule is available here.

PROXY ADVISORY FIRM UPDATES

Glass Lewis Updates

Glass, Lewis & Co. (Glass Lewis) recently published its 2017 Proxy Season Guidelines. The guidelines include a number of changes, a summary of which is outlined below.

Director Overboarding. Beginning February 2017, Glass Lewis will implement its policy regarding director board commitments. Glass Lewis will issue negative recommendations for directors that serve on more than five public company boards and company executives that serve on a total of two public company boards, including his or her own.

Governance for Newly Public Companies. For newly public companies, Glass Lewis will recommend against directors and members of governance committees who adopt provisions causing shareholders’ rights to become “severely restricted indefinitely.” Provisions such as anti-takeover mechanisms, including poison pills or classified boards, along with exclusive forum and fee-shifting provisions will all be considered for such recommendations.

Board Self-Assessment. Glass Lewis has updated its views regarding board evaluations to account for director skills and how those skills align with company strategy, as opposed to merely relying on tenure and age. Glass Lewis has further taken the stance that shareholders are better equipped to measure the board’s composition and approach to corporate governance.

Gender Pay Disclosure. Glass Lewis issued a new policy for reviewing companies’ gender pay equity, on a case-by-case basis. Upon review, Glass Lewis will generally recommend proposals requesting greater disclosure where inattention and inadequate policies expose the company to risk.

In its update, Glass Lewis also noted its support for proxy access and the management of environmental and social risks.

A copy of the full Glass Lewis Proxy Season Guidelines is available here.

ISS Updates

Institutional Shareholder Services (ISS) also updated its proxy voting policy guidelines for 2017, which will affect shareholder meetings taking place after Feb. 1, 2017. The guidelines set forth a number of updates:

Director Overboarding. Similarly to Glass Lewis, ISS will also implement its policy regarding director overboarding, establishing the threshold for overboarding to five public boards for directors who are not company executives. The policy for overboarding of company executives threshold will remain at three total boards, including his or her own.

Undue Restrictions. A new ISS policy recognizes shareholders’ ability to amend bylaws as a fundamental right. Under the policy, ISS will vote against or withhold recommendation for members of the governance committee if the company’s charter imposes “undue restrictions” on shareholders’ rights to amend the bylaws. ISS also recognized complete prohibitions on binding shareholder proposals and share ownership requirements beyond the requirements of Rule 14a-8 as being undue restrictions on shareholders’ rights. ISS will generally recommend against governance committee members whose company has any of these provisions in its charter as well.

Unilateral Governance Changes. ISS updated its policy for governance of newly public companies to include consideration for any reasonable sunset provision when issuing recommendations against directors who have adopted charter or bylaw amendments that ISS views as materially adverse to shareholder rights or that implement a multi-class capital structure affording unequal voting rights prior to or in connection with an IPO.

Shareholder Ratification of Non-Employee Director Pay Program. As a result of recent highly publicized lawsuits involving excessive non-employee director compensation, ISS will consider qualitative factors such as the presence of problematic pay practices relating to director compensation and the quality of disclosures surrounding director compensation, when evaluating whether to recommend ratification programs regarding non-employee director compensation.

A copy of the full ISS 2017 Proxy Voting Guidelines is available here.

2016 IN REVIEW

During the 2016 proxy season, proxy access remained the predominant topic for the second consecutive year. In fact, shareholders submitted over 200 proxy access resolutions during the 2016 proxy season. The SEC’s 2010 proxy access rule, Rule 14a-11, provided that a shareholder was eligible to nominate proxy access candidates if the shareholder held at least 3 percent of the voting power for at least three years and was not prohibited from proposing a candidate under law or the company’s governing documents. Although this rule was vacated by the U.S. Court of Appeals for the D.C. Circuit in 2011 for being arbitrary, many shareholder proposals are still based on both Rule 14a-11 and the SEC’s amendments to Rule 14a-8. At the end of June 2016, over 250 companies, with 190 S&P 500 firms, established proxy access rights through voluntary adoptions and negotiated withdrawals. As a result, proxy access proposals continue to drive change and mold standard market terms.

As companies grew in 2016, so did the need to properly assess, implement and maintain internal controls over financial reporting (ICFR) pursuant to Rule 13a-15. ICFR is the process by which public companies provide reasonable assurance to the public that its financial statements are prepared in accordance with GAAP and are ultimately reliable. To comply, the SEC requires an annual management report of the company’s ICFR effectiveness, including disclosure of any material weakness that may create a possibility for the company to be unable to promptly detect or prevent a material misstatement on its financial statements, in Form 10-K. Companies should implement accounting controls designed to mitigate financial reporting risk and regularly evaluate any deficiencies. This is particularly important in light of revenue reporting rules issued by the Financial Accounting Standards Board becoming effective for public companies in 2018 and as new accounting standards are issued.

The comment periods have expired for other proposed changes to incentive-based compensation arrangements, the securities transaction settlement cycle, disclosure of payments by resource extraction issuers, pay-for-performance, hedging disclosure, and clawbacks. These changes have not been finalized. At this time, there is no anticipated date for implementation of these policies, so there will be no effect on 2017 filings.

OTHER SECURITIES LAW DEVELOPMENTS

Exemptions to Facilitate Intrastate and Regional Securities Sales and Offerings

In October 2016, the SEC adopted its final rule modernizing the existing intrastate offering framework by implementing amendments to Rule 147 under the Securities Act of 1933. The SEC’s amended Rule 147 provides a safe harbor under Section 3(a)(11) for issuers organized and principally doing business within a single state to offer and make sales of securities to resident purchasers of the same state. The amendments allow companies to raise money from investors within their state without simultaneously registering the offer and sale at the federal level.

The SEC’s new Rule 147A will expand the safe harbor to issuers that maintain a principal place of business in a different state from where it is incorporated and permit issuers to offer and make sales to residents in the state where it operates. Under Rule 147A, issuers will also be able to make offers across state lines, but sales remain limited to residents of the state.

The final rule also repealed Rule 505 and expanded Rule 504 of Regulation D, by increasing the aggregate amount of securities that may be offered and sold in any 12-month period from $1 million to $5 million. Additionally, the final rule disqualifies certain bad actors from participation in offerings under Rule 504. Through these amendments, the SEC sought to facilitate issuers’ capital raising efforts and provide additional investor protections.

Rule 147 and new Rule 147A will be effective on April 20, 2017. The amendments to Rule 504 will be effective on January 20, 2017. The removal of Rule 505 will be effective on May 22, 2017. All other amendments will be effective on May 22, 2017. The final rules are available here.

Supreme Court Decides First Insider Trading Case in Decades: Salman v. United States

In December 2016, after 20 years without a decision regarding the scope of insider trading, the Supreme Court held that even when no financial or tangible benefit is received, insider trading may arise when a tipper makes a “gift” of confidential information to a friend or relative, in Salman v. United States, No. 15-628 (U.S. Dec. 6, 2016). Although the tipper received no physical benefit from providing the information to the tippee, the Supreme Court found that the personal benefit received from bestowing a “gift” of confidential information to a family member or friend was enough for conviction, thus paving a smoother path for prosecutors seeking conviction.

The Supreme Court relied on the “personal benefit test” established in the seminal 1983 case Dirks v. SEC, 463 U.S. 646 (1983) but declined to clarify the scope of the “personal benefit test.” Additionally, the Supreme Court expressly rejected the Second Circuit’s decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which held that the government must prove that a tippee knew an insider received a personal benefit in exchange for disclosing confidential information, and any benefit received must be sufficiently consequential. While the Supreme Court only narrowly expanded the “personal benefit test” in Salman, it rejected the government’s argument that a gift to “anyone” satisfies the “personal benefit test” potentially providing for a distinction between disclosures to friends and family and those to market professionals. The Salman opinion can be found here.

Mutual Funds/Investment Companies: Rule 22e-4 and Swing Pricing

In October 2016, the SEC adopted its final Rule 22e-4. This new rule requires mutual funds and registered open-end management investment companies, including open-end exchange-traded funds (ETFs) to create a liquidity risk management program, in order to reduce the risks associated with fund redemption obligations. The liquidity risk management program must include periodic review of a fund’s liquidity risk, classification of the liquidity of fund portfolio investments, determination of a highly liquid investment minimum, a limitation on illiquid investments, and board oversight. The rule also permits open-end funds, excluding ETFs and money market funds to use swing pricing, which allows funds to adjust their net asset value per share in order to pass on the costs associated with trading activity to purchasing and redeeming shareholders. The rule requires board approval and periodic review of the funds’ swing factor upper limit and swing threshold. Companies will need to comply with the new Rule 22e-4 beginning on or after Jan. 17, 2017 and access to swing pricing will become available Nov. 19, 2018. The final rule is available here.

Investment Company Reporting Modernization

In October 2016, the SEC adopted new forms and amendments to modernize the reporting and disclosure requirements for registered investment companies. Form N-PORT, a new monthly reporting form requires registered funds other than money market funds to provide portfolio-wide and position-level holdings data. Reporting requirements include data related to the pricing of portfolio securities, information regarding repurchase agreements, securities lending activities, counterparty exposure, terms of derivatives contracts, and portfolio level and position level risk measures, to the SEC on a monthly basis. Form N-CEN will require registered investment companies to annually report certain census-type information as well. Finally, the SEC is adopting amendments to Forms N-1A, N-3 and N-CSR to require certain disclosures regarding securities lending activities. Collectively, these amendments will enhance investors’ ability to use and analyze data to ultimately make more informed investment decisions. The rule becomes effective Jan. 17, 2017, and most funds will be required to begin filing new Forms N-PORT and N-CEN after June 1, 2018. The final rule is available here.

Universal Proxy

In October 2016, the SEC proposed changes to the proxy rules requiring the use of universal proxy cards during a contested election. During a proxy contest, the proposal would require proxy contestants to provide shareholders a proxy card with the names of management and dissident director nominees listed. Similar to voting in person, the proposal would give shareholders the ability to vote for their preferred combination of board candidates through proxy. The proposal aims to remedy shareholders’ current inability to combine nominees to create their own slate during a contested election. The comment period for the proposal ends Jan. 9, 2017.

© 2016 Dinsmore & Shohl LLP. All rights reserved.

Register for the 24th Annual Marketing Partner Forum January 25-27: Client Collaboration & the New Rules of Engagement

In January 2017, Marketing Partner Forum returns to Terranea Resort in Rancho Palos Verdes, CA for a three day summit on law firm marketing and business development set against the breathtaking Southern California shoreline. Marketing Partner Forum will welcome law firm marketing partners, rainmakers, practice group heads, business development leaders and esteemed corporate counsel for a dynamic and vibrant conference designed for the industry’s most experienced professionals.

Call to register: 1-800-308-1700

Or click here to email and we will contact you.

For more information, click here.

Terranea Palos Ranchos Verdes Marketing Partner ForumWhy You Should Attend

Marketing Partner Forum is designed for client development partners, rainmakers, and the senior-most legal marketing and business development professionals across the legal industry. Our content reflects the experience and sophistication of our international audience in terms of rigor, ambition and scope. Attendees can expect to hear from venerable thought leaders both within and outside of the legal industry. Enjoy ample networking opportunities and the stunning scenery, golf course, spa and hiking trails at one of California’s most picturesque resorts. Take advantage of our brand new Marketing Partner Conference Track consisting of several compelling sessions designed specifically for the law firm partnership. Interact directly with senior clients and network for new business. Explore the brand new Marketing Partner Forum Technology Fair. Bring your family to our Thursday night reception and Friday Bloody Mary Brunch. Depart the event with practical takeaways to share with peers and firm leadership.

Fifth Circuit Judge Blocks Rule That Would Ban Arbitration in Nursing Home Disputes

nursing home arbitrationA federal district court recently issued a preliminary injunction barring enforcement of a rule prohibiting the use of pre-dispute arbitration agreements with patients in long-term care facilities that participate in Medicare and Medicaid programs.

The new rule, promulgated by the Centers for Medicare and Medicaid Services (CMS), would have taken effect on November 28, 2016. It would have prohibited (1) entering into pre-dispute arbitration agreements and, (2) requiring the signing of an arbitration agreement as a condition of admission. The injunction was granted by U.S. District Court Judge Michael P. Mills, who sits in the Northern District of Mississippi, at the request of members of the nursing home industry to stop the rule from taking effect while it is being challenged in court. In their lawsuit, the American Health Care Association and four other state and local health care groups are claiming that CMS and the Department of Health and Human Services are overstepping their authority in issuing the rule. Specifically, the plaintiffs contend that Congress has repeatedly rejected legislation to invalidate arbitration agreements, and further argue that the rule isn’t necessary to protect the health and safety of nursing home residents.

In entering his order, Judge Mills did concede that the CMS rule does appear to be based on “sound public policy.” As some residents of nursing homes suffering from ailments such as dementia and the like might not have the capacity to grasp what an arbitration agreement entails, in addition to the fact that there is stress upon nursing home residents and their families that is inherent to the admissions process, it can be argued that arbitration and the nursing home admissions process do not belong together.

However, in granting the injunction, Judge Mills stated that, as sympathetic as the court may be to the public policy considerations that motivated the rule, it is not willing to allow the federal agency to overstep its executive authority and “engage in a rather unprecedented exercise of agency power. The court is unwilling to play a role in countenancing the incremental ‘creep’ of federal agency authority beyond that envisioned by the U.S. Constitution.”

The nursing home industry has said that arbitration offers a less costly alternative to court. Facilitating more lawsuits, the industry has said, could drive up costs, forcing some nursing homes to close. Lawyers representing residents, however, state that people being admitted to nursing homes are often at the most stressful juncture of their lives, and are not equipped or capable of understanding what it is they are being asked to sign. Regardless of whether one believes striking down the rule would help the nursing home industry reduce its legal costs, or that the rule assists the families of nursing home residents in getting justice, it is clear that the court’s grant of the injunction as well as the impending decision in the underlying case will have an impact upon the future of the nursing home industry.

© 2016 Heyl, Royster, Voelker & Allen, P.C

You’re Hired: Labor Policy Under Trump Administration and 115th Congress

labor policy trump administrationIf personnel reflect policy, President-elect Donald Trump’s selection of Andrew Puzder as the next Secretary of Labor signals a turning point for labor and employment policy.  The Chief Executive Officer of CKE Restaurants, Mr. Puzder has been critical of many of the Obama administration’s labor initiatives.  His efforts to carry out Mr. Trump’s job creation agenda will likely intersect with action in Congress and in the courts, where several pivotal labor-related cases are currently being heard on appeal.  These dynamics mean that the early days of the Trump administration and the 115th Congress will be a time of flux for employers, with changes to existing regulations and new legislative and regulatory initiatives.  This article details several of the most important policy areas that are likely to undergo change.  Employers should consider engaging in the policymaking process now to help shape legislation and regulations.

New Players, New Priorities

As the leader of a major fast-food company, Mr. Puzder brings a “real-world” perspective on how policy decisions affect employers and employees.  He has been a vocal critic of several Obama-era labor initiatives, especially its activities with respect to the joint employer standard, expanded eligibility for overtime pay and paid leave, among others.

Mr. Puzder’s views on these topics are largely in alignment with the Republican leadership of the Congressional committees with jurisdiction over labor and employment issues.  On the House Education and Workforce Committee, Representative Virginia Foxx (R-NC) is expected to become the new Chair following the retirement of current Chair John Kline (R-MN).  Representative Foxx has promised “to do whatever [Republicans] can to stop the rules coming out of the [Obama] Labor Department – either block them or repeal them.”  She has named the repeal of the Department’s overtime and persuader rules as top priorities, in addition to the National Labor Relations Board’s (NLRB) broadened joint employer standard and rules related to the union election process.  Representative Bobby Scott (D-VA) will remain the Ranking Member on Education and Workforce.

In the Senate, Senator Lamar Alexander (R-TN) will remain the Chairman of the Senate Health, Education, Labor, and Pensions Committee (HELP), while Senator Patty Murray (D-WA) will continue to serve as the top Democratic or ranking member.

Overtime Rule

One of the key labor policies that Mr. Puzder, Rep. Foxx, and their Republican colleagues may consider for reform are the Obama administration’s initiatives with respect to overtime pay.  The overtime rule, which was published in the Federal Register on May 23, 2016, revises income thresholds for determining overtime pay for executive, administrative, professional, outside sales, and white collar employees exempt from regular minimum wage and overtime pay requirements, and raises the cut-off salary of employees eligible for overtime pay from $23,660 to $47,476 per year.  The rule was due to become effective on December 1, 2016.

However, a U.S. District Court Judge in Texas on November 22 issued a nationwide preliminary injunction blocking implementation of the overtime rule, just a few days before its December 1 effective date.[1] This preliminary injunction has given businesses that had not yet moved to comply with the new rules a respite from updating their systems and notifying employees.  In turn, knowing that some businesses have not yet had to comply, Congress has now prioritized repeal of the overtime rule as an early order of business in 2017.

Under complex procedural rules, repeal of the overtime rule could possibly be accomplished through use of the Congressional Review Act (CRA).  CRA is a 1996 law that allows Congress to repeal new “major rules” through an expedited resolution of disapproval as long as those regulations were issued within sixty legislative days in the House or session days in the Senate of the start of the new administration.  With the House and Senate still holding occasional pro forma sessions into mid-December, the Overtime Rule is in a grey area of the CRA window, and the final determination will be made by the Office of the Clerk.  Notably, the Senate Republican Policy Committee has identified the Overtime Rule as a potential candidate for review under the CRA.[2]

Paid Leave

Another key issue is the Department of Labor’s (DOL’s) final September 2016 rule implementing President Obama’s Executive Order 13706 to require federal contractors and subcontractors to provide certain employees with up to seven days of paid sick leave annually.  President-elect Trump has not made any statements regarding his position on mandated paid sick leave for federal contractors.  Delivering on a broad campaign promise to rescind executive orders issued by President Obama, it is possible that President-elect Trump may repeal the executive order, along with other Obama executive orders, during his first weeks in office.

On the other hand, the Trump administration and 115th Congress also could address issues surrounding paid leave.  During the campaign, the President-elect proposed six weeks of mandatory paid maternity leave, as well as tax incentives to support child and elder care.  Although the details of the plan, including what percentage of their salaries mothers will receive, have yet to be clarified, it could offer an opportunity for Democrats and Republicans to find common ground.

Minimum Wage

President-elect Trump has not taken a strong position on the federal minimum wage and has indicated an openness to an increase in the minimum wage as recently as July 2016.

Federal minimum wage legislation was last considered by Congress in April 2014, but the Minimum Wage Fairness Act could not garner enough support in the Senate to proceed to a vote.  This act would have gradually raised the federal minimum wage from $7.25 to $10.10 per hour over a two-year period.  Notably, there were attempts at compromise, which although unsuccessful could serve as a foundation in the case the issue moves forward, perhaps prompted by state-by-state action.[3] For example, Senator Susan Collins (R-ME) proposed to increase the federal minimum wage to $9 per hour, a wage that the Congressional Budget Office had projected would greatly reduce the negative impact on jobs.[4]

A Trump administration may look favorably towards an increase in the minimum wage — indeed, in a television appearance Mr. Puzder said that he was “not opposed to raising the minimum wage rationally.”  However, Congressional Republicans have generally not voiced support for increasing the minimum wage, so prospects for action remain unclear.

Joint Employer Standard

Mr. Puzder and Rep. Foxx will likely prioritize the NLRB’s joint employer standard for repeal.  The NLRB ruling broadens the standard for who is considered an employer from the company that is currently exercising control, to any company with authority to exercise control over the employee.  The result is that when two or more companies are involved with a worker — such as a temporary employment agency and the current employer — they may be considered joint employers.  The implication of this change is that it creates stronger grounds for organizing unions that represent workers at both of the joint employers, thus giving employees more leverage.  The change also increases exposure to liability because a company can now be held liable for labor violations committed by sub-contractors, franchisees, and other companies to which it outsourced responsibilities.

The issue remains unsettled into the next administration because the underlying case that prompted the NLRB decision is currently on appeal in the D.C. Circuit.[5]  In Congress, HELP Committee Chairman Lamar Alexander (R-TN) and House Education and the Workforce Chairman Kline introduced a bill to repeal the changes to the joint employer standard created by the NLRB’s ruling in Browning-Ferris Industries.  The Protecting Local Business Opportunity Act provides potential models for the next Congress.  The legislation would reaffirm that multiple employers must have “actual, direct, and immediate” control over employees to be considered joint employers, rather than the “indirect” or even “potential” control over employment decisions permitted under the NLRB’s new joint employer standard. Because the broadened standard was established by an NLRB ruling, it would require either future litigation or legislative action to overturn.

Additionally, the Committee on Education and the Workforce has been focusing its attention on this issue in part by conducting a year-long investigation of the Occupational Safety and Health Administration (OSHA) joint employer standard, which, they claim, instructs OSHA’s inspectors to “delve into unrelated matters – financial and otherwise – far outside their expertise,” and drifts from the agency’s core mission of examining workplace health and safety in a way that benefits union leaders.  In October, the Committee wrote a letter to Labor Secretary Thomas Perez expressing these concerns.

Persuader Rule

In March of this year, the DOL finalized its much-anticipated “persuader rule,” which requires employers to report any third-party arrangement entered into with the goal of persuading employees, whether directly or indirectly, regarding their right to organize or bargain collectively.  Critics of the rule argue that it will have a chilling effect on employer speech and prevent employers from hiring legal counsel or speaking on labor issues.

Since its passage, the persuader rule has faced significant hurdles in the form of lawsuits challenging its enforcement as unconstitutional, unlawful, and exceeding DOL’s authority.  Although it was set to go into effect July 1, a U.S. District Court judge in Texas granted a nationwide preliminary and later permanent injunction against enforcement of the rule.[6] The DOL is appealing the injunctive relief to the U.S. Court of Appeals for the Fifth Circuit.[7] However, since the persuader rule is based on an administrative determination of the DOL, it is likely that Trump administration changes in DOL priorities or personnel would moot the appeal at some point.  Relying in part on the assumption that a Trump DOL would abandon the rule and the permanent nationwide injunction issued in Texas, a federal judge in Minnesota faced with a similar case recently stayed that litigation, despite his earlier decision not to grant injunctive relief.[8] The split suggests that the issue could ultimately make its way to a federal court of appeals or to the Supreme Court.

Blacklisting Rule

Another DOL regulation following a path similar to that of the Persuader Rule is the DOL’s guidance for implementing E.O. 13673, Fair Pay and Safe Workplaces.  The DOL’s rule is popularly referred to as the “Blacklisting Rule,” and it was published on August 25, 2016.  E.O. 13673 requires that federal contracting officers consider a contractor’s compliance with certain federal and state labor laws as part of the determination of contractor responsibility in awarding federal contracts. The Blacklisting Rule requires that federal contractors bidding over $500,000 report violations of fourteen different labor laws, as well as similar state laws, to the federal government.  Contractors are obligated to report violations even if they are still being contested in court.

The rule was due to become effective on October 25, but just two days before that date, the U.S. District Court for the Eastern District of Texas granted a temporary injunction blocking parts of the rule from going into effect. Judge Marcia Crone ruled that the portion requiring disclosure of labor law violations — even if those violations are being challenged in court or have been settled without any actual violation of the law — was in violation of the First Amendment.[9]  While the injunction is temporary, it demonstrates that the court is likely to eventually rule in favor of the plaintiffs, Associated Builders and Contractors, and strike down the rule.  The ruling left intact the rule’s paycheck transparency provision, which requires employers to note on paychecks information such as whether the person is an independent contractor or an employee under the Fair Labor Standards Act.

In the event that the injunction is lifted, Congress may pursue repeal of the Blacklisting Rule through use of the CRA.  Since the rule was published on August 25, it falls within the CRA’s sixty-legislative or -session day window.  Similar to the Overtime Rule, the Senate Republican Policy Committee has identified the Blacklisting Rule as a potential candidate for review under the CRA.[10]

Predictive Scheduling

Proposed legislation to regulate work schedules has emerged at the state and local levels in the wake of San Francisco’s enactment of its “Retail Workers Bill of Rights” ordinance in November 2014.  A similar law, which applies to retail and food service establishments employing 500 or more workers, will take effect in Seattle on July 1, 2017.  The provisions of these scheduling laws vary, but most require employers to give good faith estimates of an employee’s work hours in advance and provide additional compensation to employees whose hours are changed on short notice, among other provisions.

Proposals similar to the San Francisco and Seattle laws are pending in state legislatures in California, Connecticut, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New York, Oregon, and Rhode Island, as well as in major cities like New York and at the federal level.

In the event state and local scheduling laws begin to gain momentum, the Republican majorities in the House and Senate could advance federal legislation to preempt such efforts. As a veteran of the fast-food industry, which has been a target of the push for restrictive scheduling, Mr. Puzder could be sympathetic to calls for a federal solution that balances the interests of employers and employees.

Conclusion

The Trump administration and leadership of the 115th Congress are charting a different course with respect to labor and employment policy than the outgoing Obama administration on the issues described above as well as many others.  The incoming administration and Congress will almost certainly advance efforts to repeal some of the Obama administration’s key labor and employment initiatives, and Congress will also position itself to react to state-based initiatives and legal challenges.  These developments promise a period of changing obligations for employers, as well as opportunities to shape the future of this important policy area.

Labor Regulation/Issue Status Options for Repeal/Change
Overtime Rule Under temporary injunction
  • Possibly CRA repeal
  • Congressional action
  • Final court ruling
Paid Leave for Federal Contractors Obama executive order and DOL implementing regulation passed
  • President-elect Trump can repeal with an executive order
Federal Paid Leave Legislation Currently none
  • Congressional action
Federal Minimum Wage Currently $7.25; no pending Congressional action
  • Congressional action
Joint Employer Standard NLRB ruling issued, currently on appeal in the D.C. Circuit
  • Congressional action
  • Final court ruling
Persuader Rule Under permanent injunction
  • Congressional action
  • Final court ruling
Blacklisting Rule Under temporary injunction
  • CRA repeal
  • Congressional action
  • Final court ruling
  • Reversal of underlying executive order
Predictive Scheduling This is currently being handled at the state and local level
  • Congressional action
Copyright 2016 K & L Gates

[1] State of Nevada v. U.S. Dep’t of Labor, No. 4:16-CV-00731 (E.D. Tex. Nov. 22, 2016).

[2] Reining in Obama Regulatory Overreach, SENATE REPUBLICAN POL’Y COMM. (Dec. 6, 2016).

[3] Alexander Bolton, Centrist Republicans Cool to Minimum Wage Hike Compromise, THE HILL (Apr. 4, 2014 6:00AM).

[4] Id.

[5] Browning-Ferris Indus. of California, Inc. d/b/a Newby Island Recyclery, 362 NLRB No. 186 (Aug. 27, 2015).

[6] Nat’l Fed’n of Indep. Bus. v. Perez, Case No. 5:16-cv-00066-C (N.D. Tex. June 27, 2016) (preliminary injunction); Nat’l Fed’n of Indep. Bus. v. Perez, Case No. 5:16-cv-00066 (N.D. Tex. Nov. 16, 2016) (permanent injunction).

[7] Lawrence E. Dubé, DOL Persuader Rule Blocked by Federal Judge, BLOOMBERG BNA (Nov. 17, 2016) https://www.bna.com/dol-persuader-rule-n57982082867/.

[8] Vin Gurrieri, Persuader Case Halted Pending Trump DOL Action, LAW 360 (Dec. 8, 2016, 6:27 PM), https://www.law360.com/articles/870551/persuader-case-halted-pending-trump-dol-action;  Labnet, Inc., d/b/a Worklaw Network v. U.S. Dep’t of Labor, Case No. 16-CV-0844 (PJS/KMM) (D. Minn. June 22, 2016) (stay of proceedings issued on Dec. 7).

[9] Assoc. Builders and Contractors of Southeast Texas v. Anne Rung, Administrator, Office of Fed. Procurement Policy, Office of Mgmt. and Budget, Case No. 1:16-CV-425 (E.D. Tex. Oct. 23, 2016).

[10] Reining in Obama Regulatory Overreach, SENATE REPUBLICAN POL’Y COMM. (Dec. 6, 2016) http://www.rpc.senate.gov/policy-papers/reining-in-obama-regulatory-overreach.

San Marcos, Texas Joins Growing Ranks of Cities Raising Minimum Wage to $15 Dollars

San Marcos Texas Minimum wageTaking its cue from other, larger cities, San Marcos, Texas, recently voted to raise the minimum wage to $15 dollars per hour for businesses applying for tax breaks and others incentives to build or expand in the city. In addition to the higher wage, businesses must also offer all employees and their dependents benefits equal to those offered to full-time employees. The San Marcos City Council saw requiring the higher pay rate as a way businesses could return the favor of receiving tax incentives to the local economy. This new law applies only to future businesses seeking economic development incentives, and not companies already doing business in San Marcos.  The city joins the ranks of cities such as Los Angeles, Seattle, San Francisco, and Washington, D.C. that require a “living wage.”

Key Takeaways for Businesses in San Marcos

Businesses seeking tax incentives to build or expand in San Marcos need to be prepared to pay a higher minimum wage and offer benefits to all of employees. This trend is likely to continue in other cities across the nation.

© 2016, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.

New Partnership Tax Audit Rules: Ready or Not, Here They Come!

IRS partnership tax auditOn November 2, 2015, the Bipartisan Budget Act of 2015, (the Act), H.R. 1314, 114 Congress/Public Law No. 114-74, made significant changes to the rules governing US federal income tax audits of partnerships (New Audit Rules). The New Audit Rules are codified at Internal Revenue Code Sections 6221 through 6241. On August 4, 2016, the IRS released temporary and proposed regulations relating to certain aspects of the New Audit Rules. And, on December 6, 2016, technical corrections to the New Audit Rules (Technical Corrections) were introduced in both the House of Representatives, H.R. 6439, and in the Senate, S. 3506.

The New Audit Rules take effect for taxable years beginning on or after January 1, 2018, and are intended to facilitate Internal Revenue Service (IRS) audits and adjustments with respect to certain types of partnerships. In the wake of the New Audit Rules, all partnerships should evaluate whether their agreements (existing as well as those in the negotiation stages) address the new rules.

The New Audit Rules apply broadly to partnerships with 11 or more partners at any one time during the tax year. A partnership is also subject to the rules if any of its partners is a partnership, a limited liability company which is treated as a partnership or as a disregarded entity (it is expected that additional guidance will be released in the future to allow a “look through” to the regarded member of a disregarded entity, but that guidance has not yet been issued), a trust, a nominee, a nonresident alien or an S corporation. Partnerships with 100 or fewer partners, however, may be eligible to elect out of the New Audit Rules. Recommended Action: The partnership agreement should address the election out and if the election out is intended to be perpetual, the agreement might include a covenant to remain under 100 partners.

The New Audit Rules provide for tax adjustments at the partnership rather than the partner level. Technical Corrections would focus the adjustments to amounts or items relevant in determining the income tax liability of any person (e.g., partnership items, affected items, and computational items). Mechanically, the partnership may cause its current partners to bear the tax liability or may “push out” the tax liability to the persons who were partners during the reviewed year. The election must be made no later than 45 days after receipt of a notice of final partnership adjustment. If the push out election is made, the interest rate on imputed underpayments is determined at the partner level and is 2 percent higher than the rate for imputed underpayments which are not pushed out. Technical Corrections would provide guidance with respect to the push out election for tiered partnerships. Recommended Action: Consider whether the push out election should be mandatory, and if so, amend the partnership agreement accordingly.

The TMP is no more! Under the New Audit Rules, the partnership designates a “partnership representative.” The partnership representative has the sole authority to act on behalf of the partnership in an audit. The partnership and the partners are bound by the actions taken by the partnership representative on behalf of the partnership. The partnership representative does not need to be a partner in the partnership. Recommended Action: Consider amending the partnership agreement to define the standards for selecting, terminating and replacing the partnership representative. Consider amending the partnership agreement to require the partnership representative to consult with the partners with respect to key issues, such as extending the statute of limitations, settling an audit, filing a petition for readjustment and making the push out election.

A partnership may elect to apply the New Audit Rules to any of its partnership returns filed for a partnership taxable year beginning after November 2, 2015, and before January 1, 2018. Temporary Regulations § 301.9901-22T provide time, form and manner for a partnership to elect into the New Audit Rules. Recommended Action:  Consider whether there is any benefit to electing to apply the New Audit Rules before the mandatory application date. The benefits of electing early application of the New Audit Rules may include a more efficient audit process and the ability to cause current year partners to bear the tax liability following an adjustment. If your partnership is tiered with partnerships as partners, electing into an entity level tax may obviate the need to issue amended Forms K-1 and having to amend multiple federal and state returns due to an IRS adjustment.

© 2016 McDermott Will & Emery

Innovation, Change and Accountability: A Way Forward for Law Firm Leadership

Law firms across the country are facing a crisis in leadership, but many of them don’t know it yet.  Despite all the challenges discussed in Part 1 of this series, many law firms, especially small and mid-sized firms,  are not changing their strategies, in fact, they keep on doing the same old things.

law firm leadership and governance

Many law firms are structured where decisions are made based on consensus, and the Managing Partner is tasked with conducting the orchestra–managing the processes, focusing on firm administration and the tasks the firm is working on.  Even though this decision and execution process is clunky, no one seems to be leaving it behind.  According to Re-Envisioning, “Most MPs enjoy the positive aspects of the MP role, but many don’t seem to want accountability or to be responsible for holding others accountable for getting results.”  Tough conversations are not had, problems are not addressed, and necessary changes are not being made because Managing Partners are not empowered to focus on the right things.  David Maister, author of True Professionalism, says, “What worries me most is not that today’s law firm leaders are often imperfect in fulfilling the role, but rather than many of them aren’t even aiming at it.”

law firm leadersHow can law firms change their leadership structure to be more like a business?

As we discussed in Part 1, one of the major recommendations of Re-Envisioning is changing the Managing Partner to a CEO, in name and in function.  This requires the MP to act more as a CEO–focusing on having tough conversations to ensure client service is provided at the highest level, and that results and profits are being made.  One suggestion is that the MP/CEO have a formal job description.  Of the MPs surveyed for Re-Envisioning, 53% indicated that they did not have a formal job description, and an additional 20% indicated that one existed, but that it was not closely followed.  In fact, only 19% of respondents indicated that they had a written job description and that it was followed, and of those 19%, 93% said that they liked having a job description–that it gave them something to “focus on.”  Armed with a title change and a job description, CEO’s are better equipped to move the firm forward in the direction it needs to go.

Other changes that can help re-shape the firm’s culture can be achieved through the Executive Committee.  Hiring a Chief Operating Officer and giving him or her a strong voice on the leadership team can help the firm keep eyes on the prize.  Additionally, Re-Envisioning suggests morphing the Executive committee so “it functions like a CEO’s senior leadership team.”

To function like a leadership team the executive committee needs to do the following:

  1. Oversee firm-wide strategic priorities
  2. Members would be elected for terms by owners on a staggered basis
  3. But with no term limits for committee members.  If someone is doing a good job in a position, you want them to keep doing a good job in that position.law firm managers managing partner

What kind of firm culture should the executive committee strive for?

Innovation, Change and Accountability are things the Executive Committee should promote in the firm.  The new culture of legal services demands creative thinking, an ability to adapt to shifting circumstances, and a willingness to hold everyone accountable for achieving results.  But what does that mean in practice? Innovation as a value will reward creativity and taking risks to find better ways to accomplish things–and looks at everything, all processes and asks “why do we do it this way?” and most importantly, makes changes as needed.  With Change, the firm and its leaders are open to new ideas, conflicting opinions and constructive feedback, always looking for better solutions and embracing changes that improve results and profitability.

Finally, accountability means the CEO:

  1. Holds himself or herself to high standards and achieving results
  2. Communicates expectations of executive committee members, stakeholders/owners and members of the firm
  3. Identifies the need for change and makes adjustments when necessary
  4. Quickly and firmly addresses problematic partners and underperformers
  5. Build trust in order to enact changes
  6. Emphasize clients first, firm second, individuals third as a guiding principle
  7. Expect others to follow his or her lead and hold others accountable for achieving results and performing at a high level

It’s clear that there is plenty of work to do in law firm leadership.  To achieve the objectives of re-orienting law firm leadership to a CEO structure, and to encourage the adoption of innovation, change and accountability as firm-wide principles, law firm leadership needs to set priorities. The survey results that Re-Envisioning was based on indicate that the top 3 contributions that leaders should focus on were Strategic objectives, being a Change agent, and making the tough decisions and holding people accountable.  These objectives can help law firm leaders make the changes in their firms that need to be made.

These recommendations may seem daunting, or a huge disruption of firm life, however, they are the changes the new industry demands.  Terry Isner, President of Marketing and Business Development at Jaffe says, “Law firm leadership isn’t about boots on the ground anymore–it’s a 10,000 foot perspective with 360-degree views of the firm, its clients and the industry as a whole at all times.  It’s being able to adapt to change quickly and making hard choices that will inspire and empower greatness.”

 law firm leaders

This is NLR’s second article on the report  Re-Envisioning the Law FIrm: How to Lead Change and Thrive in the Future  developed by the Managing Partner Forum, Jaffe, and The Remsen Group and released on December 8th.  You can read the first article here.