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SEC Approves NYSE, NYSE MKT and NASDAQ Compensation Committee Listing Standards

The National Law Review recently published an article by Jeff C. Dodd and Scott L. Olson with Andrews Kurth LLP regarding, SEC regulations:

The Securities and Exchange Commission (SEC) recently approved amendments to the compensation committee listing standards of the New York Stock Exchange (NYSE),¹ the NYSE MKT² and the NASDAQ Stock Market (NASDAQ)³ that were initially proposed in September 2012 to comply with Rule 10C-1 of the Securities Exchange Act of 1934.⁴ In approving the listing standards, the SEC did not require any changes to the exchanges’ proposals, as amended.

The new listing standards will impact the authority and responsibilities of compensation committees with respect to their advisers and the independence analysis for compensation committee members. Although the SEC has approved the new compensation committee listing standards, issuers with listed equity securities subject to the new standards will have time to comply as follows.

NYSE- and NYSE MKT-listed issuers have until:

the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the enhanced compensation committee independence standards; and
July 1, 2013 to comply with the remaining standards (e.g., the authority to retain and fund advisers to the committee and the responsibility to consider specified independence factors before selecting or receiving advice from advisers).

NASDAQ-listed issuers have until:

July 1, 2013 to establish in the compensation committee charter, board resolutions or other board action the compensation committee’s new responsibilities and authority (i.e., the authority to retain and fund advisers to the committee and the responsibility to consider specified independence factors before selecting or receiving advice from advisers); and
the earlier of their first annual meeting after January 15, 2014, or October 31, 2014, to comply with the remaining standards (e.g., have a formal compensation committee of at least two independent directors, have a compensation committee charter and satisfy the enhanced compensation committee independence standards).

Current compensation committee listing standards will apply pending the transition to the new standards.

Click here to read about key aspects of the NYSE’s new compensation committee listing standards.

Click here to read about key aspects of the NYSE MKT’s new compensation committee listing standards.

Click here to read about key aspects of NASDAQ’s new compensation committee listing standards.

Click here to read about practical considerations for NYSE-, NYSE MKT- and NASDAQ-listed issuers to consider in response to the new compensation committee listing standards.

NYSE Compensation Committee Listing Standards

Committee charter requirements for compensation committee authority and responsibilities regarding its advisers. In addition to current NYSE charter requirements, compensation committee charters must specify the following:

the committee’s authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, legal counsel or other adviser (collectively referred to throughout the discussion of the NYSE’s new listing standards as advisers);
the committee’s direct responsibility for the appointment, compensation and oversight of the work of any adviser retained by the committee;
the issuer’s responsibility to provide for appropriate funding (as determined by the committee) for the payment of reasonable compensation to any adviser retained by the committee; and
the committee’s responsibility to conduct an independence assessment before selecting or receiving advice from an adviser to the committee (as discussed in more detail below under “Assessment of adviser independence”).

The new authority and responsibilities regarding advisers do not:

require the compensation committee to implement or follow its advisers’ advice or recommendations; or
affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

Assessment of adviser independence. As noted above and subject to limited exceptions discussed below, before selecting or receiving advice from an adviser (for compensation or non-compensation matters and regardless of who retained the adviser), the compensation committee must consider all factors relevant to that adviser’s independence from management, including:

the provision of other services to the issuer by the adviser’s employer;
the amount of fees received from the issuer by the adviser’s employer, as a percentage of the employer’s total revenue;
the policies and procedures of the adviser’s employer that are designed to prevent conflicts of interest;
any business or personal relationship between the adviser and a compensation committee member;
any issuer stock owned by the adviser (as the SEC noted in its adopting release for Rule 10C-1, it interprets this to include stock owned by the adviser’s immediate family members); and
any business or personal relationship between either the adviser or the adviser’s employer and an issuer’s executive officer (as the SEC noted in its adopting release for Rule 10C-1, this would include, for example, situations where an issuer’s CEO and the adviser have a familial relationship or where the CEO and the adviser or the adviser’s employer are business partners).

These factors are considerations for the compensation committee rather than bright-line standards. Although compensation committees must consider the specified factors, they are also responsible for identifying and considering all additional factors relevant to an adviser’s independence from management. After conducting the required independence assessment, compensation committees may select or receive advice from any adviser they prefer, even those that are not independent.⁵ In response to comments that compensation committees should be specifically required to also consider whether an adviser requires a contractual agreement to indemnify the adviser or limit the adviser’s liability, the NYSE noted that it is not apparent that the existence of such indemnification agreements or contractual limitations on liability is relevant to an independence analysis.⁶

Compensation committees must conduct the independence assessment for any adviser that the committee selects or receives advice from, other than:

in-house legal counsel; and
any adviser whose role is limited to:
- consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the issuer, and that is available generally to all salaried employees; or
- providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

In response to comments, the NYSE made it clear that the independence assessment requirement applies to any outside legal counsel consulted by the compensation committee, including any regular outside counsel to the issuer consulted on matters such as SEC filing requirements or federal tax issues associated with equity compensation plans.

In response to a comment expressing concern about the possible need to conduct a new independence assessment before every compensation committee meeting for those advisers that regularly provide advice to the compensation committee, the NYSE indicated that the frequency of the assessment will be a facts and circumstances determination. Specifically, the NYSE noted that “[w]hile an annual assessment may be sufficient in some cases, in other circumstances a more frequent review may be warranted.” In approving the new standards, the SEC noted its expectation that the assessment would be conducted at least annually.

Compensation committee independence. Current listing standards require that a compensation committee be comprised solely of independent directors, and the board must affirmatively determine that a compensation committee member is independent under the general board independence standards set forth in Section 303A.02 of the Manual.

Under the new standards, in making an affirmative independence determination regarding a compensation committee member the board must also consider all factors specifically relevant to determining whether a director has a relationship to the issuer that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including:

the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the issuer to the director; and
whether the director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.

These factors do not include any specific numerical or materiality tests, and are considerations for the board rather than bright-line standards. For example, the NYSE did not adopt an absolute prohibition on a board making an affirmative independence finding for a compensation committee member solely because the member or any of his or her affiliates are significant stockholders. Although the board must consider the specified factors, it must also identify and consider all additional factors that would be relevant to a compensation committee member’s independence from management. In response to comments, the NYSE confirmed that a single factor or relationship considered in the independence analysis may be sufficiently material to render a director non-independent.

When considering the source of a director’s compensation, the board should consider whether the director receives compensation from any person or entity that would impair his or her ability to make independent judgments about the issuer’s executive compensation. Likewise, when considering any affiliate relationship, the board should consider whether the relationship places the director under the direct or indirect control of the issuer or its senior management, or creates a direct relationship between the director and senior management, in each case of a nature that would impair the director’s ability to make independent judgments about the issuer’s executive compensation.

In response to comments that director fees should be an explicit factor to be considered in compensation committee independence determinations, the NYSE noted that it does not believe that it is likely that director fees would be a relevant consideration for the independence analysis. However, if “excessive” board compensation might affect a director’s independence, the NYSE noted that the listing standards would require the board to consider that factor in its independence determination, as the standards require the board to consider all relevant factors. The NYSE did not indicate what constitutes “excessive” board compensation.

If a compensation committee member ceases to be independent for reasons outside that member’s reasonable control, the member may, with prompt notice by the issuer to the NYSE, remain a compensation committee member until the earlier of (1) the next annual stockholder meeting or (2) one year from the event that caused the member to cease to be independent. This cure provision is limited to situations where the compensation committee continues to have a majority of independent directors.

Exemptions. The new compensation committee listing standards will not apply to the following issuers that are exempt from the NYSE’s current compensation committee listing standards:

controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another company);
limited partnerships (for example, master limited partnerships (MLPs));
companies in bankruptcy;
closed-end and open-end funds registered under the Investment Company Act of 1940 (1940 Act);
passive business organizations in the form of trusts (for example, royalty trusts);
derivatives and special purpose securities; and
issuers whose only listed equity security is preferred stock.

Smaller reporting companies (generally issuers with less than $75 million of public equity float) are exempt from the new enhanced compensation committee independence and consideration of adviser independence standards. As a result, their compensation committee charters will not have to reflect these matters. However, these issuers are subject to the other new standards. An issuer that ceases to qualify as a smaller reporting company will have:

six months from the date it ceases to be a smaller reporting company to comply with the consideration of adviser independence standard;
six months from the date it ceases to be a smaller reporting company to have one member of its compensation committee satisfy the enhanced compensation committee independence standard;
nine months from the date it ceases to be a smaller reporting company to have a majority of its compensation committee members satisfy the enhanced compensation committee independence standard; and
12 months from the date it ceases to be a smaller reporting company to have a compensation committee consisting entirely of members that satisfy the enhanced compensation committee independence standard.⁷

Foreign private issuers that elect to follow home country practice are exempt from the new compensation committee listing standards provided that they comply with the disclosure requirements of Section 303A.11 of the Manual.

Transition periods for newly-listed and other issuers. The current transition periods available to newly-listed issuers and certain other categories of issuers (e.g., issuers listing in connection with a carve-out or spin-off transaction) apply to the new compensation committee listing standards. For example, an issuer listing in connection with its initial public offering (IPO) must have one independent compensation committee member by the earlier of the IPO closing date or five business days from the listing date, a majority of independent members within 90 days of the listing date, and a fully independent committee within one year of the listing date.

Click here to read about practical considerations to consider in response to the new compensation committee listing standards.

NYSE MKT Compensation Committee Listing Standards

Compensation committee authority and responsibilities regarding its advisers. A compensation committee⁸ must have the following authority and responsibilities:

the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, legal counsel or other adviser (collectively referred to throughout the discussion of the NYSE MKT’s new listing standards as advisers);
the direct responsibility for the appointment, compensation and oversight of the work of any adviser retained by the committee;
the issuer must provide for appropriate funding (as determined by the committee) for the payment of reasonable compensation to any adviser retained by the committee; and
the responsibility to conduct an independence assessment before selecting or receiving advice from an adviser to the committee (as discussed in more detail below under “Assessment of adviser independence”).

The new authority and responsibilities regarding advisers do not:

require the compensation committee to implement or follow its advisers’ advice or recommendations; or
affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

the provision of other services to the issuer by the adviser’s employer;
the amount of fees received from the issuer by the adviser’s employer, as a percentage of the employer’s total revenue;
the policies and procedures of the adviser’s employer that are designed to prevent conflicts of interest;
any business or personal relationship between the adviser and a compensation committee member;
any issuer stock owned by the adviser (as the SEC noted in its adopting release for Rule 10C-1, it interprets this to include stock owned by the adviser’s immediate family members); and
any business or personal relationship between either the adviser or the adviser’s employer and an issuer’s executive officer (as the SEC noted in its adopting release for Rule 10C-1, this would include, for example, situations where an issuer’s CEO and the adviser have a familial relationship or where the CEO and the adviser or the adviser’s employer are business partners).

These factors are considerations for the compensation committee rather than bright-line standards. Although compensation committees must consider the specified factors, they are also responsible for identifying and considering all additional factors relevant to an adviser’s independence from management. After conducting the required independence assessment, compensation committees may select or receive advice from any adviser they prefer, even those that are not independent.⁹ In response to comments that compensation committees should be specifically required to also consider whether an adviser requires a contractual agreement to indemnify the adviser or limit the adviser’s liability, the NYSE MKT noted that it is not apparent that the existence of such indemnification agreements or contractual limitations on liability is relevant to an independence analysis.¹⁰

Compensation committees must conduct the independence assessment for any adviser that the committee selects or receives advice from, other than:

in-house legal counsel; and
any adviser whose role is limited to:
- consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the issuer, and that is available generally to all salaried employees; or
- providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

In response to comments, the NYSE MKT made it clear that the independence assessment requirement applies to any outside legal counsel consulted by the compensation committee, including any regular outside counsel to the issuer consulted on matters such as SEC filing requirements or federal tax issues associated with equity compensation plans.

In response to a comment expressing concern about the possible need to conduct a new independence assessment before every compensation committee meeting for those advisers that regularly provide advice to the compensation committee, the NYSE MKT indicated that the frequency of the assessment will be a facts and circumstances determination. Specifically, the NYSE MKT noted that “[w]hile an annual assessment may be sufficient in some cases, in other circumstances a more frequent review may be warranted.” In approving the new standards, the SEC noted its expectation that the assessment would be conducted at least annually.

Compensation committee independence. Current listing standards require that executive officer compensation be determined, or recommended to the board for determination, either by a compensation committee comprised solely of independent directors or by a majority of the independent directors. Moreover, the board must affirmatively determine that a compensation committee member is independent under the general board independence standards set forth in Section 803A(2) of the Guide.

Under the new standards, the board must also affirmatively determine that all of the compensation committee members (or all of the independent directors if an issuer does not have a compensation committee) are independent for compensation committee purposes. To make this determination, the board must consider all factors specifically relevant to determining whether a director has a relationship to the issuer that is material to that director’s ability to be independent from management in connection with the duties of a compensation committee member, including:

the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the issuer to the director; and
whether the director is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer.

These factors do not include any specific numerical or materiality tests, and are considerations for the board rather than bright-line standards. For example, the NYSE MKT did not adopt an absolute prohibition on a board making an affirmative independence finding for a compensation committee member solely because the member or any of his or her affiliates are significant stockholders. Although the board must consider the specified factors, it must also identify and consider all additional factors that would be relevant to a compensation committee member’s independence from management. In response to comments, the NYSE MKT confirmed that a single factor or relationship considered in the independence analysis may be sufficiently material to render a director non-independent.

In response to comments that director fees should be an explicit factor to be considered in compensation committee independence determinations, the NYSE MKT noted that it does not believe that it is likely that director fees would be a relevant consideration for the independence analysis. However, if “excessive” board compensation might affect a director’s independence, the NYSE MKT noted that the listing standards would require the board to consider that factor in its independence determination, as the standards require the board to consider all relevant factors. The NYSE MKT did not indicate what constitutes “excessive” board compensation.

If a compensation committee member ceases to be independent for reasons outside that member’s reasonable control, the member may, with prompt notice by the issuer to the NYSE MKT, remain a compensation committee member until the earlier of (1) the next annual stockholders meeting or (2) one year from the event that caused the member to cease to be independent. This cure provision is limited to situations where the compensation committee continues to have a majority of independent directors.

The NYSE MKT amended its listing standards so that only smaller reporting companies (generally issuers with less than $75 million of public equity float) may rely on the current exception that allows one non-independent director to serve on the compensation committee under exceptional and limited circumstances, even for a director who fails the enhanced compensation committee independence standards. Under the exception, one non-independent director may be appointed to the compensation committee if:

the committee consists of at least three members;
the non-independent director is not currently an executive officer, employee, or an immediate family member of an executive officer or employee;
the board, under exceptional and limited circumstances, determines that the individual’s membership is required by the best interests of the issuer and its stockholders; and
the non-independent director serves for no longer than two years.

A smaller reporting company relying on the exception must provide certain disclosures required by NYSE MKT listing standards in the proxy statement for the next annual meeting following the determination (or annual report on Form 10-K if a proxy statement is not required), and any disclosure required by Instruction 1 to Item 407(a) of Regulation S-K regarding reliance on the exception.

Exemptions. The new compensation committee listing standards will not apply to the following issuers that are exempt from the NYSE MKT’s current compensation committee listing standards:

controlled companies (i.e., issuers where more than 50% of the voting power is held by an individual, a group or another issuer);
limited partnerships (for example, MLPs);
companies in bankruptcy;
closed-end and open-end funds registered under the 1940 Act;
asset-backed issuers and other passive business organizations (for example, royalty trusts);
derivatives and special purpose securities; and
issuers whose only listed equity security is preferred stock.

Smaller reporting companies are exempt from the new enhanced compensation committee independence and consideration of adviser independence standards. However, these issuers are subject to the other new standards. An issuer that ceases to qualify as a smaller reporting company will have:

six months from the date it ceases to be a smaller reporting company to comply with the consideration of adviser independence standard;
six months from the date it ceases to be a smaller reporting company to have one member of its compensation committee satisfy the enhanced compensation committee independence standard;
nine months from the date it ceases to be a smaller reporting company to have a majority of its compensation committee members satisfy the enhanced compensation committee independence standard; and
12 months from the date it ceases to be a smaller reporting company to have a compensation committee consisting entirely of members that satisfy the enhanced compensation committee independence standard.¹¹

Foreign private issuers may seek an exemption on the basis that they follow home country practice if they comply with the requirements of Section 110 of the Guide.

Transition periods for newly-listed issuers. The current transition periods available to newly-listed issuers apply to the new compensation committee listing standards. Thus, an issuer listing in connection with its IPO must have one independent compensation committee member at the time of listing, a majority of independent members within 90 days of listing, and a fully independent compensation committee within one year of listing.

Click here to read about practical considerations to consider in response to the new compensation committee listing standards.

NASDAQ Compensation Committee Listing Rules

Compensation committee authority and responsibilities regarding its advisers. A compensation committee must have the following authority and responsibilities:

the authority, in its sole discretion, to retain or obtain the advice of a compensation consultant, legal counsel or other adviser (collectively referred to throughout the discussion of NASDAQ’s new listing standards as advisers);
the direct responsibility for the appointment, compensation and oversight of the work of any adviser retained by the committee;
the issuer must provide for appropriate funding (as determined by the committee) for the payment of reasonable compensation to any adviser retained by the committee; and
the responsibility to conduct an independence assessment before selecting or receiving advice from an adviser to the committee (as discussed in more detail below under “Assessment of adviser independence”).

For those issuers without a standing compensation committee, until the requirement to have a standing compensation committee is effective (as discussed in more detail below under “Compensation committee composition and independence”) these requirements will apply to the independent directors who determine, or recommend to the board to determine, the compensation of executive officers.

Issuers will need to consider under the corporate law of the state of their incorporation whether to grant by July 1, 2013 the authority and responsibilities discussed above through a charter, board resolution or other board action.

The new authority and responsibilities regarding advisers do not:

require the compensation committee to implement or follow its advisers’ advice or recommendations; or
affect the ability or obligation of the compensation committee to exercise its own judgment in fulfilling its duties.

the provision of other services to the issuer by the adviser’s employer;
the amount of fees received from the issuer by the adviser’s employer, as a percentage of the employer’s total revenue;
the policies and procedures of the adviser’s employer that are designed to prevent conflicts of interest;
any business or personal relationship between the adviser and a compensation committee member;
any issuer stock owned by the adviser (as the SEC noted in its adopting release for Rule 10C-1, it interprets this to include stock owned by the adviser’s immediate family members); and
any business or personal relationship between either the adviser or the adviser’s employer and an issuer’s executive officer (as the SEC noted in its adopting release for Rule 10C-1, this would include, for example, situations where an issuer’s CEO and the adviser have a familial relationship or where the CEO and the adviser or the adviser’s employer are business partners).

These factors are considerations for the compensation committee rather than bright-line standards. After considering the six independence factors, compensation committees may select or receive advice from any adviser they prefer, even those that are not independent.¹²

Compensation committees must conduct the independence assessment for any adviser (including outside legal counsel) that the committee selects or receives advice from, other than:

in-house legal counsel; and
any adviser whose role is limited to:
- consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the issuer, and that is available generally to all salaried employees; or
- providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser and about which the adviser does not provide advice.

In approving the new listing rules, the SEC noted its expectation that the independence assessment would be conducted at least annually.

Compensation committee composition and independence. NASDAQ’s current listing rules require that an issuer’s executive officer compensation must be determined, or recommended to the board for determination, either by:

a compensation committee comprised solely of independent directors; or
independent directors constituting a majority of the board’s independent directors in a vote in which only independent directors participate.

NASDAQ eliminated the second alternative and by the relevant 2014 compliance date issuers, including smaller reporting companies (generally issuers with less than $75 million of public equity float), must have a standing compensation committee comprised of at least two members. Each compensation committee member must be an independent director (as defined in current Listing Rule 5605(a)(2)), and boards are required to make an affirmative determination that no independent director has a relationship that, in the board’s opinion, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

In addition to satisfying the requirement that each compensation committee member be an independent director, the new rules provide that:

each member is prohibited from accepting directly or indirectly any consulting, advisory or other compensatory fee from the issuer or any of its subsidiaries; and
the board must consider whether a compensation committee member is affiliated with the issuer, a subsidiary of the issuer or an affiliate of a subsidiary of the issuer to determine whether any affiliation would impair the member’s judgment as a member of the compensation committee.

These independence factors do not include any specific numerical or materiality tests. In approving the listing rules, the SEC confirmed that, despite any explicit statement by NASDAQ on the matter, a single factor could disqualify a director from being independent under the enhanced compensation committee independence rules.

Although director fees are not an explicit factor to be considered in compensation committee independence determinations, NASDAQ noted that as boards must make an affirmative independence determination that each independent director has no relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director the board could, if appropriate, consider director fees in that context.¹³

The enhanced independence rules adopt the same bright-line prohibition against compensatory fees applicable to audit committees. The prohibition does not include a “look-back” period and, therefore, would apply only during a director’s service on the compensation committee. “Compensatory fees” do not include:

fees received for board or board committee service; or
the receipt of fixed amounts of compensation under a retirement plan, including deferred compensation, for prior service with the issuer (provided that the compensation is not contingent in any way on continued service).

Unlike the prohibition regarding compensatory fees, the rules do not impose a bright-line prohibition on affiliation, but rather impose a requirement to consider such affiliations when making a compensation committee independence determination. Although a board may conclude differently based on the specific facts and circumstances, NASDAQ does not believe ownership of issuer stock by itself, or possession of a controlling interest through ownership of issuer stock by itself, precludes a board from finding that it is appropriate for a director (for example, as a representative of a significant stockholder) to serve on the compensation committee. The board will not be required to apply a “look-back” period and, therefore, need consider affiliation only with respect to relationships that occur during a director’s service on the compensation committee.

Issuers, including smaller reporting companies, may rely on the current exception that allows one non-independent director to serve on the compensation committee under exceptional and limited circumstances, even for a director who fails the new enhanced compensation committee independence rules. Under this exception, one non-independent director may be appointed to the compensation committee if:

the committee consists of at least three members;
the non-independent director is not currently an executive officer, employee, or a family member of an executive officer;
the board, under exceptional and limited circumstances, determines that the individual’s membership is required by the best interests of the issuer and its stockholders;
the non-independent director serves for no longer than two years; and
the issuer provides certain disclosures required by the listing rules either on its website or in the proxy statement for the next annual meeting following the determination (or annual report if a proxy statement is not required), and the disclosures required by Instruction 1 to Item 407(a) of Regulation S-K regarding reliance on the exception.

If an issuer, including a smaller reporting company, fails to comply with the compensation committee composition requirements due to one vacancy, or one compensation committee member ceases to be independent for reasons beyond that member’s reasonable control, the issuer must regain compliance by the earlier of (1) its next annual stockholder meeting or (2) one year from the event that caused the non-compliance. If the annual stockholder meeting occurs within 180 days after the event causing the non-compliance, the issuer would instead have 180 days from the event to regain compliance. An issuer relying on the cure period must provide notice to NASDAQ immediately upon learning of the event or circumstances that caused the non-compliance.

Committee charter requirements. Issuers must certify that they have adopted a formal written compensation committee charter and that the compensation committee will review and reassess the adequacy of the charter on an annual basis.¹⁴ The charter must specify:

the scope of the committee’s responsibilities and how it carries out those responsibilities, including structure, processes and membership requirements;
the committee’s responsibility for determining, or recommending to the board for determination, the compensation of the issuer’s executive officers;
that the CEO may not be present during voting or deliberations by the committee on his or her compensation; and
the specific committee authority and responsibilities discussed above under “Compensation committee authority and responsibilities regarding its advisers.”

Smaller reporting companies must adopt either a formal written compensation committee charter or a board resolution that specifies only the matters in the first three bullets above. These issuers are not required to specify the compensation committee authority and responsibilities set forth in the fourth bullet above or to certify that they will review and reassess the adequacy of the charter or board resolution on an annual basis.

Exemptions. The new listing rules do not apply to the following issuers that are exempt from NASDAQ’s current compensation-related listing rules:

asset-backed issuers and other passive issuers;
cooperatives;
limited partnerships (for example, MLPs);
management investment companies registered under the 1940 Act; and
controlled companies (i.e., issuers where more than 50% of the voting power for the election of directors is held by an individual, a group or another company).

Smaller reporting companies are exempt from the new compensation committee listing rules, except as follows:

they must have (and certify that they have and will continue to have) a formal compensation committee comprised of at least two independent members based on the current independent director definition in Listing Rule 5605(a)(2), but not the enhanced compensation committee independence standards; and
they must certify that they have adopted a formal written compensation committee charter or board resolution as discussed above under “Committee charter requirements.”

An issuer that ceases to qualify as a smaller reporting company will have six months from the date it ceases to be a smaller reporting company to:

comply with the committee authority and responsibilities standards; and
certify to NASDAQ that it (1) has adopted a formal written compensation committee charter, including all of the matters specified above under “Committee charter requirements,” and (2) has, or will within the required phase-in schedule,¹⁵ comply with the enhanced compensation committee independence standards.

Foreign private issuers that follow their home country practice are exempt from the new listing rules provided that they comply with the disclosure requirements in current Listing Rule 5615(a)(3). In addition, foreign private issuers that follow their home country practice in lieu of having an independent compensation committee as required by NASDAQ listing rules must disclose in their annual reports filed with the SEC the reasons why they do not have an independent compensation committee.

Certification. Issuers must certify to NASDAQ within 30 days after the final implementation deadline applicable to them, on a form to be provided by NASDAQ, that they have complied with the new compensation committee listing rules. Although smaller reporting companies, foreign private issuers and controlled companies are exempt from some or all of the compensation committee listing standards, based on a sample certification form provided by NASDAQ in one of its rule filings these issuers would need to complete and file the required certification form.¹⁶

Transition periods for IPO issuers. Although issuers listing in connection with their IPO are subject to the new rules, they can phase-in compliance with the compensation committee composition requirements in accordance with current phase-in schedules. Thus, these issuers must have one independent compensation committee member at listing, a majority of independent members within 90 days of listing and a fully independent committee within one year of listing.

Practical Considerations

NYSE-, NYSE MKT- and NASDAQ-listed issuers and their boards and compensation committees that are subject to the listing standards should consider the following matters. In addition to the following, issuers should not forget to conduct a review of “conflicts of interest” with compensation consultants who had any role in determining or recommending the amount or form of executive and director compensation (subject to certain exceptions). A new SEC rule requires any such conflicts of interest to be disclosed in proxy statements for meetings involving the election of directors held on or after January 1, 2013.¹⁷ As part of this process, issuers should update their director and officer questionnaire to solicit information about the existence of business or personal relationships with compensation consultants and the consultants’ employers and establish policies and procedures for collecting and analyzing information about compensation consultants to determine whether a conflict of interest exists.

By July 1, 2013:

Grant required compensation committee authority and responsibilities regarding advisers.
- NASDAQ- and NYSE MKT-listed issuers should consider under the corporate law of the state of their incorporation whether to grant the new authority and responsibilities to the compensation committee (or, in lieu of such a committee, the independent directors who determine or recommend executive compensation) through a committee charter amendment, board resolution or other board action. Although the authority and responsibilities must be granted by July 1, 2013, NASDAQ-listed issuers are not required to include these matters in their compensation committee charter until 2014 (as discussed below). NYSE MKT-listed issuers are not required to have a compensation committee charter, but must determine how best to grant the required authority and responsibilities by July 1, 2013. Although not required until 2014, NASDAQ-listed issuers with existing compensation committee charters may determine it is best to amend their charters by July 1, 2013 to grant the required authority and responsibilities instead of relying on a board resolution or other board action.
- NYSE-listed issuers should review their compensation committee charters and amend as necessary to grant the new authority and responsibilities.
Conduct adviser independence assessment.
- Discuss the new listing standards with each existing and potential adviser to the compensation committee, even those advisers retained by management or the issuer, to determine whether an independence assessment is required.
- As specifically noted by the SEC in its adopting release for Rule 10C-1, establish policies and procedures for collecting and analyzing information about advisers before the compensation committee can select or receive advice from those advisers. Steps issuers could take include (1) collecting information internally on the services provided by advisers, including identifying the individual advisers that perform services for the issuer and such advisers’ employers, and the fees paid for such services, (2) having the advisers complete a questionnaire or requesting specific representations and covenants in the adviser engagement letter to solicit the information necessary for the compensation committee to consider the enumerated factors set forth in the listing standards and any other factors deemed relevant to the compensation committee, and (3) updating the director and officer questionnaire to determine the existence of any business or personal relationship with any adviser to the compensation committee or such adviser’s employer. Ensure that any policies and procedures developed are consistent with the compensation committee charter and other issuer procedures, and that they provide that the required independence assessment is conducted prior to selecting or receiving advice from new advisers and at least annually for existing advisers.
- For existing advisers to the compensation committee where an independence assessment is required, assess their independence and then schedule the next assessment for that adviser at least annually thereafter. As part of this exercise, boards of NYSE- and NYSE MKT-listed issuers should identify and consider any factors in addition to the six specified factors that would be relevant to an adviser’s independence from management. The listing standards are clear that advisers are not required to be independent if the independence assessment is conducted before selecting or receiving advice from an adviser. However, compensation committees may want to consider whether to adopt a policy that guides their actions if an adviser is not independent.

By the earlier of the first annual meeting after January 15, 2014, or October 31, 2014:

Evaluate compliance with enhanced compensation committee independence standards.
- Update the director and officer questionnaire to address the enhanced compensation committee independence standards.
- Evaluate the independence of compensation committee members to ensure they satisfy the enhanced compensation committee independence standards. Except for NASDAQ’s absolute prohibition on compensatory fees from the issuer or its subsidiaries, the enhanced independence standards do not impose a prohibition on committee membership if the enumerated independence factors are not satisfied. However, as stockholders and proxy advisory firms may be concerned if any factor is not satisfied boards should carefully consider how they will respond if a member does not satisfy the enumerated independence factors. Issuers may choose to conduct such an evaluation in 2013, and develop contingency plans in the event one or more of the existing compensation committee members would not be deemed independent under the enhanced independence standards (for example, in the case of a NASDAQ-listed issuer if a member receives any compensatory fees from the issuer or its subsidiaries). In such case, issuers should consider updating their 2013 director and officer questionnaire to include, for compensation committee members, questions that solicit the information that will enable the board to conduct an evaluation under the enhanced independence standards.
Establish a compensation committee. For NASDAQ-listed issuers without a formal compensation committee, establish a committee in accordance with the new listing rules.
Adopt a compensation committee charter. For NASDAQ-listed issuers, adopt a compensation committee charter that complies with the new charter standards or ensure that the existing compensation committee charter complies with the new charter standards.

Provide compliance certification. NASDAQ-listed issuers must certify to NASDAQ within 30 days after the final implementation deadline applicable to them, on a form to be provided by NASDAQ, that they have complied with the new compensation committee listing rules.

_{1. New York Stock Exchange LLC, Notice of Filing of Amendment No. 3, and Order Granting Accelerated Approval for Proposed Rule Change, as Modified by Amendment Nos. 1 and 3, to Amend the Listing Rules for Compensation Committees to Comply with Securities Exchange Act Rule 10C-1 and Make Other Related Changes, Release No. 34-68639 (Jan. 11, 2013), 78 Fed. Reg. 4570 (Jan. 22, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-01-22/pdf/2013-01106.pdf. The amendments impact Sections 303A.00, 303A.02(a) and 303A.05 of the NYSE Listed Company Manual (Manual). The text of the amended listing standards is included in Exhibit 5 to this NYSE rule filing.}

_{2. NYSE MKT LLC, Notice of Filing of Amendment No. 3, and Order Granting Accelerated Approval for Proposed Rule Change, as Modified by Amendment Nos. 1 and 3, to Amend the Listing Rules for Compensation Committees to Comply with Securities Exchange Act Rule 10C-1 and Make Other Related Changes, Release No. 34-68637 (Jan. 11, 2013), 78 Fed. Reg. 4537 (Jan. 22, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-01-22/pdf/2013-01104.pdf. The amendments impact Sections 110, 801(h), 803A and 805 of the NYSE MKT Company Guide (Guide). The text of the amended listing standards is included in Exhibit 5 to this NYSE MKT rule filing.}

_{3. The NASDAQ Stock Market LLC, Notice of Filing of Amendment Nos. 1 and 2, and Order Granting Accelerated Approval of Proposed Rule Change as Modified by Amendment Nos. 1 and 2 to Amend the Listing Rules for Compensation Committees to Comply with Rule 10C-1 under the Act and Make Other Related Changes, Release No. 34-68640 (Jan. 11, 2013), 78 Fed. Reg. 4554 (Jan. 22, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-01-22/pdf/2013-01107.pdf. The amendments impact compensation committee- and corporate governance-related Listing Rules 5605(d) and 5615, and add new Listing Rule 5605A. The amendments also include conforming amendments to audit and nominations committee-related Listing Rules 5605(c) and 5605(e)(3) and corrections of typographical errors in other listing rules. The text of the amended listing rules is included in Exhibit 5 to this NASDAQ rule filing.}

_{4. Please see our client alert dated October 22, 2012 for a discussion of the listing standard amendments as originally proposed, NYSE, NYSE MKT and NASDAQ Propose Amendments to Compensation Committee Listing Standards.}

_{5. Issuers should remember that pursuant to new Item 407(e)(3)(iv) of Regulation S-K their proxy statements for meetings involving the election of directors held on or after January 1, 2013 must include disclosure of any “conflict of interest” involving compensation consultants (but not other advisers such as lawyers) who had any role in determining or recommending the amount or form of executive and director compensation (subject to certain exceptions). “Conflict of interest” is not defined, but to determine whether a conflict of interest exists, issuers should use the factors set out in Exchange Act Rule 10C-1(b)(4) relating to adviser independence, which are the same six factors identified in the new NYSE standards.}

_{6. See Letter from Janet McGinness, Exec. Vice Pres., Corp. Sec’y & Gen. Counsel, NYSE Markets, to Elizabeth M. Murphy, Sec’y, SEC (Jan. 10, 2013), availableat http://www.sec.gov/comments/sr-nyse-2012-49/nyse201249-8.pdf.}

_{7. These issuers would also need to update their compensation committee charters to reflect these matters.}

_{8. For the remainder of the discussion of the NYSE MKT’s new listing standards, references to compensation committee are meant to refer to an issuer’s independent directors as a group where the issuer does not have a compensation committee, but instead relies on its independent directors to determine, or recommend to the board for determination, executive officer compensation.}

_{9. Issuers should remember that pursuant to new Item 407(e)(3)(iv) of Regulation S-K their proxy statements for meetings involving the election of directors held on or after January 1, 2013 must include disclosure of any “conflict of interest” involving compensation consultants (but not other advisers such as lawyers) who had any role in determining or recommending the amount or form of executive and director compensation (subject to certain exceptions). “Conflict of interest” is not defined, but to determine whether a conflict of interest exists, issuers should use the factors set out in Exchange Act Rule 10C-1(b)(4) relating to adviser independence, which are the same six factors identified in the new NYSE MKT standards.}

_{10. See Letter from Janet McGinness, Exec. Vice Pres., Corp. Sec’y & Gen. Counsel, NYSE Markets, to Elizabeth M. Murphy, Sec’y, SEC (Jan. 10, 2013), availableat http://sec.gov/comments/sr-nyse-2012-49/nyse201249-8.pdf. Although no comments were submitted on the NYSE MKT’s proposed listing standards, comments were submitted on the NYSE’s and NYSE Arca’s proposed listing standards. In response to these comments, NYSE Euronext (the parent company of NYSE, NYSE MKT and NYSE Arca) issued one response letter that addressed the comments on behalf of all NYSE exchanges, including NYSE MKT, as the comments raised are in substance applicable to all three proposals.}

_{11. Any such issuer that does not have a compensation committee must comply with this transition requirement with respect to all of its independent directors as a group.}

_{12. Issuers should remember that pursuant to new Item 407(e)(3)(iv) of Regulation S-K their proxy statements for meetings involving the election of directors held on or after January 1, 2013 must include disclosure of any “conflict of interest” involving compensation consultants (but not other advisers such as lawyers) who had any role in determining or recommending the amount or form of executive and director compensation (subject to certain exceptions). “Conflict of interest” is not defined, but to determine whether a conflict of interest exists, issuers should use the factors set out in Exchange Act Rule 10C-1(b)(4) relating to adviser independence, which are the same six factors identified in the new NASDAQ rules.}

_{13. See Letter from Erika J. Moore, Assoc. Gen. Counsel., NASDAQ Stock Market LLC, to Elizabeth M. Murphy, Sec’y, SEC (Dec. 12, 2012), available at http://www.sec.gov/comments/sr-NASDAQ-2012-109/NASDAQ2012109-9.pdf.}

_{14. NASDAQ also proposed, and the SEC approved, amendments to NASDAQ’s audit committee listing rules that require listed issuers to proactively certify that the audit committee “will review and reassess” the adequacy of the audit committee charter on an annual basis. Current listing rules require the certification to provide that the audit committee “has reviewed and reassessed” the adequacy of the audit committee’s charter on an annual basis. NASDAQ noted that this change is consistent with its current interpretation of the audit committee charter requirements and will harmonize the audit committee charter requirements with the new compensation committee charter requirements.}

_{15. A smaller reporting company that loses that status must comply with the enhanced compensation committee independence requirements as follows: (1) one member in compliance within six months from the date smaller reporting company status is lost, (2) a majority in compliance within nine months from the date smaller reporting company status is lost and (3) all members in compliance within one year from the date smaller reporting company status is lost.}

_{16. See Exhibit 3 to this NASDAQ rule filing for the form of compensation committee certification NASDAQ intends to use.}

_{17. For more information on this SEC disclosure requirement, please see our client alert dated July 9, 2012, SEC Adopts Rules Implementing Dodd-Frank Requirements for Compensation Committees and Compensation Advisers.}

I’m Too Sexy It Hurts… My Employment

Ryan S. Carlson with Giordano, Halleran & Ciesla, P.C. recently had an article, I’m Too Sexy It Hurts… My Employment, published in The National Law Review:

Studies often show that attractive workers tend to get hired sooner, get promotions more quickly, and are paid more handsomely than their less-attractive co-workers. But can good looks get you fired without any job protection? According to a unanimous decision by the Iowa Supreme Court, they can.

In Nelson v. Knight, the Iowa Supreme Court considered whether a female employee could be lawfully terminated because her boss believed that she was an irresistible attraction and keeping her employed was a threat to his marriage. Nelson, the terminated employee, had worked for Knight’s dental practice for ten years along with Knight’s wife. Ultimately, Knight’s wife became jealous and demanded that Knight terminate Nelson. Knight too believed that if Nelson remained employed he would likely have (or attempt to have) an affair with her. Consequently, Knight notified Nelson that she was terminated because she was too irresistible and a threat to his marriage. Nelson then brought a cause of action against Knight alleging that she was terminated because of her gender in violation of the Iowa Civil Rights Act. Nelson did not allege at any time that Knight sexually harassed her.

The Iowa Supreme Court upheld Nelson’s termination. In doing so, the Court drew an important distinction between an isolated employment decision based on personal relationship issues (which is lawful in most cases) and an employment decision based strictly on one’s gender (which is unlawful in most cases). The court reasoned that this case fell under the first scenario in which Knight terminated Nelson because of personal relationship issues and not because of her gender. Therefore, the court found that Nelson’s termination was lawful under the Iowa Civil Rights Act.

Although this may seem like a novel decision, it should not be a surprise. In New Jersey, it is well-established that physical attractiveness is not a protected class under the New Jersey Law Against Discrimination. It is also well established that an employee can be terminated because of relationship issues stemming from a consensual workplace relationship with his or her employer absent sexual harassment. In applying these principles, it is fair to conclude that a similar decision might have been rendered by a court in New Jersey. On the other hand, Nelson was a threat to Knight’s marriage only because she is a woman; thus, it is not difficult to imagine that a court in New Jersey might have gone the other way.

Advancement of Women Lawyers In Private Practice: Learning From Their Sisters in Corporate Legal Departments and from Senior Lawyers In Private Practice

The National Law Review recently published an article, Advancement of Women Lawyers In Private Practice: Learning From Their Sisters in Corporate Legal Departments and from Senior Lawyers In Private Practice, written by Beth L. Kaufman of the National Association of Women Lawyers:

As the voice of women in the law, National Association of Women Lawyers (“NAWL”) in 2006, challenged corporations and law firms to double their number of women general counsel and equity partners from 15% to 30% by 2015. Recent statistics indicate that the “NAWL Challenge” for corporate legal departments in Fortune 500 corporations already has been met.

Women today comprise 30% of General Counsels, when only a few years ago they comprised only 15% of the General Counsels in the same companies. This achievement is in sharp contrast to the fate of women lawyers in the 200 largest U.S. law firms (“AmLaw 200”), where women have stagnated at 17% or less of those law firms’ equity partners since NAWL’s annual survey of the advancement of women lawyers began.

Ask anyone in corporations –from mid-sized to the largest in the country — and they will tell you that they have embraced diversity and inclusion — their customers, their audience, their constituents are diverse– and their leadership, including their lawyers, must be diverse. Many have overhauled their in-house legal departments and the way they deal with and select their outside counsel. They have created comfortable and welcoming environments in which their dedicated and loyal women lawyers can thrive.

Apparently not so in the highest echelons of the largest law firms in this country (indeed, globally). For the first time, this year, there has been a decrease in the number of first year women law students and the number of women in entering classes of associates at AmLaw 200 firms. Is this an aberration or is this the result of the disillusionment of women with a legal profession that is viewed by many as inhospitable to women.?

To be sure, there are thousands of women lawyers in this country in many different practice settings who have advanced, are leaders, and love the practice of law. I am one of them and have spent almost 35 years loving what I do as a professional each and every day. Many of NAWL’s leaders and members have similar feelings. As an organization, NAWL brings those lawyers together whenever it can to share their experiences with younger lawyers and impart views as to how the practice of law can be a nurturing professional experience for women, and one in which they can achieve whatever success they desire.

This year’s NAWL Mid-Year Meeting at Disney World in Orlando promises to make its own significant contribution to that effort. STRETCHED & BALANCED: A Holistic Approach to Law Practice for the Woman Lawyer, will be held at the Grand Floridian from February 14-16. Highlighting the event will be programs for both in-house and outside counsel, including:

The Male Factor: What Every Woman Lawyer needs to Know about How Men and Clients View Women Attorneys in the Workplace
Ethical Issues for Inside and Outside Counsel
Circuit Training: 10 Legal Issues Every Lawyer Should Understand
Do You Want to Make More Money? Negotiating Your Compensation
From Daunting to Doable: How to Build Positive Client Relationships and Become a Rainmaker in the Process

The timeliness of the educational programs, the wisdom imparted by the speakers and the unparalleled networking opportunities will offer significant guidance and assistance to lawyers both in private practice and in-house, as they strive to achieve continued success for themselves, their law firms and their companies. For more information on the Mid-Year Meeting, go to www.nawl.org.

ICE Worksite Fines, No Thaw in Sight for 2013! (Immigration and Customs Enforcement)

The National Law Review recently published an article regarding Immigration Compliance written by Dawn M. Lurie with Sheppard, Mullin, Richter & Hampton LLP:

Just how much money did Immigration and Customs Enforcement (ICE) fine US companies last year? While we don’t have an exact number confirmed by the government, we do know the fine amounts skyrocketed to over $10 million according to data released by ICE in response to a request from the Associated Press. What’s more important is the fact that ICE issued over 3,000 Notices of Inspection (NOI) in FY 2012. An NOI initiates a government administrative inspection of a company’s Form I-9s. NOIs are considered administrative tools which are used to assist in criminal investigations. We also know that 238 company managers were arrested last year in light of these investigations. Under the Obama administration, civil administrative audits are just one of many tools ICE is using to reduce the demand for unauthorized unemployment and protect opportunities for U.S. workers. This enforcement strategy also includes the expanded use of civil penalties, employer audits, and debarment. While ICE has told stakeholders it no longer tracks the conclusion of an investigation or whether a matter is being pursued before the Office of the Chief Administrative Hearing Officer (OCAHO), we know the Agency does track how many Notices of Inspection (NOIs), Notices of Fines, Final Orders, and Debarments it issues. The scope of this Alert does not cover debarments for federal contractors, but it should be noted that ICE has rapidly expanded the program and continues to refine the suspension and debarment process.

With comprehensive immigration reform on the horizon and President Obama’s proposal calling for “cracking down on employers hiring undocumented workers,” we can expect at least another 3,000 audits in 2013 (bets anyone?). ICE is fairly predictable and consistent in its approach to worksite enforcement. In fact, it is likely we will see the first round of audits by mid-March. While the days of “worksite enforcement actions” (AKA raids) are gone, there are many in the government that still agree with the words of Julie Myers Wood, a current proponent for comprehensive immigration reform and former Department of Homeland Security Assistant Secretary for ICE who said, “We want to send the message that your cost of business just went up because you risk your livelihood, your corporate reputation and your personal freedom.” Wood was also quoted as saying that ICE was prosecuting “individuals who have profited from hiring illegal aliens…we’re going after their houses, their Mercedes and any money that they have, as well.”

For certain, NOIs and administrative audits are something every employer needs to take very seriously. These inspections are clearly serving as examples and being used as deterrents. Again, as immigration reform heats up and the Administration focuses on effectuating a new policy, the fines are likely to increase and enforcement efforts will be stepped up. The inequities that plague the worksite program in terms of how some employers are treated verses other employers will likely be addressed during the reform process. We can also expect that once reform is effectuated there will be serious consequences embedded in the legislation, not only for employers, but also for employees that work without authorization. That said, in order toemployers to the government, and provide employers with adequate tools and discernible guidance to determine who is authorized to work and who is not.

In the meantime, the fine amounts listed below, coupled with ensuing bad P.R., legal expenses and other drains on a company involved in a worksite investigation should be high enough to catch the attention of “mom & pop” employers and the Board of Directors of public companies alike.

Specifics from four states

In numbers that were just released today, February 5th, ICE noted it fined 10 businesses in San Diego and Imperial counties more than $173,800 for hiring “unlawful” employees. In addition to listing the names of the businesses and the amounts fined the agency noted in a news release, “In fiscal year 2012, HSI conducted 151 worksite audits in San Diego and Imperial counties, compared to 86 audits the previous year and 63 audits in fiscal year 2010.”

In Massachusetts, ICE issued a total of thirty-five NOIs and ultimately fined seventeen employers for a total of $349,620. The fines hit Northern Pelagic Group (NORPEL) particularly hard with the highest amount fined in Massachusetts, $151,200. Special agent in charge (SAC) of Homeland Security Investigations (HSI) Boston Bruce M. Foucart disclosed that ICE’s investigation of NORPEL discovered 351 suspect documents, which according to Foucart “for the most part…means the employee[s] [were] illegal.”

Companies in Connecticut were fined a total of $132,584. Out of the eighteen inspections ICE conducted, ICE issued twelve fines to Connecticut companies ranging from $45,000 to $1,386. Calabro Cheese Corporation of East Haven received the highest fine of $45,000. Foucart, who has jurisdiction over this area as well, announced that the company had a “significant amount” of workers with suspect documents, along with “supporting documents that were not real or were from someone else.” Calabro’s general manager Rich Kaminski noted that ICE “led all of the people who were illegal out of [the company] on the same day.”

Rounding third on the list of fines was Maine with a grand total of $78,967. Out of the twenty-two inspections ICE conducted, eight resulted in fines ranging from $13,900 to $1,777. While substantial, these numbers represent a significant drop from ICE’s total fines of $150,000 for only six Maine companies in 2011. SAC Foucart of Boston who oversees HSI throughout New England noted that these settlements will “serve as a reminder to employers that HSI will continue to hold them accountable for hiring and maintaining a legal and compliant workforce.” Foucart expanded that employers should “take the employment verification process seriously” because ICE is expanding the number of audits it is conducting each year, focusing on employers that are “knowingly employing illegal workers.” According to Foucart, ICE will continue to target specific industries and businesses known or alleged to hire illegal workers. ICE has continued its trend of ramping up worksite enforcement efforts in the criminal arenas, as well. Last October, three individuals were arrested for unlawful employment and for conspiracy to induce illegal aliens to reside in the United States. The indictment alleges that the three owners of the Bamboo Village restaurant in Rosenberg, Texas, hired employees without completing Form I-9s or viewing identification and work authorization documents. If convicted of the conspiracy charge, the owners could face up to ten years in prison and a $250,000 fine.

In September, Micro Solutions Enterprises (MSE) and its owner both pled guilty to criminal charges resulting from a HSI investigation in 2007. As part of its plea bargain, MSE pled guiltyto one misdemeanor count of continuing to employ unauthorized workers, admitted to hiring fifty-five unauthorized workers and continuing to employ them, will pay $267,000 in civil and criminal fines, and is on a three-year probation term with implementation of “stringent measures” to ensure it is complying with hiring laws. MSE’s owner pled guilty to one felony count of false representation of a Social Security number and faces up to five years in prison and up to a $250,000 fine.

There is good news to add in at this point. A review of recent OCAHO decisions, illustrates that for the majority of those employers challenging the fine assessments ICE in 2012, the court reduced the amounts of the fines/penalties sought by the government.

The Takeaway

What is the bottom line? Take NOIs seriously. Consider while some companies get lucky with new/inexperienced auditors and agents who may not have the time or interest to pursue an investigation, other special agents remain aggressive. Also consider that in many instances neither ICE nor the U.S. Attorney’s office will forgive companies who they consider to be “willfully blind”. Ignoring a “problematic” work force, identity theft issues, and error-ridden Form I-9s can lead to the knowing hiring or continued employment of unauthorized workers. At the same time, if you have received a fine notice from ICE after trying to negotiate a reasonable settlement, don’t rule out a hearing before OCAHO, if the economics warrant, and the company has the appetite to challenge the fine assessment.

The message remains the same: Be proactive; review your Form I-9-related compliance; conduct internal audits supervised by experienced counsel and act on the results; do not ignore unconventional Social Security no-match notifications (such as unemployment claims of employees not working at your company) and potential identity theft issues; provide ongoing training to those individuals completing Form I-9s; seriously consider the use of E-Verify, and finally, above all else, institute a written compliance plan and establish workable policies.

#Human Resources Tip – Save Those Voicemails

Mitchell W. Quick with Michael Best & Friedrich LLP had an article, #Human Resources Tip – Save Those Voicemails, featured in The National Law Review:

Probably every Human Resources Manager has received a voicemail from an employee advising them he is “quitting.” Sometimes the employee even “thanks” the HR Manager and/or the company for the “opportunity,” and does not say anything negative about his employment experience.

I strongly recommend saving such voicemails from any employee the company suspects is a “litigation risk” (in their original audio format) for at least a year, and preferably two.

Why save them? Employees often conveniently change their “stories” or recollections after quitting. Such voicemails present compelling evidence to defeat an employee’s later claim that he was “fired” or “forced to quit” (aka “constructive discharge”). They are particularly useful in knocking down unemployment compensation claims and previously unreported claims of harassment. The employee is left to “explain away” his own statements, and will not appear credible in doing so.

Why save them that long? Under most federal and state laws, claims for discrimination, harassment and retaliation generally have to be asserted within 300 days of the alleged adverse employment action. Retaining the voicemail for at least a year will ensure you have it available if a claim is filed. Keeping them two years is preferable because claims under the Federal Family and Medical Leave Act (FMLA) and the Federal Fair Labor Standards Act (FLSA) can be asserted 2 (or even 3) years later.

Bottom line: don’t hit the “delete” button, and you may “save” your case!

Department of Labor “DOL” Publishes New Family and Medical Leave Act “FMLA” Regulations – Analysis and Implications

The National Law Review recently featured an article by Rene M. Johnson, Michelle Seldin Silverman, Silvia A. LeBlanc, and Sarah Andrews with Morgan, Lewis & Bockius LLP regarding Family Medical Leave Act Regulations:

Final rule takes effect on March 8 and makes changes to model certification forms, intermittent leave, exigency and military caregiver leave, and flight crew rules.

On February 6, the U.S. Department of Labor (DOL) published a final rule^[1] (Final Rule) that (1) amends the Family and Medical Leave Act (FMLA) regulations addressing the coverage of military caregiver and exigency leaves and (2) revamps eligibility requirements for certain airline industry employees. While the Final Rule will require some changes to most employers’ written FMLA policies and forms, it should not bring about substantial changes to the way most employers administer military caregiver and exigency leaves.

Summary of the Final Rule

This LawFlash provides a detailed analysis of the changes included in the Final Rule. Most importantly, employers should note that the Final Rule does the following:

Adds a new category of exigency leave for parental care
Increases the maximum number of days from five to 15 calendar days for exigency leave to bond with a military member on rest and recuperation leave
Makes effective amendments that extend military caregiver leave to family members of certain veterans with qualifying serious injuries or illnesses
Clarifies the scope of exigency leave to family members of those in the regular armed forces
Retains the physical impossibility rule, which provides that, where it is physically impossible for an employee to commence or end work midway through a shift, the entire period that the employee is forced to be absent is counted against the employee’s FMLA leave entitlement
Retains, but clarifies, the existing regulation regarding the appropriate increments to calculate intermittent and reduced-schedule leave

Employers should also be aware that the DOL has developed several new FMLA forms^[2] and has released new guidance regarding the existing definition of “son or daughter.”

Background on FMLA Amendments

As most employers are now well aware, the FMLA was amended in January 2008 to provide the following two types of military family leave for FMLA-eligible employees:

Exigency leave: a 12-week entitlement for eligible family members to deal with exigencies related to a call to active duty of service members of the National Guard and reserves
Military caregiver leave: a 26-week entitlement for eligible family members to care for seriously ill or injured service members of the regular armed forces, National Guard, and reserves

Less than a year later, Congress again amended the FMLA through the National Defense Authorization Act for Fiscal Year 2010 (FY 2010 NDAA), P.L. No. 111-84. In this act, Congress expanded both types of military family leave by doing the following:

Expanded military caregiver leave to include the family members of certain veterans with serious injuries or illnesses who are receiving medical treatment, recuperation, or therapy if the veteran was a member of the armed forces at any time during the five years preceding the date of the medical treatment, recuperation, or therapy
Expanded exigency leave to include the family members of those in the regular armed forces but added the requirement that service members be deployed to a foreign country
Extended military caregiver leave to the family members of current service members with a preexisting condition aggravated by military service in the line of duty on active duty

The FY 2010 NDAA did not include an effective date, so these changes were presumed effective on October 28, 2009.^[3] Later in 2009, Congress also passed the Airline Flight Crew Technical Corrections Act (AFCTCA), P.L. 111-119, to provide an alternative eligibility requirement for airline flight crew employees.

Final Rule Relating to Qualifying Exigency Leave

The Final Rule includes a number of changes relating to qualifying exigency leave. It is important to note that, in response to concerns raised in the comment period, the DOL reaffirmed that, where a qualifying exigency involves a third party, employers may contact that third party to verify the meeting and the purpose of the meeting.

Definition of “Active Duty” — § 825.126(a), Now § 825.126(a)(1) and (a)(2)

The Final Rule replaces the existing definition of “active duty” with two new definitions: (1) “covered active duty,” as it applies to members of the regular armed forces, and (2) “covered active duty or call to covered active duty,” as it applies to members of the reserves.

The new definition of “covered active duty,” as it relates to the regular armed forces, requires that the service member be deployed with the armed forces in a foreign country.^[4]

The new definition of “covered active duty or call to covered active duty,” as it relates to reserves members, requires that the service member be under a call or order to active duty during the deployment of the member to a foreign country under a federal call or order to active duty in support of a contingency operation. While the FY 2010 NDAA struck the term “contingency operations” from the FMLA, the DOL has taken the position that members of the reserves must be called to duty in support of a contingency operation in order for their family members to be entitled to qualifying exigency.

Exigency Leave for Child Care and School Activities — § 825.126(a)(3), Now § 825.126(b)(3)

The Final Rule places limits on exigency leave to arrange for child care or attend certain school activities for a military member’s son or daughter. Specifically, the Final Rule states that the military member must be the spouse, son, daughter, or parent of the employee requesting leave in order to qualify for the leave. The child in question could be “the military member’s biological, adopted, or foster child, stepchild, legal ward, or child for whom the military member stands in loco parentis, who is either under age 18 or age 18 or older and incapable of self-care because of a mental or physical disability at the time that FMLA leave is to commence.” The child for whom child care leave is sought need not be the child of the employee requesting leave.

The DOL specifically declined to extend qualifying exigency leave to employees who stand in loco parentis to a child of a military member when that employee does not have the statutorily required relationship with the military member for that leave. For example, while the mother of a military member may take leave to care for the military member’s child, the military member’s mother-in-law is not qualified for such leave, regardless of her relationship with the child, because the military member is not the spouse/son/daughter/parent of the employee requesting leave.

The DOL also declined to provide a specific category of exigency leave to address educational and related services for disabled children, noting that the current regulations are sufficient to cover meetings about eligibility, placement, and services and meetings related to a child’s individualized education plan. The DOL comments make clear that child care and school activity exigency leave does not cover routine academic concerns.

Exigency Leave for Rest and Recuperation — § 825.126(a)(6), Now § 825.126(b)(7)

The Final Rule increases the maximum number of days from five to 15 calendar days for exigency leave to bond with a military member on rest and recuperation leave, beginning on the date the military member begins his or her rest and recuperation leave.

The actual amount of leave provided to the employee should be consistent with the leave provided by the military to the member on covered duty. For example, if the military allows a member 10 days of rest and recuperation leave, the employee is entitled to 10 days. The leave may be taken intermittently, or in a single block, as long as the leave is taken during the period of time indicated on the military member’s rest and recuperation orders.

New Exigency Leave for Parental Care — Now § 825.126(b)(8)

The Final Rule adds parental care as a qualifying exigency for which leave may be taken. This allowance tracks the child care exigency provision and allows parental care exigency leave for the spouse, parent, son, or daughter of a military member in order to do the following:

Arrange for alternative care for a parent of the military member when the parent is incapable of self-care and the covered active duty or call to covered active duty status of the military member necessitates a change in existing care arrangements
Provide care for a parent of the military member on an urgent, immediate-need basis (but not on a routine, regular, or everyday basis) when the parent is incapable of self-care and the need to provide such care arises from the covered active duty or call to covered active duty status of the military member
Admit or transfer a parent of the military member to a care facility when the admittance or transfer is necessitated by the covered active duty or call to covered active duty status of the military member
Attend meetings with staff at a care facility for a parent of the military member (e.g., meetings with hospice or social service providers) when such meetings are necessitated by the covered active duty or call to covered active duty status of the military member

The military member’s parent must be incapable of self-care, which is defined as requiring active assistance or supervision to provide daily self-care in three or more “activities of daily living” (e.g., grooming, dressing, and eating) or “instrumental activities of daily living” (e.g., cooking, cleaning, and paying bills).

Final Rules Relating to Military Caregiver Leave

Certification Provisions for Caregiver Leave — § 825.310

The existing regulations limited the type of healthcare providers authorized to certify a serious injury or illness for military caregiver leave to providers affiliated with the U.S. Department of the Defense (DOD) (e.g., a Veterans Affairs facility (VA) or DOD-TRICARE provider). The Final Rule eliminates this distinction and allows any healthcare provider authorized under section 825.125 to certify injury or illness under the military caregiver provisions. In doing so, the DOL recognized that private healthcare providers might be unable to make certain military-related determinations to certify that the serious injury or illness is related to military service. Therefore, the Final Rule will allow providers to rely on determinations from an authorized DOD or VA representative on these issues.

Because of this change, the Final Rule will allow for second and third opinions on certifications of military caregiver leaves for non-DOD/VA providers. The Final Rule does not alter the prohibition on second and third opinions when the certification has been completed by a DOD/VA authorized provider.

The DOL has developed new Forms WH-385 and WH-385-v to help employers meet the FMLA’s certification requirements. While the use of the forms is optional, employers may not require any information beyond what is authorized by regulation.

Leave to Care for a Covered Service Member with a Serious Injury or Illness — § 825.127

As employers will recall, military caregiver leave provides a 26-week leave entitlement for eligible family members to care for seriously ill or injured military members. The existing regulations specifically excluded former members of the regular armed forces, former members of the National Guard and reserves, and members on the permanent disability list from the definition of a “covered service member.” The Final Rule will remove this exclusion so that military caregiver leave now applies to former members of the military.

Definition of “Covered Veteran” for Caregiver Leave — § 825.127

The existing regulations did not define “covered service member” with regard to veterans. The Final Rule will remedy this gap and include veterans in the applicable definition. Specifically, covered service members include (i) a covered veteran (ii) who is undergoing medical treatment, recuperation, or therapy (iii) for a serious injury or illness.

A “covered veteran” is defined as a member of the armed forces, National Guard, or reserves who was discharged or released under conditions other than dishonorable at any time during the five-year period prior to the first date the eligible employee takes FMLA leave to care for the covered veteran.

Employers need to be aware that the Final Rule excludes the period between October 28, 2009, and March 8, 2013 (the effective date of the Final Rule) from the five-year “look back” for covered veteran status. This grace period attempts to address complexities stemming from the DOL’s position that military caregiver leave did not become effective for veterans until its proposed rules became final.

Furthermore, the Final Rule reiterates the DOL’s position that leave provided to veterans under this provision before March 8, 2013, cannot be counted against an employee’s leave entitlement because companies provided it voluntarily before the effective date of the Final Rule. It is unclear if the courts will agree with this interpretation, and employers should proceed with caution.

Definition of “Serious Injury or Illness” — § 825.127

The Final Rule clarifies that a serious injury or illness can include a preexisting condition aggravated by military service in the line of duty on active duty. The Final Rule explains that a preexisting injury or illness generally will be considered to have been aggravated in the line of duty where there is an increase in the severity of such injury or illness during service, unless there is a specific finding that the increase in severity is due to the natural progression of the injury or illness.

Under the Final Rule, a current member of the armed forces must have a serious injury or illness that renders the member medically unfit to perform the duties of the member’s office, grade, rank, or rating.

The Final Rule also defines “serious injury or illness” of a covered veteran. Like the definition of “serious injury or illness” for military service, the serious injury or illness of a covered veteran must be incurred in, or preexisting but aggravated by, the line of duty on active duty. The serious injury or illness of a covered veteran also must be one of the following:

A continuation of a serious injury or illness that was incurred or aggravated when the covered veteran was a member of the armed forces and that rendered the service member unable to perform the duties of the service member’s office, grade, rank, or rating
A physical or mental condition for which the covered veteran has received a U.S. Department of Veterans Affairs Service-Related Disability Rating (VASRD) of 50% or greater, with such VASRD rating being based, in whole or in part, on the condition precipitating the need for military caregiver leave
A physical or mental condition that substantially impairs, or would do so absent treatment, the covered veteran’s ability to secure or follow a substantially gainful occupation by reason of a disability or disabilities related to military service
An injury, including a psychological injury, on the basis of which the covered veteran has been enrolled in the Department of Veterans Affairs Program of Comprehensive Assistance for Family Caregivers

The DOL noted that, while the definition of a covered veteran’s “serious injury or illness” includes conditions that impair the ability of a veteran to work, covered veterans may be employed. The DOL offers the example of a veteran with post-traumatic stress disorder who is able to work because of medical treatment but who may still need care from a family member for other reasons (e.g., to drive the veteran to medical appointments or to assist the veteran with basic medical needs).

The commentary in the Final Rule also makes it clear that, although a military member’s Social Security Disability Insurance determination is not dispositive of having a qualifying serious injury or illness, a private healthcare provider might consider the determination in his or her assessment.

Special Rules for Airline Flight Crews

The AFCTCA, which took effect on December 21, 2009, provides that an airline flight crew employee will meet the hours-of-service eligibility requirement if he or she has worked or been paid for not less than 60% of the applicable total monthly guarantee (or its equivalent) and has worked or been paid for not less than 504 hours (not including personal commute time or time spent on vacation, medical, or sick leave) during the previous 12 months. Airline flight crew employees continue to be subject to the FMLA’s other eligibility requirements.

The Final Rule includes provisions to align the existing regulations with the passage of the AFCTCA. Employers should note that the regulations applicable to airline flight crews in the Final Rule are wholly contained in a separate, newly titled subpart, “Subpart H – Special Rules Applicable to Airline Flight Crew Employees,” and are not integrated into the existing regulations by topic.

Hours-of-Service Requirement — § 825.801

Because the AFCTCA established a special hours-of-service requirement for airline flight crew employees, the DOL has adopted new section 825.801, which largely tracks the DOL’s 2012 proposal. Airline flight crew employees may become eligible under the FMLA (as amended by the AFCTCA) if they have either the required number of “hours worked” or “hours paid” during the previous 12-month period.

The Final Rule provides that an airline flight crew employee can meet the hours-of-service requirement under the FMLA if he or she (1) meets the standard eligibility threshold contained in section 825.110 (1,250 hours/12 months) or (2) has worked or been paid for not less than 60% of his or her applicable monthly guarantee and has worked or been paid for not less than 504 hours.

For airline employees who are on reserve status, the “applicable monthly guarantee” is defined in new section 825.801(b)(1) as the number of hours for which an employer has agreed to pay the employee for any given month. For airline employees who are not on reserve, the applicable monthly guarantee is the minimum number of hours for which an employer has agreed to schedule such employee for any given month.

The Final Rule clarifies that employers have the burden of proof in showing that an airline flight crew employee is not eligible for leave.

Calculation of Leave — § 825.802

The Final Rule allows airline flight crews up to 72 days of leave during any 12-month period to use for one or more of the following reasons: as an employee’s basic leave entitlement for the employee’s own illness; to care for an ill spouse, child, or parent; for the birth or adoption of a child or placement of a child in the employee’s home for foster care; or for exigent circumstances associated with the employee’s spouse, son, daughter, or parent on covered active duty. This entitlement is based on a uniform six-day workweek for all airline flight crews, regardless of time actually worked or paid, multiplied by the statutory 12-workweek entitlement. Airline flight crews are entitled to up to 156 days of military caregiver leave.

When a flight crew employee takes intermittent or reduced-schedule leave, the Final Rule requires employers to account for the leave using an increment no greater than one day.

Recordkeeping Requirements — § 825.802

In addition to the recordkeeping requirement applicable to all employers under the FMLA, the Final Rule requires airline employers to maintain any records or documents that specify the applicable monthly guarantee for each type of employee to whom the guarantee applies, including any relevant collective bargaining agreements or employer policy documents that establish the applicable monthly guarantee, as well as records of hours worked.

Other Changes Universal to the FMLA

Increments of Intermittent FMLA Leave — § 825.205

The existing version of section 825.205(a) defined the minimum increment of FMLA leave to be used when taken intermittently or on a reduced schedule as an increment no greater than the shortest period of time that the employer uses to account for other forms of leave, provided that it is not greater than one hour. According to the comments of the Final Rule, the DOL intended to emphasize that an employee’s entitlement should not be reduced beyond the actual leave taken and therefore added language to paragraph (a)(1), stating that an employer may not require an employee to take more leave than is necessary to address the circumstances that precipitated the need for leave. This change does not necessitate action for any employer already complying with the shortest increment rule.

The DOL further clarified that the additions to section 825.205(a) underscore the rule that if an employer chooses to waive its increment-of-leave policy in order to return an employee to work at the beginning of a shift, the employer is likewise choosing to waive further deductions from the FMLA entitlement period. In other words, if the employee is working, the time cannot count against FMLA time, no matter what the smallest increment of leave may be.

The DOL had proposed to remove the language in section 825.205(a) that allowed for varying increments at different times of the day or shift in favor of the more general principle of using the employer’s shortest increment of any type of leave at any time. However, the Final Rules does not incorporate this change. Employers who account for use of leave in varying increments at different times of the day or shift may also do so for FMLA leave, provided that the increment used for FMLA leave is no greater than the smallest increment used for any other type of leave. An employer can account for FMLA leave in smaller increments at its discretion.

The existing version of section 825.205(a)(2) included a provision on physical impossibility, which provided that, where it is physically impossible for an employee to commence or end work midway through a shift, the entire period that the employee is forced to be absent is counted against the employee’s FMLA leave entitlement. The DOL had proposed to either (1) delete this provision or (2) add language emphasizing that it is an employer’s responsibility to restore an employee to his or her same or equivalent position at the end of any FMLA leave as soon as possible.

The Final Rule retains the physical impossibility provision with clarifying language that the period of physical impossibility is limited to the period during which the employer is unable to permit the employee to work prior to or after the FMLA period.

The Final Rule also clarifies that the rule stated in section 825.205(c), which addresses when overtime hours that are not worked may be counted as FMLA leave, applies to all FMLA qualifying reasons and not just serious health conditions.

The DOL had proposed to add section 825.205(d), which would have provided a methodology for calculating leave for airline flight crew employees, but noted in the comments to the Final Rule that this language will now appear in section 825.802.

Recordkeeping Requirements — § 825.500

The Final Rule adds a sentence to section 825.500, reminding employers of their obligation to comply with the confidentiality requirements of the Genetic Information Nondiscrimination Act of 2008 (GINA). To the extent that records and documents created for FMLA purposes contain “family medical history” or “genetic information” as defined in GINA, employers must maintain such records in accordance with the confidentiality requirements of title II of that act. The DOL noted that GINA permits genetic information obtained by the employer, including family medical history, in FMLA records and documents to be disclosed consistent with the requirements of the FMLA.

Eligible Employees — § 825.110

The Final Rule makes clarifications to note that the protections afforded by the Uniformed Services Employment and Reemployment Rights Act (USERRA) extend to all military members, both active duty and reserve, returning from USERRA-qualifying military service. The DOL noted in the comments to the Final Rule that the previous regulation may have been unclear in that USERRA rights apply to employees returning from service in the regular armed forces.

Forms

The regulations will no longer include model forms as a part of the appendices. These forms will remain available on the DOL’s website. The practical implication of this change is that the DOL will be able to make changes to the forms without going through the formal rulemaking process. The DOL has made small modifications to the model forms. For example, Form WH-384 was modified to refer to a military member, use the term “covered active duty,” and contain the requirement that the member be deployed to a foreign country. The Final Rules has also created new forms for the certification of a serious injury or illness of a covered veteran—Forms WH-385 and WH-385-v.

New Administration Interpretation

In addition to the Final Rule, the DOL has recently published Administrator’s Interpretation No. 2013-1 (Administrator Interpretation), which provides clarifications to the existing definition of “son or daughter,” as it applies to an individual who is 18 years of age or older and incapable of self-care because of a mental or physical disability.^[5]Employers should note the following important provisions set forth in the Administrator Interpretation:

The FMLA regulations adopt the Americans with Disabilities Act’s (ADA’s) definition of “disability” as a physical or mental impairment that substantially limits a major life activity.^[6]
The FMLA regulations define “incapable of self-care because of mental or physical disability” as when an adult son or daughter “requires active assistance or supervision to provide daily self-care in three or more of the ‘activities of daily living’ or ‘instrumental activities of daily living.'”^[7] Determinations with respect to the disability of the son or daughter should be made in accordance with the ADA.
The age of onset of the disability is irrelevant to this analysis. The adult son or daughter must also have a qualifying serious health condition, and the parent must be “needed to care” for the son or daughter, which is defined as including physical care, transportation for healthcare, and psychological comfort and reassurance for a son or daughter whose serious health conditions require inpatient or home care.
The definition of a “son or daughter” under the covered military leave entitlement is distinct from the definition for basic coverage. However, the same son or daughter could qualify a parent for both types of leave. For example, if an employee exhausts 26 weeks of military caregiver leave in one FMLA year, this same employee can take FMLA leave to care for that same son or daughter in subsequent years due to the adult child’s serious health condition, as long as all other FMLA requirements, such as the 1,250 hours-of-service rule, are met.

Implications

Employers should review their FMLA policy, internal processes, and any associated forms to ensure that they comply with the Final Rule and new Administrator Interpretation. Employers who have offered leave pursuant to the veteran’s provisions prior to March 8, 2013, should contact counsel when counting that leave against an employee’s entitlement.

_{[1]. View the Final Rule here.}

_{[2]. View the new forms here.}

_{[3]. Notably, the DOL has taken the position that the 2009 statutory amendments relating to leave to care for a veteran will not actually go into effect until March 8, 2013-the date when the Final Rule becomes effective. Because caregiver leave for veterans is limited to those needing treatment within five years of discharge from the military, the DOL has provided a special formula for calculating caregiver leave for family members of veterans discharged between 2009 and 2013. We recommend consulting with counsel with respect to this formula.}

_{[4]. The Final Rule clarifies that active duty orders will generally specify whether a member’s deployment is to a foreign country. To further the point, the Final Rule defines “deployment” with the armed forces to a foreign country as deployment to areas outside of the United States, the District of Columbia, or any territory or possession of the United States, including deployment in international waters.}

_{[5]. View the Administrator Interpretation here.}

_{[6]. 29 C.F.R. § 825.122(c)(2).}

_{[7]. 29 C.F.R. § 825.122(c).}

United Kingdom Employment Compensation Payments Increase

Celia Kendrick, Matthew Howse, and Labor & Employment Practice with Morgan, Lewis & Bockius LLP recently had an article featured in The National Law Review titled, United Kingdom Employment Compensation Payments Increase:

Annual increase on certain statutory payments takes effect from 1 February.

On 1 February, the annual increase on certain statutory payments comes into effect. The key changes are the following:

Maximum unfair dismissal compensatory award: £74,200 (increase from £72,300)
Maximum unfair dismissal basic award: £13,500 (increase from £12,900)
Cap on a week’s pay for certain statutory calculations: £450 (increase from £430)
Maximum statutory redundancy pay: £13,500 (increase from £12,900)

Other increases will take effect in April 2013, including increases in statutory maternity pay and statutory sick pay, and the level of national minimum wage will increase in October 2013.

Additionally, on 17 January, the government announced that the cap on the unfair dismissal compensatory award will change. Beginning around summer 2013, unfair dismissal compensation will be capped at the lower of the statutory cap (currently £74,200) and 12 months’ pay. This is a major change in UK employment law and one that employers will welcome because the financial risk of dismissing an employee who earns less than the statutory cap will be reduced. However, it is likely to mean that more employees will make discrimination or whistleblowing claims, for which no statutory cap applies.

DOL, IRS, and HHS Put the Brakes on Stand-Alone Health Reimbursement Arrangements Used to Access Health Insurance Coverage in the Individual Market

The National Law Review recently featured an article regarding Health Reimbursement Arrangements written by Alden J. Bianchi and Gary E. Bacher of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.:

In a set of Frequently Asked Questions¹(FAQs) posted to the Department of Labor’s website on January 24, the Departments of Health and Human Services, Labor, and Treasury (the “Departments”) put a stop to an approach to health plan design under which employers furnish employees with a pre-determined dollar amount (a “defined contribution”) that employees can apply toward the purchase of health insurance coverage in the individual health insurance market.

An arrangement under which an employer provides an amount of money to employees to pay for unreimbursed medical expenses or for individual market premiums is itself a “group health plan.” Such an arrangement is referred to and regulated under the Internal Revenue Code as a “health reimbursement arrangement” or “HRA.”² The HRA approach described above is referred to as a “stand-alone HRA” to distinguish it from arrangements in which the HRA is paired with an employer’s group health plan. This latter HRA design is referred to as an “integrated HRA.”

The rules governing HRAs stand in contrast to cafeteria plans and medical flexible spending arrangements, which pave the way for employee contributions to be paid with pre-tax dollars. Where employee contributions are limited to premiums, the cafeteria plan is referred to colloquially as a “premium-only” plan. Where employees can set aside their own money to pay for certain medical expenses including co-pays and co-insurance with pre-tax dollars, the arrangement is referred to as a “medical flexible spending arrangement” or “medical FSA.” Medical FSAs can include employer money (typically in the form of “flex credits”), but they cannot be used to pay health insurance premiums.

While some vendors have begun to market stand-alone HRAs, it was never clear that HRAs used to access individual market coverage could pass muster under the Patient Protection and Affordable Care Act (the “Act”) or other applicable laws. The regulatory hurdles, both before and after 2014, include the following:

Before 2014, carriers issuing coverage in the individual market are free to impose all manner of underwriting conditions, which raise the specter of discrimination based on health status in violation of Title I of the Health Insurance Portability and Accountability Act (HIPAA). These concerns disappear commencing in 2014 as a consequence of the Act’s comprehensive overhaul of health insurance underwriting practices.
The Act generally prohibits group health plans and health insurance carriers from imposing lifetime or annual limits on the dollar value of essential health benefits. In prior guidance, the regulators gave a “pass” to integrated HRAs, but not to stand-alone HRAs.
Because individual market products are age rated, the same coverage will cost more in the hands of an older employee than in the hands of a similarly-situated younger employee. Before 2014, the variations in premium costs are a matter of state law; from and after 2014, the Act establishes a federal floor under “modified community rating” rules that permit a disparity of no more than 3:1. Under either regulatory regime, a flat dollar amount is thought to raise questions under the Age Discrimination in Employment Act (ADEA). Under the ADEA, variations in premiums are permitted only where the added cost charged to an older employee is justified by the actuarially-adjusted cost of providing the benefits to the older employee.

The FAQs cite the Act’s ban on lifetime and annual limits as the basis for their objection to stand-alone HRAs used to access individual market coverage. Specifically, the FAQs note that—

“[A]n HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer. …”

The Departments state their objections unequivocally: an HRA used to purchase coverage in the individual market cannot be considered integrated with that individual market coverage. Therefore, such an arrangement does not satisfy the requirements Act prohibiting group health plans and health insurance carriers from imposing lifetime or annual limits on essential health benefits. The Departments also made clear that an employer-sponsored HRA may be treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in that coverage. Thus, if an HRA credits additional amounts to an individual only when he or she does not enroll in the employer’s group health plan, the HRA will not comply with the Act.

Recognizing the potential hardship to existing stand-alone HRAs, the FAQs include a special rule for amounts credited or made available under HRAs in effect prior to January 1, 2014. Whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014 may be used after December 31, 2013 to reimburse medical expenses without running afoul of the Act. If the HRA did not prescribe a set amount or amounts to be credited during 2013, then the amounts credited cannot exceed the amount credited for 2012.

NLRB Appointments are “Constitutionally Invalid”

Mark A. Carter with Dinsmore & Shohl LLP recently had an article, NLRB Appointments are “Constitutionally Invalid”, published in The National Law Review:

The D.C. Circuit Court of Appeals has invalidated the appointments of three members of the National Labor Relations Board who were designated on January 4, 2012. On January 25, 2013, the Court issued its ruling in Noel Canning v. NLRB, et al. Docket No. 12-1115. http://www.cadc.uscourts.gov/internet/opinions.nsf/ 13E4C2A7B33B57A85257AFE00556B29/$file/12-1115-1417096.pdf. In Noel Canning, the employer sought to prohibit enforcement of a February 8, 2012 NLRB decision concluding it violated the National Labor Relations Act.

The Court granted the Petition of Noel Canning on the basis that the NLRB lacked a sufficient quorum of members when it reached its decision. In February 2012, the NLRB was putatively staffed with a full complement of five members. However, three of those members were appointed by the President, without confirmation by the Senate, on January 4, 2012. The NLRB maintained the appointments were legitimate “recess” appointments made while the Senate was out of session. The Petitioner argued that, in fact, the Senate was in pro forma session and as such, the President had no constitutional authority to make “recess appointments” of the NLRB members.

The D.C. Circuit agreed with the Petitioner that the President’s appointments were “constitutionally invalid.” As such, the Board did not have a “quorum for the conduct of business” on the date of its decision as only two members of the NLRB were properly seated.

The impact of the decision is likely substantial. In an appearance before the Oversight Committee of the U.S. House of Representatives on February 1, 2012, Dinsmore Labor Practice Group Chair Mark Carter testified, that if the recess appointments on January 4, 2012 were determined to be improper “every administrative decision and every administrative rule or regulation implemented by the National Labor Relations Board will be subject to appeal or attack.” http://oversight.house.gov/wp-content/uploads/2012/02/2-1-2012_Carter-Full.pdf.

Carter testified that if the appointments were invalidated, as they have been, “the actions of the NLRB will be ultra vires” and every decision and regulation will be subject to attack. The NLRB has been active both in the arenas of decision-making and regulatory action over the past year. If the decision of the D.C. Circuit is upheld, the decisions of the Agency since January 4, 2012 may have no mandatory impact on employers, unions or employees.

The NLRB reacted to the decision on the afternoon of January 25 by insisting that the remaining recess appointees, Richard Griffin and Sharon Block, will continue to perform their statutory duties and issue decisions along with Chairman Mark Pearce. House Oversight Committee Chairman Darrell Issa (R – CA) called upon the NLRB to “take the responsible course and cease issuing further opinions until a constitutionally-sound quorum can be established.” Chairman Issa stated “(t)he unconstitutionally appointed members of the NLRB should do the right thing and step down.”

Women Really CAN Have it All – Ridding the Legal Field of “The Mommy” / “Tiger Lady” Oxymoron

The National Law Review recently published a book review of, Women Really CAN Have it All – Ridding the Legal Field of “The Mommy” / “Tiger Lady” Oxymoron, by Heidi R. Wendland of The National Law Review / The National Law Forum LLC:

The National Law Review a top volume legal news website

Long gone is the notion that a woman’s place is at home. Anne Murphy Brown has had her own success in balancing motherhood with a legal career as a litigator, corporate attorney and currently as an Assistant Professor and Director of Legal Studies at Ursuline College. Anne Murphy Brown finds more than 20 other women who have enjoyed the same successes and profiles them in Legally Mom: Real Women’s Stories of Balancing Motherhood and Law Practice. She does an excellent job in making this book relevant to every woman by carefully selecting a diverse array of women to profile. She finds women practicing at law firms and at governmental agencies. She also profiles women who have started their own law firms, who pursue a legal career from home, and who work as in house counsel at corporations. Each chapter contains a different woman’s personal experience and perspectives in balancing motherhood and her legal career. While all of these women face unique challenges depending on which course of work they pursue in the legal field, a common theme prevails throughout the entire book. The recipe for success of “having it all” is the same: these women have been successful because they have had support, drive, and a realistic grasp on their own personal limitations.

Many of the women within Legally Mom are able to pursue a career and be a mother because they have strong support from their husbands. Their husbands help split the parenting duties allowing the mother to keep up with the demands of her career. Other women profiled are not as lucky, and have to find support outside of the home. Some find support from family members in the form of child care. Others find support from within their workplace through understanding bosses, flexible hours, and policies enacted for mothers within the firm such as paid time off, nursing rooms, and child care offered on the premises. Anne Murphy Brown also provides the reader with a great resource: www.mamalaw.com . This website was created by a group of career moms to serve as a forum for other career moms to lend support to each other.

All the women profiled share a desire to succeed as both a mother and a lawyer. The book demonstrates how women have to fight for their right to pursue a career while being a mother and every woman profiled gives excellent advice as to how to do so. They have to be comfortable in confronting their bosses in order to achieve what they want. In fact, one woman profiled mentions an excellent point that it is to a firm’s detriment to not be flexible for women attorneys. Law firms and companies lose many educated women to motherhood because they do not enact policies that provide for flexibility to pursue both. This interesting perspective gives the reader a great negotiating tool when confronting her employer.

Women who want both a career and to be a mother must still acknowledge that there are limits since there are only 24 hours in a day. The women in the book all prioritize their lives in different ways and give advice as to how to live with the choices they make. In the end, the women do what works best for their own unique situation.

For some women profiled, being a mother and pursuing a legal career was something they always knew they wanted to balance. For other women profiled, being a mother was an afterthought and it was not until they had established themselves within their career did they consider starting their families. Every woman who is considering whether it is possible to be a mother and pursue a legal career should read this book. Every woman who thinks it is impossible to have both should certainly read this book. While woman have a huge task in front of them when deciding to be a mother and a career lady, this book proves it is not impossible. With effective time management, a woman can pursue a successful career and be a good mother. Legally Mom serves to enhance the feeling of female camaraderie in a traditionally male dominated career of law, and will no doubt inspire every reader and continue the movement for change and women empowerment.

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NASDAQ-listed issuers have until:

NYSE Compensation Committee Listing Standards

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NASDAQ Compensation Committee Listing Rules

Practical Considerations

By July 1, 2013:

By the earlier of the first annual meeting after January 15, 2014, or October 31, 2014:

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Specifics from four states

The Takeaway

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Final rule takes effect on March 8 and makes changes to model certification forms, intermittent leave, exigency and military caregiver leave, and flight crew rules.

Summary of the Final Rule

Background on FMLA Amendments

Final Rule Relating to Qualifying Exigency Leave

Definition of “Active Duty” — § 825.126(a), Now § 825.126(a)(1) and (a)(2)

Exigency Leave for Child Care and School Activities — § 825.126(a)(3), Now § 825.126(b)(3)

Exigency Leave for Rest and Recuperation — § 825.126(a)(6), Now § 825.126(b)(7)

New Exigency Leave for Parental Care — Now § 825.126(b)(8)

Final Rules Relating to Military Caregiver Leave

Certification Provisions for Caregiver Leave — § 825.310

Leave to Care for a Covered Service Member with a Serious Injury or Illness — § 825.127

Definition of “Covered Veteran” for Caregiver Leave — § 825.127

Definition of “Serious Injury or Illness” — § 825.127

Special Rules for Airline Flight Crews

Hours-of-Service Requirement — § 825.801

Calculation of Leave — § 825.802

Recordkeeping Requirements — § 825.802

Other Changes Universal to the FMLA

Increments of Intermittent FMLA Leave — § 825.205

Recordkeeping Requirements — § 825.500

Eligible Employees — § 825.110

Forms

New Administration Interpretation

Implications

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Annual increase on certain statutory payments takes effect from 1 February.

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