On February 12, 2018, the SEC Division of Enforcement announced the Share Class Selection Disclosure Initiative self-reporting initiative (the SCSD Initiative). The SCSD Initiative is in response to numerous enforcement actions filed against investment advisers for disclosure failures relating to advisers’ selection of mutual fund share classes that paid the adviser, or its related entities or individuals, a 12b-1 fee when a lower-cost share class of the same fund was available to clients.

Pursuant to Section 206(2) of the Investment Advisers Act of 1940 (the Advisers Act), advisers are prohibited from engaging in any acts or practices that operate as a fraud upon any client or prospective client. In addition, Section 206(2) imposes a fiduciary duty on investment advisers to act for their clients’ benefit and to make full disclosure of all material facts, including conflicts of interest. Furthermore, Section 207 of the Advisers Act makes it unlawful to willfully make any untrue statement of any material fact in a registration application or report filed with the SEC, or to willfully omit from such a registration application or report any material fact which should be included therein. Relying upon Sections 206 and 207 of the Advisers Act, the SEC recently pursued the numerous actions against investment advisers referenced above.

Who Should Consider Self-Reporting to the Division of Enforcement

The Enforcement Division describes a “Self-Reporting Adviser” as an adviser who received 12b-1 fees in connection with recommending, purchasing or holding 12b-1 paying share classes for its advisory clients when a lower-cost share class of the same fund was available to those clients, and failed to disclose “explicitly” in its brochure/brochure supplement(s) the conflict of interest associated with the receipt of such fees. The investment adviser received 12b-1 fees if:

• It directly received the fees;
• Its supervised persons received the fees; or
• Its affiliated broker-dealer (or its registered representatives) received the fees.

So as to be sufficient, an adviser’s disclosure must clearly describe the conflicts of interest associated with making investment decisions in light of the receipt of 12b-1 fees, and selecting the more expensive 12b-1 fee paying share class when a lower-cost share class was available for the same fund. Additional information regarding adequacy of disclosures is provided in the various enforcement actions referenced in the announcement. In our third quarter 2017 Newsletter, DCS provides information regarding the administrative proceeding In the Matter of SunTrust Investment Services, Inc.,Investment Advisers Act Rel. No 4769 (September 14, 2017). Regarding the inadequacy of disclosures relating to 12b-1 fees retained by an adviser, the SunTrust Order provides the following:

STIS [SunTrust Investment Services] did not adequately inform its advisory clients of the conflicts of interest presented by its IARs’ share class selections and the receipt by STIS and the IARs of 12b-1 fees. STIS disclosed in its Form ADV Part 2A brochures for its investment advisory programs that STIS “may” receive 12b-1 fees as a result of investments in certain mutual funds and – for several STIS programs – that such fees presented a “conflict of interest.” However, STIS did not disclose in its Form ADV Part 2A brochures or otherwise that many mutual funds offered a variety of share classes, including some that did not charge 12b-1 fees and were, accordingly, less expensive for eligible investors. Moreover, STIS failed to disclose to affected clients that an IAR could purchase, hold, or recommend—and in certain instances did purchase, hold or recommend—mutual fund investments in share classes that paid 12b-1 fees to STIS, which STIS ultimately shared with its IARs as compensation, even though such clients also were eligible to invest in share classes of the same mutual funds that did not charge such fees and were less expensive.

When Must Investment Advisers Self-Report

To be eligible for the SCSD Initiative, an investment adviser must self report by notifying the Division of Enforcement by midnight EST on June 12, 2018. Notification can be made by email to SCSDInitiative@sec.gov or by mail to SCSD Initiative, U.S. Securities and Exchange Commission, Denver Regional Office, 1961 Stout Street, Suite 1700, Denver, Colorado 80294.

What Must Investment Advisers Self-Report

Within 10 business days from the date of its notification, an adviser must confirm its eligibility for the SCSD Initiative by submitting a completed questionnaire. Following is a summary of the information included in the questionnaire:

• Identification and contact information;
• To the extent applicable, identification and contact information for the affiliate broker-dealer;
• Identification of the periods during which brochure(s) and brochure supplement(s) failed to include the necessary disclosures and copies of such forms;
• The following information regarding each mutual fund that paid 12b-1 fees for investing or holding client assets (submitted in a provided Excel format):
  • Fund name;
  • Ticker symbol;
  • CUSIP;
  • Amount of year-end assets held by the adviser’s clients;
  • Total amount of 12b-1 fees incurred by the adviser’s clients (by each share class);
  • Amount of 12b-1 fees (if any) if the adviser’s clients assets had been invested in the lowest cost share class available;
  • Amount of 12b-1 fees in excess of the lowest cost share class;
  • Total 12b-1 fees received by the adviser, its supervised persons, an affiliated broker-dealer and/or the affiliated broker-dealer’s registered representatives; and
  • 12b-1 fees that the adviser plans to disgorge.
• Any other facts that the adviser determines would be relevant to the Division of Enforcement’s understanding of the circumstances.

The Standardized Terms of Settlement

If an adviser meets the terms of eligibility for the SCSD Initiative and the Division of Enforcement decides to recommend enforcement action against the adviser, the following are the settlement terms to be recommended by the Division of Enforcement.

Types of Proceedings and Nature of Charges

The proceeding will be an administrative cease-and-desist proceeding under Sections 203(e) and 203(k) of the Advisers Act for violations of Sections 206(2) and 207 of the Advisers Act based on the adviser’s failure to disclose the conflict of interest. In an approved settlement, the adviser will neither admit nor deny the findings of the SEC.

Cease-and-Desist Order and Censure

The settlement will include an order to cease-and-desist from committing violations of Sections 206(2) and 207 of the Advisers Act, and a censure.

Disgorgement and Prejudgment Interest

The settlement will include disgorgement of the inappropriately received 12b-1 fees and prejudgment interest on such amounts. For eligible advisers, the Division of Enforcement will not recommend the imposition of a penalty.

Undertakings

Approved advisers will be required to acknowledge taking the following steps within 30 days of an approved settlement order:

• Review and as necessary correct the disclosure documents;

• Evaluate whether existing clients should be moved to a lower cost share class and move clients as necessary;

• Evaluate, update if necessary and review for effectiveness the implementation of policies and procedures designed to prevent violations of the Advisers Act related to disclosures regarding mutual fund class share selection;

• Notify all affected clients of the settlement terms; and

• Provide to the SEC, no later than 10 days after completion, a compliance certification regarding the undertakings.

Individual Liability

The SCSD Initiative covers only advisers. The Division of Enforcement is providing no assurances as part of the program that individuals will be offered similar terms if they engaged in violations of federal securities laws. The Division of Enforcement may seek enforcement actions against such individuals and remedies beyond those provided for in the SCSD Initiative.

Entities That Do Not Take Advantage of the SCSD Initiative

For advisers that would have been eligible for the SCSD Initiative but did not participate, the Division of Enforcement expects in any proposed enforcement action to recommend additional charges and the imposition of penalties. The Division of Enforcement and the Office of Compliance Inspections and Examinations plan to continue to make mutual fund share class selection practices a priority.

This article was written by Kevin S. Woodard of Dinsmore & Shohl LLP

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It would be unusual for a large to medium scale construction project to be completed without the general contractor experiencing issues with at least some of its subcontractors or suppliers.

Under such circumstances, it is typical for back charges to be assessed by the general contractor against the subcontractor or supplier who failed to perform properly pursuant to the terms of their contract. If the possibility of litigation looms in the future concerning such issues, or even if it may not, it is suggested that the general contractor carefully document any potential back charges against the subcontractor or vendor.

The process discussed below will ensure that the back charges are appropriately documented and will give the general contractor the best chance of success in any potential future litigation or negotiations.

The most important issue that a contractor must be aware of when documenting back charges, is to provide appropriate notice to the subcontractor or vendor, as may be required by the terms of the subcontract. If the subcontractor is entitled to a time to cure any deficiencies, this opportunity must be given by the general contractor to the subcontractor or vendor. If the subcontractor properly cures the issue, than in that event, the matter is concluded. On the other hand, if the subcontractor or vendor fails to take remedial measures than the general contractor should take the following additional steps before assessing a back charge. It is important that these steps be carefully followed in order to provide the best chance of success in potential future litigation or negotiations.

The first thing that the general contractor should do is to notify the subcontractor or vendor in writing specifically what the issues are with the materials or services which were provided. This letter should spell out in great detail any and all issues with regard to the materials or services.

The next step is for the contractor to provide notice to the subcontractor or vendor and give them the ability to come to the project to inspect the purported issues prior to any remedial measures taking place. Once again, providing the opportunity to inspect is a very important step in this process.

The next step is to advise the subcontractor or vendor as to when the remedial measures will occur to remedy the deficient condition. This notification should be in writing and should also provide the subcontractor or vendor with the opportunity to be present to observe the remedial measures.

This may very well be the most important piece of documentation to be provided to the vendor or subcontractor and should be sent via certified, regular mail, or any other way in which the contractor can provide to the subcontractor or supplier.

While the remediation is proceeding, the general contractor should carefully videotape any and all remedial efforts, and take very detailed photographs with regard to the remediation process. It is also suggested that any and all invoices, timesheets, or other documents with regard to the back charge be stored in a separate folder and that all of these documents be provided to the defaulting subcontractor or vendor once the back charge work is completed.

The final step in the process would be to provide a complete back charge form to the vendor or supplier with all the relevant invoices which detail the total amount of the back charges. Thereafter, the contractor can deduct this amount from any amount which may be due the subcontractor or vendor.

This article was written by Paul W. Norris of Stark & Stark

As we predicted in our year-end post on civil and criminal enforcement trends, 2018 is already off to strong start in opioid-related enforcement against individual providers and associated practices.  Earlier this month, the Department of Justice (DOJ) announced that a Michigan physician, Dr. Rodney Moret, was sentenced to 75 months in prison for his role in conspiracies to distribute prescription pills illegally and to defraud Medicare. The conduct alleged against Dr. Moret is particularly extreme, but nevertheless reflects the government’s commitment to ferreting out opioid-related misconduct.

The government contended that Dr. Moret was involved in a scheme in which he was the sole practitioner at a medical clinic that purported to be a pain management and HIV infusion clinic but in fact was just a “pill mill.” As part of this scheme, Dr. Moret allegedly would conduct a cursory (if any) examination of patients, which were billed to Medicare, before writing a prescription for controlled substances. Once those prescriptions were filled, patient marketers would sell those drugs on the street in Southeast Michigan. This clinic operated from 2010 to 2015.

As part of this scheme, Dr. Moret was alleged to be responsible for illegally distributing over 700,000 dosage units of Hydrocodone, more than 240,000 dosage units of Alprazolam, and more than 2 million milliliters of promethazine with codeine cough syrup. These drugs had a street value of more than $15 million. Dr. Moret was also responsible for over $6 million in health care fraud. He pled guilty to one count each of conspiracy to commit health care fraud and conspiracy to illegally distribute prescription drugs. In its comments on this sentencing, the U.S. Attorney’s Office for the Eastern District of Michigan made clear that one of the government’s main concerns with Dr. Moret’s conduct was his role in exacerbating the opioid crisis in his community.

A few weeks before DOJ announced Dr. Moret’s sentencing, DOJ announced that a Tennessee chiropractor and a pain clinic nurse practitioner had entered into settlement agreements to resolve allegations under the False Claims Act that they had improperly billed Medicare and TennCare for painkillers, including opioids.

Matthew Anderson, a chiropractor, and his management company, PMC, LLC, managed four pain clinics in Tennessee. Anderson and PMC entered into a settlement agreement to pay $1.45 million to resolve the claims that from 2011 through 2014 they caused pharmacies to submit requests for Medicare and TennCare payments for pain killers, including opioids, which were dispensed based upon prescriptions that had no legitimate medical purpose. The government also alleged that (1) Anderson caused all four clinics to bill Medicare for upcoded claims for office visits that were not reimbursable at the levels sought and (2) Anderson and PMC caused the submission of Medicare claims for services provided by two nurse practitioners who were not meeting applicable supervision requirements.

The United States will receive $1,040,275 of the $1.45 million at issue, while the State of Tennessee will receive $163,225. Anderson and PMC also agreed to be excluded from billing federal health care programs for five years. In addition, the settlement agreement requires Cindy Scott, a nurse practitioner from Nashville, to pay $32,000 and to surrender her DEA registration until October 2021.

While enforcement focus in the first weeks of 2018 appears to have remained largely on individual providers and practices, it remains to be seen whether the government (and whistleblowers) will turn their attention to larger companies and providers. As we reported in our year-end post, in September of last year Galena Biopharma, Inc. agreed to pay $7.55 million to resolve allegations under the FCA that it paid kickbacks to physicians to encourage them to prescribe an opioid product (Abstral). Last month, DOJ announced that Costco Wholesale agreed to pay $11.75 million to settle allegations that its pharmacies violated the Controlled Substances Act by improperly filing prescriptions for controlled substances. Although the allegations against Costco involved lax controls surrounding compliance with requirements related to filling prescriptions (and not the same kind of misconduct related to opioid prescriptions alleged against other providers), the government emphasized that it was undertaking its enforcement efforts with an eye toward the opioid epidemic.  The U.S. Attorney for the Eastern District of Michigan commented that “[i]n light of the prescription pill and opioid overdose epidemic we are seeing across the country, compliance with regulations governing pharmacies is more important than ever” and applauded Costco for working with DEA and shoring up its compliance efforts “to ensure that prescription pills do not end up on the street market.”

This article was written by Samantha P. Kingsbury of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

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Congress recently passed and President Trump signed a comprehensive two-year defense spending budget agreement for fiscal years 2018 and 2019 to prevent an extended federal government shutdown. The legislation also contained a shortterm continuing resolution (“Continuing Resolution”) to fund federal programs further, including the EB-5 Program, through March 23, 2018. The Continuing Resolution contained a framework of a long-term budget accord, and thus, an omnibus spending bill is expected ahead of the March 23 deadline. In fact, a group of Republican senators on Sunday night released a version of President Trump’s immigration proposal ahead of a floor debate on immigration this week.

With regard to the EB-5 Program, the continuing resolution marks another “kicking of the can down the road” by a short-term resolution without change, something we have seen continually since September 2015. Indeed, the last longterm extension occurred in September 30, 2012, when President Obama signed S.3245, which extended the EB-5 Program for three years through September 30, 2015.

What will happen to the EB-5 Program during these ensuing six weeks and thereafter? The short answer is: it is not entirely clear. Numerous reform bills to the EB-5 Program in the House and Senate have circulated between 2015 and 2017; most of these have grown stale. Several Congressional proposals on the topic of immigration have emerged in 2018, but none of them have addressed the EB-5 Program.

Still Relevant Pending EB-5 Legislation

Participation in the EB-5 Program by direct investment in a job-creating enterprise has not required renewal since created by Congress in 1990 as a permanent program. What has been a greater debate in recent years is the Immigrant Investor Pilot Program (“Pilot Program”) that Congress created in 1992 to stimulate additional interest in the EB-5 Program, which involves investing through “regional centers” rather than directly in a job-creating enterprise. The appeal of the Pilot Program is the ability to include indirect and induced jobs as well as direct jobs, which allows a greater number of worthy projects to utilize funding from the EB-5 Program, such as the construction of residential housing, solar and wind farms, infrastructure construction and improvements and other beneficial projects that do not command many on-site direct jobs.

With the Pilot Program’s profound growth, especially in the years following the Great Recession, concern grew in Congress of inadequate governance. With the approaching sunset of the Pilot Program’s three-year renewal in September 2015, numerous House and Senate bills proposed either major overhaul or minor reform measures, certain of which caused quite a commotion in the EB-5 community though ultimately none were enacted. Since then, many more proposed bills have surfaced to reform the Pilot Program and many of these have faded away as well, though a few bills proposed in 2017 remain relevant in terms of what happens next to the EB-5 Program:

• The American Job Creation and Investment Into Public 4 Works Reform Act of 2017 (H.R.3471) introduced by Representatives Brian Fitzpatrick (R-Pennsylvania) and Dwight Evans (D-Pennsylvania) on July 27, 2017, would extend the Pilot Program until September 30, 2022, increase the minimum investment amounts from $500,000 and $1 million to $800,000 and $1.2 million. The new minimum amount of $800,000 would apply to projects in a targeted employment area (“TEA”) and investments in an infrastructure project or a manufacturing project.
• The American Job Creation and Investment Promotion Reform Act of 2017 introduced by Senator Grassley (R-Iowa) and Senator Leahy (D-Vermont), circulated as draft legislation in April 2017, would increase the minimum investment amounts from $500,000 and $1 million to $800,000 and $1 million and would extend the Pilot Program to September 30, 2022, create EB-5 visa set asides for rural and priority urban projects and redefine TEAs to cover rural and priority urban areas and closed military bases.
• The EB-5 Immigrant Investor Visa and Regional Center Program Comprehensive Reform Act of 2017 introduced in April 2017 by Senator Cornyn (R-Texas) would extend the Pilot Program to September 30, 2023, would increase the minimum investment amounts from $500,000 and $1 million to $800,000 and $925,000, create EB-5 visa set asides for rural projects and redefine TEAs to create three categories (i) distressed rural; (ii) distressed urban; and (c) closed military bases.

The foregoing represents only a handful of the bills pending but are germane because they were more recent and may influence the outcome.

What Happens Next for EB-5?

While most eyes are following the activity of the omnibus immigration bills circulating in Congress, including Mitch McConnell’s (R-KY) initiating of the Broader Options for Americans Act (H.R. 2579) to proceed to the Senate, a more compelling prospect to the EB-5 community that could lead to assorted changes to the Pilot Program arises from meetings Senator Grassley (R-Iowa) and Representative Bob Goodlatte (R-Virginia), Chairs of the Senate and House Judiciary Committees had last fall with United States Citizenship and Immigration Services (“USCIS”). Senator Grassley explained his impatience with the delays in enacting reform to the EB-5 Program and the urgency to pass a rule by February 2018, which would become effective within 30 to 90 days later. USCIS has likewise announced that if Congress does not enact reform by April 2018, USCIS will enact its own changes.

Among the changes sought by Senators Grassley and Representative Goodlatte include modification of the TEA concept to include rural and urban distressed/high employment areas utilizing a single-census tract analysis. The proposal would increase the minimum investment amount to $925,000 for projects in the new definition of TEAs and increase all other projects by $25,000 to more than $1 million. Other rumored proposals include visa set-asides for rural projects, minimum direct job requirements, and permission for EB-5 petitioners to retain their original priority date in the event of a petition amendment, among other sundry amendments to the EB-5 Program’s filing and interview procedures.

Further discussions have been limited to a tight circle thus it is unclear what the final rules will contain but they are expected not to be sweeping and to be released sometime between the coming two weeks and April with a transition time of 30 to 90 days thereafter. The inner circle of EB-5 stakeholders have been advocating intensely behind the scenes with lawmakers with the hope that the reform measures result in increased visa set asides and modest minimum investment amount increases or a gradual phase-in to avoid impairing this vital program. We will keep on top of developments and provide additional alerts as news develops.

This article was written by Debbie A. Klis of Polsinelli PC

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As previously reported here, in November 2017, following the Office’s of Management and Budget (“OMB’s”) “immediate stay” of the EEO-1 pay data reporting requirement, the National Women’s Law Center (“NWLC”) and the Labor Council for Latin American Advancement (“LCLAA”) filed a lawsuit to reinstate the EEO-1 pay data reporting requirement, asserting OMB lacked the legal basis to stay the pay data reporting requirement.

This week, the OMB struck back with a motion asking the court to dismiss the NWLC/LCLAA lawsuit.  OMB argued it has continuing authority to review the pay data collection requirement.  Moreover, OMB contended the NWLC and LCLAA do not have standing to sue because neither have been impacted by the OMB’s decision to stay the requirement pending further review. OMB further argued that, in any event, the lawsuit was premature because it has not yet made a final decision on EEO-1 pay data collection.

Regardless of the ultimate fate of EEO-1 pay data collection, gender and race pay gap issues continue to be an area of focus.

This article was written by F. Christopher Chrisbens of Jackson Lewis P.C.

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As forecasted in a blog post last summer, the United States Department of Justice (“DOJ”) has again used the money laundering statute to accomplish the otherwise elusive goal of prosecuting foreign officials who allegedly receive bribes. On Monday, DOJ unsealed its Indictment against five Venezuelans employed by or closely connected to Petroleos de Venezuela S.A. (“PDVSA”), the Venezuelan state-owned and state-controlled oil company.

The unsealing of the charges against these five Venezuelan individuals marks the latest development in a multi-year effort by DOJ to investigate and prosecute bribery at PDVSA. As DOJ’s press release notes, ten individuals have already pleaded guilty in the investigation thus far.  Key among these individuals are Roberto Enrique Rincon Fernandez and Abraham Jose Shiera Bastidas, two American businessmen who pleaded guilty in 2016 to violating the Foreign Corrupt Practices Act of 1977 (the “FCPA”) for paying bribes to PDVSA.  In connection with their pleas, the two admitted to paying PDVSA bribes in order to win lucrative energy contracts and to be given payment priority over other PDVSA vendors during a time when PDVSA faced a liquidity crisis.

Last October, more than one year after these guilty pleas, Spanish police announced the arrests of four of the five individuals named in Monday’s Indictment.  The arrests were described as “part of a months-long sting ordered by the U.S. Department of Homeland Security.”  Currently, three of the defendants remain in Spain pending extradition, the fourth was extradited to the United States and made his initial appearance last Friday, and the fifth remains at large.

As noted above, the Indictment is notable for using the money laundering statute to accomplish what the FCPA statute cannot—bringing charges against a foreign official. Last summer, we blogged about the conviction and sentencing of Guinea’s former Minister of Mines and Geology.  There, we noted the FCPA generally prohibits individuals and businesses from paying bribes to foreign officials to assist in obtaining or retaining business.  However, “foreign officials” cannot be charged under the FCPA or with conspiracy to violate it.  Therefore, a foreign official could not be prosecuted for his conduct in soliciting or receiving bribes under the FCPA.

Here, Monday’s Indictment begins by stating that three of the five Venezuelan defendants were “foreign officials” as that term is used in the FCPA. The Indictment then alleges, in detail, how the defendants laundered the proceeds of the aforementioned PDVSA bribery scheme through numerous financial transactions in the names of various companies.  They are alleged to have worked together to provide banks with false justifications for the bribe payments and, in one instance, used the bribe proceeds to purchase a condominium in Miami in the name of a company controlled by a relative.  All five defendants are alleged to have engaged in at least one conspiracy to commit money laundering, and each is charged with one or more counts of money laundering.  The Specified Unlawful Activity, or SUA, underlying the money laundering counts is the FCPA.  Thus, the FCPA supports money laundering counts in instances in which the FCPA itself could not be charged directly.

The paradox of the latest development in this investigation is intriguing. The investigation was and remains, in its essence, a prototypical FCPA case, in which DOJ is seeking to combat the bribery of foreign officials.  Yet, without the money laundering statute, the U.S. would be unable to prosecute some of the individuals central to the alleged activities.  This paradox is highlighted in the Indictment’s lone count that does not allege a violation of the money laundering statute, Count Two.  There, the Indictment alleges a conspiracy to violate the FCPA, but only names the two defendants who were not “foreign officials.”  In other words, the Indictment implicitly acknowledges that a majority of the defendants are outside the reach of the FCPA statute.  Thus, the money laundering statute acts not simply as a supplement to the FCPA, but as an instrumental component of DOJ’s strategy to prosecute wrongdoing at the highest levels.

The unsealing of the Indictment comes at a tumultuous time in the U.S.-Venezuela relationship and amidst what is described as a time of economic crisis in that country.

Last year, we blogged about the U.S. Department of Treasury’s designation of Venezuela’s Executive Vice President, Tareck Zaidan El Aissami Maddah (“El Aissami”), as a Specially Designated Narcotics Trafficker under the Foreign Narcotics Kingpin Designation Act.  Through this designation, U.S. individuals and entities are prohibited from dealing with El Aissami and certain named entities to which he is allegedly connected, and any assets held by him or those entities in the U.S. are frozen.

More recently, U.S. Secretary of State Rex Tillerson announced earlier this month that the U.S. is considering banning sales of Venezuelan oil in the United States and halting the refining of Venezuelan crude by U.S. companies.  Venezuela, for its part, recently announced its President’s plan to float a new cryptocurrency backed with the country’s oil reserves in an attempt to fend off economic distress.  That plan was met with resistance from Venezuela’s parliament, the U.S. Treasury Department and investors worldwide.  Notably, the article linked above quotes one commentator as predicting this new crytocurrency would “become a money laundering tool for well-connected people” within the President’s regime.

While some commentators believe Venezuela’s frayed relationship with the U.S. may have played some role in the decision to pursue the five Venezuelan executives named in Monday’s Indictment, the message here is universal. An unwary foreign official receiving bribes can easily fall within the ambit of the U.S. money laundering statute.  And the effort to find and arrest any such foreign official is not confined to the U.S. borders.  Perhaps this was best stated by a commentator referencing the October 2017 arrests in Spain:  “There are lots of people that are not sleeping well tonight.”

This article was written by Evan W. Krick of Ballard Spahr LLP

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The Louisiana Fifth Circuit Court of Appeal has held that painters may be treated as independent contractors if they bring some of their own tools, control their own schedules, and make decisions on how to complete the work for which they have been hired.

Background

In Ocampo v. Maronge, No. 17-CA-403 (December 27, 2017), plaintiffs Javier Ocampo and Dennis Ordonez asserted claims for unpaid wages following discharge pursuant to the Louisiana Wage Payment Act (LWPA). A claim under the LWPA requires that the claimant be an “employee.”

Ocampo and Ordonez were hired by Nicole Maronge to perform painting on a residential property in Napoleonville, Louisiana. Maronge claimed that Ocampo and Ordonez were hired to work from Tuesday February 25, 2014, through Friday February 28, 2014. Ocampo and Ordonez testified that they were not informed of an initial deadline to complete the job.

Maronge supplied Ocampo and Ordonez with a ladder, as well as other materials to complete the job, including “sheetrock, paint, primer, caulk, tape, spackling and other similar items.” Ocampo and Ordonez supplied some of their own tools, including brushes, rollers, buckets, and drop cloths.

After arriving at the Napoleonville property, Ocampo and Ordonez learned the job would entail more work than painting, including floor and garage demolition. By the end of February 28, 2014, they informed Maronge that they were not finished with the job, but that they could complete the job by March 2, 2014, with the assistance of an additional laborer. Maronge agreed. Ocampo and Ordonez thereafter worked through March 2, 2014, and completed the job except for the trim painting. They did not return to the jobsite on March 3, 2014, and Maronge hired other laborers to finish the job.

Ocampo and Ordonez claimed in their lawsuit that Maronge never paid them for the hours they worked for her. Specifically, they claimed they were each owed $17 an hour for 62 hours worked on the Napoleonville property, as well as penalties and attorneys’ fees resulting from Maronge’s failure to timely pay their wages.

Maronge did not dispute that Ocampo and Ordonez were owed money for the work they performed. Instead, Maronge disputed the hourly rate and number of hours they worked. Maronge claimed that they were each owed $15 per hour for only 45 hours worked. Maronge also disputed that plaintiffs were her “employees” under Louisiana law.

After discovery, Ocampo and Ordonez filed a motion for partial summary judgment urging the court to find that they were Maronge’s “employees” as a matter of law. The district court denied their motion. Thereafter, the matter proceeded to trial, where the district court found Ocampo and Ordonez to be independent contractors. They subsequently appealed the court’s denial of their motion for partial summary judgment, as well as the court’s judgment finding them to be independent contractors, amongst other issues.

The Louisiana Fifth Circuit’s Analysis

On appeal, the Louisiana Fifth Circuit Court of Appeal affirmed both rulings, emphasizing the independent nature of the plaintiffs’ jobs. The court explained that the essence of the employer-employee relationship is the “employer’s right to control the employee.” As a result, the court declared that to prevail on their motion for partial summary judgment, Ocampo and Ordonez were required to prove that the degree of control Maronge exerted over them rose to the necessary level to create the employer-employee relationship.

The court applied the five factor employee-employer test first enumerated by the Louisiana Supreme Court in the seminal Hickman v. South Pacific Transport Company case from 1972. The court asked: (1) whether there was a valid contract between the parties, (2) whether the plaintiffs used nonexclusive means in accomplishing the work, (3) whether the defendant controlled how the work would be performed, (4) whether there was a specific price for the project, and (5) whether the work was for a certain time or subject to termination by either party at their will.

In affirming the denial of the plaintiffs’ motion for partial summary judgment and the district court’s conclusion that the plaintiffs were independent contractors, the court enumerated the following facts to support its conclusion: the plaintiffs set their own schedules, Maronge did not direct the plaintiffs in how to perform their work, the plaintiffs supplied some of their own tools and techniques, and Maronge was not present on the jobsite. At the same time, the court deemphasized or ignored the ways in which Maronge directed the work to be performed, the tools Maronge provided for the job, the complexity of the actual work performed, and the March 2 deadline for completion of the work that the plaintiffs acknowledged but ignored.

As a result, the Louisiana Fifth Circuit declared that the district court was not “manifestly erroneous or clearly wrong” in classifying the plaintiffs as independent contractors.

Key Takeaways

Ocampo indicates that the sophistication of work performed may not control the existence of an employer-employee relationship. In this instance, the plaintiffs were only painting and demolishing property and the majority of their “tools” were provided by the defendant. Nonetheless, the court found the plaintiffs to be independent contractors. As a result, the LWPA did not apply and thus penalties and attorneys’ fees for late payment of earned wages were not recoverable.

This article was written by Andrew P. Burnside and Hal D. Ungar of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.