The Hidden Assassin: How This Contractual Provision Can Derail A Manufacturer’s Acquisition Plans

An”anti-assignment” clause can be the death knell of any deal involving the sale or purchase of a manufacturing company.  You might ask:  what is an anti-assignment clause?  Here is the typical language that is often buried at the end of many types of contracts, including those with your suppliers and customers:

Seller shall not assign any of its rights or interest in this Agreement without [Business Partner’s] prior written consent.

It appears simple enough.  But, we have seen contracts that not only prevent the assignment of contracts to third parties, but also expressly prohibit consolidation, mergers or change of ownership without prior written consent.

Such provisions raise a host of questions such as: “Can a party withhold consent unreasonably?”  The answer to that is it depends on the language of the contact.  Some anti-assignment clauses expressly state that consent cannot be withheld unreasonably while others are silent on the issue.  [Note:  If you find yourself in the latter situation, we have developed arguments to help].

The other issue that arises is what type of conduct is unreasonable?  Not surprisingly, your customers and suppliers may grant their consent only after obtaining economic concessions and/or re-negotiating the contract.  Some courts have held that such conduct is inappropriate while others have allowed consent to be withheld if the business partner can show that it will be economically harmed or injured by the assignment.

How does this issue derail a deal?  Simple – the party looking to buy or sell or change ownership seeks consent and cannot get it.  If the contract at issue is a key driver for the deal, the whole acquisition can go up in smoke.  For that reason, check your contracts and scrutinize anti-assignment clauses at the time of negotiation.


The Background Check Conundrum: “Manufacturing” a Problem (Pun Intended)

I am a longtime advocate of pre-employment criminal background checks.  So I have watched with resigned acceptance as the EEOC, over 100 states and cities across the United States, and other public advocates have fought to limit the use of an applicant’s criminal history in all but limited circumstances.  New York City’s recently enacted “ban the box” ordinance, which took effect September 2, remains one of the most recent legislative responses, but most certainly will not be the last.  Driving home the point, on September 8, the EEOC announced a settlement of its long running criminal background screening litigation against BMW in which BMW agreed to pay $1.6 million and offer employment opportunities to approximately 100 former applicants.

Against this “ban the box” tsunami, some employers also have been attacked for not being aggressive enough in rejecting applicants based on their criminal backgrounds.  Uber attracted a great deal of attention (and litigation) this summer with the revelation that many Uber drivers were hired notwithstanding significant past criminal convictions.  See, for example, New York Times and Time magazine.  Implicit in this criticism of Uber is the view that the mere fact of conviction for some crimes, no matter how long ago and regardless of the circumstances, made the applicant forever unfit from driving a car-for-hire.

The “Catch 22” has left some employers in doubt as to the course to take.

This practitioner believes the elements of a good background screening policy include the following:

  • An analysis of each position and its essential functions, including degree of unsupervised access to company property, customers, minors and those with special needs.
  • Uniform policies and practices to ensure compliance with federal, state and local laws and notice requirements (such as the Fair Credit Reporting Act).
  • An opportunity for an applicant to voluntarily disclose relevant past criminal convictions and to explain the circumstances and any mitigating factors (youth, rehabilitation, certificate of relief from disabilities, pardon, and so on).
  • An opportunity for an applicant to correct inaccurate criminal conviction reports or explain discrepancies between her or his disclosure and conviction records.

There are many publicly available “best practices” guidelines, two of which can be found here and here.

The debate surrounding the use of criminal convictions is not likely to end soon.  Manufacturers will be well served to review their policies and practices accordingly.

EPA To Propose Overhaul of RCRA Generator Regulations

EPA is poised to publish a proposed rule revising regulations applicable to hazardous waste generators under the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. (RCRA).  The proposed rule, which has not yet been published in the Federal Register, represents a significant overhaul of the RCRA generator regulations.  EPA states that the purpose of the proposed rule is to make the regulations easier to understand, facilitate compliance, provide greater flexibility in the management of hazardous waste, and close important gaps in the regulations.

Currently under RCRA, there are three categories of generators based on the quantity of waste they generate: Large Quantity Generators (LQGs), Small Quantity Generators (SQGs) and Conditionally Exempt Small Quantity Generators (CESQGs).  The proposed rule would replace the term CESQG with Very Small Quantity Generators (VSQGs).  The generator quantities would not change, but the new term reflects the fact that all categories of generators are conditionally exempt from obtaining a RCRA disposal permit, provided they comply with certain parameters.

The proposed rule also provides some leniency for generators that produce larger quantities of hazardous waste as a result of an episodic event.  A generator would be allowed to maintain its existing generator category even if, as the result of an expected or unexpected episode, the generator generates enough waste to bump the facility into a more stringent category.  A generator would be able to take advantage of this episodic exception once in each calendar year.

The proposed rule would also allow VSQGs to send their waste to LQGs under the control of the same person, provided the facilities meet certain conditions.  The waste from the VSQGs would then be subject to the LQG rules, including notification, recordkeeping and reporting, and labeling, and all wastes at the LQG facility would be uniformly managed.  States would be free to have more stringent rules preventing these waste transfers, and in the event that waste is to be transported across state lines, the generators would need to ensure that both states allow for the transfer.

There are a number of other proposed changes and revisions to the regulations, including more specificity around hazardous waste determinations.  According to EPA, various studies have shown that generators are not properly classifying hazardous waste.  The proposed regulations would provide more detail about how to make these determinations, including a proposal to create an electronic system to help generators navigate through the process.

The proposed revisions are too numerous to recount in this post, but suffice to say, if they become final, they will represent a significant shift for all RCRA generators.  The proposed rule is expected to be published any day in the Federal Register.

Heralding Wholesale Changes for Manufacturers, Labor Board Revamps “Joint Employer” Test

Just in time for Labor Day, the National Labor Relations Board handed organized labor a great gift and potentially disrupted the business and labor relationships of thousands of American manufacturers.

On August 27, 2015, a divided Labor Board ruled 3-2 that Browning-Ferris Industries was the “joint employer” of workers supplied by a third-party.  Browning-Ferris Industries, 362 NLRB No. 186 (Aug. 27, 2015).  Rejecting over thirty (30) years of precedent holding that joint employer status would not be found unless the alleged joint employer actually exercised direct control over the employees’ terms and conditions of employment, the Board adopted a new test.  Going forward, the Board can find that two separate entities are joint employers of a group of employees if they “possess” the power to “share or codetermine” the “essential terms and conditions of employment.”  If you think there is a lot of writing behind those words, you would be correct.  The Board’s decision and dissent comprise over 50 pages of text, with 208 separate footnotes and a diagram.

The facts of the case are illustrative.  Leadpoint Business Services contracted with Browning-Ferris to supply labor to Browning-Ferris’s Newby Island recycling plant.  The contract appears to have been typical.  Leadpoint agreed to provide labor based on Browning-Ferris’s needs and schedule, and Browning-Ferris agreed to pay Leadpoint a per hour fee for each hour of work.  Leadpoint agreed to hire, train and be responsible for its workers, all of whom were required to meet minimum training standards and successfully complete pre-employment drug tests.  The agreement also provided, however, that Leadpoint could not assign employees to the Browning-Ferris facility for longer than six-months, could not assign former Browning-Ferris employees, and could not pay the employees more than the pay rate of current Browning-Ferris employees in the facility.  The evidence shows that on two occasions, Browning-Ferris managers notified Leadpoint of possible misconduct by its employees, misconduct which actually resulted in disciplinary action – once when two workers were observed passing a bottle of whiskey while working on the recycling equipment and once when a piece of equipment was found vandalized.

On these facts, the Labor Board held that Browning-Ferris was a joint employer of the Leadpoint employees.  While the Board could have held that Browning-Ferris was a joint employer under its long-established test, the Board went much further.  Announcing a new standard, the Board found that because Browning-Ferris possessed the power to determine or co-determine the “essential” employment terms, it was the employees’ co-employer.

The Board’s new standard was announced in the context of an initial representation election, but it carries profound implications for manufacturers.

First, many companies routinely enter into agreements with third-parties to provide labor or services – mailroom and delivery services, operating cafeterias and newsstands, cargo and short-haul freight delivery, and security to name just a few.  These typical service agreements contain many of the same terms the Board relied on in finding Browning-Ferris to be a joint employer.  Manufacturers usually determine when personnel can access their facility, require background checks and security clearances, mandate minimum qualifications, set standards for codes of conduct and work performance, and otherwise enact requirements to safeguard the premises and employees.  I personally cannot imagine a reputable employer failing to act after witnessing a contractor’s employees drinking on the job.  Thus, the Board’s decision opens the possibility that manufacturers will be found to be joint employers of the employees of routine third-party service providers.

Second, the Board expressly rejected any “bright-line” test and ignored a fundamental goal of labor relations – predictability.  Addressing this concern, the Board wrote:  “[W]e do not and cannot attempt today to articulate every fact and circumstance that could define the contours of a joint employer relationship.  . . . [T]hese issues are best examined and resolved in the context of specific factual circumstances.”  The absence of a predictable joint employer test could result in significant disruption down the road.  If a manufacturer can only determine whether it “jointly employed” the employees of a third-party service provider after protracted litigation, a manufacturer may have a difficult time deciding when to involve itself it the employment affairs of that third-party and when to stand back.

Finally, the lack of a predictable standard ignores the sometimes chaotic nature of labor relations.  The Browning-Ferris case arose in a representation election context .  But the joint employer standard often comes into play during contract negotiations, grievance-arbitration proceedings, and picketing and strike activity.  When an employee of a service provider files a demand for arbitration over an alleged wrongful discharge, will the manufacturer be obligated to participate in that arbitration even though it is not a party to the contract under a joint employer theory?  If a labor union strikes a service provider, is the manufacturer also a lawful primary target or does picketing at its gates become unlawful secondary activity?  If employees of a third-party service provider walk off the job to protest the actions of the manufacturer, are those employees even engaged in “protected” activity in the first place?

These are just some of the more disconcerting questions to come to mind.  Undoubtedly, as the “warp and woof” of the modern industrial workplace unfolds, we will have many chances to address these issues again.

In the meantime, manufacturers would be well served by reviewing there relationships with third-party service providers in light of the Browning-Ferris decision.


OSHA Updates National Emphasis Program on Amputations

In August 2015, OSHA updated its National Emphasis Program (NEP) on Amputations.  Based on a review of data from general industry as well as targeted industries, OSHA determined that workplace amputations were being underreported.  OSHA updated the NEP on Amputations to target all workplaces with machinery or equipment capable of causing amputations.

OSHA defines “amputation” as follows:

An amputation is the traumatic loss of a limb or other external body part. Amputations include a part, such as a limb or appendage, that has been severed, cut off, amputated (either completely or partially); fingertip amputations with or without bone loss; medical amputations resulting from irreparable damage; amputations of body parts that have since been reattached. Amputations do not include avulsions, enucleations, deglovings, scalpings, severed ears, or broken or chipped teeth.

29 C.F.R. § 1904.39(b)(11).  Amputations have become a priority – in January 2015, a new rule came into effect requiring employers to report amputations within 24 hours to the nearest OSHA Area office, the OSHA toll-free number, or through OSHA’s online reporting system.

The updated NEP establishes procedures to help identify and reduce machine and equipment hazards that are likely to cause amputations.  The NEP includes targeting/selection, inspection, and outreach activities.

OSHA Area and Regional offices will develop targeted lists for inspection, including general industry establishments where amputations have occurred due to machinery or equipment in the last five years.  Area offices will schedule inspections, which may include inspections of machinery or equipment and potential employee exposures during certain activities, such as regular operation, cleaning, or clearing jams or upset conditions.  Pre-inspection outreach is required for newly targeted establishments.

The NEP provides a list of machinery and equipment of particular interest (which is not inclusive).  The list includes aerial lift platforms, cranes, conveyors, extruding machinery, metal and woodworking machinery, and presses.  A complete list can be found in Appendix A of the NEP.

Congressional Decision Looms on U.S. Export-Import (Ex-Im) Bank

For those in the manufacturing community, one of the significant events of the summer was when Congress allowed the authority of the Export-Import Bank of the United States (Ex-Im) to lapse. The main goal of the bank is to provide financing to allow for the export of U.S. products, including working with private banks to help secure financing for overseas sales.  The result of this inaction, as reported by the Bank itself, was that “as of midnight on June 30th the Export-Import Bank of the United States (Ex-Im) ceased processing new applications or engaging in new business.”

Over the past few months, a firestorm of controversy has ensued.  Groups such as the National Association of Manufacturers (NAM), the U.S. Chamber of Commerce, and large companies such as Boeing have voiced their displeasure with the failure of Congress to re-authorize the bank.  Others claim that the Bank is simply a pathway for large corporate welfare.  In this Wall Street Journal article, an opponent of the bank opined that “The Congressional Budget Office reported in May that Export-Import Bank programs, if subjected to the fair-value accounting methods required of private banks, actually operate at a deficit that will cost taxpayers some $2 billion over 10 years, in addition to the bank’s operating costs.”

As Congress comes back from its summer recess, the stakes continue to be high and this issue bears watching by manufacturers and distributors of all sizes — particularly those that export products. We will keep you posted of any developments.


Raising Manufacturing Employees’ Wages? Consider the Unintended Consequences

The political discourse focusing on the wage disparity between the rich and the poor has led to efforts to raise the minimum wage for American workers.  Today, more than half the states have minimum wages above the Federal minimum wage, and effective July 1, 2015, the District of Columbia crossed the $10 per hour threshold with a $10.50 per hour general minimum wage. Several local governments elected to phase in even higher minimum wages. For example, Los Angeles County, the City of Los Angeles and the City of Seattle adopted a $15 minimum wage to be phased in by 2021.

The effort to bring higher wages to workers has not been limited to hourly employees. As reported recently in this blog and elsewhere, the United States Department of Labor solicited comments on a proposal to modify (and potentially index) the minimum salary to be paid to exempt employees under the Fair Labor Standards Act, a move which could raise the wages of tens of thousands of managers and supervisors.

Whether you support or oppose higher wages through these political initiatives, increasing the wages of workers may carry unintended consequences which manufacturers should take into account.  See, for example, “A Company Copes With Backlash Against the Raise That Roared” (reported in the New York Times on July 31, 2015) and “Why Raising Employee Wages Sometimes Backfires” (by Michael Wheeler, who teaches at Harvard Business School, and is available on LinkedIn). Published reports have noted that some higher wage earners harbor feelings of resentment when recently hired employees get a “bump.” Some recipients of the higher wages question whether they have or will “earn it.” Finally, customers might question how higher wages impact them, believing that manufacturers will inevitability pass higher wages on to the public.

Many commentators recommend that “messaging matters” in this area. If so, when implementing a minimum or other wage increase, manufacturers should consider:

  • The impact on employees making more than the new minimum – does the manufacturer leave those employees “as is,” raise those employees’ wages by a similar amount or adopt a “middle of the road” approach?
  • The impact of higher hourly wages on working hours and overtime – does the manufacturer reduce hours to compensate for increase costs or otherwise seek to reduce that impact by controlling overtime?
  • What is the overall impact of higher earnings on fringe benefit costs, withholdings, and other “hidden” costs?
  • Whether higher costs should or could be passed on to the ultimate customer?

It does not appear that the pressure for higher wages will go away anytime soon. Manufacturers might be wise to consider these issues now and plan for what may be inevitable.

Does Next Generation Compliance Mean Expanded Enforcement?

EPA is in the process of rolling out Next Generation Compliance, or NextGen, in an effort to make its programs more effective, facilitate compliance, and, ultimately, enhance environmental benefit.  But in many ways, NextGen seems poised to expand enforcement against the regulated community.

NextGen consists of five interconnected components:

  • More Effective Regulations and Permits
  • Advanced Monitoring
  • Electronic Reporting
  • Expanded Transparency
  • Innovative Enforcement

EPA is already using the components of NextGen to guide enforcement actions and settlements around the country (and in fact, EPA case teams have been directed to consider and include NextGen compliance tools in civil judicial and administrative settlements).  These NextGen compliance tools often involve the use of new technology or other advanced practices that are not commonly used or included in settlements.  Specifically, NextGen compliance might include:

  • Advanced monitoring, including the use of technology that is not yet in widespread use in a particular sector or regulatory program;
  • Independent third party verification of a settling party’s compliance,
  • Electronic reporting, and
  • Public accountability through increased transparency of compliance data.

EPA may also try to expand the use of NextGen compliance tools in the settlement context beyond the allegedly violating facility.  For example, if EPA is asking for advanced monitoring in the context of a settlement, there is a good possibility that it will ask for that advanced monitoring on a company-wide (or geographically relevant) basis.

EPA plans to use the increased data gathered under NextGen to develop data analytics tools so that it can evaluate performance on an industry-by-industry basis.  It also plans to develop predictive analytics in an effort to identify potential future risks.  It is not clear how EPA intends to use these analytics tools, or whether they will be available to the public, but it is reasonable to assume that they will be used to guide enforcement priorities.

EPA has developed a Strategic Plan for implementation of NextGen through 2017.  While the mechanics of NextGen are still being developed and implemented, one thing is certain – if you are involved in a compliance or enforcement matter with EPA, you can be sure that NextGen will influence the regulator’s goals.

Department Of Justice (DOJ) Prioritizes Prosecutions Of Food Companies

The post below is a follow-up to an earlier post written by my colleagues, Edward Heath and Kate Dion. Edward is my partner and is Chair of Robinson + Cole’s White-Collar Defense and Corporate Compliance Practice. Kate is a litigation associate who routinely handles government and internal investigations for manufacturing clients.

In the wake of reports about the government’s investigation of Blue Bell Creameries, the United States Department of Justice has issued an ominous warning to food companies: compliance failures will be aggressively prosecuted.

Last week, the third highest-ranking DOJ official announced that food safety investigations and prosecutions are a priority for the agency.  Noting that both companies and individual employees are subject to prosecution, the DOJ official directed his comments to senior management: “It is easy to think — that could never happen at my company. It is easy to think — that could never be me.”

He then added:

Even a single decision to cut corners can have deadly consequences. The criminal prosecutions we bring should stand as a stark reminder of the potential consequences of disregarding danger to one’s customers in the name of getting a shipment out on time — of sacrificing what is right for what is expedient.

To reinforce the point, the official noted that the government is willing to rely upon criminal laws that are not directly related to food manufacturing, such as those addressing obstruction of justice, and mail and wire fraud.

DOJ has conducted some noteworthy prosecutions in the last two years involving the sale of adulterated food.

  • In one case, the company entered a guilty plea to a misdemeanor violation of the federal Food, Drug, and Cosmetics Act in connection with the sale of a contaminated food product.  The company admitted that some of its employees were aware that the product could be contaminated.  The plea agreement required the company to pay millions of dollars in a criminal fine and forfeiture of assets.
  • In another case, two former company officials were tried and convicted on criminal charges related to the sale of a contaminated product.  The evidence presented at trial established that the defendants misled consumers about the contamination and then fabricated COAs accompanying various shipments.  When FDA officials visited the plant to investigate the outbreak, the defendants then gave misleading or untrue answers to their questions.  Those defendants are still awaiting sentencing.

Blue Bell has entered into voluntary agreements with several state agencies outlining corrective actions necessary to commence selling its ice cream products again, including engaging an expert to oversee sanitation efforts and instituting a “test and hold” procedure that requires it to obtain negative test results before distributing its product for sale.  While the FDA has approved of these agreements and is in discussions with Blue Bell concerning resuming sales of its product, the government has not yet indicated whether it will pursue criminal charges against that company for the three deaths and seven people that were hospitalized as a result of the listeria outbreak.

Regardless, the DOJ’s latest commentary is a striking reminder of the importance of a robust, well-enforced compliance program that addresses all applicable Federal and State rules and regulations.

Proposed DOL Rulemaking Means Uncertainty for Manufacturers

On June 30, 2015, the United States Department of Labor (DOL) issued a Notice of Proposed Rulemaking seeking comments on a proposal to raise the salary threshold for the so-called “white-collar” exemptions from $455 per week ($23,660 annually) to an expected $970 per week ($50,440 annually), as projected by the DOL for 2016. The DOL also proposes that the salary basis track the 40th percentile of the earnings of full-time salaried workers, meaning that if adopted this salary threshold would adjust automatically in the future without further DOL action. The DOL further seeks comments on the current duties tests for determining whether employees are performing work that is exempt from overtime under the executive, administrative, professional, outside sales, and computer exemptions.

Under the federal Fair Labor Standards Act, employers must pay employees overtime pay of one and one-half times their regular rate for any hours worked over 40 in a workweek, unless the employer can establish that the employee is exempt. The salary threshold for “white-collar” exemptions was last updated in 2004. Many states, including Connecticut, Massachusetts, and New York, have separate salary basis and duties tests for determining whether employees are exempt.

The DOL’s proposal did not include proposed changes to the duties tests for comment; rather, it seeks comment on whether any changes should be made to the duties tests for the “white-collar” exemptions. In particular, the DOL noted difficulties in litigating the “primary duty” test, which requires employers to show that an exempt employee’s primary duty involves the performance of exempt tasks. The DOL also noted that some commentators believe it should consider a rule that requires workers to spend at least 50 percent of their time on exempt tasks to qualify for the exemption, as done in California.

If adopted, the DOL’s proposed rule may have a substantial impact on manufacturers. Many working foremen and other professional, administrative and executive staff currently classified as exempt could automatically lose the exemption from overtime as a result of the raising of the salary threshold. Even those who meet that salary threshold in one year could lose it the next simply because their salary did not keep up with the rate of inflation. (To this writer, pegging an increase in the threshold salary to the 40th percentile of all salaried workers would seem to put inflationary pressure on the entire spectrum of salaried positions.) Finally, to the extent the DOL changes the “primary duties” test to require more than 50 percent of the employee’s time be spent on exempt duties, many working supervisors and managers would become eligible for overtime without regard to their salary.

These changes may require manufacturers to modify their payroll and other practices. Employees previously (and properly) exempt from overtime may not have recorded working hours or tasks. Simply speaking there was no need to conduct any job task analysis to prove exempt status. That may no longer be true. Going forward, the failure to track job tasks and time spent may endanger the exempt status of not only the particular employee in question, but the entire class of employees working in the same job classification.

The Notice of Proposed Rulemaking was published in the Federal Register on July 6, 2015, and is subject to a 60-day comment period. Interested parties may submit comments at before September 4, 2015. If the proposed rule becomes final, the salary threshold increase is not expected to take effect until sometime in 2016. To view the announcement by the U.S. Department of Labor, click here. To view the Notice of Proposed Rulemaking, click here.