Time Running Out for Compliance with New DOL Overtime Regulation

As noted in this space in May, effective December 1, employees earning less than $47,476 per year may no longer be treated as exempt from overtime under the federal Fair Labor Standards Act.  See New Wage and Hour Requirements for Certain Employees of Manufacturers.”  Those manufacturers which have not yet addressed the issue have a little over two months to do so.

To recap, generally speaking all employees must be paid at least minimum wage ($7.25 per hour under federal law) for all hours work and time-and-a-half for all hours worked in excess of 40 hours per week.  An employee may be “exempt” from these requirements if she or he (a) is employed as a bona fide executive, administrative, or professional employee, (b) is paid on a “salary basis” and (c) receives a minimum annual salary of not less than $455 per week ($23,660 per year)(prior to 12/1/16).  On December 1, the minimum salary will double to $913 per week ($47,476 per year).  This change could dramatically increase the wages of first level managers, foremen and leads.

Economic Impact.  Manufacturers must take a look at every employee paid on a salary basis and making less than $47,476 per year to assess the impact.  For each employee, manufacturers must decide (1) whether to pay the employee hourly based on her or his hourly wage rate (calculated by dividing the numbers of hours worked per week by the weekly salary) and then overtime for all hours worked in excess of 40 hours per week based on that rate; (2) increase the employee’s weekly salary to not less than $913 per week, or (3) adjust the employee’s hourly rate downward and pay overtime for all hours worked in excess of 40 hours per week based on the new rate.  (While adjusting the wage rate should reduce to almost zero the economic impact of the change, an employer will need to know the number of overtime hours the employee works each week.  To calculate the “new rate,” take the number of overtime hours worked, multiply that by 1.5, add the product to 40 and then divide the previously paid weekly wage by this result).

Record Keeping Impact.  Keep in mind that the new overtime requires not only impact how a manufacturer pays employees, but also what records the manufacturer must keep.  Manufacturers must now keep detailed time records for previously-exempt employees who fall below the salary threshold.  Among other things, manufacturers must keep a record of starting time, ending time, breaks of more than 10 minutes (if unpaid), total number of hours worked per day, and total number of hours worked per week.  In addition, manufacturers will now have to pay these previously exempt employees for waiting time (if the employee cannot use time effectively for her or his own purposes), travel time (between employment sites), travel time away from employee’s “home community,” time spent in mandatory training, and potentially time spent checking e-mail, phone calls, text messaging.  Manufacturers may need to consider its policies with respect to use of smart phones, especially outside of normal working hours.

Other Impact.  Remember there could be other “unintended” impacts as a result of the new DOL rule.  The increase in wages for lower level managers and supervisors could create or increase wage compression issues.  The recent publicity surrounding the DOL’s regulation may also bring new attention from workers who may have reason to question their previous designation as an exempt employee.  Finally, keep in mind that state law may require substantially higher wages than current requirements and employees get to take advantage of the more beneficial law.

Manufacturers should not wait until the last minute to address the dynamic situation created by the DOL’s new regulation.

Key Considerations For Foreign Manufacturers That Wish To Sell Products In The United States

Last week, I had the privilege of speaking at the American Bar Association’s Business Law Section Annual Meeting in Boston.  The title of my presentation was:  “Key Considerations for Foreign Manufacturers That Wish to Sell Products to the United States” which was presented at the meeting of the International Expansion and Cross-Border Transactions Subcommittee.

Here are some of the key takeaways from my presentation:

  1. CONSIDER THE BRAND:  Although the tax implications often drive foreign investment and the corporate form selected, I often focus on things beyond the “mechanics” of the deal.  For instance, if a manufacturer is launching a product in the United States, we need to consider intellectual property protection.  The key here is often not just coming up with a name that can be trademarked, but considering whether the product will actually sell.  For that reason, we often engage consultants on our client’s behalf to consider these business issues.
  2. LOCATION, LOCATION, LOCATION:  There are three considerations that often are most important for foreign manufacturers when selecting a location for their U.S. subsidiary:  (1) access to a distribution network; (2) geographic proximity to key customers; and (3) access to skilled labor.  Often times, executives at foreign manufacturers also heavily weigh quality of life issues for those executives that will be leading the U.S. operations.
  3. GLOBAL COMMUNICATION:  Not surprisingly, there is always an extreme sensitivity about maintaining corporate formalities so that the assets of the foreign parent are protected from liability that may arise in the United States.  While it is important to respect these lines, there can be overkill.  Specifically, manufacturers often struggle at having the various departments talk to each other about product development and experience in the marketplace.  When a company has global operations, these challenges only increase as it is not uncommon for a lack of communication between engineers/quality in the United States and the rest of the world.  For that reason, we have helped several companies establish a process that allows for communication with the goal of minimizing liability risks.

I have some brief slides from the presentation.  Please email me at jwhite@rc.com if you would like them.

Court Dismisses Public Nuisance Claims Against Monsanto for Manufacture of PCBs

Last week, a federal court dismissed claims brought by three California cities against Monsanto that were aimed at forcing Monsanto to pay for polychlorinated biphenyl (“PCB”) contamination in San Francisco Bay.

The cities—San Jose, Berkeley, and Oakland—each filed lawsuits against Monsanto alleging that Monsanto was liable for PCB pollution in the Bay, not because Monsanto actually discharged PCBs, but solely because it manufactured them. The cities operate stormwater systems that collect stormwater and discharge it to the Bay under discharge permits. Oftentimes, this stormwater contains PCBs. The permits include limitations on the amount of PCBs that the cities may discharge into the Bay through stormwater. In May 2015, a new draft permit went into effect that imposed stricter PCB limits, which would ultimately result in increased compliance costs for the cities.

The cities filed suit against Monsanto alleging that Monsanto’s sale of PCBs created a public nuisance. Under California law, the cities alleged that they had a property interest in the stormwater, and that property interest was harmed by the presence of PCBs. The court rejected this allegation, holding that, because the cities had failed to establish a property interest in the stormwater, they had failed to establish the threshold requirement for a nuisance claim.

The cities will have an opportunity to amend their complaints, as the court noted that the cities’ claims “are not altogether clear on precisely what property interest they claim or why they have such a property interest.”

While we have not likely seen the last of this public nuisance theory, the decision can be seen as victory for all manufacturers that might be subject to liability based solely upon their manufacture and sale of certain substances.

The cases, pending in the U.S. District Court for the Northern District of California, are City of San Jose v Monsanto Co. et al., No. 15-03178; City of Oakland v Monsanto Co. et al., No. 15-05152; and City of Berkeley v. Monsanto Co. et al., No. 16-00071.

Cybersecurity Risks to the Manufacturing Sector

The 2016 Manufacturing Report by Sikich finds that there has been a progressive growth in cyber-attacks in the manufacturing sector. This is consistent with the most recent IBM /X-Force Research 2016 Cyber Security Intelligence Index, which  notes that the manufacturing industry represents the second most attacked industry, just behind health care.

Manufacturing companies often don’t believe that they are targets since they do not hold vast amounts of consumer data. Therefore, they do not concentrate on cybersecurity and remain vulnerable. These two reports show that the risk of a cyber-attack is high and real to the manufacturing sector.

According to the Sikich report, the risks to the manufacturing sector include:

  • Operational downtime
  • Physical damage
  • Product manipulation
  • Theft of intellectual property and sensitive data

 These reports are a dose of reality to the manufacturing sector that it is under attack, and the threats and risks of cyber intrusions are real and are not dissipating. Addressing these risks and the potential devastating consequences are critical for any company in the manufacturing sector.

This post was authored by Linn Foster Freedman and is also being shared on our Data Privacy +Security Insider blog. If you’re interested in getting updates on developments affecting data privacy and security, we invite you to subscribe to the blog.

Teamsters’ Central States Pension Plan: A Saga Becomes a Nightmare?

We have been watching, warning and posting about the saga of the troubled Central States Pension Plan (“CSPP”).  See The Gift-Giving Season? Three “Game-Changing” Employment Developments Impacting Manufacturers, Teamster Plan to Cut Pensions Presents Significant Issues for Manufacturers, and A Troubling Future Part One:  Teamsters’ Pension Rescue Plan.  Things were bad.  They got worse.

Created in 1955, the CSPP remains one of the largest and oldest multiemployer pension plans in the United States, funding the pensions of 400,000 active and retired Teamsters.  Shockingly, with the decline in the unionized trucking industry, only 15 percent of those with vested pension benefits are actively employed.  The rest are all inactive or retired.  This imbalance (the pensions of all 400,000 participants being funded by assets and contributions on behalf of a mere 60,000 active employees) has put the CSPP under severe financial stress.  Trustees estimate that the CSPP will become insolvent in less than nine years.  Currently, the CSPP is $17.5 billion short of the funds it needs to cover vested benefits.  (That works out to $47,750 for each participant.)

To make matters worse, the Pension Benefit Guarantee Corporation (“PBGC”), the “ultimate insurer” of the multiemployer pension plans in the U.S., does not have the resources to pay even the “minimum benefits” required if the CSPP were to become insolvent.

Mindful of the plight of the CSPP and other funds, in late 2014, Congress took controversial action.  Moving at warp speed in eight days, Congress adopted the 2014 Multiemployer Pension Reform Act – An Act which would permit troubled multiemployer pension funds to seek permission to cut the vested benefits of retirees.  In essence, Congress plotted a roadmap which could permit distressed pension plans to reduce the benefits being paid to retirees in order to avoid insolvency.  In September 2015, the CSPP became one of the first plans in the United States to take advantage of this new law.

Following a series of public hearings and submission of numerous comments, in May 2016, Special Master Kenneth Feinberg, issued his report rejecting the CSPP “Rescue Plan.”  In doing so, Special Master Feinberg relied on four key defects.  Read Special Master Feinberg’s Report here.    First, in his opinion, the Rescue Plan used an overoptimistic rate of return assumption (the CSPP assumed assets would earn a 7.5% return over  the next 50 years).  Second, the Plan assumed that all newly hired workers coming into the plan would be age 32, meaning that they likely would not receive benefits (and thus would not deplete assets) for at least 20 years.  Third, the impact of the benefit cuts would be harder on some participants than others and the unequal treatment was not justified or explained.  Fourth, the submission itself was unduly technical and virtually impossible for the average participant to understand.

Shortly after Special Master Feinberg issued his report, the CSPP announced that it had abandoned efforts to rescue the fund.

While the CSPP may be the largest multiemployer plan facing insolvency, there are others.  Five other multiemployer pension plans have benefit reduction plans pending before the Treasury Department, one had its plan rejected and a seventh plan voluntarily withdrew its application.  See Applications for Benefit Suspensions.

The number of multiemployer plans seeking benefit reductions under the Multiemployer Pension Reform Act, coupled with Treasury’s failure to approve a single application since the adoption of the Act, strongly suggests that Congress should look for another solution.  One might think that a Presidential Election year would be the opportunity to debate these issues, as support from organized labor may be critical to one side or the other and down ballot races.  But so far that debate seems lacking.  And time may be running out.  One pension fund (Road Carriers Local 707 Pension Fund) projects it will be insolvent by February 2017 – just a few days after our new president takes office.

How These Contract Provisions Can Reduce A Manufacturer’s Margins

One of the key aspects of any supply chain contract is the section regarding pricing.  Nothing is more important in a business deal than determining how much one manufacturer might pay another in a B2B transaction.

In situations where one party has more leverage, that party often includes pricing language that can really impact the economics of any deal.

One type of provision often reads as follows:

Notwithstanding anything in this Agreement to the contrary, the price of each Product will not exceed the lowest price at which Seller sells the same or substantially similar product in the same or lesser quantities to any other customer.

When I see these provisions, the first question I ask any client is whether such a provision is feasible from a business perspective.  We then talk about whether the products being sold are custom or “off the shelf” as that will impact whether this provision has been triggered.

Another provision that I am seeing more often is as follows:

Seller shall notify Buyer of cost savings implemented by Seller (e.g. Seller manufacturing productivity improvements) which do not result in a change in drawings, materials, design, fit or function of the Products.

This type of provision is becoming more common as buyers attempt to contractually drive down prices over time.  The issue here is that, over time, manufacturers often improve their margins by reducing the overhead associated with making a particular product.  In other words, manufacturers become more efficient and hence make more money.  Sellers often know this and demand notice of such cost savings so that they can be passed on.

For that reason, I often tell clients to scrutinize these types of provisions as they can jeopardize a company’s margin long-term.

Aerial Emissions Are Not “Disposal” Under CERCLA

Last year, we told you about a district court case in which air emissions from a lead smelter that ultimately settled on the land and in a water body gave rise to liability under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9601 et seq. (“CERCLA”). Last week, the Ninth Circuit overturned the district court’s decision, scaling back CERCLA liability to exclude such emissions.

The case involved emissions from Teck Cominco Metals’ smelter, located in British Columbia, Canada. Plaintiffs filed suit against Teck under CERCLA, arguing that emissions from the smelter were being deposited into the Upper Columbia River site in the United States. Plaintiffs claims that Teck was liable as a party that arranged for the disposal of hazardous substances under CERCLA. The district court agreed with the plaintiff but because the issue was one of first impression, it certified its holding to the Ninth Circuit to weigh in on the issue.

The Ninth Circuit reversed the district court’s decision, holding that the aerial emissions, which ultimately deposited onto the land and water, were not a “disposal” under CERCLA. According to the Ninth Circuit, the plaintiff’s theory was that Teck allowed hazardous substances to be deposited at the site by wind, as opposed to a direct deposit. Because of the intervention of this natural source, the Court held that it was not a disposal. Relying on prior case law, the Court held that “deposit”, a term included in the definition of “disposal”, means “putting down” or “placement,” not “the gradual spread of contaminants without human intervention.” The Court went on to say that if “aerial depositions” were considered “disposals,” “‘disposal’ would be a never-ending process . . . .”

The Ninth Circuit’s decision is in line with prior decisions interpreting the meaning of “disposal” in the context of both the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq. (“RCRA”) and CERCLA. These decisions support the notion that passive migration of hazardous substances or hazardous wastes does not constitute disposal under CERCLA or RCRA.

The Ninth Circuit opinion is Pakootas, et al. v. Teck Cominco Metals, Ltd., No. 15-35228 (9th Cir. Jul. 27, 2016).

Regulatory and Legislative Changes: No Summer Holiday Break

While you may have thought that the major party conventions and Olympic Games in Rio would have resulted in a break from significant legislative and regulatory changes, that simply does not seem to be the case.  Recent changes affecting manufacturers include the following:

The U.S. Department of Labor to increase civil penalties for ERISA violations.  You can read Robinson+Cole’s update here.  My special thanks to the Employee Benefits Group (Bruce Barth, Virginia McGarrity, Devin Karas and Jean Tomasco) for providing this timely update.

Connecticut’s General Assembly ended the 2016 session by adopting several new employment law regulations.  Among other things, the legislature allows employers to pay employee compensation via “payroll cards,” permits employers to pay by direct deposit, authorizes the use of electronic paystubs; permits bi-weekly payroll without the express approval of the CT DOL; further restricts the use of criminal background information; and extended further protections for employees serving in the military.  You may read the full summaries of these and other legislative changes here.

As reported here previously, the “Year of Change” forces manufacturers to stay on top of a rapidly changing landscape.


How The Failure To Comply With The Conflict Minerals Law Can Expose Manufacturers To Criminal Penalties

Last year, we provided an overview regarding the requirement that U.S. publicly traded companies disclose their use of “conflict minerals.”  As of 2014, the Government Accounting Office reported that 1,321 companies filed the requisite disclosure.  The GAO anticipated that over 6,000 companies could be affected by the rule.  That discrepancy can be explained either by:  (1) the GAO’s stats were off; or (2) a large number of companies did not make the filing.  The numbers for 2015 will be available next month and we will update our readers on whether the number of compliant companies has increased.

This coming fall, I will be presenting a webinar about conflict minerals compliance with the help of one of firm’s summer associate’s Nicole Mulé.  If you are interested in receiving an invitation, please email me at jwhite@rc.com.

In the meantime, a teaser.  Are privately held manufacturers impacted by this law?  The answer is yes.  First, from a business perspective, many publicly traded companies require that companies in their supply chain certify that they do not use conflict minerals.  Second, and more daunting, is that the Office of Foreign Asset Control (OFAC) has instituted sanctions for companies (even if they are not publicly traded) that import conflict minerals from the DRC region.   Such sanctions can range from substantial monetary fines to criminal penalties, including lengthy prison time.

I-9:  Ways to Avoid Identity Theft

This week, we thank members of Robinson+Cole’s Immigration Practice Group (Megan NaughtonJosh Mirer, Lauren Sigg, and Jennifer Shanley) for this post:

Employers are increasingly being contacted by individuals, their insurance and payroll providers, the IRS and/or police about employees who are possibly involved in identity theft.  If an employee steals a name and matching social security number and has a fraudulent identity document and social security card, this can be very difficult to detect.  A strong I-9 compliance process can assist in making sure an employer has done what it can to try to avoid this issue.  A number of steps that employers may wish to consider implementing:

I.  Compliance can begin during the interview – Ask applicants:

Do you have authorization to work in the U.S.?

II.  Let candidates know in the offer letter/application that they will need to complete the Form I-9 as a condition of employment

Language for offer letter:  Your employment is conditional upon your successful completion of the Form I-9 verifying both your identity and authorization to work in the U.S.

III.  Have an experienced/trained person be responsible for completing the I-9 forms with the employee

IV.  Question the validity of documents which seem suspicious

Permanent resident Cards should no longer indicate “INS” or “Immigration Naturalization Services” anywhere on them.  Cards should only have forward facing photos and not three quarter view photos.  They are called Permanent Resident Cards now and not Resident Alien Cards.  If you notice any of these issues, it is a red flag to question the Card.

Driver’s licenses can be difficult to verify as each state has its own document and they can be changed/updated frequently.  If you have reason to suspect a license may be fraudulent, it is acceptable to look for a sample license at the state’s website for assistance.  Some states/sites have helpful information online, including:

California: https://www.dmv.ca.gov/portal/wcm/connect/e090f7ec-64bc-4e87-afc8-e66895903b37/dl627e.pdf?MOD=AJPERES

Texas: https://chadhasty.wordpress.com/2009/04/23/texas-redesigns-your-drivers-license/

Connecticut: http://www.ct.gov/dmv/cwp/view.asp?a=805&q=379684

V.  Keep copies of documents, but do not make and keep copies of documents you don’t need

If you have a List A document, you should only have a copy of the List A document and not extra documents from List B and/or C.  If you don’t have a List A document, then, you would need copies of both the List B and List C documents.

VI.  Review the I-9 to verify that it is completed correctly and perform self-audits

VII.  Consider proper transmission and storage of the I-9

As sensitive personal information is contained on the Form I-9, careful employers will be cautious about where the I-9 is stored and where it might be duplicated.  Faxing or emailing Forms I-9 (unless the email is encrypted) can create risks of inadvertent disclosure.  Be cautious about an unsecure digital copy that could be created in a scanner or on someone’s email account.  Paper I-9 forms will be more secure if stored in a secure space under lock and key.

This post is also being shared on our Data Privacy +Security Insider blog. If you’re interested in getting updates on developments affecting data privacy and security, we invite you to subscribe to the blog.