Environmental Considerations in Corporate Transactions

My partner Bob Melvin and I recently gave a presentation on environmental, health, and safety considerations in mergers and acquisitions. While it would be impossible to cover our entire presentation in a blog post, I thought it would be good to highlight a few important environmental considerations in developing, negotiating, and finalizing corporate deals.

  • Consider the Scope of Due Diligence. When purchasing a business or division, consider not only properties that are currently owned and operated by that business, but historic properties as well. Phase I Environmental Site Assessments can help you learn about a property’s past and present, but, when conducted properly, they can also help you maintain legal defenses against future liability. It is important to consider the purpose for which you are conducting a Phase I, including preserving your ability to defend against liability, before you develop the scope of the assessment.
  • Liability Associated with the Structure of the Deal. Generally speaking, we think of stock deals as accomplishing a transfer of all assets and liabilities, while liability transfer in asset deals may be more carefully limited. However, legal theories of successor liability may serve to undo even the best laid plans for allocation of liability. You may want to consider the structure of the deal and how it could be interpreted under legal theories that could impose successor liability even in apparently structured asset transactions.
  • Evaluate Potential Risk Transfer Options. In cases where neither the buyer nor the seller is interested in assuming environmental obligations, risk transfer may be an option. An Environmental Risk Transfer (ERT) entity may be willing to purchase environmental liability, including environmental investigation and remediation obligations, as well as to provide an indemnity for environmental and remediation risk. The arrangement may or may not involve land transfer, but it typically involves the ERT entity entering into any required orders and securing all required permits. ERT entities back the indemnity with a number of financial tools, including insurance, fixed price contracts, escrow accounts, and using purchased assets as collateral.
  • Separately Consider Emerging Environmental Issues. Emerging environmental concerns—like PFAS—may need to be treated differently than well-worn environmental issues. Emerging contaminants may not yet be legally defined as hazardous, and discharges may not be a violation of environmental law, just because the statutory and regulatory amendment process takes time. It is important to separately consider emerging environmental concerns, how they play into the deal, and how to address them in the contract documents so that they are not inadvertently excluded.

Advice for Foreign Manufacturers Looking To Grow In The United States

Over the past few months I have had the pleasure to participate in several significant manufacturing events, including events at The White House, the Department of Commerce, and most recently, at the first International Space Trade Summit.  At these events, I had a chance to speak with manufacturers across the globe, including several companies that wanted to explore either launching (no pun intended!) or growing in the United States.

In my experience, entry into the U.S. by a foreign manufacturer is very doable despite what others might say.   I try to simplify entry into four key concepts or four “Yours.”

  1. Your Commitment:  It is important to be here.  Potential customers, suppliers, and employees all pay attention to whether the business executives from abroad spend time in the United States.
  2. Your Entry Point (“Buzz”):  In my experience, the companies that can create a buzz around their entry are more likely to succeed.  This is done by celebrating the opening of the factory (with key local officials), marking significant anniversaries, and interacting with government officials early in the process.
  3. Your People:  It is important to have “boots on the ground.”  A lot of companies will hire a U.S. based sales representative as a first step, but sometimes that is fraught with peril.  The manufacturers that I have seen succeed place an emphasis on getting their U.S. based employees to buy into their culture and integrate them as quickly as possible.  In addition, location in the U.S. is key – don’t try to cover too much, too early.
  4. Your Structure:  My discussion of corporate structure is intentionally last.  Most legal and tax advisors will start here.  They will talk about corporate structure and formation before anything else.  Yes, tax implications often drive a lot of decisions for a foreign company.  But, corporate structure considerations should not drive the overall business strategy.

Legal Pot = Storm Clouds for Manufacturers

New York City’s recent ban on pre-employment marijuana testing, coupled with recent decisions in New Jersey and Connecticut, could give manufacturers cause for concern.  Effective May 20, 2020, New York City employers will no longer be allowed to require pre-employment marijuana testing for most jobs, testing which historically has been a routine part of the onboarding and hiring process.  The law exempts from coverage certain jobs, such as law enforcement officials, police officers, those charged with the care or supervision of children, and so on.  Interestingly, the law is silent on mandatory drug testing after employment begins.

A majority of states, 32 at last count, have legalized the use of medical marijuana and 11 states have made recreational marijuana legal as well.  The rapid adoption of statutes legalizing marijuana mirrors the growing public support for legalization.  One poll shows that 80% of the public support legalization of medical marijuana and 60% support legalization of recreational marijuana.  See Locke Lord LLP, “The ABC’s of the Marijuana Industry Today,” 2019 WLNR 14886903 (May 14, 2019).  While public support may be growing at a fast pace, the law in this area is lagging far behind, creating potential pitfalls for manufacturers seeking to ensure workplace safety and productivity.

Notwithstanding this broad public acceptance of marijuana (and changes to state laws nationwide) the use, distribution, and possession of marijuana remains a crime on the federal level.  (The Obama Administration adopted a “hands-off” approach to prosecuting medical marijuana users.  The Trump Administration signaled a change in that approach although it has not yet manifested.)

The New Jersey Appellate Court’s decision in Wild v. Carriage Funeral Holdings, Inc. should give manufacturers a reason for caution.  In that case, the court held that an employee who tested positive for marijuana could sue his employer for disability discrimination.  The court rejected the employer’s argument that its actions were lawful because the New Jersey medical marijuana law expressly stated “Nothing in this act shall be construed to require . . . an employer to accommodate the medical use of marijuana in any workplace.”  In the court’s view, that sentence demonstrated a legislative intent for the law to be neutral in its impact.  An otherwise discriminatory act (penalizing an individual for using a prescribed drug to treat a covered medical condition) did not become more lawful because of the statute.

In 2018, a Federal Court in Connecticut issued a similar decision.  See Noffsinger v. SS Niantic Operating Co., 2018 WL 4224075 (D. CT 2018) (granting summary judgment for the plaintiff).

Further complicating the issue has been the growing popularity of marijuana alternatives, particularly Cannabidiol or CBD.  CBD, a close relative to tetrahydrocannabinol (THC, the active ingredient in marijuana), allegedly provides the same or greater health benefits without the psychotropic effects (the “high”) some get from using marijuana.  See Fisher Phillips, “The ABCs Of CBD For Employers,” 2019 WLNR 14205600 (May 8, 2019).

The pressure may be building.  Federal law currently prohibits the marketing of food or dietary supplements which contain CBD.  The FDA recently announced a May 31 public hearing on CBD, with comments being accepted until July 2019 (although the timing of the hearing may be up in the air).  The FDA will be looking to see whether federal standards should be changed to permit the advertising and sale of CBD supplements to the public.

How much worse can it get for manufacturers?  In November 2018, Denver citizens voted to decriminalize “Magic Mushrooms.”

Manufacturers may wish to review and potentially update their drug testing and drug use policies, hiring and onboarding procedures/policies, and internal guidelines related to drug testing.  Focusing on impairment while on the job, ensuring safety at work, and making sure policies are uniformly and consistently applied may be the best way to navigate the waters ahead.

A special thanks to my colleague, Abby Warren (AWarren@rc.com), who greatly contributed to this post.

OSHA Seeking Public Comments on Lockout/Tagout Standards

Thank you to my colleague, Jonathan Schaefer, for this post. Jon focuses his practice on environmental compliance counseling, occupational health and safety, permitting, site remediation, and litigation related to federal and state regulatory programs.

OSHA recently announced that it is considering whether it should revise the Control of Hazardous Energy (Lockout/Tagout (LOTO)) standard to accommodate recent technological advances concerning control circuit-type devices. The LOTO standard (29 CFR 1910.147(a)(1)(i)) covers the servicing and maintenance of machines and equipment in which the unexpected energization or start-up of machines or equipment, or release of stored energy, could harm employees.

The LOTO standard currently requires that all hazardous energy from power sources and energy stored in the machine itself be controlled using energy isolating devices (EIDs) when an employee is performing servicing or maintenance of a machine or equipment. OSHA’s definition of EIDs excludes push buttons, selector switches, and other control circuit type devices.

The LOTO standard was issued in 1989. OSHA recognizes that, at least in some circumstances, as a result of advances in technology since 1989, control circuit type devices may be at least as safe as EIDs. In recent years, OSHA has granted at least one company a variance to the LOTO standard allowing the company to use control circuit type devices.

OSHA may also consider changes to the LOTO standard that address hazardous energy control for the robotics industry and new robotics technologies as employers are increasing the use of robots and robotic components in the workplace.

OSHA is interested in better understanding how employers have been using control circuit devices. Among other information, OSHA would like employers to provide information about the following areas:

  • types of circuitry and safety procedures in use;
  • limitations of their use, to determine under what other conditions control circuity-type devices could be used safely;
  • new risks of worker exposure to hazardous energy as a result of increase interaction with robots; and
  • whether OSHA should consider changes to the LOTO standard that would address these new risks.

OSHA has signaled that potential changes to the LOTO standard could not only result in increased safety in the workplace, but also have the potential to decrease compliance costs and increase productivity.

Comments should include data, where possible, as well as information on anticipated additional costs, or cost savings, associated with potential changes to the standards. Comments must be submitted on or before August 18, 2019.

Deadlines Approaching: Large Manufacturers Must Submit 2017 and 2018 Pay Data

Key Dates:  May 31, 2019 and September 30, 2019

You may have been following the complex twists and turns involving the collection of employee pay and demographic data by the EEOC.  While the landscape seems to be constantly changing, pending a stay of the court order in National Women’s Law Center, et al., v. Office of Management and Budget, et al., Civil Action No. 17-cv-2458 (D.D.C.), covered manufacturers must file the 2018 EEO-1 Form (now called “Component 1” of the EEO-1) by May 31 and the expanded “Component 2” (the expanded demographic survey data) for both 2017 and 2018 by September 30.

Who has to file the Form EEO-1?  Any manufacturer employing 100 or more employees regardless of the identity of the companies with which it does business, or any manufacturer employing 50 or more employees and with $50,000 or more in annual contracts with the U.S. Government or a U.S. Government subcontractor, must file an annual EEO-1 form.

Historically, the deadline for this EEO-1 submission was September 30 of the year following the year of data collection.  Previously. the due date was changed to March 31 for the 2018 data, but due to the government shutdown in 2019, the EEOC extended this due date to May 31, 2019.  See announcement here.

Component 2 of the Form EEO-1 is the new pay component to the EEO-1 Form.  Component 2 requires the submission of pay and hours data, broken down by wage tier and demographics.

Whether to require manufacturers to submit Component 2 data has been a “on-again” “off-again” saga over the last few years.  As a result of litigation, a Court ordered the EEOC to collect Component 2 data by September 30, 2019.  The EEOC was given an option to collect similar data for either 2017 or 2019.  Surprisingly, given the EEOC had cited the burdens imposed on employers as a reason not to require any data be submitted at all, in early May the EEOC announced that it would collect Component 2 data for the year 2017.  If the EEOC had selected 2019 as the data collection year, the data would not have been due until May 31, 2020.  By selecting 2017, the EEOC is requiring manufacturers to submit that data by September 30 of this year.

This also means that manufacturers which filed an EEO-1 Form for 2017 (presumably by September 30, 2018) must now supplement that data by filing a Component 2 of the Form EEO-1 by September 30, 2019.

Wait – Maybe?  The story may not be over.  On May 3, the EEOC filed a notice of intent to appeal the court’s order.  This author would not be surprised to see an effort to further stay any data collection.

Manufacturers with questions on their obligations should confer with their employment counsel.

Preparing for an Economic Downturn: How Manufacturers Can Prepare

You may ask why we are using the words “economic downturn” in a post.  Most of our manufacturing clients are reporting strong sales and many economic pundits are saying that a recession is still far off into the future.  With that said, this is exactly the time to start thinking about your supply chain and your contracts.  Because, as many manufacturers know, supply chain and customer disputes rear their ugly head when the economy takes a nosedive.

I recently read an article entitled “Can Supply Chains Prepare for a Recession?”, which discusses a study completed by the MIT Center for Transportation & Logistics.  The following quote caught my eye:

Good times are dangerous: Business managers are under constant pressure to bend the rules, be flexible and agree to policies during good times that will cause great pain and suffering when the economy goes south.

The article then goes on to identify seven considerations for how manufacturers can prepare for an economic downturn by understanding how their supply chains will be impacted.  But, I would go back to the quote.

For example, a lot of manufacturers enter into long-term agreements to ensure stability.  Those LTAs are often loaded with conditions that tend to not be enforced during good times.  When the economy tightens, however, it is common for customers and suppliers to start enforcing difficult terms and also seeking to apply those terms retroactively.  For that reason, even if you do not negotiate a term out of a contract, it is important to know it is there.  Hence, why manufacturers are starting to adopt playbooks and checklists to ensure that their contracting personnel understand the risks of what they are signing.

U.S. Government Agencies’ Fast Track Changes to Legal Standards (Part 1)

With the Trump Administration now in its 27th month (half-way through the first term), Federal agencies seem to be picking up the pace of fundamentally altering the legal landscape in which manufacturers operate.  Keeping up with these changes can be a full time job.

In this blog post, I will highlight some of the more important legal changes the National Labor Relations Board (“NLRB”) has implemented with respect to work rules and policies.  Future posts will summarize other changes at the NLRB and changes at the United States Department of Labor and the Equal Employment Opportunity Commission.

In a case called Lutheran Heritage (2004), the NLRB articulated a standard under which facially neutral policies and work rules would nevertheless be found unlawful if a hypothetical employee could “reasonably construe” the rule as prohibiting lawful “union” or “concerted protected” activities.  Between 2004 when the case was decided and November 2017, the NLRB would routinely commence litigation against countless employers challenging neutral workplace practices and policies, even when there was no evidence any employee was prevented from organizing or impacted in the least by the rule.

In The Boeing Co. (2017), NLRB overturned Lutheran Heritage and held that facially neutral work rules (that is, rules which did not expressly prohibit union or protected activity) would be assessed on a case-by-case basis.  The Board stated it would balance the potential impact on employee rights against a manufacturer’s legitimate justification for the rule.

Since the NLRB decided The Boeing Co., the General Counsel (the NLRB’s head prosecutor) has directed regional offices to dismiss or amend an uncounted number of pending lawsuits.  The General Counsel has upheld rules:

  • Prohibiting dissemination of “user data” without authorization;
  • Banning employees from sharing “confidential” information and data;
  • Prohibiting the use of cellphone cameras during working time or in working areas at any time;
  • Restricting the ability of an employee to speak on behalf of the manufacturer on social media;
  • Imposing a “professional” dress code;
  • Prohibiting working for a competitor; and
  • Prohibiting the disclosure of confidential or proprietary information to the media without authorization.

Conveniently, the General Counsel has published a good number of his Advice Memos outlining his views on lawful work rules.  Those memos can be found here:  https://www.nlrb.gov/news-publications/nlrb-memoranda/advice-memos/advice-memoranda-dealing-handbook-rules-post-boeing

Manufacturers should proceed with caution when revising handbooks and workplace policies.  The NLRB’s current approach may not survive after the next election and, even if it does, there is no certainty the courts will uphold the NLRB’s back-and-forth on this score.

OSHA Requesting Public Comment on Powered Industrial Truck Standards

OSHA recently announced that it is considering whether it should revise the powered industrial trucks standards for general, construction, and maritime industries. Powered industrial trucks include forklifts, fork trucks, motorized hand trucks, platform lift trucks, tractors, and other industrial trucks powered by an electric motor or internal combustion engine. The powered industrial trucks standards have not been updated since 1998, and OSHA is currently seeking public input to determine whether these standards should be revisited.

The current powered industrial trucks standards contain requirements for design and construction, appropriate locations for use, maintenance, and training, among others. The standards were originally based on standards from the American National Standards Institute (ANSI) and the National Fire Protection Association (NFPA), both of which have been revised several times since OSHA relied on them for its own standard.

OSHA is now seeking information to help determine what it should do, if anything, to modify, repeal, or replace outdated portions of its powered industrial trucks standards. Some of the questions OSHA hopes to answer include:

  • Do you use the types of powered industrial trucks that are currently covered by the standard?
  • Should new powered industrial trucks should be included?
  • Is your training is performed in-house or by outside specialists?
  • Are OSHA’s current training requirements are inadequate or excessive?
  • Have you implemented a training program that you think is more effective than the OSHA standard?
  • Do you use any aftermarket equipment, such as a back-up camera or perimeter sensor alarm, to reduce accidents related to powered industrial trucks? Are they effective?
  • Do your powered industrial trucks have rollover protection or enclosures?
  • How often do you inspect your powered industrial trucks?
  • What are the most common workplace injuries at your facility involving powered industrial trucks?
  • Which activities (e.g., loading, unloading, traveling) result in the most incidents?
  • Should OSHA’s powered industrial trucks standards be identical across general, construction, and maritime industries?
  • Do the ANFI and NFPA standards ensure that workers are protected from hazards associated with powered industrial trucks?
  • Are you currently in compliance with the ANFI and NFPA standards?
  • If OSHA changes its powered industrial trucks standards, should older powered industrial trucks be grandfathered?

Comments should include data, where possible, as well as information on anticipated additional costs, or cost savings, associated with potential changes to the standards. Comments must be submitted on or before June 10, 2019.

Are the Metal Tariffs Helping or Hurting U.S. Manufacturers?

Earlier this year, we posted our 2019 Corporate Compliance & Litigation Outlook.  In the post, we said the following with respect to tariffs:

2018 was the year of the “tariff” for manufacturers.  You could not read a manufacturing news story without mention of it.  There is a lot of hype around tariffs and other trade regulations.  Some companies have been able to absorb the costs by passing it on to their customers and others have not.  In 2019, I expect that these discussions will continue.

Today, Industry Week posted a story from Bloomberg entitled “A Year On, Trump’s Metals Tariffs Have More Losers Than Winners.”   The key points in the story are that while U.S. steelmakers have seen profits, U.S. producers of aluminum have not.  And, the story references large losses by buyers of steel and aluminum as examples of how U.S. companies have lost due to the tariffs.  While the Bloomberg story focuses on large companies (such as Caterpillar) there is no discussion of how tariffs have impacted small to medium sized companies within the supply chain.

Recently, I hosted a manufacturing executives’ dinner for privately held manufacturers.  Notably, when the subject of tariffs came up, many of the CEOs indicated that either the tariffs were not impacting their sub-sector of the marketplace and/or that the costs were being passed on to the customer.  As a result, I think it is safe to say that the hype about tariffs will continue, but I think it is too early to make generalized predictions about how tariffs are impacting all manufacturers.


New DOL Overtime Rule Impacts Manufacturers

The United States Department of Labor finally published its proposed regulation raising the minimum salary to be paid under the “white collar” exceptions to the Fair Labor Standards Act.  To refresh your recollection, virtually every worker must be paid at least minimum wage (currently $7.25 per hour under federal law, with many states having a higher minimum wage) and overtime for all hours worked in excess of 40 hours per week.  Certain employees are “exempt” from these requirements, however, if they are working as executive, administrative or professional employees, are paid on a “salary basis” and earn at least the minimum salary threshold.  Prior to 2016, the minimum salary had been set at $455 per week ($23,660 per year), or $100,000 per year for so-called “highly compensated” workers.

In 2015, the Obama DOL attempted to raise the minimum salary to $913 per week ($47,476 per year).  At the same time, the threshold salary for highly compensated workers was increased to $134,004 per year.  In 2017, a Texas federal court enjoined enforcement of the rule.  The DOL appealed that decision to the Court of Appeals, but asked that the appeal not be heard until it had a chance to review its options.

Those seeking to read prior blog posts on the topic may find them here:  Proposed DOL Rulemaking Means Uncertainty for Manufactures (7/21/15), New Wage and Hour Requirements for Certain Employees of Manufacturers (5/31/16), Time Running Out for Compliance with New DOL Overtime Regulation (9/19/16), Breaking News Manufacturers Breathe Relief as Court Strikes Down DOL Overtime Rule (8/31/17), and Buckle-Up for 2018 New Overtime Regulations Manufacturing Confusion (11/5/17).

On March 7, the DOL published the revised rule.  As expected, the Trump DOL also decided it was time to raise the minimum salary to be paid exempt employees from the current $455 per week to $679 per week ($35,308 annually) (a 49% increase over the current standard).  At the same time, however, the DOL raised the “highly compensated” minimum salary from $100,000 to $147,414 (a 47% increase).  The DOL estimates that raising the salary threshold potentially impacts 1 million American workers.

The  period for public comment on the proposed regulation will end in 60 days (May 6, 2019).  The DOL expects the regulation (if left unchanged) to take effect in January 2020.  It is too soon to say whether business groups will seek to halt implementation of the revised rule.

Manufacturers should examine their workforce to determine the number of employees potentially impacted by the new regulation.  For those currently exempt employees making less than $35,308 annually, an employer may be able to take advantage of a rule provision which permits the payment of a non-discretionary bonus of up to 10% of wages.  Other employees may have to be converted to hourly workers or have their base pay adjusted in order to maintain their exempt status.