News and Articles

NYC Fair Chance Act Limits If and How Employers Can Consider Criminal Histories in the Hiring Process

Erin Lloyd - Tuesday, December 01, 2015

On October 27, 2015, the New York City Fair Chance Act went into effect. The law makes it illegal for employers to ask applicants about a criminal record before making a job offer. The Act bans reference to criminal histories or background checks in employment ads, job applications, and during interviews. Only once the employer has made a conditional offer of employment is the employer allowed to inquire into an applicant’s criminal record and determine whether there are grounds to revoke the offer consistent with New York Correction Law Article 23–A (“Article 23–A”). The Fair Chance Act applies to all employment decisions—including hiring, firing, and promoting individuals with criminal histories. This article focuses on the hiring of applicants with criminal records and outlines what employers must do to comply with the new law when they offer a position to someone they discover has a criminal record.

How Do I Comply with the Fair Chance Act?

Prior to Making a Conditional Offer

The first step is to eliminate any reference to criminal histories or background checks in an employer’s employment ads, job applications, and interview practices. Advertisements with phrases such as “no felonies,” “must pass background check,” or “must have clean record” are illegal. As for print and online job applications, employers must rid them of any language inquiring into an applicant’s criminal history or asking an applicant to authorize a background check. This practice is the same during the interview, where the interviewer is prohibited from asking about an applicant’s criminal history.

If during the interview, an employer or hiring manager accidentally discovers the applicant has a criminal record, the interviewer should give the applicant a basic overview of the NYC Fair Chance Act. Explain that employers are only allowed to consider the applicant’s criminal record after making a conditional offer and that it would be inappropriate to discuss the record until that point, if at all. Interviewers may want to make a note in the applicant’s file should disclosure later become an issue.

After Making a Conditional Offer

Only after an employer extends a conditional offer of employment may it ask the applicant, either in writing or orally, whether he/she has a criminal history or pending criminal case. The New York City Commission of Human Rights recommends employers style their written inquiry as follows:

Have you ever been convicted of a misdemeanor or felony? (Answer “NO” if your conviction: (a) was sealed, expunged, or reversed on appeal; (b) was for a violation, infraction, or other petty offense such as “disorderly conduct;” (c) resulted in a youthful offender or juvenile delinquency finding; or (d) if you withdrew your plea after completing a court program and were not convicted of a misdemeanor or felony.)

If an employer runs a background check to determine or confirm the applicant’s criminal history, it is legally obligated to give the applicant the exact information used to inquire into his/her background. For example, if the employer hired a third party to conduct the check, it must turn over a copy of its report; if it found the information online, it should print a copy of the page; if it accessed the information by public record, it must print that page; or if it relied on the applicant’s oral testimony about the record, best practice would be to present a written summary of that information back to the applicant.

Once the employer has the applicant’s criminal record, if it decides the information discovered in the applicant’s criminal history is irrelevant and makes a final offer of employment without regard to the criminal history, and the employer complied with the above requirements, no other steps are required to be in compliance with the law.

Revoking a Conditional Offer

An employer that is unsure whether to hire the applicant based in any part on the information you discovered in this criminal history must carefully and deliberately evaluate whether that criminal record outweighs the reasons the applicant was selected for the position.

For forty years, New York State Article 23–A, has prohibited employers from denying applicants work based solely on a criminal record, and has governed how employers make this determination. Article 23–A requires employers evaluate job seekers and current employees with conviction histories fairly and on a case-by-case basis. It lists eight factors employers must use to determine whether there is a direct relationship between the criminal record and the prospective position or whether, based on the conviction, the employer can show the applicant poses an unreasonable risk to the company’s safety:

  • 1. New York State’s public policy of encouraging the employment of persons with prior convictions;
    • 2. The specific duties and responsibilities necessarily related to the . . . employment sought;
    • 3. The bearing, if any, the criminal offense or offenses for which the person was previously convicted will have on his ability to perform one or more such duties or responsibilities;
    • 4. The time which has elapsed since the occurrence of the criminal offense or offenses;
    • 5. The age of the person at the time of the occurrence of the criminal offense or offenses;
    • 6. The seriousness of the offense or offenses;
    • 7. Any information produced by the person, or produced on his behalf, in regard to his rehabilitation and good conduct; and
  • 8. The legitimate interest of the . . . private employer in protecting property, and the safety and welfare of specific individuals or the general public.
  •  

If after weighing these factors, an employer still wishes to hire the applicant, again, there is nothing more to do.

If, on the other hand, the employer decides to revoke the offer based on the applicant’s criminal history, it must: (1) explain to the applicant why, using the City’s Fair Chance Notice; (2) provide the applicant with a copy of the background check or criminal history information you obtained; (3) and give the applicant three business days to respond to the notice. The Fair Chance Notice acts as the employer’s application of Article 23–A to the applicant’s criminal history; it gives the applicant the employer’s reasoning for wanting to rescind the offer. The applicant has three days to respond to the Notice and should include information about errors in his/her record and any additional information the employer should consider before making the final determination to retract the offer.

The New York City Commission offers free trainings on the Fair Chance Act. Given how dramatically this law changes former employment practices in hiring people with criminal histories, it is important all employers and employees are aware of all its requirements to avoid unlawful discrimination against job seekers with criminal histories. If you are unsure how to apply the new law in your business, or if you feel you have been a victim of unlawful discrimination in the hiring process, our attorneys can help. Contact us today.

Erin Lloyd, Esq. is an employment and business lawyer and partner at Lloyd Patel LLP, a general practice law firm. She can be reached directly at el@lloydpatel.com.

Whitney McCann is a second year law student at City University of New York School of Law, interning at Lloyd Patel LLP, and expects to graduate in May 2017.

November 2015 NEWSLETTER

David Lloyd - Tuesday, November 03, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) New York City legislation, effective January 2016, expanding the right to pre-tax transit benefits for certain employees; (2) Governor Cuomo’s recently introduced statewide regulations prohibiting harassment and discrimination against transgender people; and (3) The first article in a two-part series focusing on executive severance packages and negotiations.

Pre-Tax Benefits a Boost for Commuters
Beginning January 1, 2016, New York City companies with 20 or more full-time employees will be required to offer their employees pre-tax transit benefits. This legislation encourages employers to take advantage of an existing federal tax benefit that allows companies to offer workers $130 as pre-tax income for transportation costs. As a result of this law, the City anticipates employees will save $400 per year on MetroCard expenses and employers will annually save $100 per employee in tax liability. The Department of Consumer Affairs will enforce the law, which imposes fines on covered business who do not offer the required benefits. However, companies that fail to comply will be given a 90-day grace period to fix their violation before being subject to civil penalty. To allow businesses adequate time to adjust their practices, employers will not be subject to penalty before July 1, 2016.


Expanded Protections for Transgender New Yorkers
Governor Cuomo recently introduced regulations by Executive Order that provide broad protections for transgender New Yorkers from unlawful discrimination. The statewide regulations prohibit harassment and discrimination against transgender people by all public and private employers, housing providers, businesses, creditors, and others. Cuomo’s order, to be enforced by the New York State Division of Human Rights, will be subject to a 45-day notice and comment period before being fully implemented. The regulations will provide the full force and protections of the existing New York Human Rights Law, which includes extensive compensation and other legal remedies for victims of discrimination and harassment, as well as stiff penalties for those who violate the law.


Executive Severance Negotiation
Executives who have been recently terminated and more importantly those that are considering leaving their current positions, including those that believe they are about to be terminated are urged to think more pro-actively about their severance packages. Rather than settle for what an employer may initially offer, if anything at all, executives should consider the benefits of developing a negotiation strategy that results in a package that makes their transition to the next phase of their lives and careers more manageable and equitable. The legal issues that generally determine what leverage, if any, an employee may have depends in large part on the rights under their specific executive employment agreements, any legal claims they may have against their employer, and other non-legal factors. To find out more about how to negotiate a better severance package from your employer, please read a more in-depth article posted here on our website.

 

Next month's newsletter will focus on the flip-side of the issues - Executive Compensation strategy.


Readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.

Negotiating a Better Severance for Executives

Yogi Patel - Monday, November 02, 2015

If you are an executive looking to leave your current business, or if you have recently been terminated, consulting with an attorney is absolutely essential for negotiating the terms of your severance. All to often, executives are either uninformed about their rights, or they simply do not take the time to exercise the leverage they do have, and they ultimately agree to conditions that leave them in a far less favorable situation than necessary. When executives seek the advice of counsel and refuse to blindly sign away their rights, they can be assured that they are negotiating from as strong a position as possible and are maximizing their benefits under any settlement they reach with their former or soon-to-be former employer.

This article is the first in a two-part series on executive negotiation of severance packages and new employment agreements. The goal of this article is to demonstrate how, with the assistance of an attorney, an executive can maximize her leverage in negotiating the termination of her employment. The second article in this series will detail how an executive can utilize the expertise of a lawyer in negotiating the terms of a new offer of employment.

Why do Employers Negotiate with Executives?

Perhaps most fundamentally, an employer negotiates because either it or the executive is seeking to terminate a relationship governed by a contract that did not work out. Unlike a typical at-will employment arrangement, an executive employment agreement may contain a wide array of benefits, obligations, restrictions, and even limits on termination itself. The terms of an executive employment agreement can govern the actions of the employer and executive both during the performance of the contract and after they part ways, and a breach by either party can have serious consequences.

Additionally, an executive may be financially invested in the company, holding a significant number of shares or other assets in the company’s name, or she may know inside information about the business’s operations. Buying or otherwise taking back company assets from an executive and ensuring she does not reveal company secrets after she leaves are two vital interests of employers that give significant leverage to executives when negotiating a severance.

Finally, an executive may have been subjected to unlawful or abusive treatment, or she may know of other behavior or information that the company would not wish to be made public. While an executive must be careful not to short-change herself in waiving claims against an employer or to partake or implicate herself in anything illegal or unethical, her experience and interactions with others within the company can also strengthen her bargaining power.

How Does Negotiation Work?

Regardless of whether an executive has been terminated, is facing termination, or wishes to leave her current position, the first step is always to consult with an experienced attorney. An executive is ill advised to engage in negotiations unless she is clear about what her obligations and rights are under both her employment agreement and the law. Reviewing the contract with a lawyer ensures that an executive understands the full implications of its terms and enables her to develop a negotiation strategy with the assistance of an expert.

The next decision to make is whether to have the attorney directly advocate on the executive’s behalf, or for her to assist from the sidelines. Typically, this decision will depend upon the relationship between the executive and her employer, whether the situation is hostile or not, and to what degree the executive will be using potential legal claims as leverage.

The advantage of having the executive negotiate directly with her employer while the attorney advises in the background is that in an informal format, an employer may be willing to discuss terms more candidly. If an informed executive is able to work out a severance with her employer in such a manner, negotiations may proceed more quickly and additional confrontation may be avoided. Still, even in the most amicable of negotiations, an executive should not agree to or sign anything without having her attorney carefully reviewing any proposed terms of separation.

The reality is, however, more often than not an executive is seeking to leave her position or is terminated because of a dispute between her and her employer. The initial conditions for negotiating are therefore often unfriendly or hostile and attempts at informal resolution can prove to be counterproductive. Involving an attorney under such adversarial circumstances is not only necessary to ensure that an executives interests and rights are all being protected, but it also can mitigate some of the personal hostility the parties may feel towards one another and provide some leverage in reaching a resolution.

Once an attorney is involved, she will usually communicate with the employer’s attorney and make a severance demand based on the 1) terms of the executive employment agreement;
2) actions of the parties; 3) existence and viability of any legal claims against either party;
4) need for the employer to protect its interests and public image; and 5) the financial interests the executive has in the company. An experienced attorney will be able to take all these factors into consideration and weave them into leverage designed to maximize an executive’s compensation package with an eye towards avoiding litigation. While sometimes filing a claim may prove necessary, it is almost always the objective to reach a settlement without involving the courts.

So What Exactly are the Benefits of Negotiation?

Executives who have opted to negotiate rather than waive their rights and settle for less have received any number of the following:

  • • Additional Severance Pay
  • • Severance Pay as a Salary Continuation Rather than as a Lump Sum
  • • Continued Medical Coverage for their Families
  • • Additional Consideration for Agreeing to Restrictive Covenants;
  • • More Favorable Asset Buyout Terms
  • • Compensation for Waiving Legal Claims
  • • Compensation for Entering into a Confidentiality and Non-Disparagement Agreement
  • • Reimbursement of Unused Vacation Days
  • • Postponing the Executive’s Termination Date
  • • A Neutral or Positive Letter of Reference
  • • Reimbursement of Attorney’s Fees
  •  

Conclusion

Most employers want to be held in high esteem by their former executives, or at least have that be the public perception. Though employers might be stringent in negotiating better severance packages because they do not believe the former executive has power, an executive who pushes a negotiation can prove not only that she does have power, but also that it may actually be in the employer’s best interest to negotiate. By consulting with an attorney, executives can become fully informed of their rights and the leverage they have, and can design a negotiating plan that maximizes their bargaining power that increases the benefits they receive as severance.

Next month, we will publish the second article in this series, which details how executives can maximize their leverage in negotiating a new employment agreement with the assistance of a lawyer. If you are an executive looking to leave your current company, negotiate a new employment agreement, or if you have been recently terminated, you are encouraged to consult with one of our attorneys and may contact us here.

This article is not intended to be nor should it be construed as providing legal advice. As with any matter, the particular details of each executive’s situation require careful consideration and should be reviewed individually with an attorney.

October 2015 NEWSLETTER

Yogi Patel - Monday, October 05, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the current and upcoming obligations for employers under the Affordable Care Act; (2) the differences between employees and independent contractors; and (3) Non-Qualified Stock Options as a tool for entrepreneurs to attract expert advisors/consultants/employees.

The Affordable Care Act Employer Mandate
Under the Affordable Care Act ("ACA"), employers with over 50 full-time employees are required to provide health insurance. The insurance must meet certain minimal standards and must be offered to the vast majority of employees in large businesses. Employers who fail to meet the ACA's requirements face penalties that could total in the tens or hundreds of thousands of dollars. While the ACA's rules for 2014 and 2015 have been more flexible, beginning in 2016, employer obligations and penalties will be in full effect. For smaller employers who are not required to provide insurance, the ACA offers tax incentives for doing so. All employers are encouraged to consult with counsel to make sure they are in compliance and can read more about this issue in our article available here.

Employees vs. Independent Contractors
Understanding what makes a worker an employee or an independent contractor under the law is one of the most important distinctions a business owner should be able to make. Depending on the classification, employers are required to make specific tax withholdings and carry workers compensation and unemployment insurance policies. Additionally, employees (as opposed to independent contractors) are protected by minimum wage, overtime, and other labor laws both under City, State and Federal Laws. Employers who misclassify workers and then fail to meet their obligations and/or violate the law can be held liable for penalties and damages that are as much as triple what they owe. Additionally, employers may be subject to investigation by government agencies. Recently, the U.S. Department of Labor issued an interpretation that clarified the standard used for determining a worker's status and the extent to which State and Federal agencies are auditing employee classification. For more information, including the test used for determining whether a worker is an independent contractor or an employee, see our article here.


Non-Qualified Stock Options
For entrepreneurs and business owners who might not have substantial cash on hand, offering equity in exchange for services is a commonly utilized option. One way in which this can be done is through Non-Qualified Stock Options ("NQSOs"), which grants an individual the right to purchase shares in a company at a low, fixed rate, in exchange for providing expert advise or other services. If the price of the company's stock goes up, the option holder will be able to purchase the shares at the lower, fixed rate and enjoy the increased stock price as profit. NQSOs come with built-in limitations that are designed to protect the interests of the business and allow the parties to establish their relationship first. Most commonly, the option holder does not gain the right to purchase shares until he or she has provided services to the company for a certain period of time. Understanding how to use NSQOs can be a powerful tool for business owners and is something all entrepreneurs should have at their disposal. For more information and in-depth discussion on NQSOs, see our article here.


Readers are encouraged to peruse the more in-depth articles on our website and to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other legal developments throughout the month.

Navigating Employers’ Responsibilities Under the Affordable Care Act

Kyle Carraro - Friday, October 02, 2015

Confused about your obligations as an employer under the Affordable Care Act (“ACA”)? The good news is you are not alone. With a sea of rules and regulations that have undergone several revisions and delays, knowing exactly what you are supposed to be doing as an employer with regards to your employees’ health care can be overwhelming. However, as the benefits and penalties of the ACA are set to take full effect soon, employers must take steps to educate themselves.

Employer Responsibilities: Who Must Provide Insurance and When Must They Do So

While the term “employer mandate” has made headlines and is quickly becoming part of the pubic vernacular, few people can explain its precise meaning. First, the employer mandate is a reference the Employer Shared Responsibility (“ESR”) provisions of the ACA. The ESR provisions state that any employer with over a certain number of employers must provide insurance coverage to its workers. Generally speaking, larger employers with 50 or more full-time employees must offer health care coverage to their employees and their dependents. The coverage must be affordable and meet certain minimal criteria. Employers who fail to comply with this requirement can be assessed hefty fines by the Internal Revenue Service.

For the year 2015, the government has offered “transitional relief” for employers who have between 50 and 99 full-time employees, meaning that for these employers, coverage does not have to be provided until January 1, 2016 if they meet certain requirements.

Here is where it can get a little confusing: In order to be exempt from the coverage requirements under the ACA, the employer must have had between 50 and 99 full-time employees from February 9 through December 31, 2014. Additionally, the employer must certify that it has not made any reductions to its workforce in order to meet the exemption requirements and must maintain any health coverage that was already previously being offered. If no such coverage was being offered, there is no requirement to begin offering coverage for employers who qualify for transitional relief until January 1, 2016. Of course, if an employer has legitimate business reasons for reducing or modifying her workforce, she is permitted to do so.

Businesses with 100 or more full-time employees are not exempt from providing insurance in 2015, but there is partial relief available. For 2015, if such a large employer offers coverage to at least 70% of its employees (and their dependents) and no employee receives a premium tax credit to help pay for coverage through an insurance Marketplace, then the employer will not be subject to any penalty payment. For 2016, the threshold is raised to 95%. Any employer with 100 or more full-time employees that does not offer insurance to the threshold number of employees and/or which has at least 1 employee who receives a premium tax credit, it will be subject to a penalty.

So Just How Bad Could the Penalties Be?

The short answer is: steep enough to incentivize employers to offer insurance to their employees. Any employer who is required to provide insurance but fails to do so, and which has at least one employee that receives a premium tax credit through an insurance Marketplace, will be subject to a penalty equal to the number of full-time employees it has for the year roughly equivalent to $2,000 per employee. The penalties are calculated on a monthly basis, meaning they only apply to the months during which no insurance was offered, but some employers could easily see fines in the tens or even hundreds of thousands of dollars each year.

Even employers who are providing insurance can be subject to penalties if they are not providing adequate coverage or if they fail to offer insurance to enough of their employees. While there are certain reduced penalties for 2015 only, there is currently no relief being offered from the complicated and stringent requirements of the ACA for 2016 or later. Any employer who is concerned about meeting the ACA’s requirements, even those who currently provide insurance, would be wise to consult with an attorney. Our lawyers are knowledgeable of employers’ obligations under the ACA and are dedicated to working closely with our business clients to make sure they are in compliance and avoid paying these steep penalties.

How to Calculate the Number of Full-Time Employees

A full-time employee is defined under the ACA as one who works at least 30 hours a week or 130 hours per month on average. For an employer who employs only full-time employees, this is a straightforward calculation taking the total average number of full-time employees she had each month over the previous calendar year. For employers who have part-time employees, the calculation is a little more complicated.

For the purposes of determining an employer’s obligation to provide insurance only, the ACA provides for the inclusion of Full-Time Equivalents (FTEs) into the calculation. This works by multiplying the total number of hours part-time employees work by the number of part time employees, all divided by 30. For example, 21 part-time employees who work 20 hours per week would amount to 14 FTEs.

Keep in mind, employers who own or operate more than one business will likely have the employees from each business added together for the purposes of determining whether or not the employer is required to provide insurance.

Tax Credits for Small Businesses

Under the ACA, businesses with less than 25 full-time employees who are paid, on an average, less than $50,000 per year are eligible for a tax credit if they pay at least half of the insurance premiums for their employees. The maximum tax credit is 50% of the premiums paid for small businesses, and 35% for small tax-exempt employers. Employees must generally enroll in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace in order to qualify. The credit is refundable, or it may be applied to future taxes.

Filing Requirements

Beginning in 2016, businesses with over 50 full-time employees must fulfill reporting requirements with the IRS. Employers are responsible for forms 1095-c and 1094c, which provide information to the IRS on the employers’ full-time employees and their insurance coverage. When employees, in turn, file their personal income taxes, the IRS will know whether or not an employee received a premium tax credit. The IRS then uses the employee’s personal income taxes and the employer forms to determine what, if any, penalty to assess.

So What Should Business Owners Do?

If business owners have over 50 full-time employees, they should plan to provide health coverage to their employees (and their dependents) beginning January 1, 2016. For every month afterwards that coverage is not provided, employers will face stiff penalties for non-compliance. Employers should work closely with an attorney and a payroll professional to make sure not only that they have in place the necessary coverage, but also are maintaining proper records, making withholdings from employees’ paychecks, and fulfilling their filing requirements. Smaller business should also consult with an attorney or tax professional to help determine if they are eligible for certain tax incentives. Finally, an employer who is growing a business or who owns multiple businesses should seek professional assistance to determine what her future obligations might be under the ACA to avoid paying hefty fines.

Employers of any kind should keep in mind that this article is intended to provide a general overview of some of the most pressing obligations under the ACA and should not be construed as legal advice. As with any important decision, there are nuances and specific details that may pertain to your situation and you are best advised to work with a licensed professional to meet your business’s needs. If you would like to consult with one of our attorneys about your ACA obligations, you can contact us here.

When Your Intern is Really an Employee: Avoiding Triple Liability After Glatt v. Fox Searchlight Pictures, Inc.

Erin Lloyd - Friday, October 02, 2015

Many businesses work with interns at one point or another, using them for special projects or hiring them on an annual or other regular basis to work side by side with traditional staff members. Often, businesses do not pay their interns, reasoning that it is an educational experience and, in fact, students sometimes get school credit or even compensation from their school for an unpaid internship. In a landmark case this summer, a Federal court for the Second Circuit (which covers New York) clarified the circumstances in which an interns is excluded from basic employee protections, and all businesses should take note of the new rules that apply to unpaid interns.

Generally speaking, with the exception of “professional” and other highly compensated, salaried workers, most employees must be paid at least minimum wage for every hour worked up to 40 hours in a week, and must also be paid overtime for all hours worked beyond 40 in any given week, at a rate of time and a half of their usual hourly rate. These requirements are mandated by both the Federal Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”), and employees cannot waive these statutory rights.

In the past, there has been much disagreement about whether “interns” qualify as “employees”—and thus, whether the FLSA and NYLL even apply to interns. The U.S. Supreme Court, in 1947, held that individuals participating in a training program were not employees and the FLSA did not apply to them because they did not displace regular workers, were not promised employment after the training program, which was similar to training offered by a vocational school, and the employer did not receive any immediate advantage to its business from the work performed by the trainees. (Walling v. Portland Terminal Co., 330 U.S. 148). Based in part on this decision, the U.S. Department of Labor published guidance setting for six criteria which, if all were met, allowed for the trainee/worker to be treated as exempt from FLSA.

However, while the DOL required all six criteria to be met, courts—and specifically, the district court in Glatt v. Fox Searchlight Pictures, Inc., No. 11 Civ 6784 (WHP) (SDNY June 11, 2013)—employed more of a balancing test, evaluating whether most of the factors, on balance, indicated the individual was an employee or an intern/trainee.

On appeal, the Second Circuit declined to adopt either the DOL’s strict six-factor test or the lower court’s balancing test and, instead, adopted its own balancing test which it referred to as the “primary beneficiary test”. The Court wrote, “The primary beneficiary test has two salient features. First, it focuses on what the intern receives in exchange for his work. Second, it also accords courts the flexibility to examine the economic reality as it exists between the intern and the employer.” Glatt v. Fox Searchlight Pictures, Inc., Nos. 13-4478-CV, 13-4481-CV at p. 14 (2d Cir. July 2, 2015) (internal citations omitted).

The Court set forth a list of “non-exhaustive factors” that it said courts (and therefore, employers) should evaluate and consider when determining whether an intern should be considered an employee for purposes of the FLSA (and NYLL), including:

1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.

2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship. 

The Court noted that “[t]he purpose of a bona-fide internship is to integrate classroom learning with practical skill development in a real-world setting,” and the non-exhaustive list of considerations is thought to reflect that purpose as well as balance it with economic realities of today’s workforce. The overarching concern for employers, based on Glatt, should be to develop an internship program that clearly provides the primary benefit to the student-intern and has the student-intern’s educational and experiential experience at its core.

It is important to note that if an intern is not paid—or is paid less than minimum wage, or is not paid for overtime pursuant to the law—and a court later determines that the intern should have been classified as an employee, a violation of the FLSA and NYLL will likely be found. In that case, courts can award back pay based on what the employee should have been paid, as well as up to 100% of that amount under each of those statutes. In other words, in the worst-case scenario, employers could be forced to pay three times what they should have paid in the first instance. On top of that, in most cases the employer is responsible for paying the employee’s attorneys’ fees, which can be in the tens of thousands for even a simple case. For these reasons, it is essential that employers and interns take a hard look at the Glatt factors and their own internship program to ensure compliance and seek legal guidance, when appropriate. Our attorneys can help you if you have not been properly paid as an intern, or if you are an employer who wants to maintain or develop a strong internship program that will steer clear of any legal liability.

For more information, employees and employers can contact us here

Employee or Independent Contractor? You May be Surprised by the Answer.

Erin Lloyd - Friday, October 02, 2015

For years now, businesses have been hiring independent contractors at increasing rates, in part reflecting the shift in our economy over the last decade, and in part reflecting attempts by businesses to limit costs and have a more flexible work force. We often hear from clients, “Our independent contractors use their own computer and work from home, so they supply their own tools work independently,” or “We have an independent contractor agreement, so they’ve agreed they are independent contractors.” What many of our clients don’t know is that none of these facts—and, indeed, many others cited by our clients—will turn an “employee” into an “independent contractor” under the law. Recently, the U.S. Department of Labor (“DOL”) issued an interpretation that clarified both the standard used to determine if someone is truly an employee or an independent contractor, and the extent to which the Federal and State Departments of Labor and other agencies are cracking down on misclassification.

Why Does This Distinction Even Matter?

Before discussing how courts and the DOL (as well as the IRS and other government agencies) define employee versus independent contractors, it is worth taking a moment to consider some of the reasons the distinction between the two is important. This issue affects the rights of individuals, the obligations of employers, and can also shed some light on the various factors courts and the government find important in this determination.

First, only “employees” are entitled to a minimum wage and overtime pay.[1] Independent contractors are entitled to offer their services at any rate they wish, and a business is free to negotiate lower rates with independent contractors or even alternative payment arrangements, such as in-kind payments.

While this may seem like a great benefit to any business, keep in mind that if an employee is misclassified as an independent contractor and the business did not conform to the wage and hour laws that apply to an employee, the employer runs the very real risk of facing a lawsuit in state or federal court. The Fair Labor Standards Act, a federal law, allows covered, non-exempt employees who were either 1) not paid for all hours worked, 2) paid less than minimum wage, or 3) not paid for overtime, to collect all the back pay they are entitled to plus 100% of those damages on top of the back pay for 2 to 3 years. Likewise, in New York, the New York Labor Law may permit the same employee to receive another 100% on top of that, and can go back 6 years. Further, both statutes allow the employee’s attorney(s) to recovery their reasonable attorney’s fees from the employer on top of the employee’s damages. That kind of judgment will very quickly cancel out any savings the business enjoyed by misclassifying the employee.

Of course, in an economically competitive environment, workers can sometimes face the Hobson’s choice between being unemployed or taking a position that they know is misclassified as “independent contractor,” overlooking the wage and hour violations of the employer. However, this is precisely the kind of work environment that the Fair Labor Standards Act was enacted to avoid in the early part of the 20th Century.

Beyond wage and hour protections, many other worker protections apply only to “employees,” including anti-discrimination statutes, family leave protections, disability and unemployment statutes, and more.

For example, businesses do not have to purchase unemployment insurance in New York for independent contractors, and independent contractors are likewise not entitled to receive unemployment benefits when their contract with a business ends. This is because independent contractors are thought of as individuals who are in business for themselves, whether they are acting as a sole proprietor or under a corporate form. But an individual who is truly an employee is entitled to collect unemployment if they qualify and, therefore, their employer is expected to pay into the system to provide that coverage.

The DOL and Courts Balance a Series of Factors, and No Single Factor is Determinative

When conducting an inquiry into whether a worker or group of workers has been misclassified by an employer as independent contractors, the U.S. DOL and Federal Courts, and to some extent the New York State DOL, apply what has been referred to as the “economic realities” test.[2] This test evaluates and weighs various factors in an attempt to answer the question whether the worker is economically dependent upon the employer or is truly in business for him or herself:

  •    1. Is the work performed an integral part of the employer’s business?
    •    2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
      •    3. How does the worker’s relative investment compare to the employer’s investment?
        •    4. Does the work performed require special skill and initiative?
          •    5. Is the relationship between the worker and the employer permanent or indefinite?
  •    6. What is the nature and degree of the employer’s control?
  •  

The DOL and Courts have made it very clear that applying the economic realities test, most workers are employees. True independent contractors are the exception, not the rule.

Enforcement Efforts Have Increased in Response to Lawsuits and DOL Complaints

The DOL has entered into memoranda of understanding with the Internal Revenue Service, as well as with 26 states, including New York, to facilitate information sharing and cooperate on enforcement efforts. In New York, both the Attorney General’s Labor Bureau and the New York State Department of Labor are sharing data and coordinating efforts with the U.S. DOL, and according to the DOL, these efforts are paying off: in fiscal year 2014, it recovered more than $79 million in back wages for more than 109,000 employees who were misclassified and, therefore, improperly compensated.

As a result, employers could see an investigation initiated by any number of agencies, State or Federal. If an employer has properly maintained records and documented the legal basis for classifying any workers as independent contractors, such investigations or audits can be relatively painless. If it has not, however, just the investigation alone can be extraordinarily costly to the business.

For this reason, employers should regularly consult with legal counsel to evaluate their employee and independent contractor relationships, to review documentation efforts, to modify contracts as necessary to keep up with changing law, and to otherwise engage in compliance reviews.

For more information, employees and employers can contact us here



[1] Note: Not all “employees” are entitled to overtime pay or minimum wage. This article does not address the difference between those who are entitled to such benefits (known as “non-exempt” employees) and those who are not (known as “exempt” employees). If you have questions about how these distinctions apply to your employees or to yourself, one of our attorneys can help you conduct that analysis.

[2] While the New York State DOL’s test has some variances, it is substantially similar to the Federal test.

Another Tool for the New Entrepreneur: Non-Qualified Stock Options

Kyle Carraro - Friday, October 02, 2015

Many entrepreneurs, especially those who are new to running a business, often find themselves low on cash reserves while desiring to retain the services of industry experts. When a business owner does not have cash to pay for services, a useful alternative is to offer equity instead. While exchanging equity in lieu of cash can be a wise, necessary business decision, it does come with its risks. When one purchases equity in a company, she is entering into a relationship that binds her to the company and can grant her certain rights as a shareholder.

This type of arrangement can be mutually beneficial, but business owners are rightfully reluctant to offer equity to an outside professional without having an opportunity to test whether the expert is a good fit for the business. Likewise, an expert may not want to be tied to a company before first seeing its inner workings for herself. But stock options—specifically non-qualified stock options—can assuage the concerns of both parties and offer a great solution for the business owner and expert advisor.

Non-Qualified Stock Options Defined

Generally speaking, an option is the right to buy or sell a security or other asset at an agreed-upon fixed price. A non-qualified stock option (“NQSO”) gives the holder of the option the right to purchase shares in a company at a fixed price, usually for a specified period of time. In exchange, instead of cash, the party receiving the option can offer services to the issuer of the option (the company). If the option-holder believes the value of the business is bound to increase, or the stock price does in fact go up, she can buy the stock at the fixed-price and reap the difference in profit.

For example, Smith & Assoc. engage Ms. Johnson to work in an advisory capacity. In exchange for agreeing to provide advising services on a part-time basis, Ms. Johnson receives the right to purchase up to 50,000 shares in Smith & Assoc. at a fixed-price of $0.10 per share. If Ms. Johnson believes the stock price will increase or actually sees the price increase, Ms. Johnson can exercise her right to purchase the Smith & Assoc. shares at $0.10 per share and enjoy the profit.

While this arrangement is at the core of the relationship between the parties, there are additional restrictions and limitations involved that are designed to protect the interests of both parties.

Vesting

The primary concern for a business owner offering equity is that the holder of the option might exercise her purchasing rights and then quit providing services. To mitigate this possibility, non-qualified stock options are made subject to certain “vesting” periods during which time the option holder’s right to purchase stock accrues. Typically, option holder will not have the right to purchase stock for a certain period of time, after which the amount of stock she may purchase will accrue in increments, up to the maximum amount under the option contract.

In our example above, it would not benefit the company to allow Ms. Johnson to purchase any shares in Smith & Assoc. on the first day she began providing services; rather, the option contract would ideally be crafted to allow Ms. Johnson to purchase equity only after advising Smith & Assoc. for a substantial period of time. Additionally, even when Ms. Johnson gains the right to purchase stock, she might only be able to buy a small percentage of the 50,000 shares contemplated by the agreement. Although each company’s needs will differ, in this example, the parties could agree that Ms. Johnson be permitted to purchase 5% of the total shares after the first six months, and then each month after that up to 5% more, so after 20 months she would be “fully vested” and able to buy up to 50,000 shares at the fixed price of $0.10 per share.

Vesting allows an entrepreneur to vet an expert before giving up equity in her business. If the relationship appears to be mutually beneficial, the business owner should be happy to exchange equity for the value that the expert advisor brings to her business. In the end, the exact vesting schedule is a major point of negotiation, and the exact terms will depend on the circumstances of each party.

Don’t Forget About Taxes

When an option holder decides to exercise her rights to purchase shares, she must also be careful to consider the tax consequences. The difference in option purchase price and the stock price when the option is exercised generates income on which taxes must be paid. For example, if Ms. Johnson purchases 50,000 shares at $.10 per share but the value of the shares increases to $.50 per share, she will have paid $5,000 for shares worth $25,000. The difference, $20,000, is generally treated as taxable income. Of course, any further increases in stock price after exercising the option could also be subject to long-term capital gain taxes.

Because of these tax consequences, the party exercising the option will need to plan ahead to make sure she has enough cash to cover the taxes she will owe. While this is primarily a concern for the receiver of the option, it might also be a point for negotiation. All individuals considering such financial transactions should obtain advise from a well-qualified tax advisor to understand the full consequences.

Conclusion

Overall, offering non-qualified stock options in exchange for expert services can be a great tool for the entrepreneur, especially one whose cash flow is limited. While this article is intended to provide a basic introduction to non-qualified stock options, it does not cover every facet of non-qualified stock options and is not to be construed as legal advice. As with any major business decision, owners are best advised to speak with an attorney to make sure their needs and obligations are being fulfilled, and to review other potential provision to include in a stock purchase agreement. To consult with one of our attorneys, please contact us here.

September 2015 NEWSLETTER

Yogi Patel - Wednesday, September 09, 2015

Dear valued clients and supporters: This month's newsletter will focus on: (1) the NLRB's restatement of the joint-employer standard, expanding the right to unionize; (2) the New York City ban on employers using or requesting credit information of employees and job applicants; and (3) Businesses' need to keep trade secrets safe, methods for protecting them, and actions to take when they are misappropriated.

NLRB Expands Right to Unionize 
Under the National Labor Relations Act, employees have the right to collectively bargain (unionize) only against their employer. The joint-employer doctrine recognizes that in circumstances where two separate entities each have the right to exercise a certain degree of control over a set of employees' working conditions, that both entities should be considered employers. In a recent decision, Browning-Ferris Indus., the NLRB "restated" its standard for evaluating the existence of a joint-employer relationship in a way that expanded its scope. The decision particularly impacts the franchise industry.  (FULL ARTICLE)
 

NYC Ban on Employer use of Credit Information 
As of September 3, 2015, NYC employers will be prohibited from using or requesting the consumer credit history of an applicant or employee pursuant to Local Law 37. Under the new law, it will be considered an unlawful discriminatory practice to ask applicants or employees about their credit information, such as their credit score, missed payments, and collections. Any use of such credit information with regard to hiring, compensation, or the terms, conditions, or privileges of employment will also be considered an unlawful discriminatory practice. Employees and applicants who suffer credit discrimination will be protected by New York City Human Rights Law, which allows them to file a claim against the employer and seek compensatory and punitive damages, as well as discretionary costs and attorney's fees. Employers should be aware of this development and work with their counsel to ensure their employment practices are not in violation of this new law.  (FULL ARTICLE)

Trade Secrets 
Trade Secrets are the key to many business's success, especially in the absence of a patent or other forms of intellectual property protections in place. Proprietary information that entities exclusively know and use is what allows them to compete in their industries. When trade secrets become publicly known or known to a competitor, an entire business may be at stake. That is why any business that operates in reliance upon trade secrets must take specific precautions to limit the number of people who access such information and to place restrictions on those with whom it is shared. Requiring employees to agree not to disclose trade secrets and to follow certain protocols when accessing or using trade secrets is vital to a business's security. When a business shares its secrets with potential investors or partners, the interaction should be subject to a non-disclosure agreement. Security measures are the front line defense against the leaking of trade secrets, and imposing affirmative obligations not to disclose or use trade secrets gives businesses specific remedies against those who misappropriate their proprietary information. (FULL ARTICLE) 

Readers are encouraged to follow us on Twitter (@lloydpatelllp) and Facebook to receive updates on this and other issues throughout the month.

Workers Right to Unionize Gets Boost From National Labor Relations Board

Yogi Patel - Tuesday, September 08, 2015

 

Intro

The National Labor Relations Board (“NLRB”) recently issued a major decision making headlines everywhere that both advocates and opponents say greatly expands workers’ right to unionize. The decision, Browning-Ferris Indus., restated the standard for determining whether a joint-employer relationship exists where more than one entity exercises some degree of control over workers. In a joint-employer relationship, employees have more than one employer and can exercise their rights against both employers. Because workers only have the right to collectively bargain (unionize) with their employer, by expanding the definition of a joint-employer relationship, the NLRB expanded the rights of employees to unionize. Given the recent decision and other pending actions before the Board, there is much speculation as to the scope of the impact the Browning-Ferris restated rule will have.

What Exactly is a Joint-Employer Relationship?

In a joint-employer relationship, two or more entities that have a business relationship each exercise a certain degree of control over a set of employees such that they should each be considered their employer. A common example of a joint-employment relationship is where a temporary placement agency provides employers to an employer; under such circumstances, both the agency and the business where the employees are placed would be considered employers. Determining whether or not a joint-employer relationship exists does not rely one a single concrete definition, but rather requires analyzing several factors relating to the control and supervision of employees. Overall, the general idea is that while two business entities that are involved with one another may be separate, when they share or codetermine matters governing the essential terms and conditions of employment, they should both be considered employers. What the NLRB did in Browning-Ferris was alter the factors used in the joint-employer analysis such that they expanded the relationship’s definition.

So What Exactly Happened in Browning-Ferris?

Browning-Ferris Industries was the operator of a recycling plant. BFI maintained their own employees who were responsible for operating forklifts and other machinery within the plant, but they hired a separate company, Leadpoint, to provide workers to operate conveyor belts within the plant that sorted recycled materials. The Leadpoint workers also performed other tasks, such as cleaning the facility. Eventually, the union that represented the BFI workers tried to represent the Leadpoint workers as well. Since employers may only unionize against their employer, this raised the issue as to whether or not BFI should be considered the Leadpoint employees’ employer as well, thus creating a joint-employer relationship.

 

In its decision, the Board explained that the rapid growth of the employment placement services industry required that it revisit its previous standard for assessing whether or not a joint-employer relationship exists. The Board emphasized that it has the obligation to apply the law to the “complexities of industrial life,” and to adapt the law “to the changing patterns of industrial life,” and that given the record numbers of workers employed through temporary agencies and other placement services, the Board was compelled to restate the joint-employer standard to address its shortcomings.

Under the previous rule, a company like BFI who was not the primary employer would only be considered a joint employer if it exercised “direct and immediate” control over certain working conditions if the employees. Under the “new” rule, which advocates claim already existed prior to the 1980s, the Board will determine that two or more entities are joint employers if they:

are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating the allocation and exercise of control in the workplace, we will consider the various ways in which joint employers may “share” control over terms and conditions of employment or “codetermine” them, as the Board and the courts have done in the past.


The Board retained an “inclusive” approach to defining the essential terms and conditions of employment, which contain, hiring, firing, discipline, supervision, direction, setting wages and hours, dictating the number of workers, controlling scheduling, seniority, and overtime, assigning work, and determining the manner and method of work performance. However, the Board expressly held that it would no longer require an entity to actually directly exercise control over workers to be considered a joint employer, but rather that the essential determination would be based upon whether the entity had the right to exercise such control, directly or indirectly. To put it more plainly, an entity that has the right to indirectly control the essential terms and conditions of employment of certain workers should be considered their joint employer.

In the Browning-Ferris case, Leadpoint had its own supervisors at the plant, managed its employees schedules, evaluated its employees’ work, had its own HR, made all hiring decisions, made discipline and determination decisions, and set pay rates. However, Leadpoint’s control was limited and/or influenced by BFI in that BFI set the job qualifications and criteria, required drug and skills tests, insisted on some discharges, set an indirect cap on pay by limiting the amount it would reimburse Leadpoint, and set the hours or operation of the plant and shift times. The Board found that because of the control BFI held over the Leadpoint employees, whether direct or indirect, authorized or not, BFI was a joint-employer under the restated rule.


Why This is Such a Big Deal

One of the biggest areas of business that pundits are speculating the Browning-Ferris decision will have the greatest impact is over the franchise-franchisee relationship. Prior to Browning-Ferris, a franchisor, such as McDonald’s, would not be considered the employer of each franchise’s employees because McDonald’s the corporation did not exercise direct and immediate control over the working conditions of the employees. Under the new rule, most analysts assert that McDonald’s would be considered the joint-employer of all of its franchises’ employees, thus granting the employees the right to collectively bargain with McDonald’s itself. Previously, franchise employees had no such right, and if they tried to form a union, it was perfectly legal for the parent corporation, such as McDonald’s, to have the franchise such down.


Generally, analysts see the Board’s ruling as an opening for employees across many industries to attempt to unionize where it was previously forbidden, which would expand the rights of workers everywhere to collectively bargain. Naturally, advocates see this ruling as a welcome expansion of workers’ rights and opponents argue that the ruling will be disastrous for business and destroy the franchise model altogether.


Conclusion

Perhaps the most poignant argument the Board put forth in defending its decision attacked the disparity that arises when an entity can retain a certain degree of control over workers without workers having any rights against the entity: “It is not the goal of joint-employer law to guarantee the freedom of employers to insulate themselves from their legal responsibility to workers, while maintaining control of the workplace.” Given the rise of employment placement agencies by businesses, the Board was concerned that far too many employees would be left powerless against entities that profited from their labor and exercised control over them, which, it argues, the National Labor Relations Act was put in place to prevent. While time will tell what the true impact of the decision will have, especially given that it will almost certainly be approved, the Board did sent a clear message to employers that it would no longer tolerate business who seek to reap the benefits of labor it controls without any corresponding obligations.


This article is not intended to be nor should it be construed as legal advice. As with any legal inquiry, both employees and employers should seek the advice of council before taking any action pursuant to the information discussed above.


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