September 2015 - Laborsphere

New Jersey Supreme Court Holds That Economic Loss is Not Needed To Recoup a Former Employee’s Salary for Breach of the Duty of Loyalty

On September 22, the New Jersey Supreme Court unanimously gave the green light to awards of the remedy of equitable disgorgement, even in the absence of economic loss, as a fair and practical response to an employee’s disloyal conduct. The Court also noted that the fear of disgorgement should serve to as a deterrent to employee misconduct. Bruce Kaye v. Alan P. Rosefielde (A-93-13) (073353), New Jersey Supreme Court.

The Facts of the Case

Bruce Kaye hired attorney Alan Rosefielde as a full-time, salaried employee after using him as outside counsel. Rosefielde served as Chief Operating Officer and General Counsel for some of Kaye’s timeshare businesses. Kaye terminated Rosefielde’s employment based on discovery of unauthorized self-dealing and other actions by Rosefielde that exposed Kaye’s companies to potential liability, and as result of dissatisfaction with Rosefielde’s job performance. Kaye sued Rosefielde for breach of fiduciary duty, fraud, legal malpractice, unlicensed practice of law and breach of the duty of loyalty. After a lengthy bench trial, Rosefielde’s egregious conduct was found to breach his duty of loyalty, among other claims. The trial court awarded compensatory and punitive damages, as well as legal fees. However, the court did not order disgorgement of Rosefielde’s salary as an equitable remedy because the breach of loyalty did not result in any actual damage to the employer’s companies. The Appellate Division affirmed.

Upon review of the limited question of whether a court may award the remedy of disgorgement of a disloyal employee’s salary to an employer who has sustained no economic damage, the New Jersey Supreme Court recognized that the remedy of equitable disgorgement has only rarely been discussed in appellate decisions. Writing for the unanimous court, Justice Anne Patterson stated that:

“[t]he disgorgement remedy is consonant with the purpose of a breach of the duty of loyalty claim: to secure the loyalty that the employer is entitled to expect when he or she hires and compensates an employee.…[w]hen an employee abuses his or her position and breaches the duty of loyalty, he or she fails to meet the employer’s expectation of loyalty in the performance of the job duties for which he or she is paid….[r]equiring an employer to demonstrate a that it has sustained economic loss ‘is inconsistent with a basic premise of remedies available for breach of fiduciary duty’”. (Opinion, Page 24/25).

As one example, the New Jersey Supreme Court cited to the determination that Rosefielde had engaged in multiple inappropriate sexual advances towards toward co-workers as a basis for disgorgement of Rosefielde’s salary – without requiring the employer to demonstrate that litigation resulted from the misconduct, or that any other economic loss resulted from the inappropriate behavior.

What type of conduct may justify an award of disgorgement of salary? Examples of the misconduct constituting breach of duty of loyalty in the Kaye case included: unauthorized business transactions that provided a personal financial benefit to the employee; billing the employer for non-business expenses during a Las Vegas trip (a hotel suite shared with three adult film stars); sexual advances towards female co-workers; a fraudulent application to a health insurer to obtain employee coverage for independent contractors; and retaliation against another employee who refused to participated in a self-dealing scheme.

In terms of application of the Kaye decision to unfair competition claims, employers will presumably no longer need to demonstrate economic loss to recoup salary for employee misconduct such as theft of confidential information or customers, use of employer time and resources to set up a competitive activity, misdirecting business opportunities to a potential new employer or failing to fully perform duties or responsibilities while anticipating a jump to a new employer.

How much salary can be recouped?

The New Jersey Supreme Court remanded for a determination on disgorgement, and instructed the trial court to apportion the employee’s compensation by focusing on time periods during which the employee committed acts of disloyalty, and to consider the following factors: the employee’s degree of responsibility and level of compensation; the number of acts of disloyalty; the extent to which those acts placed the employer’s business in jeopardy; the degree of planning to undermine the employer that is undertaken by an employee; and other factors that may guide a court in the exercise of its discretion to impose an equitable remedy.

The Court also directed that the trial court should order disgorgement for monthly pay periods in which the Rosefielde committed acts of disloyalty because he was paid his salary on a monthly basis.

While the Court did caution that the trial court should not order a wholesale disgorgement before conducting the analysis cited above, it did include a footnote in the Kaye decision allowing for disgorgement of the employee’s entire salary if there is a determination that the employee was disloyal during all pay periods. (Opinion, fn.8).

The Takeaway

Employers should include breach of duty of loyalty claims when suing for “on the job” misconduct, especially for highly paid employees. Such claims may very well have the deterrent effect intended by the New Jersey Supreme Court by allowing employers to recoup salaries without having to show economic loss. Deterrence may be especially relevant with regard to claims of unfair competition, as subsequent employers will likely not able to offer enforceable indemnification guaranties for disgorgement awards.

The DOL Announces Final Rule for the Obama Administration’s 2014 Pay Transparency Executive Order

As we’ve previously covered here, on April 8, 2014 President Obama signed Executive Order 13665 (“Non-Retaliation for Disclosure of Compensation Information), at an event commemorating National Equal Pay Day, an annual public awareness event that aims to draw attention to the gender wage gap. On September 10, 2015, the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) announced the Final Rule implementing the Order, which will take effect on January 11, 2016.

In its press release announcing the Final Rule, the DOL highlighted its intent to specifically address the gender pay gap, stating that “a culture of secrecy keeps women from knowing that they are underpaid, and makes it difficult to enforce equal pay laws. Prohibiting pay secrecy policies and promoting pay transparency helps address the persistent pay gap for women . . .”

The Final Rule seeks to promote pay transparency by, among other things:

Revising the Equal Opportunity Clause included in covered federal contracts to include a provision prohibiting employers from discriminating against employees or job applicants for discussing or disclosing their or their co-workers’ compensation;
Requiring covered contractors to notify employees and applicants of these nondiscrimination protections in existing policies;
Enabling employees and job applicants who believe they have been discriminated against for discussing or inquiring about pay to file discrimination complaints with the OFCCP.

The Final Rule outlines two defenses that a contractor may assert where a violation of the nondiscrimination requirement is alleged. The first is a “general defense” that the contractor “disciplined the employee for violation of a consistently and uniformly applied company policy . . . [which] does not prohibit, or tend to prohibit, employees or applicants from discussing or disclosing their compensation or the compensation of other employees or applicants.” The second is the “essential job functions” defense, which essentially permits a contractor to take action against an employee (such as a Human Resources Director) whose job duties and functions necessarily entail access to compensation information, and who discloses such information other than in response to a formal complaint, charge, investigation, or proceeding.

The Obama administration has in the past few years issued multiple orders or memoranda to accelerate change in employment-related areas it believes are within the authority of the Executive Branch, without the need for legislation. As described in more detail here, there is an often lengthy rule-making process required for these mandates to become effective law, but the DOL is close to (or has) announced Final Rules on many of the administration’s proposals. Accordingly, employers should be aware that many of the prospective regulatory changes discussed in the past few years are, in the near future, set to become reality.

Obama Board Reaffirms Successor’s Right to Set Initial Terms of Employment when Taking Over Unionized Operation

Last week, the National Labor Relations Board issued a refreshingly employer-friendly decision which allowed a successor company to implement new pay terms without having to first bargain with the labor union. In Paragon Systems, Inc., 362 NLRB No. 182 (2015), a divided three-member Board panel held that the new guard service, Paragon Systems, Inc. (Paragon), had given sufficient notice to employees of a change in pay and therefore could assert its right to unilaterally set the initial terms and conditions of employment when it assumed a federal contract from the predecessor employer, MVM, whose work force was represented by The Federal Contract Guards of America International Union.

A Successor Can Make Unilateral Changes

In 2011, the Board reinstated the “successor bar” doctrine, where a union is presumed to retain its majority status when the employees it represents are hired to work for a successor employer. UGL UNICCO Service Co., 357 NLRB 76 (2011). This decision overturned MV Transportation, 337 NLRB 770 (2002) in which the Bush Board had refused to impose a successor bar in favor of the employees’ right to free choice of a union representative.

Paragon was deemed a successor because the majority of its work force was made up of former MVM guards. Paragon conceded that it was a successor and in fact, agreed to recognize and bargain with the union. However, without first consulting with the union, Paragon implemented employee pay terms that were different from what its predecessor had in place. Specifically, Paragon reduced the amount of paid “guard mount” time – time spent getting and returning weapons and ammunition – from 30 minutes to 10 minutes per day and discontinued paying for “guard mount” time on weekends.

The union filed an unfair labor practice charge against Paragon which was dismissed by the Administrative Law Judge.

On appeal, the union and the NLRB’s general counsel argued that Paragon as a successor violated Section 8(a)(5) and (1) when it unilaterally made changes to the pay terms. In analyzing the case, the Board stated that “a ‘successor’ employer under NLRB v. Burns International Security Services, 406 U.S. 272 (1972), and Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27 (1987), is free to set initial employment terms without first bargaining with an incumbent union, unless ‘it is perfectly clear that the new employer plans to retain all of the employees in the unit,’ in which case ‘it will be appropriate to have him initially consult with the employees’ bargaining representative before he fixes terms.’” Paragon Systems, Inc., 362 NLRB. No. 182, slip op. at p. 2 (quoting Burns at 294-295). The Board went on to state that “[o]nce a Burns successor has set initial terms and conditions of employment, however, a bargaining obligation attaches with respect to any subsequent changes to terms and conditions of employment.” Id. In other words, once the successor has established the initial terms, it cannot make any unilateral changes to employment terms without first bargaining with the union.

The Board held that it was undisputed that Paragon was a Burns successor and had properly implemented the initial terms and conditions of employment when it started operations. Accordingly, the Board held that Paragon did not violate the Act when it made unilateral changes to the pay terms that had been in place under the prior employer’s agreement.

Effective Notice to Employees Is Critical

The key issue in this decision was not whether the successor had the right to implement its initial terms and conditions upon becoming the new employer, but the sufficiency of the notice given to employees regarding the change in pay terms. The majority found that Paragon provided adequate notice to employees that there may be a change in such terms. Specifically, prior to taking over the contract, Paragon announced that it had the right to establish compensation, benefits and working conditions; its job applications specifically advised applicants that employees would have to conform to all Paragon policies and reiterated Paragon’s right to set compensation, benefits and other terms and conditions of employment; and Paragon specifically informed applicants that shift schedules would be set in accordance with the operational needs of the contract being serviced by Paragon.

Taken together, these statements were found by the Board to have made clear to employees that Paragon was not adopting MVM’s practice regarding paid guard mount time. Additionally, the implementation of these pay changes occurred on the first day that Paragon assumed operations. The Board majority concluded that the change in pay was within Paragon’s right to set initial terms and conditions of employment.

The sole dissenting Board member argued not that the successor was prohibited from setting the initial terms and conditions of employment, but that the implementation of this change was unlawful because Paragon had not provided specific notice of the specific change. The dissent noted that none of Paragon’s prior statements and communications to employees specifically addressed paid guard mount time.

Moreover, noted the dissent, even if Paragon’s general statements regarding its right to establish compensation, benefits and other working conditions were broad enough to cover the guard mount pay, the fact that Paragon provided detailed information in the contingent offer letter regarding many of the changes in wages and benefits, but was silent regarding guard mount time, reasonably conveyed to employees that no change would be made to such pay.

Practical Takeaways

This decision is good news for potential buyers of businesses, and other employers who are deemed to be successor employers of unionized operations having union contracts, because it reaffirms a successor’s right to make unilateral changes to the initial terms and conditions of employment upon commencement of operations (so long it is not “perfectly clear” that the successor intends to follow the existing agreement – a doctrine beyond the scope of this alert, as the “perfectly clear” doctrine is anything but perfectly clear).

In order to make such changes lawfully, however, the successor must make certain to provide adequate notice about the changes to employees. Notice will be deemed adequate if the successor communicates that it has the right to establish wages, benefits, and working conditions and provides enough general detail about the terms that may be subject to change. A cautious employer should be as specific as it can be when setting initial terms and conditions.

The NLRB Expands the Definition of “Joint Employer”

Yesterday, the National Labor Relations Board (the “NLRB” or “Board”) issued a decision greatly expanding the standard for determining whether a company may be deemed a “joint employer.” The Board’s decision, in Browning-Ferris Industries of California, Inc., overturned the narrower standard that the Board had been applying for 30 years. The impact on companies that rely on staffing agencies and contractors is likely to be significant and the effects may ripple into the world of franchised business.

The Previous Joint Employer Standard

The National Labor Relations Act (“NLRA”) imposes numerous obligations on employers, including the duty to bargain with a union that workers select as their designated representative. These obligations can extend to a company that does not directly employ the workers in a traditional sense, if the company is deemed to be a joint employer.

For decades, to determine whether a company constituted a joint employer, the Board relied on a test set forth in NLRB v. Browning-Ferris Industries of Pennsylvania, Inc., 691 F.2d 1117 (3d Cir. 1982), and refined in two subsequent Board decisions – TLI, Inc., 271 NLRB 798 (1994), and Laerco Transportation, 269 NLRB 324 (1984). Under the Third Circuit’s test in Browning-Ferris Industries of Pennsylvania, two or more companies could be considered joint employers of the same group of employees if they “share[d] or codetermine[d] those matters governing the essential terms and conditions of employment.” In TLI and Laerco, the Board imposed additional limitations on the test, requiring that, to be considered a joint employer, a company must actually exercise control – not merely possess the authority to exercise control. Moreover, the control had to be direct and immediate, not limited and routine.

The Facts

Browning-Ferris Industries of California, Inc. (“BFI”) owned and operated the Newby Island Recyclery (“Newby Island”), where workers sorted mixed waste and recyclable materials into separate commodities that were sold to other business. BFI employed 60 employees at Newby Island, who were represented by the International Brotherhood of Teamsters (the “Union”). BFI entered into a temporary labor services agreement (the “Agreement”) with Leadpoint Business Services (“Leadpoint”) under which Leadpoint provided employees to sort the recyclables on Newby Island’s conveyor belts, clean the screens on the sorting equipment and provide housekeeping services.

BFI and Leadpoint maintained separate management teams and human resources functions. Although BFI managers were not directly involved in hiring Leadpoint’s employees, under the Agreement, BFI required Leadpoint to ensure that any personnel assigned to Newby Island met certain BFI-set qualifications, including drug testing and certification and training requirements. The Agreement provided that Leadpoint retained sole authority to counsel, discipline, and terminate its employees. However, the Agreement also granted BFI the authority to reject any personnel provided by Leadpoint and to “discontinue the use of any personnel for any or no reason.” As to wages, Leadpoint was responsible for paying the employees who worked at Newby Island. Yet, under the Agreement, Leadpoint could not, without BFI’s approval, pay a higher rate than BFI to Leadpoint employees who performed similar tasks to BFI’s own employees. As to hours and scheduling, while Leadpoint decided what employees to schedule for which shifts, BFI retained sole control over the shifts and operating hours of the facility. Moreover, BFI – not Leadpoint – decided how many employees to assign to specific conveyor lines. BFI also set productivity standards and retained the sole authority to set the pace of the material streams. As to training and safety, although Leadpoint conducted its own training, BFI occasionally supplemented the training, and Leadpoint employees were required to comply with BFI’s safety policies and procedures. The Agreement expressly provided that Leadpoint was the sole employer of its personnel and that nothing in the Agreement should be construed as creating a joint employer relationship.

The Union petitioned to represent Leadpoint’s sorters, screen cleaners, and housekeepers. The Union wanted to bargain with BFI on behalf of these workers, arguing that BFI was the joint employer. Applying TLI/Laerco, the Board’s Regional Director disagreed, finding that BFI was not a joint employer and, therefore, BFI had no duty to bargain. In arriving at this decision, the Regional Director focused on the fact that, under the Agreement and in practice, Leadpoint retained primary and direct control over its employees supplied to Newby Island.

The Union requested that the Board review the decision. Among its arguments, the Union contended that the Board should revisit its joint employer standard.

The Board’s Decision

After reviewing the history of its joint employer jurisprudence, the Board concluded that the test originally set forth by the Third Circuit in Browning-Ferris Industries of Pennsylvania had been severely distorted in subsequent NLRB decisions, including TLI and Laerco. The Board noted the increasing prevalence of employers procuring workers through staffing and subcontracting arrangements. In its view, the existing, narrow, joint employer test was out-of-date in light of the changing realities of industrial life.

A “New” Joint Employer Test

After criticizing the long line of Board decisions that had narrowed the joint employer designation, the Board declared that it was returning to the original test announced by the Third Circuit. The Board articulated this “new” test as follows:

The Board may find that two or more entities are joint employers of a single work force if they are both employers within the meaning of the common law, and if they share or codetermine those matters governing the essential terms or conditions of employment.

Relevant facts to consider under this test include the roles that companies play with regard to: hiring, firing, discipline, supervision and direction; wages and hours; scheduling, seniority and overtime; assigning work; and determining the manner and method of work performance. The Board explicitly overruled TCI, Laerco, and their progeny, stressing that a company may be a joint employer by virtue of its authority to exercise control, irrespective of whether the company actually exercises that control. The Board rejected the requirement that a joint employer’s control is necessarily exercised directly and immediately. Now, control exercised indirectly may establish joint employer status.

The Board stressed that a putative joint employer’s “bare rights to dictate the results of contracted services or to control or protect its own property” would not be determinative. However, it made clear that:

[w]here … [a] user firm owns and controls the premises, dictates the essential nature of the job, and imposes the broad, operational contours of the work, and the supplier firm, pursuant to the user’s guidance, makes specific personnel decisions and administers job performance on a day-to-day basis, employees’ working conditions are a byproduct of two layers of control.

In such situations, the Board suggested that both the supplier and user of the contingent or temporary workforce would constitute joint employers.

The Board Reverses The Regional Director’s Determination

Applying its revived joint employer standard, the Board found that BFI constituted a joint employer. Even though BFI was not directly responsible, it exercised “significant control” over hiring, firing and discipline by virtue of the parties’ Agreement. Moreover, the Board noted that, by virtue of its unilateral control over the operation of its facilities, it also had control over the supervision, direction and hours of work of Leadpoint’s employees. Likewise, by virtue of the agreed-upon wage ceiling, the Board found that BFI exercised control over Leadpoint’s employees’ wages.

Take Aways From And Potential Impact Of Browning-Ferris

It is unknown whether the Browning-Ferris decision will be appealed. However, unless and until it is potentially narrowed or overturned by the Supreme Court, the case may have significant consequences for companies that rely on staffing agencies or contractors. When a company reserves significant authority with regard to the workers of a staffing agency or contractor, the company risks being deemed a joint employer of those workers. The company would then have a duty to bargain with a union representing those workers and could be subject to unfair labor practice charges for alleged NLRA violations. The Browning-Ferris decision could also have implications for franchisors if they retain significant control over their franchisees (and franchisee employees).

For now, the Browning-Ferris decision only has implications for an employer’s obligations and exposures under the NLRA. It does not have the force of law in other contexts, such as wage and hour disputes and claims of discrimination under other state and federal laws. However, it is conceivable that some courts may find the decision persuasive and appropriate for application in other legal contexts. In that event, every company that has labor supplied through subcontractors could now face vastly expanded liability under those other laws.

In light of the Browning-Ferris decision, companies that rely on supplemental workforces and franchise agreements should examine their current arrangements carefully.