Scherzer Blog

New York joins in efforts to root out misclassification of independent contractors

On November 18, 2013, New York’s attorney general and the state labor department entered into agreements with the U.S. Department of Labor’s Wage and Hour Division to coordinate investigations, make referrals, share data and take other actions to combat worker misclassification. Fourteen other states (California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, Utah and Washington) already participate in this national “misclassification initiative” that is a collaboration between the U.S. Department of Labor and the Internal Revenue Service.

An employer that misclassifies an employee as an independent contractor faces significant consequences that can include the payment of back taxes plus interest, overtime and state workers’ compensation, and the provision of health and welfare benefits.

|Educational Series|

E-Verify has new safeguard to combat identity theft

On November 18, 2013, the U.S. Citizenship and Immigration Services (the “USCIS”) announced a new E-Verify safeguard that enables USCIS to “lock” a Social Security number that appears to have been misused, protecting it from further misuse in the E-Verify process.

If an employee attempts to use a locked Social Security number, E-Verify will generate a “tentative non-confirmation” status. The employee will then have the opportunity to contest the result at a local Social Security Administration (‘SSA”) field office. If an SSA officer confirms that the employee’s identity matches the number, the non-confirmation will be converted to “employment authorized’” status.

|Employment Decisions|

Reminder to New Jersey employers to provide required CEPA notice

New Jersey employers with 10 or more employees are reminded of their annual obligation to provide to their employees, in both English and in Spanish, the required notice under the Conscientious Employee Protection Act (the “CEPA”). The notice may be distributed in hard copy or electronic format, but having only a poster or a policy in a handbook does not fulfill an employer’s notice obligation under the CEPA.

Enacted in 1986, this anti-retaliation statute is known as New Jersey’s Whistleblower’s Act. The goal of the CEPA is to encourage whistleblowers to report wrongdoing to their employers without fear of reprisals. Overall, CEPA provides a broader range of protections and remedies than other similar statutes, such as the federal False Claims Act.

|Educational Series, Employment Decisions, Legislation|

SEC’s whistleblower program gains momentum

On November 15, 2013, the SEC released its third annual Whistleblower Report to Congress. According to the report, In the fiscal year 2013, the SEC paid four major awards, one of which was for over $14 million for information leading to an enforcement action that recovered substantial investor funds. Three other payments totaling $832k were made for information regarding a bogus hedge fund.

The report states that the number of complaints and tips increased from 3,001 in the 2012 fiscal year to 3,238 in 2013. The three most common complaints or tips were about corporate disclosures and financials, offerings fraud, and manipulation. The number of FCPA-related tips also rose, from 115 to 149.

|Fraud|

From hair styles to criminal records, increased employment regulations to continue

Recent enforcement efforts by the Equal Employment Opportunity Commission (the “EEOC”) combined with some local and state “ban-the-box” laws are causing trepidation among employers who must not only consider, but also apparently hire, applicants with a criminal history and unprofessional hairstyles.

The EEOC recently filed a lawsuit in Alabama alleging that an insurance claims company violated Title VII of the Civil Rights Act by discriminating against an African-American applicant because she wore dreadlocks. The EEOC’s position is that the company’s policy of requiring a professional/business look “focuses on the racial bias that may occur when specific hair constructs and styles are singled out for different treatment because they do not conform to normative standards for other races.”

The EEOC has also pushed its position that considering criminal convictions in hiring decisions can be racially discriminatory, issuing its well-publicized guidance and filing lawsuits against employers that use background checks. Based on EEOC’s logic, Massachusetts and Hawaii already have adopted “ban the box” laws that apply to both private and public employers, and on January 1, 2014, similar measures will take effect in Rhode Island and Minnesota. The cities of Buffalo, NY, Newark, NJ, Seattle, WA, and Philadelphia, PA, also have passed similar legislation affecting private employers. Many more states and municipalities have “ban-the-box” laws that apply only to public employers. (Generally, “ban-the-box” legislation calls for the removal of the criminal history box/question on the job application, and prohibits employers from asking about criminal records in the initial application process.)

Win or lose, the EEOC is unlikely to let up, and the trend of increased employment regulations will continue into 2014, according to legal commentators. Employers should review their policies and procedures at least annually to ensure that they meet EEOC’s guidelines, comply with all federal, state and local laws and regulations, are fair and consistent and aligned with the business model.

|Employment Decisions, Judgment|

New law prohibits North Carolina employers from asking about expunged records

Effective December 1, 2013, employers in North Carolina will not be able to ask job applicants about arrests, criminal charges, or convictions that have been expunge SB 91 prohibits inquiries into expunged matters both on applications and during interviews, and was enacted to clear the public record of any arrest, criminal charge, or conviction that was expunged so that the subject is legally entitled to withhold all information about it from potential employers and others. Notably, employers will still be allowed to ask about arrests, criminal charges, or convictions that have not been expunged and can be found in public records.

|Criminal Activity, Employment Decisions, Legislation|

Remedying Rule 506 “bad actor” disqualification through reasonable care

The SEC’s Rule 506 “bad actor” amendments went into effect September 23, 2013. As we reported previously, these amendments add Rule 506(d) to implement Regulation 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the rule, securities offerings involving certain “felons and other ‘bad actors'” are disqualified from the Rule 506 exemption unless the disqualification is waived or remedied through a “reasonable care” exception. (See Securities Act Release No. 9414, 78 Fed. Reg. 44,729; July 24, 2013).

The rule’s long list of disqualifying events – and an even longer list of covered persons – is raising consternation as issuers and practitioners come to grips with the challenges of compliance. A disqualification due to the presence of “bad actors” can be catastrophic, resulting in the loss of the exemption altogether, spilling into regulatory actions, litigation, and reputational issues. And any impediment to raising capital is likely to scare away investors.

The rule provides an exception from disqualification if the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The SEC has not prescribed specific steps to establish reasonable care; however, it has indicated that the concept includes a factual inquiry in view of the particular facts and circumstances and other offering participants. Despite the procedural ambiguity, the message is clear that is not enough to show that the issuer was unaware of the disqualifying event – the issuer must establish that in exercising “reasonable care,” could not have known that a disqualification existed.

In anticipation of this ruling, SI has been including “disqualifying event” searches in many of its reports for over two years. Now that the ruling has gone into effect, SI also offers a specialized factual inquiry service to help our clients evidence “reasonable care” under the highest standards. For information, please contact Dave Lazar at 440-423-1157 or e-mail dlazar@scherzer.co or Jessica Staheli at 818-227-2598 or e-mail jstaheli@scherzer.co.

|Dodd-Frank|

Issuers should ensure that investors are not criminals

The JOBS Act requires that issuers wishing to engage in general solicitation take “reasonable steps” to verify the accredited investor status of purchasers. Rule 506(c) sets forth a principles-based method of verification which requires an objective determination by the issuer or its representatives that the steps taken are “reasonable” in the context of the particular facts and circumstances of each purchaser and transaction. But perhaps a question whether the investor is a felon should be added to the list.

A case decided in 2011 by California’s Court of Appeal, Second District, suggests that indeed it may be prudent for issuers to ensure that investors are not criminals. The plaintiff in this case intended to purchase units in a limited liability company, but was rejected after the mezzanine lender would not accept the plaintiff as a member due to his status as a former felon. The plaintiff subsequently sued the lender, alleging a violation of the Unruh Civil Rights Act. After a dismissal by a trial court, the case was appealed, resulting in a conclusion that (1) status as a felon is not a personal characteristic similar to those enumerated in the statute; (2) criminal convictions raised legitimate questions about the honesty and trustworthiness of the plaintiff, and the lender had legitimate business reasons justifying its decision; and (3) the potential consequences of allowing the plaintiff’s claim would improperly involve the courts in second-guessing a lending institution‘s expertise in determining loan and investment criteria. As lenders are absolved from potential liability under the Act, issuers who unwittingly accept convicted felons as investors may be jeopardizing their funding.

|Employment Decisions, Fraud, Legislation|

California passes two new data privacy laws

Effective January 1, 2014, California will have two new data privacy laws: AB 370, which mandates disclosure of “do not track” and other tracking practices in online privacy policies, and SB 46, which amends the state’s data security breach notification law.

AB 370 adds to the California Online Privacy Protection Act (“CalOPPA”) a requirement for companies that collect personally identifiable information online to include disclosures regarding (1) how they respond to a web browser’s “do not track” (DNT) signal, and (2) if third-parties can collect personal information across a network of sites. The law does not require websites to honor browser DNT signals or block third-party tracking; it simply tries to increase transparency about the site’s practices.

SB 46 adds a new category of data triggering California’s breach notification requirements, to wit: “a user name or e-mail address, in combination with a password or security question and answer that would permit access to an online account.” The new law requires notification of unauthorized access to user credential information even if that information is encrypted.

|Educational Series, Legislation, Privacy|

Grace period for E-Verify compliance ends November 5, 2013

Now that E-Verify services are back online, employers must create an E-Verify case for each employee hired during the shutdown (October 1-17, 2013) no later than November 5, 2013. When prompted by the E-Verify system to explain why the case was initiated late (a violation of the three-day E-Verify rule), employers should select “other” from the drop-down menu and enter into the text field “federal government shutdown.” See the USCIS E-Verify instructions page for handling specific situations.

|Educational Series, Employment Decisions|