Expert Guide – Labour & Employment Law

Expert Guide w w w. c o r p o r a te l i v e w i r e . c o m

Labour & Employment Law

ELA

IBA

Jones Day

Waller Lansden

McGuireWoods

and more...

April 2012

Europe Chief Executive Officer Osmaan Mahmood Publisher and Editor in Chief Jake Powers Managing Director Andrew Walsh Art Director Adeel Lone Senior Writer James Drakeford

6 - 9 - Social Media in the workplace – watch your step!

10 - 13 - Buying A Business In Administration – Impact of Recent Case Law and Tupe 14 - 17 - Recent Developments in Dutch Labour

Staff Writers Mark Johnson Ehan Kateb

Law

Contributing organizations Employment Lawyers Association (ELA) ¦ Speechly Bircham LLP ¦ IBA Employment and Indutrial Relations Committee ¦ Niederer Kraft & Frey Ltd ¦ Allen & Overy ¦ Sagardoy Abogados ¦ Jones Day ¦ Thompson Coburn LLP ¦ Waller Lansden ¦ McGuirewoods ¦ Dezan Shira & Associates ¦ Bharucha & Partners ¦

18 - 21 - Summary Overview on Certain Swiss

Marketing Manager Sylvia Estrada

Employment Law Aspects 22 - 25 - Tax Deductibility Of Costs From A Court’s Perspective

Production Manager Sunil Kumar

26 - 29 - An In-depth Labour Reform

Account Managers Ibrahim Zulfqar Norman Lee Sarah Kent Steve Bevan

30 - 33 - Snapshot – Europe

Accounts Assistant Jenny Hunter Editorial Enquiries Editor@corporatelivewire.com Advertising Enquiries advertising@corporatelivewire.com General Enquiries info@corporatelivewire.com Corporate LiveWire The Custard Factory Gibb Street Birmingham B9 4AA United Kingdom Tel: +44 (0) 121 270 9468 Fax: +44 (0) 121 345 0834 www.corporatelivewire.com

The Americas 34 - 35 - Employee Misclassification: An Expensive Mistake, Is Your Company Getting It Right?

36 - 39 - Negotiating U.S. Executive Employment Agreements 40 - 41 - NLRB Posting Postponed: U.S. District Courts Hold Contradictory Views On Whether The NRLB May Require Posting of Employee Rights

42 - 45 - U.S. Supreme Court Considers Constitutional Challenges to Health Reform 46 - 47 - Snapshot – The Americas

Asia

48 - 51 - Liabilities of the Legal Representative 52 - 53 - Indian Employment Law: A Case for Reform 54 - 55 - Snapshot – Asia

Expert Directory 56 - 57 - Europe Directory 58 - 59 - The Americas Directory 60 - Asia Directory

Introduction

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By Jake Powers

he past twelve months has failed to provide a foregone conclusion and one suspects that the proceeding twelve months will fail to do so as well. We’re talking about the social media beast that has ravaged its way through discussion and debate in employment law and how employers can effectively tame this monster. From its detrimental effect on productivity with employees spending endless hours scouring through Facebook and Twitter accounts during the working day, through to the murky waters of defamation, data protection, and privacy – this is one hot topic that shan’t be going anywhere any time soon.

Rates for statutory maternity, paternity and adoption pay increase in line with the Retail Price Index. From April 1 the weekly rate increased from £128.73 by 5.2% to £135.45, and from April 6 the statutory sick pay went up from £81.60 to £85.85.

The weekly earnings threshold has also gone up from £102 to £107.

Kicking things off with the United States, we are continuing to see an explosion of Fair Labor Standards Act (FLSA) cases. The US Department of Labor has recently proposed or enacted new regulations interpreting key provisions of the FLSA, Americans with Disabilities Act (ADA) and Family Medical Leave Act (FMLA). Weaknesses have been identified in various industries with a wave of class and collective litigation focused more on major compliance obligation under federal and state employment and labour laws. State law wage and hour compliance is a key area, with enforcement agencies focusing not only on key statutory provisions but also on compliance problems such as whether employers have properly included all items of compensation in the overtime rate calculation.

Other tribunal changes include doubling maximum costs awards, from £10,000 to £20,000, and deposit orders (paid in by claimants or respondents as a condition of a case with little prospect of success being allowed to proceed) from £500 to £1,000.

Each April a host of changes are made to employment legislation in the UK and 2012 is no exception. While last year saw the repeal of the retirement age, the important amendments this year include those relating to tribunal procedures, unfair dismissal, and statutory maternity and sick pay.

In a significant cost-cutting measure, employment judges sitting alone will be now the default position to hear unfair dismissal cases, and witness statements will be taken as read with the parties to a claim being liable for witness expenses, rather than this being state-funded.

Perhaps the most significant change is an increase in the qualifying period for unfair dismissal from one year to two years. The higher threshold will only apply to those starting employment on or after April 6 2012 and employers will need to alter handbooks, policies and procedures accordingly.

The Government expects the changes to save employers £6million a year and cut the number of unfair dismissal claims by 2,000 annually.

With the economy in a difficult state and unemployment figures high, this is seen as an attempt to instil greater confidence in taking on new staff as well as a continuation of easing the pressures on the tribunal process.

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Meanwhile, general striking and dissatisfaction with labour and employment laws seems to be a trending theme across the EU this year. Italian Prime Minister Mario Monti has run into trouble over a labour reform that is at the centre of his programme to jump start Italy’s chronically stagnant growth, while Spain is also causing a stir after overhauling the country’s hiring and firing laws to safeguard companies should they wish to move workers on. This has been seen as a firewall to prevent both countries being sucked into the same abyss as Portugal, Greece and Ireland, but both measures have been met with significant social unrest.

And finally... With London playing host to the Olympic Games this summer it was inevitable that it would play havoc on employment laws and regulations – and now emergency legislation is on the way. It was announced in this year’s budget that the Sunday Trading Act 1994, which prohibits large shops from opening to serve customers on Sundays outside the hours of 10am-6pm and for a period in excess of six hours, will be relaxed for eight weeks from Sunday 22 July, to allow businesses to trade for longer during the Olympics.

Given the timeframe and temporary nature of the changes it is unlikely that the alterations will contain any additional employment protection so employers can expect a busy period with the need to review contractual terms and conditions whilst also complying with the Employment Rights Act 1996 and Working Time Regulations 1998.

The Union of Shop, Distributive and Allied Workers has already called an emergency meeting with the Government to express its displeasure at the proposed changes, so employers really need to be on the ball when preparing how to maintain a smooth coverage over this period, including a strategy in place to deal with any planned industrial action.

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Social Media in the workplace – watch your step!

By Richard Linskell

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ocial networking sites such as Facebook, Twitter and LinkedIn have revolutionised the way people all over the world connect with their friends as well as their professional contacts. They are also beginning to change the ways businesses access and interact with their customers.

Social media presents great opportunities for people and businesses but also huge risks if they are not managed properly. A daily diet of social media stories appearing on both the Internet and in the traditional media reinforces the impression that there is an epidemic of bad behaviour by employees and swathes of intolerant employers overreacting to seemingly innocuous postings on social media. It is therefore important to be aware of the dangers of social media and take steps to protect yourself.

For example, in one widely reported case, an Apple employee was dismissed for criticising the employer’s products and practices to friends on Facebook, in contravention of an express policy which prohibited the making of any comments about the company in social media. The employee thought he was only speaking to friends but one of them printed off the email and showed it to his boss.

Apple is known to guard its brand jealously and was able to defend an unfair dismissal claim as it had a very clear policy on references to the company in social media use. However, employers must be proportionate in their response and think about the seriousness of what actually occurred rather than what they imagined the damage might be.

In another case, a housing association demoted one of its managers for posting opinions on Facebook about gay marriages in church. His Facebook profile identified him as working for the housing association although there did not seem to be any suggestion that he was making the post in that capacity or that he was speaking on behalf of the employer. However, the employer felt that

the post breached its policy that opinions posted in social media should not be taken to be views of the employer.

One area that causes particular concern for employers is LinkedIn connections particularly where those connections include clients and the employee is using the platform to connect with clients after termination. The courts have still not ruled on who owns or is entitled to control those connections, and given that they are stored in the Cloud, it seems that it may be difficult to restrain the use of them after termination. However, they may provide useful evidence of unlawful solicitation of clients’ business and in one case an employee was required by the court to disclose his LinkedIn connections so that the employer could ascertain whether he was breaching his restrictive covenants against dealing with clients.

Preventing Social Media Fallout Ultimately, there is little an employer can do to guarantee an employee posting something in their private capacity does not damage the business. One of the main problems with social media is that it is treated as an informal and temporary mode of communication, similar to a chat with a friend over a drink. However, anything posted on the internet is permanent and may well be shown to unintended recipients, even if there are privacy settings on their profile. So what was once unrecorded and informal is now available for the entire world to see.

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Drafting a policy is not an easy task, as every industry and sector will adopt a different approach.

Equally, it would be wise for employers to ensure that they have employee support for any policy as it will often be an intrusion into their private time and could cause employee relations issues if overbearing. There are many parts of the business that have a stake in this process, including HR, marketing, IT and the legal department. Ideally, a policy will have input from all aspects and will have four components: Education, Guidance, Rules and Contacts/Confidential Information.

Education A policy should inform employees about the risks associated with the use of social media as many are simply unaware that comments they might make to friends on a platform like Facebook, or videos they post to YouTube can impact on their employment. Informing employees not only minimises the risk of damage to the company’s image, it also ensures fairness for employees so that they are fully aware of the consequences of an inappropriate comment. This also makes it more likely that any disciplinary action or dismissal will be found to be fair in an employment tribunal.

Guidance Guidance on how best to use social media for the benefit of the company would be helpful, although not essential, as employees may not know how to take advantage of the undoubted opportunities presented by social media. This is an area that the marketing/PR function of the company is most likely to have a stake and the best knowledge.

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A daily diet of social media stories appearing on both the Internet and in the traditional media reinforces the impression that there is an epidemic of bad behaviour by employees and swathes of intolerant employers overreacting to seemingly innocuous postings on social media.

Rules

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Employees need to understand that use of social media should not be unrestricted or casual. Problems can be avoided to some extent by the introduction of a carefully drafted and balanced social media policy. Even if the company has prohibited social media use in the workplace, employees will be using social media, probably even during the working day on their smart phones. Employers therefore need to educate their employees about the dangers of posting something on social media that might embarrass them or the company, and let them know what the consequences of that might be, as that will at least reduce the likelihood of inadvertent lapses.

The rules will contain the traditional do’s and don’ts one might expect to see in a policy, such as time-wasting, defamation, preserving confidential information and not bringing the company into disrepute, but there are also other less obvious elements such as whether a work email address can be used for a private account and whether it is acceptable to “friend” with certain categories of people on Facebook e.g. university lecturers with students.

Contacts and confidential information It is important to ensure that a policy deals with issues relating to the ownership of social media connections and what employees may do with their connections on termination. This is a developing area of the law which the courts have not yet got to grips with so it is preferable that there provisions which are contractual as to what happens on and after termination.

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Social media is fast-evolving and new platforms are emerging all of the time, each of which will bring its own dilemmas and problems. Social media represents a big opportunity for those that know how to grasp it, although many remain to be convinced that it is anything more than a time sink, into which hundreds of hours of productivity will flow.

However, whatever stance you take in relation to social media as a marketing tool, it has revolutionised communications between employers, and employees will need to be aware of and be ready to deal with the consequences.

The Employment Lawyers Association (ELA) is an apolitical organisation representing the views and interests of over 6,500 specialist, qualified employment lawyers in the UK. Since its inception in 1992, ELA has become the voice of authority in employment law.

ELA’s members are drawn from all branches of the legal profession and include barristers and solicitors who act for employers and employees, trade unions, the voluntary sector, industry and the judiciary.

ELA’s fundamental aims are: - to promote the best practice of employment law; and - to support the work and represent the interests of UK employment lawyers Richard Linskell can be contacted on 020 7427 1076, or alternatively by emailing: Richard.linskell@speechlys.com.

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Buying A Business In Administration – Impact of Recent Case Law and Tupe The current UK economic environment is presenting opportunities to purchase businesses placed into administration and turn them around. The impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) and recent case law, however, should be considered before deciding whether the opportunity to buy a distressed business in administration is as attractive as it appears.

Overview of TUPE The purpose of TUPE is to protect the rights of employees on the transfer of a business, undertaking or a service provision change (e.g. an outsourcing or an in-sourcing) from one person to another.

Where TUPE applies, a buyer will need to bear in mind the key consequences of TUPE including: - The risk of claims for automatic unfair dismissal against the buyer arising from any dismissal for a reason connected with the transfer - whether by the administrator before the transfer or by the buyer after the transfer, unless that reason is an “economic, technical or organisational reason entailing changes in the workforce” (an ETO).

- The risk of inheriting responsibility for any debts or other liabilities to employees arising before the transfer.

- The obligation to honour existing employee terms and conditions with limited scope to vary or harmonise terms and conditions.

- The risk of joint and several liability for breach of collective information and consultation obligations - even where it is the administrator rather than the buyer which has breached its obligations, particularly given the lack of buyer protection typically offered by an administrator.

- Inheriting any trade union recognition or existing collective agreements.

By And

TUPE and sales out of administration Notwithstanding the above, TUPE has been relaxed over the years to try to promote a rescue culture. Those changes had led to uncertainty as to whether TUPE actually applied on a sale by an administrator.

The crucial issue was whether the insolvency proceedings to which the transferor was subject were “relevant insolvency proceedings” (as defined under TUPE). Relevant insolvency proceedings are those that have not been commenced with a view to the liquidation of the transferor’s assets, but, for example, have been approached with a view to rescuing the business as a going concern.

In relevant insolvency proceedings, employees and certain employment-related liabilities will transfer to the purchaser and employees will benefit from special protection against dismissal. Conversely, where insolvency proceedings have been opened with the aim of liquidation of the transferor’s assets, employees will not automatically transfer to the purchaser and employees will not benefit from special protection against dismissal.

The contentious issue, until recently, was whether an administration constitutes relevant insolvency proceedings and, accordingly, whether administrations were caught by TUPE. In Oakland v Wellswood (Yorkshire) Ltd, the court held that where the ultimate objective of the administrator was to liquidate the business following a brief period of trading, TUPE would not apply because the administration was “analogous” to insolvency proceedings. This decision left practitioners, administrators and purchasers in the rather difficult position of having to judge whether or not par-

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drew Howard & Adam Partington

The position following Oakland has recently been clarified by the Court of Appeal in Key2Law (Surrey) LLP v Gaynor De’Antiquis, which ruled that administrations will always satisfy the definition of relevant insolvency proceedings. Therefore, employees will always transfer to a purchaser under TUPE when the seller is in administration, provided the definition of a TUPE transfer is met i.e. that there has been a transfer of a business or undertaking (or part thereof), or a service provision change.

Practical points Those buying businesses in administration should therefore plan to manage the consequences of TUPE outlined above. Thorough due diligence is needed to identify the employees assigned to the transferring undertaking, the terms and conditions which will have to be honoured and the nature of any steps taken to comply with collective consultation obligations (typically none) so that the purchaser understands the risks he will take on.

Purchasers also need to plan how to deal with the inherited workforce and over what timescale. Redundancies may involve the pooling of the existing and inherited workforces if the acquisition is a bolt-on to an existing portfolio business and will probably trigger collective consultation obligations for a period of 30 or 90 days. Tribunals tend to regard compensation for breach of collective consultation as punitive rather than compensatory. Purchasers need to identify an ETO reason so that any individual redundancy is potentially fair, and must then follow a fair redundancy consultation procedure.

The purchaser cannot simply harmonise terms and conditions of the inherited workforce. Where there are relevant insolvency proceedings, an agreement to harmonise to the detriment of the employee will be void - even if the employee consents and has accepted some improvements - unless there is an agreement to that variation with appropriate representatives (which could be union representatives or employee representatives depending on the circumstances), and the variations are designed to safeguard employment opportunities by ensuring the survival of the business.

Dismissals by administrators A purchaser must also be wary of an administrator who appears to have implemented the difficult decisions before the transfer.

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Where there are relevant insolvency proceedings, an agreement to harmonise to the detriment of the employee will be void

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ticular administrations met this test and whether TUPE applied.

In Spaceright Europe Limited v Baillavoine, an employee, who was the chief executive of the business to be transferred, was dismissed by the administrator in order to make the sale of the business more attractive to potential purchasers. The Court of Appeal held that the dismissal was for a transfer-connected reason and was automatically unfair. The fact that the identity of the purchaser was not known or even contemplated at the time of dismissal was irrelevant. The Court said there is no need for a specific intent to sell, or for a particular transferee to have been identified for a dismissal to be “in connection” with the transfer.

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Where a pre-transfer dismissal is automatically unfair under TUPE, liability for the dismissal will pass to the transferee. Administrators will rarely, if ever, offer the normal warranty and indemnity protection.

The Court also commented that there could be no potentially fair ETO reason for dismissal where an employee is dismissed to enable the administrators to render the business more attractive to prospective purchasers. It added that for an ETO reason to arise, the administrator must intend to change the workforce and continue to conduct the business, as distinct from the administrator having the intention to sell it.

Conclusion Potential purchasers of a business in administration need to be alive to the effects of TUPE. Thorough due diligence is advisable to ensure that liabilities are identified prior to the transfer. A buyer can then assess its proposed purchase taking this into account.

Andrew and Adam are solicitors for Speechly Bircham LLP. They advise on all aspects of employment law including both contentious and non contentious matters. They are both members of the Employment Lawyers Association.

Andrew Howard can be contacted on +44 (0)20 7427 6601 or alternatively via email at andrew.howard@speechlys. com.

Adam Partington can be contacted on +44 (0)20 7427 6777 or alternatively at adam.partington@speechlys. com.

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Recent Developments in Dutch Labour Law

By Els de Wind, Co-Chair IBA Employment and Indutrial Relations Committee

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here have been some interesting developments in Dutch labour law lately. Two recent changes in Dutch legislation are certainly worth elaborating on given the impact on daily practice. The first concerns the increase of the state pension age and the second concerns the new legislation on holidays which entered into force on 1 January 2012.

Increase of the state pension age As in many other countries, the Dutch state pension age (AOW-leeftijd) is being increased. This was decided because life expectancy after 65 has increased significantly. Legislation has not been brought in line with these plans yet. The draft bill has passed the Lower Chamber of Parliament and is now pending in the Upper Chamber. It must be considered that if the state pension age will be higher, this affects the so-called “second and third pillar of the Dutch pension system, i.e. the pension promised by the employer and private savings respectively.

If the draft bill will be passed, which is expected during the summer, the state pension age will increase in 2020 from 65 to 66. It seems inevitable that in 2025 the pension age will be further increased to 67. The Minister of Social Affairs and Employment expects that the pension age will even be raised further to 68 in 2035. So far, the situation in The Netherlands does not seem to differ from that in surrounding countries, where it was also decided to increase the state pension age.

The fiscal limits applicable to the pension accrual in the second pillar will be amended in line with the increase of the state pension age. This may be an incentive for employers to amend their pension schemes accordingly. If they fail to timely implement the changes, this could result in an excess of the tax scope. As a result the entire pension entitlements accrued will be taxed directly at the cost of the employer.

The social partners also came up with a new type of pension entitlement: “defined ambition” entitlement (zachte rechten). The difference with the existing pension entitlements is that this new form of pension entitlement depends on one’s life expectancy and on the investment returns of the pension operator. These new pension entitlements offer less guarantees than the existing pension entitlements.

Pension operators will bear the administrative burden of having to work with two different types of pension entitlements. Currently the government is considering proposing a bill that allows pension funds and social partners to convert existing pension entitlements into the new defined ambition entitlements. In case this conversion will indeed be enabled by Dutch government, social partners and/or pension funds may consider switching but do not have to. It is not yet clear who (social partners and/or the pension fund) eventually is entitled to decide to this conversion.

Currently there is quite some resistance against the proposed conversion to defined ambition entitlements. Several interest groups have argued that the conversion of existing pension entitlements is in breach of one’s “right of ownership”. The Dutch Pension Decency Foundation (Stichting PensioenFatsoen) has already indicated that if Dutch government should implement the conversion proposal, it will start legal proceedings, even before the European Court of Justice. We will find out in the next months whether or not Dutch government proceeds with the conversion plans. If so, we may have a new lawyer’s paradise.

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The amendment of Dutch holiday legislation as of 1 January 2012 As of 1 January 2012 Dutch legislation on holidays is amended. Under Dutch law employees working full-time are entitled to at least 20 holidays each year: called statutory holidays. Most employers, however, grant their employees more holidays than the statutory minimum, for example 24 or 25 days on an annual basis. The “extra” days above the statutory minimum are called non-statutory holidays. Employees may be entitled to such non-statutory holidays pursuant to a sector wide or company collective labour agreement or an individual labour contract. Generally the employee can decide when holidays are taken, sometimes after acquiring the consent of the employer in this respect. Statutory and non-statutory holidays which have not been taken by an employee, will be compensated at termination of the employment, unless these days have lapsed by law. Under the former legislation, holidays lapsed automatically after 5 years after the end of the calendar year in which these were built up.

The amendments to the Dutch holiday legislation were made pursuant to a judgment rendered by the European Court of Justice (ECJ) in a German case on the interpretation of EU Directive 2003/88/EU on working hours. The ECJ ruled that it follows from the Directive that employees on sick leave build up holidays in the same way as regular employees. The Dutch Act implementing the Directive stipulated that employees on sick leave only build up holidays over the last 6 months of sickness. The Dutch Act therefore was found in violation of the ECJ judgment. This was later confirmed by some local Dutch courts. As a result of this, the Dutch government amended the existing legislation on holidays so to bring it in line with the Directive.

Under the amended holiday legislation, employees who are sick will (as of 1 January 2012) build up the same number of holidays as employees who are not sick. For employers this means that they will have to grant sick employees holidays over the entire period of sickness. This will lead to additional expenses for employers employing employees who are (long term) sick. This comes on top of the existing obligation to pay sick employees at least 70% of the salary (up to a certain statutory maximum amount) during the first 2 years of sickness. In order to compensate the employers for this amendment, the Dutch government implemented another amendment.

As a result of the amendments as of 1 January 2012, holidays will lapse after 6 months after the end of the calendar year in which they were built up. Holidays built up in 2012 will therefore expire on 1 July 2013. The employee will no longer be entitled to these holidays, nor be able to be compensated for them. The expiry period of 6 months applies to statutory holidays built up by employees who are sick as well as by those who are not sick. The expiry period of 6 months does not apply (i) for holidays built up prior to 1 January 2012; (ii) for non- statutory holidays; and (iii) in cases where the employee “was not reasonably able to take holidays”. In these 3 situations holidays will lapse after 5 years. Whether an employee was not reasonably able to take holidays should be assessed on the basis of all circumstances of the case. This can for instance be due to a high workload. It is not clear yet how this will all work out in practice. It may well be that the employee will ask the employer for a written statement confirming that he was not able to use a certain number of holidays. The employer and the employee may make arrangements deviating from this rule to the employee’s benefit in the labour contract, for instance by agreeing a longer expiry period.

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The amendments are warmly welcomed. Under the former holiday legislation, building up holidays over a period of 5 years had in many cases become a huge financial burden for employers.

Under the new legislation employees will not be able to build up such a large number of holidays as they used to be able to.

Els de Wind is a partner in labour and employment attorney with the Amsterdam based law firm Van Doorne N.V. She specialises in labour and employment law generally, with a focus on restructurings and M&A, outsourcing, transfer of undertaking, workers’ participation, employee data privacy and European and international employment law.

Ms De Wind just stepped down as Chair of the European Employment Lawyers Association and is currently Co-Chair of the IBA’s Labour and Employment Relations Committee. She has numerous publications and book contributions in her name.

Ms De Wind is recommended by Chambers, Legal 500, Global Counsel Handbook Labour and Employment Benefits, European Legal Experts, The Legal Media Group Guide to the World’s Leading Labour and Employment Lawyers and Who’s Who Legal Management Labour & Employment.

Els de Wind can be contacted on +31 (0)20 6789 242 or alternatively by emailing wind@vandoorne.com.

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Summary Overview on Certain Swiss Employment Law Aspects By Adrian Kammerer, Michaela Zehn

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. The Law Firm Niederer Kraft & Frey Ltd.

Established in 1936, Niederer Kraft & Frey is a preeminent Swiss law firm with a proven track record of legal excellence and innovation. As a market leader in Switzerland, we have built long-standing relationships with the world’s best international law firms. We attach great importance to combining a highly professional approach and persistence in pursuing our clients’ goals with being easy to work with, even in the most demanding situations. We are straightforward and reliable and stand alongside our clients. Our offices are located on Bahnhofstrasse, near Paradeplatz, in the heart of Zurich’s banking and financial district.

2. Swiss Labour Law in General Swiss labour law, in particular when compared to most other European jurisdictions, can be summarised as being liberal and balanced even if in certain aspects favourable towards the employer.

Swiss labour law contains only few basic mandatory provisions. Thus, limited and flexible regulation applies on the relationship between employer and employee(s). This is, amongst other things, a result of Swiss unions not having a major impact on the labour market. Also, Switzerland’s unemployment rate has been and continues to be relatively moderate.

The actual unemployment rate (status March 2012) stands at 3.2% (http://www.seco.admin.ch/ themen/00385/00387/index.html?lang=de) compared to a rate of 8.2% for the OECD area (status November 2011), 10.3% for the Euro area and 8.5% for the USA (http://www.oecd.org/document/22/0,37 46,en_2649_37457_49404566_1_1_1_37457,00. html). Also, and yet again in comparison to its competing jurisdictions in particular, Switzerland’s ranking of 5th worldwide in the global competitiveness rankings on “Government Efficiency Gap” continues to be extraordinary (http://www. imd.org/news/IMD-announces-the-2011-WorldCompetitiveness-Rankings-and-the-results-ofthe-Government-Efficiency-Gap.cfm).

The Swiss employees, as a rule, are motivated, well qualified and happy with their jobs, which may also be a consequence of the stability and reliability of Switzerland’s social security system and its overall social and political stability.

The most significant mandatory provisions of Swiss employment law aim at safeguarding the employee’s health and safety. A Swiss law governed employment agreement requires no special form in order to be valid; it may be concluded in writing, verbally or even tacitly. Only certain types of employment relationships and certain particular clauses (mainly relating to remuneration, termination and non-competition) must be in writing to be validly agreed upon. It goes without saying that the parties are nevertheless well advised to conclude a written contract. Termination provisions are liberal and most flexible as well, notice periods (according to the law which can to a certain extent be modified by mutual agreement) are reasonable (7 days during the probationary period and 1 - 3 months depending on the term of service). For severe reasons the contract may be terminated with immediate effect, i.e. without observing a notice period. Statutory restrictions to terminating the contract only apply in case of termination for abusive reasons.

The predominant and most decisive legislation on employment relationships (in particular with a view to individual employment contracts) is the Swiss Code of Obligations (Obligationenrecht, CO). Under certain circumstances, the Federal Labour Act (Arbeitsgesetz) and the Federal Act Governing the General Applicability of Collective

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nder, Laurence Uttinger & Allegra Sosso Labor Agreements (Bundesgesetz über die Allgemeinverbindlicherklärung von Gesamtarbeitsverträgen) may apply. Specific regulation on whistle blowing is not (yet) available; however, respective legislation initiatives are in the pipeline. The respective guidelines of Transparency International may serve as a guideline of “best practice” in that regard until enactment of respective legislation (most likely in the frame of the CO in some years time).

considered qualified specialists, i.e. they have a university degree and at least two to three years of professional experience, or top executives. Furthermore, to qualify as intra-company transfer, employees should have been employed abroad with a company belonging to the group of companies for at least 12 months prior to the assignment to Switzerland. Otherwise, the priority status accorded to national manpower and workforce from EU/EFTA member countries does apply.

3. Work Permits in particular

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Switzerland, not being a member state of the EU, has entered into bilateral agreements with the EU e.g. on the free movements of persons. Since the entering into force of the Bilateral Agreement on Free Movement of Persons Switzerland - EU, Switzerland applies a dual system for granting foreign nationals access to the Swiss labour market. Depending on whether the applicant is an EU/EFTA national or from a non-EU/EFTA country, the requirements and procedures for obtaining a work and/or residence permit vary.

As a rule, the only requirement to be observed for work assignments of EU/EFTA nationals (except for Romania and Bulgaria for which stricter rules continue to apply) is the availability of an employment agreement. If EU/EFTA nationals take residence in Switzerland without employment, proof of sufficient assets to cover the cost of living in Switzerland suffices.

Stricter regulation applies to non-EU nationals (so-called “third-country nationals”).

Work permits are issued to third-country nationals when the criterion of quota availability is met and provided such third-country nationals are

The most significant mandatory provisions of Swiss employment law aim at safeguarding the employee’s health and safety.

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Switzerland offers four categories of residence permits, i.e. the so-called (i) “L Permit” (short term permit), (ii) “B Permit” (annual permit), (iii) “G Permit” (cross-border commuter permit) and “C Permit” (settlement permit).

As a general rule, the priority status does not apply in the case of executives or key staff of international companies who come to Switzerland as part of a company executive transfer or in the case of highly qualified specialists whose presence in Switzerland is vital for the fulfillment of special assignments and whose presence, furthermore, lie in an overall economic interest.

Exceptions from the specialist status may be granted in certain industries, e.g. the catering industry, domestic service, healthcare, tourism, topclass sports as well as culture and entertainment.

4. Social Security and Pension Schemes in particular Switzerland’s fairly high standard social security system aims at covering all major financial risks in connection with retirement, invalidity, death and unemployment.

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It is based on three pillars. (i) The first pillar consists of several mandatory insurances that have to be provided for by the employer.

It amounts to approximately 14 % of the salary (depending on the latter’s amount) approximately 6 % of which the employer may pass on to the employee. (ii) The second pillar (pension system) entails only a small mandatory core and can be expanded by the employer (which is the reason that a rough estimate of the amount cannot be given). As a rule, contributions to the first and the second pillar are borne equally by the employer and the employee.

The third pillar allows for additional personal tax exempted insurance and/or savings by the employee.

Adrian Kammerer studied law at the University of Zurich and worked as research assistant with the chair for Swiss and European Private and Commercial Law at University of Zurich as well as secretary at the county court of Uster. He finished his studies in 1997 with a PhD degree, was admitted to the bar in 1999 and joined Niederer Kraft & Frey Ltd. the same year.

Adrian Kammerer became a partner in 2006. He frequently advises Corporates in the areas of Contract, Company and Commercial Law as well as M&A transactions and Litigation.

He further focuses on national and international legal aspects of compliance in general and the prevention of money laundering in particular. Furthermore, he has devoted a substantial amount of time to advising in Aviation and Employment Law. Adrian can be contacted on +41 (0)58 800 8000, or alternatively by emailing: adrian.kammerer@nkf.ch.

Michaela Zehnder studied law at the University of Zurich. In 2000 she joined Niederer Kraft & Frey Ltd. Michaela Zehnder is specialised in business relocation matters and private residence planning.

Her activity is focused in advising foreign and Swiss employers as well as employees regarding location issues, work and residence permits, naturalisation as well as acquisition of real estate by foreign nationals. Furthermore, she practices as a trademark agent and advises clients from clearance to registration of trademarks as well as on the management of trademark portfolios.

Michaela can be contacted on +41 (0)58 800 8000, or alternatively by emailing: michaela.zehnder@nkf.ch.

Laurence Uttinger studied law at the University of Lucerne and worked as research assistant with the chair in social security law as well as the chair in tax law at the University of Zurich. She specialises in pension matters, general social . security and tax law. She was admitted to the bar in 2009 and joined Niederer Kraft & Frey in 2011. She regularly publishes in her areas of expertise and is a member of the advisory committee on pension law to the Swiss Federal Council. She regularly advises corporations, pension funds and management employees regarding pension, social security and tax matters.

Laurence can be contacted on +41 (0)58 800 8000, or alternatively by emailing: laurence.uttinger@nkf.ch.

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Allegra Sosso studied law at the University of St. Gallen and at Columbia University in New York (LL.M.). She was admitted to the bar in 2007 and joined Niederer Kraft & Frey Ltd the same year. Allegra Sosso regularly advises financial institutions and companies engaged in various other industries on a broad spectrum of corporate, commercial, banking and financial law as well as in mergers & acquisitions. Her practice also includes the counselling of corporate clients and management employees on diverse contractual aspects of employment law.

Allegra can be contacted on +41 (0)58 800 8000, or alternatively by emailing: allegra.sosso@nkf.ch.

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Tax Deductibility Of Costs From A Court’s Perspective

By Michal Dušek and Radek Novotný

G

iven the lack of clarity of Czech tax laws, tax jurisprudence has gained increasing importance over recent years, including as concerns the question of tax deductibility of costs. This despite the absence of its true precedentary nature. This article is in three parts. The opening part outlines the role of tax jurisprudence in the Czech legal environment. The second part briefly summarises two recent decisions of the Czech Supreme Administrative Court which impact tax deductibility of costs, namely fees for group management services and salary costs where an employee (typically in a CEO, CFO or other executive position) concurrently serves on the board of the employing entity. Finally, the closing part speculates whether these cases may cast doubt over the legitimacy of the so-called split-assignments.

1. Tax Jurisprudence – To Read Or Not To Read?

The transparency of tax rules constitutes one of the key requirements for a modern tax system. This is particularly true in an environment where tax law has largely become a phenomenon of statutes and regulations. Unfortunately, being full of complex, unclear and arbitrary rules, the Czech tax system still lacks this essential feature.1 Having said that, it does not come as a surprise that the importance of the courts’ jurisprudence in tax matters has steadily been growing over recent years and that reference to ‘’applicable’’ caselaw has in fact become part of a daily routine.

Yet, the Czech Republic is not a common law country. Accordingly, while the jurisprudence has certain precedentary value2, it is not generally binding and, put simply, constitutes merely a concrete application of the law in an individual case.3 Notwithstanding this, it follows that having a good command of a tax jurisprudence has become vital for both tax payers and their advisors. It not only serves as an indicator of the likely court’s approach in similar cases, but most importantly may also bring attention to areas that may crystallize into tax issues in the future. It follows from the below that the latter is equally applicable also to a nontax jurisprudence.

2. Tax Deductibility from a Court’s Perspective The following recent decisions of the Supreme Administrative Court (hereinafter the SAC)4 outline the complexity of determining deductibility of expenses for Czech corporate income tax purposes.

While the first decision thoroughly reiterates and applies the basic tax-deductibility test confirming the SAC’s pursuit for an economic rationality in taxpayers’ behaviour, the second case demonstrates that it can be a non-tax case decided on the grounds of a settled civil-law jurisprudence that can play a key role in determining an applicable tax treatment. Furthermore, considered together, they may lead to other potentially significant conclusions.

2.1 Management Services Must Serve A Rational Purpose Situation and tax authorities’ stance This case5 concerned a Czech real estate company which owned and leased non-residential property.

The company had no employees and received various management and consultancy services from its Austrian parent company. The fees were charged on a time-spent basis.

The authorities challenged the tax deductibility of these charges. To defend its position, the company submitted a contract, invoices, and a summary of tasks performed as well as other supporting documents. Nevertheless, in describing the services, the documents contained merely general terms such as supervision, controlling, drafting of and amendments to sample lease contract and notices, secretarial services, budgeting and strategic advice, etc. Such evidence was considered insufficient by the authorities and their stance was also upheld by a competent regional court.

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Supreme Administrative Court’s view Referring to its prior decisions, the SAC firstly reiterated the relevant fundamentals. It follows that, for an expense to become deductible, there must, inter alia, be a direct and immediate link between that expense and the (prospective) taxable income.6 Put simply, it is vital that it can be evidenced that without incurring such costs the taxpayer would not have realised or would not even have a chance to realize the taxable income. The SAC followed that this is generally not so where the costs are patently in contradiction with an economically rational (proportionate) behaviour, i.e. where they do not make sense from an economic perspective.

Having outlined the applicable framework, the SAC went on by considering the particular costs within the context of the scope and nature of the activities carried out by the subsidiary. While accepting that certain services have been supplied, the SAC stressed, inter alia, that (i) whilst the fees increased by a multiple of nine, the income remained essentially constant, (ii) only a limited number of new lease contracts was concluded (iii) all contracts were long-term and essentially similar, and (iv) no notices were in fact filed.

Arguments concerning the settlement of the fees as well as the actual need for, and the alleged benefits of, an outsourcing model7 were also deemed irrelevant with respect to establishing a clear link to the subsidiary’s taxable income.

In SAC’s view, where insignificant amounts were incurred on a continuous basis it would seem to have been logical for the subsidiary to request a detailed description of the supplies enabling it to consider the economic rationale of such relationship, including its impact on the subsidiary’s taxable income.

The SAC concluded that the subsidiary failed to prove the link between the fees incurred and its taxable income. It further pointed out that a taxpayer bears the burden of proof even in the case of immaterial supplies from which no tangible outputs arise. Nevertheless, in SAC’s view, there should always exist evidence concerning the particular result of every activity.

Our comments Overall, this decision is not a breakthrough. However, specifically with respect to management services, there is certain progress. Unlike in majority of other similar cases, the actual supply of services was, to a certain extent, admitted by both the authorities and the courts. Furthermore, contrary to previous cases8, the authorities presented a clear line of reasoning successfully rebutting the arguments presented by the taxpayer who, besides proving the actual receipt of services, failed to provide the essential evidence supporting the economic rationality of the respective supplies (or, more precisely, of the related costs) within the context of its own business activities.

2.2 Salary Costs Of “Employed” Board Members/Executives Situation and the arguments used by the authorities As indicated above, this is not strictly a tax case.9 It concerned an executive10 of a Czech limited liability company who was concurrently employed as a CEO by the same entity. A dispute arose over the participation of that individual in the Czech sickness insurance system.

While the answer to this question is not important in the context of this article, what is significant are the arguments used by the authorities. Referring to a settled civil-law jurisprudence11, which

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confirms that a position of a company’s executive cannot be performed under an employment contract, the authorities concluded that the employment relationship has never been validly established.

Supreme

Administrative

Court’s

view

The SAC upheld the authorities’ stance by stating that there is no reason for it to deviate from the settled case-law of the civil courts. This is despite the fact that the matter falls within a public-law domain.

Our comments The above conclusions follow from the fact that a relationship between an executive (or, in case of a joint-stock company12, between a board member13) and a company is governed strictly by commercial law. Under commercial law, the executive is bound to carry out tasks of commercial management.14 It follows from the applicable jurisprudence15 that the scope of these tasks must be interpreted rather broadly (including, besides strategic issues, also responsibility for matters of an operational nature such as accounting, HR, sales, etc.). Accordingly, a concurrent employment relationship concerning any of the executive positions (e.g. CEO, CFO, etc.) is virtually excluded as it seems impossible to avoid an overlap of duties that is strictly prohibited by law.

Tax implications are, in fact, a mere consequence of the above legal assessment. In terms of tax deductibility, the highest risk generally lies with a joint-stock company as the remuneration of a board member is tax non-deductible by operation of law. Accordingly, any ‘’deemed’’ salary costs16 can become non-deductible.17 Nevertheless, in practice, each case must be considered on its own merits as there are other complex rules that must be considered including, in particular, those on remuneration of executives/board members.18 19 3. Split Assignments – Is The Clock Ticking?

3.1 What Is Basis?

Under this arrangement, which seems to be commonly used in practice, a senior manager (typically

an employee of a parent or other group company) is sent to the Czech Republic to, on the one hand, provide various management services to a local subsidiary on behalf of his formal employer and yet, on the other hand, to serve as a board member of that subsidiary.

The general purpose is often unrelated to tax. The manager remains an employee of a group company and the group company, by appointing the trusted person on board, gains control over the local subsidiary. In practice, the individual stays on payroll of its formal employer, the board member position is to be performed on a free-of-charge basis and a contract is put in place between the employing entity and the local subsidiary addressing the provision of consultancy services.

3.2 Our Comments Non-tax aspects It follows from the Czech Commercial Code and also from the relevant jurisprudence that holding a board member position20 constitutes a personal commitment and that the respective duties of that individual must be performed independently and with due commercial care.21 Having regard to the above and considering our comments under 2.1(c) concerning the scope of the commercial management tasks, it can be argued that a vast majority of management services performed by the respective individual in his consultancy capacity constitute, in fact, duties falling within the scope of a commercial management that the individual is bound to perform in his capacity as a board member.

Tax implications As at 2.1(c), tax implications follow from the above analysis. On these grounds, it can be argued that there is a risk that the authorities may challenge the split-assignment arrangement, claiming that the service fees incurred by the company should be treated as board member compensation for tax purposes and, as such, become non-deductible.22 In practice, each case would again need to be considered on its own merits.

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4. Conclusion It follows from the above that in spite of its limited precedentary value, tax (and, to a certain extent, also non-tax) jurisprudence should constitute an indispensable part of the everyday work of both tax professionals and their clients. It not only enables an assessment of the position in similar cases, but may also serve as an indicator of potential future issues.

While the resulting tax implications are essentially local, the related considerations might be of interest to a wider audience as the respective decisions are often discussed and made at a group level rather than at a local subsidiary level.

Michal Dušek is a tax adviser at Allen & Overy’s Prague office who joined our tax practice in 2004.

Michal regularly advises clients on both direct and indirect taxation issues with a particular emphasis on corporate tax advisory and VAT, but has also assisted clients in other fields such as social security, health insurance and investment incentives. He has been involved in a number of corporate and finance transactions as well as for major financial and leasing institutions.

Michal can be contacted on +420 222 107 159 or at Michal.

Dusek@Allenovery.com.

Radek Novotný is a tax adviser in the Prague office. He joined our tax practice in 2010 after working for ten years with one of the Big Four firms. Radek advises clients mainly on direct taxation with particular focus on corporate tax advisory, financial services industry, planning and restructuring for corporate taxpayers, and direct tax aspects of European law.

Radek can be contacted on +420 222 107 155 or at Radek.Novotny@Allenovery.com.

1 - Decision of the Supreme Administrative Court of 9 December 2010, No. 3 Ads 119/2010-58.

2 - In Czech: jednatel.

3 - For example, a decision of the Supreme Court of 17 August 2004, No. 21 Cdo 737/2004.

4 - In Czech akciová společnost.

5 - In Czech člen představenstva.

6 - In Czech: obchodní vedení.

7 - For example, a decision of the Supreme Court of 5 April 2006, No. 5 Tdo 94/2006.

8 - Including other related payments such as social security contributions payable by the employer.

9 - The historical position could be defended on the basis of the so-called administrative practise which can, according to a settled jurisprudence, become binding on the authorities. Nevertheless, as concerns the period following the publication of the decision in question, this argument is no longer valid.

10 - For example, a tax deductibility issue may arise in case of a limited liability company where a free-of-charge performance of an executive position was validly agreed between the parties and the company raises a claim for a refund of an unjust enrichment arising on the part of the executive under an invalid employment contract.

11 - At present, amendments to both the Czech Commercial Code and tax laws addressing this issue are the legislative process.

12 - This is equally applicable to an executives in a limited liability company.

13 - In Czech: péče řádného hospodáře.

14 - The position could be different in case of a limited liability company as a remuneration of an executive is generally considered as tax deductible.

15 - For example, a decision of the Supreme Court of 5 April 2006, No. 5 Tdo 94/2006.

16 - Including other related payments such as social security contributions payable by the employer.

17 - The historical position could be defended on the basis of the so-called administrative practise which can, according to a settled jurisprudence, become binding on the authorities. Nevertheless, as concerns the period following the publication of the decision in question, this argument is no longer valid.

18 - For example, a tax deductibility issue may arise in case of a limited liability company where a free-of-charge performance of an executive position was validly agreed between the parties and the company raises a claim for a refund of an unjust enrichment arising on the part of the executive under an invalid employment contract.

19 - At present, amendments to both the Czech Commercial Code and tax laws addressing this issue are the legislative process.

20 - This is equally applicable to an executives in a limited liability company.

21 - In Czech: péče řádného hospodáře.

22 - The position could be different in case of a limited liability company as a remuneration of an executive is generally considered as tax deductible.

Expert Guide : Labour & Employment Law - 25

An In-depth Labour Reform

T

he Royal Decree Law 3/2012, which came into force on 10th February 2012, includes urgent measures related to the labour market reform. The new regulation contains very important innovations in the labour legal framework in Spain, in areas such as hiring, modification of work conditions, collective negotiation and contract termination.

In the matter of contract termination, the Labour Reform has presented various modifications. In the case of unfair dismissal, for instance, the new law establishes the elimination of procedural salaries if the company opts to pay the severance payment, as well as a new severance payment for unfair dismissals of 33 days of salary per year of service, with a maximum of 24 monthly payments.

The new Law redefines the objective reasons in the case of objective and collective dismissals, doing away with both the former requirement that such negative situations could affect the company’s ability to maintain the employment and the obligation of offering a justified reason for the termination. As a consequence of the Labour Reform, there is a new Legal System for Collective Dismissals because the final decision of the Company can be contested by a collective process or by an individual contestation process. For collective dismissals based on economical, technical, organisational and productive motives, the Administrative Authorisation has been removed, although the company’s final decision can be contested before the Social Jurisdiction.

In the event of dismissals based on the inability to adhere to technical modifications, the company should offer a training course. In addition, dismissals based on absenteeism have been facilitated. Currently, the termination of contracts in the case of Public Sector Company employees can be based on a lack of sufficient funding and on other reasons established in the Royal Decree Law. The main changes regarding the cessation of contracts and the reduction of working hours are: first, the removal of the Administrative Authorization in temporary redundancy dismissals, except in the case of the administrative process, as companies are still bound to communicate the opening of the period of consultation to the Administration, and such period which must be opened together

By Carlota Riquelme Borrero

with the employee’s representative; and secondly, a discount of 50% in the Social Security payments for common contingencies in 2012 and 2013 for employees subject to contract termination or work reduction situations, with a maximum of 240 days per employee. Regarding this matter, another relevant change has been made in the form of the re-installment of the unemployment benefits if an employee is dismissed based on economical, technical, organisational or productive reasons following a process of contract termination or reduction of working hours, with a maximum of 180 days.

In the matter of internal flexibility, the distinction between professional group and professional category has been removed, the new law referring only to professional groups and establishing the possibility of irregularly dist r i b ut i n g the working hours over one year at 5%. The new law redefines the justifiable reasons for geographical mobility or substantial modification of the conditions of employment with a more extensive and flexible description, and eliminates the Administration intervention in geographical mobility processes.

The new law includes an explicit reference to the “rate of pay”, thus enabling the possibility of modification in terms of remuneration and eliminating contract termination based on the substantial modification of the conditions of employment.

Additionally, the new law has established a process to stop applying the employment conditions provided in Collective Agreements. For such cases, there is a special process which requires the concurrence of economical, technical, organisational and productive reasons within the new definition for collective dismissals.

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In matters of collective negotiation the Collective Agreement at company level will have priority over the rest of agreements (at State level, at Regional level, etc.).

The principal change in terms of permanent contracts is the creation of said contract for entrepreneurs in companies of less than 50 employees with a one-year trial period.

Additionally, the new law has established the possibility of overtime for part-time contracts, and also of teleworking in the location chosen by the employee.

To promote permanent contracts, the new law offers bonuses to companies with less than 50 employees, and has limited the overlapping of temporary contracts.

This Labour reform includes measures to favour the employability of workers such as introducing the possibility of Temporary Employment Agencies acting as placement agencies, and recognising the professional training rights of employees with 20 hours of annual leave for this purpose and the creation of a training history.

Furthermore, the maximum age for training contracts has been changed to 30 years of age, the length of contract has been increased from 2 to 3 years, including the possibility of receiving incompany training, the effective working time has been increased from 75% to 85%, a reduction in the employer´s Social Security payments has been established, with a further reduction in the event of transitioning from a temporary contract to a permanent one.

Finally, numerous relevant modifications have been made in matters such as the conciliation of work and family life, the applicable rules in Credit Institutions, commercial contracts and senior managers in the Public Sector, the Wage Guarantee Fund and unemployment benefits.

Sagardoy Abogados is the leading law firm in Spain specialised in employment law, employee benefits, pensions and social security. Since its creation in 1980, it has been engaged without interruption in the practice of the profession, offering its corporate clients a wide range of legal services in the area of human resources, both in advisory work and in litigation. The firm has offices in Madrid, Barcelona, Seville, Canary Islands and Oviedo. Â In the last three decades, the firm has undergone substantial growth and is currently composed of 60 specialised lawyers exclusively dedicated to employment and employment law issues.

Sagardoy Abogados has also created an Advisory Board composed of university professors and lecturers in Employment Law and Social Security from different Spanish universities. This Board provides high quality support for legal opinions on issues of particular importance and for publications and seminars for clients.

Within the Firm, a Consulting Board, drawn mainly from human resources managers of the country’s leading companies in different sectors, advises the Firm on current and professional issues of interest that arise in the business world. The work of this Board seeks new challenges for the legal framework of human resources and, in particular, prepares projects aimed at contributing to improvements in shaping employment relations.

At the same time, conscious of the need to internationalise services and with the intention of offering clients a global service, Sagardoy Abogados is a founding member of Ius Laboris, an International Employment Law, Pensions and Employee Benefits Alliance engaged in advising on comparative employment issues, which brings together leading Firms specialised in advisory services in Labour and Employment Law all over the world (Argentina, Belgium, Brazil, Canada, Chile, Denmark, France, Germany, Greece, Italy, Luxembourg, Mexico, the Netherlands, Poland, Sweden, the United Kingdom, and the USA, amongst others).

Expert Guide : Labour & Employment Law - 27

Iñigo Sagardoy de Simón, member of the College of Lawyers of Madrid since 1992. Academic background: Faculty of Law of ICADE. Doctorate in Employment Law and Social Security (ESINE). Professor of Employment Law at the University Francisco de Vitoria. Professor of Employment Law in the Master Programme in Private Advocacy – CEU (Madrid). Program of Instruction for Lawyers in Harvard Law School (1998) and Course on Leading Professional Service Firms in Harvard Business School (2002). Member of the National Jurisprudence Academy. Author of publications on employment and social security issues.

Iñigo Sagardoy can be contacted at is@sagardoy.com.

Carlota Riquelme Borrero, member of the College of Lawyers of Madrid since 2009.

Academic background: Degree in Law and Business Administration University Pontificia of Comillas (ICADE).

Masters in Employment Law from Sagardoy Foundation.

Carlota Riquelme Borrero can be contacted at crb@sagardoy.com.

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Snapshot – Europe

United Kingdom On Good Friday the Government increased the qualifying period for protection from unfair dismissal from one year to two year, raising fears of an imminent ‘hire and fire’ frenzy.

The move is set to decrease employers’ concerns about the high costs of excessive employment protection, potentially creating an increased level of permanent positions rather than temporary posts.

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Spain The government have increased the flexibility of the labour market by means of a Royal Decree Law in an attempt to tackle the 22.85% unemployment figure. Employers will now be able to reduce salaries without obtaining their employees’ consent in redundancy situations, while severance pay for unfair dismissal has been reduced from 45 to 33 days’ salary per year of service and the cap on the total amount payable has also been reduced from 42 to 24 months’ salary.

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Netherlands The Minister of Social Affairs & Employment Henk Kamp announced that the option of four consecutive renewals of temporary employment contracts for young people up to the age of 27 would be scrapped bringing it back in line with all other employees at three.

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France If Nicolas Sarkozy manages to gain re-election this year then France could be heading for a ‘German-style’ labour market reform in the hope of reinvigorating the economy and creating more jobs. He has suggested giving companies more freedom when it comes to flexible working hours and collective agreements with unions, which would undermine France’s statutory 35-hour working week. The Prime Minister has also expressed an interest in giving companies incentives to hire more apprentices.

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Employee Misclassification: An Expensive M Your Company Getting It Right? By Jessica Kastin, Esq

M

any companies operating in the United States supplement their workforces with contractors, interns and other non-employee service providers.

Typically “non-employees” are not eligible for employee benefits and are not generally protected by various wage and hour and other statutory employee protections. Nonemployee service providers typically fall outside the scope of workers’ compensation insurance, unemployment insurance and employer-paid federal and state payroll taxes. Employer savings attributed to the use of non-employees are directly correlated to reduced government revenue.

For these reasons, and in light of the recent economic downturn and high unemployment rates, widespread misclassification has been a focus of President Obama, and a priority for the taxing authorities and the federal and state departments of labor during his term. The U.S. Department of Labor’s budget for fiscal year 2013 includes $46 million allocated specifically to combat misclassification. The $46 million includes $25 million for state grants aimed at identifying misclassification and recovering unpaid taxes and $15 million for increased Department of Labor personnel to investigate potential misclassifications. Similarly, millions of dollars were allocated to combat misclassification as part of the President’s “Misclassification Initiative” in the fiscal budgets for the past few years.

What This Means For Employers The focus on misclassification has lead to greater enforcement efforts and coordination and information sharing among federal and state agencies.

These efforts have lead to increased employer liability. The U.S. Department of Labor’s Wage and Hour Division’s website currently lists examples of employer violations from 2010 and 2011 resulting in a total of more than $11 million in liability for back wages, overtime and penalties allocated among approximately 30 employers throughout the country. Damage assessments per employer within this sample range from $30,000 to $2.9 million.

Employers can become a target for investigation and potential liability assessments through various avenues. Often an independent contractor will file for unemployment benefits which will trigger

an investigation into whether the individual was properly classified. If the investigation leads to a conclusion that the individual was not properly classified, the relevant state department of labor will typically order that all “similarly situated” individuals be reclassified as employees as well. This could lead to payment of back wages, overtime, taxes and insurance premiums on behalf of a large group of individuals. Often these amounts are difficult to calculate because employers have not kept careful track of contractors’ hours worked and other information needed to assess the amounts owed.

Disgruntled individuals may also file claims with the federal or state department of labor or the taxing authorities alleging that they have been misclassified and seeking back pay and benefits. Situations where individuals performing similar jobs are not similarly classified often create a perception of inequity and a greater likelihood that an individual will file a complaint.

Once an employer is targeted, it is subject to time consuming audits involving review of voluminous payroll records and related documents that may not be easily accessible. These audits may be conducted by various state and federal agencies that share information about potential violators. Employers may be subject to consecutive audits by, for example, a state unemployment insurance division, a workers’ compensation division and a federal or state taxing authority. Employers are also vulnerable to both individual and class action law suits seeking back pay and penalties for any period in which individuals were allegedly misclassified.

Employee vs. Independent Contractor While different agencies rely on different tests to assess whether an individual is an employee or a contractor there are common factors reviewed in the assessments. Most tests center upon the amount of direction and control an employer exercises over the individual’s day-to-day

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Mistake, Is responsibilities. Some common relevant factors include: whether the individual determines his or her own work schedule and hours, the level of supervision and instruction exercised by the employer, and whether the individual provides his or her own work supplies, carries his or her own liability insurance, and is available to provide services to other employers.

the benefit of the intern not the employer, and that the intern is receiving academic credit for his or her work. If these factors are not met, the intern is most likely an employee that should be paid at least minimum wage and be eligible for over time.

Employers should review the classification of its service providers with these factors in mind.

It is wise for employers to conduct internal audits and take steps to remedy any potential misclassification issues going forward. The federal Internal Revenue Service and certain state agencies, such as the New York State Department of Taxation, have recently implemented amnesty or voluntary compliance programs allowing employers to voluntarily report misclassification with the opportunity for reduced penalties and liability.

Common Mistakes And Misperceptions Often companies believe that because an individual prefers to be classified as an independent contractor and signs a written agreement to that effect that the individual is properly classified as a contractor. This belief is wrong. The terms of a written agreement and the individual’s preference with respect to classification play a very small role, if any, as to whether an individual is properly classified.

Another common misperception is that temporary employees may be classified as contractors.

If an individual is performing employee functions and is subject to the direction and control of the company, the individual is likely an employee, even if he or she is hired for a short, finite duration. Similarly, employees that have been laid off or retire are often subsequently retained as “consultants” or “contractors.” These arrangements often involve the individual providing the same services they provided as full time employees only on a reduced schedule. Under such an arrangement, these individuals are most likely still employees and should be classified as such.

In addition to contractors, many companies also utilize unpaid interns. Often these interns provide services for the benefit of the employer and should be classified as paid employees. Two recent class actions have been filed by groups of interns seeking back pay alleging that they were misclassified.

Employers should ensure that unpaid interns are not performing services that are also performed by employees, that the services performed are for

How To Get It Right

Jessica Kastin is a partner in the New York office of the law firm Jones Day. She specializes in the areas of labor and employment law. Ms. Kastin represents employers is a wide variety of industries focusing on compliance with federal and New York State labor and employment laws.

Ms. Kastin’s practice also focuses on traditional labor law in the context of collective bargaining negotiations, the reorganization of unionized companies through bankruptcy, labor issues arising in the context of corporate mergers and acquisitions, grievance and arbitration proceedings, and proceedings before the National Labor Relations Board. If you have any questions about the proper classification of your workforce, or compliance with any other labor and employment laws, Ms. Kastin can be reached at 212-326-3923 or by email at jkastin@JonesDay.com.

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Negotiating U.S. Executive Employment Agreements

By Arthur Sternberg

W

hile few U.S. employees have employment agreements, they are often necessary for recruiting and retaining key executives, as well as protecting the company’s legal interests. This article discusses the main parts of executive-level employment agreements and how they can be written to be more or less favourable to the executive.

Employment agreements cover these main points: -Duties -Term and Termination -Compensation and Benefits -Intellectual Property Rights and Post-Termination Restrictions Duties The agreement usually describes (a) title and general responsibilities, (b) where the executive is based, (c) to whom the executive reports, and (d) any special requirements, such as regular travel, board memberships, and submitting periodic reports to the board. The executive is prohibited from holding other employment or, sometimes with narrow exceptions, pursuing other for-profit activities. Charitable/public service activities are typically allowed provided they do not interfere with the executive devoting full-time, best efforts for the company.

Term and Termination

How They Work Together. Term—how long the agreement lasts, and termination—how the agreement may be ended early—work in tandem. They are drafted to favour either the company or the executive. An executive who is highly marketable will be able to negotiate a term/termination provision that strongly protects against his or her economic risk of early termination.

Starting Point: Employment At-Will. Most non-union U.S. employment is “at-will,” meaning that each side is unilaterally free to end employment at any time, without notice, and for any or no reason (except for certain proscribed reasons such as discrimination). Termination by the company incurs no direct financial obligation beyond the payment of previously earned compensation.

Termination Without Cause. Employment agreements for key executives almost always contain financial obligations if the company terminates the executive without “cause.” Because U.S. law has no set definition of cause, the agreement needs to define it. It usually includes material breach of the agreement or a significant company policy; dishonesty, misconduct or wilful refusal to perform duties; conviction of a felony or of certain types of felonies; and being under the influence of alcohol during work or the use of illegal drugs at any time.

It may also include personal conduct that harms the company’s image, reputation, or financial condition. Cause ordinarily does not include merely poor performance or results. However, cause definitions vary among agreements, and a highly marketable candidate will be able to negotiate a narrower definition of what constitutes cause.

Typical Term/Termination Provisions. The most company-favourable provision is one that has no set term of employment, which is terminable at will, but with severance if the company terminates without cause. Severance may be paid in either in a lump sum or over payroll periods. The latter helps assure that the executive complies with posttermination restrictions.

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The amount or length of severance ranges considerably. The usual severance range is two to twelve months of base salary, with four or six months a frequent choice. Payment is sometimes conditioned on the executive being unable to find comparable employment.

Besides continued base salary, severance may include payment or waiver of all or part of the executive’s premiums for continued health care coverage under the federal law known as COBRA. It may also include a “gross up” to cover the income taxes due to the payment or waiver. Severance may also include all or a portion of any discretionary bonus. Non-discretionary bonuses, commissions, and deferred compensation are legally required to be paid, or excused from payment, in accordance with the terms of the plan or contract that created them.

Instead of having individually negotiated severance agreements, some companies have severance pay plans, which apply if an executive is terminated without cause. While these are unusual among privately owned companies, they do have legal advantages worth considering.

The term/termination provision that gives the most economic protection to the executive is a multiple-year term with an “evergreen” clause that automatically renews the term for successive periods of at least one year. Automatic renewal can be stopped by giving notice of non-renewal, which is usually required to be given at least 60 days before the end of the current term. If the company terminates without cause, the executive will receive a lump sum amount for all of the base salary he or she would have earned through the end of the term.

“Resignation for Good Reason.” For key executives, employment agreements often give the executive the right to resign for “good reason,” such as a decrease in salary, target bonus compensation, title, responsibilities, or reporting level, relocation of the office beyond a certain distance, and the company’s unremedied breach of the agreement.

A resignation for good reason is treated the same as a termination without cause, entitling the executive to the same severance. The agreement may include the loss of certain financial benefits, such as bonus or equity-based awards if the executive resigns without good reason. Retirement and resignation due to disability are usually addressed so as not to cause the loss of the executive’s financial benefits.

Including Conditions on Paying Severance.

Payment of severance should be expressly conditioned on the executive fully complying with all post-termination restrictions and signing a general release of all claims against the company and affiliated companies and persons. Certain rights cannot be released, such as the right to earned compensation. State and federal laws also have various requirements for a release of other claims to be enforceable.

Compensation and Benefits The compensation and benefits components of an executive employment agreement include: -Starting Base Salary and Increases -Bonuses and Other Incentive Compensation -Participation in Employee Benefit Plans and “Perks” -Equity-Based Awards Starting Base Salary and Increases. Base salary may be fixed for the entire term, be subject to discretionary annual review, or have automatic increases. While automatic increases are usually a preset percentage or amount, they may (like bonuses) be based on the degree to which company and individual-performance metrics are met.

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Salary may be lowered, unless doing so is included as grounds for the executive to resign for good reason. Also, base salary may be set high and variable compensation set low or the converse, depending on a mix of factors.

Bonuses and Other Incentive Compensation.

An annual bonus is typically included. It may be discretionary or based on the degree to which company and individual-performance metrics are met. A first-year bonus may be guaranteed, or a signing bonus given, if the candidate is relocating or forfeiting compensation with the current employer. (Relocation expenses may also be covered.)

Companies often have short and long-term incentive compensation plans applicable to (and differing between) certain management levels. Due to federal income tax laws, the employment agreement or applicable plan needs to specify when bonuses and incentive compensation are to be paid.

Unless the agreement or plan provides otherwise, termination does not necessarily end the obligation to pay all or a pro-rata portion of a nondiscretionary bonus and incentive compensation.

Employee Benefit Plans. Employment agreements include that the executive is entitled to participate in the company’s employee benefit plans, such as health insurance and 401(k) plans, which themselves are governed by a federal law called ERISA. Few companies still have traditional pension plans for new employees. However, some have supplemental executive retirement plans. Benefits may also be provided on an individual basis, but the tax treatment of individual versus group benefits needs to be considered.

Perks. While CEO-level employment agreements for large, publicly held companies may have extensive perks, such as payment of certain expenses and specified levels of business travel, privately held companies have few beyond a car allowance or, less frequently, a leased luxury-level car. While perks are usually minimal, they can be used to help gain a highly desired candidate.

Equity-Based Awards. Equity-based awards in privately held companies are included far less frequently than bonuses. Awards can take many forms, such as stock or unit options, restricted stock or units, and stock appreciation rights. While some give the executive actual equity, others essentially provide incentive compensation based on the increase in the value of the company’s value. The awards usually have a vesting schedule based on the executive’s length of service with the company. Equitybased awards are usually pursuant to written plans that the company’s board of directors adopts. Tax, employee-benefit, and ownership issues intersect in drafting an equity-based award plan, and therefore experienced counsel should be consulted.

Intellectual Property Rights and Post-Termination Restrictions Employment agreements include, or incorporate by reference, provisions that all intellectual property created as a result of the executive’s work belongs exclusively to the company. Agreements also usually restrict the executive from competing with the company for some time after employment ends. To be enforceable, the restrictions need to be narrowly drafted to avoid restricting the executive more than is necessary to protect the company’s legitimate business interest. Restrictions typically last between six to thirty-six months, with twelve to twenty-four being most frequent. While “garden leave” pay during the restricted period is common in many countries, it is less so in the U.S. Restrictions may prohibit soliciting or hiring away specified groups of company employees, soliciting or doing business with some or all of the company’s customers, and not working in a role that competes with a company’s line of business.

A worldwide restriction may be reasonable if the company does business worldwide or is subject to competition from anywhere in the world.

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The restrictions are largely governed by the laws of an applicable state, rather than by federal law.

States and courts within a state can vary greatly as to what restrictions they will enforce. In California, for example, all restrictions are largely unenforceable. In contrast, some states still routinely enforce post-employment restrictions. In most states, however, restrictions are closely scrutinised and risk not being enforced if the company failed to carefully draft them to avoid unnecessary burden on the executive.

Conclusion An executive employment agreement is not a fillin the form document. It starts with assessing the company’s interests, followed by negotiation over the candidate’s requirements. The company’s protections should be largely non-negotiable. There are many ways to meet the candidate’s requirements, as long as they incentivise the candidate to meet the company’s key business and financial objectives.

Arthur Sternberg is a partner in the Chicago office of Thompson Coburn LLP, and has been annually selected by his peers as a member of Illinois Super Lawyers and Illinois Leading Lawyers.

Arthur has extensive trial and appellate experience in employment and business litigation, including cases on employee non-competition restrictions and trade secret misappropriation. His litigation perspective is especially useful in counseling clients and drafting employment and employment-related agreements and policies. Thompson Coburn has over 325 attorneys, who provide a full spectrum of legal services for business. Its offices are also located in St. Louis, Washington D.C. and Belleville, Illinois.

Arthur Sternberg can be contacted on +1 (312) 580 2235 or alternatively via email on asternberg@thompsoncoburn.com.

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NLRB Posting Postponed: U.S. District Courts Hold On Whether The NRLB May Require Posting of Em

T

he Courts’ Decision

The United States Court of Appeals for the District of Columbia has granted an emergency motion for injunction blocking the National Labor Relations Board (“NLRB” or the “Board”) from forcing millions of U.S. employers to post notice of employee rights under the National Labor Relations Act (“NLRA”) by April 30, 2012. The Court of Appeals’ injunction is in response to two contradictory decisions at the U.S. District Court level on whether the NLRB has authority to require such a posting under the NLRA. The NLRB Chairman, Mark Pearce, said the Board will instruct its regional offices not to enforce the posting requirement pending appeal.

On March 2, 2012, the U.S. District Court for the District of Columbia upheld the Board’s right to enact regulations requiring covered employers to post notice of employee rights under the NLRA. The court stated that Congress’ intentions do not preclude the NLRB from promulgating such a rule and that it does not violate the employer’s free speech rights. The Court struck down two major provisions of the NLRB’s proposed rule. The Court first rejected the provision that provided for an automatic finding of an unfair labor practice for failure to post the notice. Second, the Court rejected the provision that tolled the applicable six month statute of limitations period for filing a charge against an employer where the Board deemed it appropriate. Remedies will still be available to the NLRB under the Court’s ruling; however, infractions will be investigated on a case-by-case basis for interference, restraint, or coercion of employees’ rights. This decision is currently on appeal with oral argument set for September 2012.

One month after the D.C. District Court’s decision, the U.S. District Court for the District of South Carolina issued a decision that completely contradicts the D.C. Court. The South Carolina District Court ruled that the Board simply does not have the statutory authority to require employers to post the notice. The Court reasoned that the Board had “confuse[d] a ‘necessary rule with one

that is simply useful” in carrying out the provisions of the NLRA. The Court further found that “by promulgating a rule that proactively imposes an obligation on employers prior to the filing of a [unfair labour practice] charge or representation petition, in the absence of express statutory authority,” the Board had “contravened the statutory scheme established by Congress.”

The Board has stated it will appeal the decision.

The Notice Posting The notice poster includes a brief description of employees’ rights under the NLRA including their right to organise with other employees and bargain collectively with their employer.

It includes a brief description of the employer’s obligations under the NLRA including the employer’s inability to prohibit union talk or solicitation during non-work time, to take adverse employment actions based on an employee’s membership or support of a union, to threaten workplace closures in response to union activity, and to generally discourage activities protected under the NLRA. The notice poster also lays out a few ground rules for unions’ solicitation of employees. Finally, the poster explains how to file a charge based on any alleged violation of the NLRA. Under the rule, employers are required to obtain an exact copy of the notice poster (with size requirements) and stick it to the bulletin board where other workplace rights are posted, which may also include internet and intranet sites.

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d Contradictory Views mployee Rights By Brian M. Clifford The Board’s jurisdiction is very broad and covers the majority of non-government employers with a workplace in the U.S., including non-profits, employee-owned businesses, non-union businesses, and even businesses in “right to work” states. Those employers specifically excluded by statute or regulation include federal, state, and local governments; those who only employ agricultural labourers; and those subject to the Railway Labor Act (railroads and airlines). An employer’s workforce does not need to be organised under the NLRA for the Board to maintain jurisdiction over a particular employer.

The Board does not conduct audits on its own initiative. An employer’s failure to post would need to be brought to the Board’s attention in the form of an unfair labour practice charge on behalf of an employee, union, or other person. In most instances, the employer’s failure to post would likely result from the employer’s unawareness of the posting requirement.

A Board agent would likely request the employer to post the notice and no further action would be taken. On the other hand, the Board may consider an employer’s failure to post as being willful and knowing under the NLRA, which could result in fines, penalties, and injunctive relief.

What Employers Should Do Employers do not need to comply with the notice posting requirement on April 30, 2012. If the U.S. Court of Appeals for D.C. ultimately determines that the NLRB has not exceeded its authority, employers may have to post it at a later date. If there are still contradictory views at the appellate level, however, the U.S. Supreme Court will likely make the final decision.

“

An employer’s failure to post would need to be brought to the Board’s attention in the form of an unfair labour practice charge on behalf of an employee, union, or other person.

“

The Board

If you have any questions or would simply like a copy of the NLRB’s Notice Poster, please contact any member of Waller’s Labor and Employment team at +1 800 487 6380 or visit www.wallerlaw.com.

Brian Clifford is an attorney with Waller Lansden practicing in the area of labour and employment law.

Mr. Clifford represents employers in a wide range of industries against allegations involving harassment, discrimination, retaliation, wage and hour issues, and wrongful discharge. His experience includes counseling employers and defending lawsuits brought under state and federal law’s including the Fair Labor Standards Act, the Family and Medical Leave Act, Title VII of the Civil Rights Act of 1964, and the Employee Retirement Income Security Act. He has assisted universities, healthcare providers, packaging and shipping companies, hospitality companies and others regarding their labour and employment matters.

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U.S. Supreme Court Considers Constitutiona Challenges to Health Reform By James P. McElligott, Jr

“S

carcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question.”

--Alexis de Tocqueville, Democracy in America (1835).

In lawsuits brought by 26 state attorneys general, two private citizens, and the National Federation of Independent Business, the U.S. Supreme Court heard arguments in late March over three constitutional questions raised by President Obama’s Patient Protection and Affordable Care Act (PPACA): -Does the Commerce Clause of the Constitution authorise Congress to enact PPACA’s “individual mandate” — the requirement that individuals purchase health insurance?

- If the Court determines that the individual mandate exceeds Congress’ Commerce Clause authority, should all of PPACA be invalidated or may the individual mandate and related provisions be “severed” and the rest of PPACA kept in force?

- Does PPACA’s extension of Medicaid violate states’ Tenth Amendment rights by threatening states with loss of all Medicaid funding if they fail to expand the program?

The constitutionality of PPACA has been debated since the law was passed in March 2010. Early drafts of the legislation imposed a tax on individuals who failed to purchase health insurance, based on Congress’ broad authority under Article I, section 8 of the Constitution to “lay and collect taxes.” Because sufficient votes could not be obtained for this approach, Congress dropped the tax and enforced the individual mandate with a “penalty,” relying upon its authority to “regulate Commerce among the several states.”

Attorneys in the Congressional Research Service advised Congress before PPACA passage that the Commerce Clause was questionable constitutional authority for the individual mandate: “Whether such a requirement would be constitutional under the Commerce Clause is perhaps the most challenging question posed by such a proposal, as it is a novel issue whether Congress may use this clause to require an individual to purchase a good or a service.”

Even before PPACA became law, several states passed laws declaring the individual mandate unconstitutional and seeking to exempt their residents from it;

Is the Penalty for Violating the Individual Mandate Really a Tax? Congress deliberately chose not to structure the individual mandate penalty as a tax, even though that would have provided a solid constitutional method of enforcing the individual mandate. Lawyers for the Obama administration continue to argue that “the penalty is really a tax,” but to date all courts to consider the issue have rejected this argument. Based on the Supreme Court’s questions during oral argument, the Supreme Court appears unlikely to find that the PPACA penalty can be upheld as within Congress’ power to levy taxes.

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al Does the Commerce Clause Authorise Congress to Require Individuals to Buy Health Insurance?

Proponents argue that the individual mandate is essential to regulation of healthcare, that Congress can surely regulate healthcare, and that the decision to forego health insurance is an economic activity that impacts interstate commerce by shifting costs to others. Except for arguing that health care is “unique,” the Obama administration has been unable to give the Court a limiting principle for this potentially broad expansion of Congressional authority.

Opponents to the individual mandates argue that the non-purchase of insurance is not “commerce,” the mandate does not regulate commerce, and acceptance of the administration’s would permit Congress to “bootstrap” virtually any legislation as impacting commerce.

If the Individual Mandate Is Unconstitutional, Can It Be Severed from PPACA, or Is All of PPACA Void?

If the Supreme Court strikes down the individual mandate, the Court must decide where to draw the line between the parts of PPACA that must fall with the individual mandate, and the parts that can be severed and stand independently.

The administration has argued that the individual mandate is absolutely necessary for PPACA’s insurance market reforms to work as intended.

The federal government concedes that “guaranteed issue” and “community rating” portions of PPACA should be invalidated if the individual mandate is found unconstitutional, but argues that other portions of PPACA are unrelated to the individual mandate and should survive.

Opponents argue that Congress deliberately removed a severability clause from an early version of PPACA, that the individual mandate is the very heart of PPACA, and that PPACA’s complexity and sweeping reordering of health care mitigate

against picking the parts of PPACA that should survive. Better to strike down all of PPACA and let Congress rewrite the law, say the 26 states.

Does PPACA Violate the Constitution by Threatening Loss of Medicaid Funding for States that Fail to Expand Medicaid?

Many were surprised that the Supreme Court took up this question and devoted extensive time to argument on the issue.

Opponents argue that Congress abuses its spending power authority by threatening a cut off of all Medicaid funds in light of the size of the current Medicaid program and the great expansion of that program under PPACA. What are the Odds the Supreme Court will uphold PPACA? One week before the PPACA arguments, the conservative Supreme Court majority (Chief Justice Roberts, and Justices, Kennedy, Thomas, Alito, and Scalia) held that Congress exceeded its authority by authorising awards of damages against the states for violations of the Family Medical Leave Act. Justice Kennedy wrote the majority opinion, emphasising the importance of protecting “a State’s fiscal integrity from federal intrusion.”

The case indicates the Justices’ thinking on issues of federalism and congressional authority that underlie the constitutional challenges to PPACA. Based on their reaction to the oral arguments over PPACA and decisions in other cases, the liberal justices on the Court (Ginsberg, Breyer, Kagan, and Sotomeyor) have an expansive view of Congressional authority under Commerce Clause and will likely support the constitutionality of PPACA.

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It is a very close question, but this writer believes that the a majority of the Court (Chief Justice Roberts and Justices Scalia, Alito, Thomas and Kennedy) will find that Congress lacks authority to impose the individual mandate under the Commerce Clause.

Chief Justice Roberts and Justice Kennedy are seriously considering the administration’s argument that health care is “unique,” but ultimately this argument will fail to persuade them.

If the individual mandate is found to be unconstitutional, I believe the same five Justices will refuse to sever the individual mandate and will strike down all of PPACA. The majority will conclude that it is better to have Congress reconsider this legislation and pass a new act, than have the Supreme Court try to determine which parts of PPACA are unavoidably linked to the individual mandate.

If the majority invalidates all of PPACA, the Court will not have to decide whether PPACA violates the Constitution by coercing states to expand Medicaid.

Mr. McElligott handles employee benefits, executive compensation, and labor relations matters for employers and fiduciaries.

He is a Fellow of the College of Labor and Employment Attorneys, and is listed in Chambers USA, Best Lawyers in America, and SuperLawyers under both Employee Benefits and Labor and Employment.

He is a member of the Employee Benefits Committees of the ABA Sections of Labor and Employment Law and Taxation, a member of the US Chamber of Commerce Employee Benefits Committee, former President of the Federal Bar Association, Richmond Chapter, and former president of the Central Virginia Employee Benefits Council.

Mr. McElligott received his law degree, cum laude, from Harvard Law School.

James P. McElligott, Jr. can be contacted on +1 804 775 4329 or alternatively by emailing jmcelligott@mcguirewoods.com.

When Will the Supreme Court Resolve All This?

The Supreme Court will rule in June. Until then, all 50 states, employers, insurers, and health care providers must devote extensive time and resources to meet PPACA’s complex rules and deadlines, notwithstanding doubts as to whether the individual mandate – or PPACA itself – is constitutional.

We will have answers to these questions soon. In all likelihood, it will be yet another 5-4 decision.

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Snapshot – The Americas

USA Expect to see the explosion of Fair Labor Standards Act (FLSA) cases cause havoc across the United States. Under new regulations interpreting key provisions of the FLSA, Americans with Disabilities Act (ADA) and Family Medical Leave Act (FMLA) a wave of collective litigation has been focusing on issues such as state law wage and hour compliance, along with enforcement agencies more heavily regulating whether employers have properly included all items of compensation in the overtime rate calculations.

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Canada Recently courts have begun to place much less emphasis on the nature of the employee’s position when determining damages for wrongful dismissal. Historically, blue collar workers were awarded significantly lower severance packages than managerial employees, based on the difference in the character of the employment between these positions. The result of this change in stance has led to an increase in the damages awarded to non-managerial employees following termination without just cause.

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Liabilities of the Legal Representative

E

By Eunice Ku

very business established in China, foreign or domestic, is required to designate a legal representative, i.e. the responsible person who performs the duties and power on behalf of a company.

The legal representative is, by definition of his or her role, one of the most powerful people in a foreign-invested enterprise. Yet this power comes with heavy responsibility and, if a single individual in a foreign-invested enterprise is to be held accountable for company actions, that person is more likely than not the legal representative.

The people eligible to fill the role of legal representative vary by FIE type. In a wholly foreign-owned enterprise (WFOE), the chairman of the board of directors (or executive director in lieu of a board) or the general manager acts as the legal representative of the company. In a joint venture (JV), the legal representative can generally be either the chairman of the board of directors or the general manager.

However, in practice, local authorities may not accept a general manager concurrently serving as a legal representative, due to a conflict between the China’s Company Law and the JV Regulations.

The name of the legal representative is stated in the business license and articles of association of a company. Since the legal representative is the authorized signatory of the company, the legal representative’s signature should be filed with Administration of Industry and Commerce (AIC).

In light of the heavy responsibility given to an FIE’s legal representative, some will note that the legal representative is not required to reside in China or even place a toe on Chinese soil. Rather, the legal representative can (through written power of attorney) authorize someone in China to act in their place, including managing the legal representative’s chop.

A legal representative of one company cannot concurrently serve as the legal representative of another company under normal circumstances.

Where, under special circumstances, an individual needs to concurrently serve as the legal representatives of two companies, they can only do so where the two companies are affiliated, associated, or have an investment relationship, and approved by the government or registration department in charge.

Liabilities The legal representative has dual liabilities, those that apply to all senior positions and those that apply specifically to the legal representative. The former are discussed in the second article and the latter are discussed here.

The liabilities specific to a legal representative are spread across a variety of laws and regulations.

Three of the most important liabilities are those dictated under the Civil Code, those under Enterprise Bankruptcy Law and those outlining obligations to the AIC. Civil Code The legal representative represents a legal person in litigation. The legal representative may be subject to fines, detention, administrative sanctions, or criminal liability pursued under the General Principles of the Civil Law of the People’s Republic of China 1986 (“the Civil Code”) if the enterprise:

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1. Carries out illegal business activities beyond the scope of business approved and registered by the AIC or its local delegate;

1. Transfer property without consideration;

2. Conceals facts from the AIC or its local delegate or from the tax authorities;

3. Provide property guaranty to unsecured debts;

3. Engages in fraud;

2. Trade at an obviously unreasonable price;

4. Pay off debts that are not yet due; 5. Abandon claims;

4. Extracts funds or conceals assets for the purpose of evading debts;

6. Debtor does not have enough assets to pay off debts but still chooses to repay certain creditors;

5. Fails to apply immediately for the registration and public announcement of a change or of termination, causing an interested party to sustain substantial loss; or

7. Conceal or transfer property to avoid repayment of debts; or

6. Engages in other activities prohibited by law, causing damage to State interests or common public interests.

Liabilities to the AIC

Under the Civil Code, the legal representative is not required to have personally engaged in, or have actual knowledge of, the above acts. Accordingly, it is possible that the legal representative may be sanctioned in the event the enterprise undertakes any of the above acts, notwithstanding that the legal representative is not personally at fault.

The People’s Court may also order the detention of the legal representative for a period of no more than 15 days. Under Chinese law, detention for this duration is considered to be a civil or administrative penalty rather than a criminal punishment.

Liabilities under Bankruptcy Law According to the 2007 Enterprise Bankruptcy Law, the legal representative of the debtor and the person who is directly responsible will be liable for compensation where an enterprise debtor commits the following acts, thereby undermining the interests of its creditor:

8. Fabricate debts or acknowledge non-existent debts.

The Regulations of the PRC Concerning the Administration of the Registration of Enterprises with the Status of Legal Persons 1988 (“Registration Regulations�) expand slightly on the liabilities listed above.

Namely, an enterprise may be punished by the AIC by issuing a warning, imposing a fine, confiscating illegal income, ordering the suspension of business for rectification and confiscating or revoking its business license when the enterprise: 1. Conceals facts or practices fraud during registration or commences business without approval and registration; 2. Amends any of the main items of registration without authorization or engages in business activities beyond its approved and registered scope of business; 3. Fails to cancel its registration in accordance with regulations or to submit the annual inspection report and carry out annual inspection procedures; 4. Forges, alters, rents out, lends, assigns, sells or duplicates without authorization its business license of an enterprise legal person or copy thereof;

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5. Gives away, diverts or conceals its property in order to evade its liabilities; 6. Engages in illegal business activities.

Where failures in the above lead to the revocation of the enterprise’s business license, the legal representative will not be permitted to serve as a legal representative within three years of the revocation date of the business license (except where they were unable to normally carry out their functions and powers during the annual inspection period).

Qualification to be a Legal Representative An individual cannot serve as a legal representative if he/she: 1. Lacks capacity for civil conduct or has limited capacity for civil conduct; 2. Is undergoing criminal punishment or a criminal coercive measure is being enforced against him/her; 3. Is being wanted by public security organs or state security authorities; 4. Has been: a. Sentenced to criminal punishment for embezzlement, bribery or financial fraud or for disrupting the order of the socialist market economy, and not more than five years have elapsed since the expiration of the enforcement period; or

5. Served as the legal representative, director or manager personally responsible for the bankruptcy liquidation of an enterprise due to mismanagement, where not more than three years have elapsed since the date of completion of the bankruptcy liquidation; 6. Served as the legal representative of an enterprise that had its business license revoked for violating the law, for which he/she bears personal liability and not more than three years have elapsed since the date of revocation of the business license; 7. Is burdened with relatively large amounts of personal debts past due but have not been settled; or 8. Under any other scribed by law and

circumstances prethe state council.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India, Singapore, and Vietnam.

Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 180 business advisory and tax professionals.

For professional advice on doing business in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.

b. Has been sentenced to criminal punishment for another crime, and not more than three years have elapsed since the expiration of the enforcement period; or c. Has been deprived of political rights for committing a crime, and not more than five years have elapsed since the expiration of the enforcement period;

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Indian Employment Law: A Case for Reform

By Justin Bharucha & Abhira Gonge

I

ndian employment law has been identified as a significant constraint on the growth of the Indian manufacturing sector. The need for reform is emphasised in the present global and domestic economic climate.

The history of Indian employment law dates back to pre-independence India when employee welfare was deliberately emphasised at the cost of manufacturing efficiency. That inherent bias continues to date and has been underscored by an increasingly complex set of Central (Federal) as well as State legislations which operate in conjunction, and occasionally in conflict, with each other.

The Indian economy is comprised of the organised sector as well as the unorganised sector with the unorganised sector having by far a greater number of employees. This is paradoxical given that Indian employment law focuses on the organised sector where there are lesser employees who are better protected, in some cases at the cost of business efficiency. Illustratively, the organised sector is governed by almost 50 Central and State statutes relating to employment law whereas the legislature is only now beginning to formulate policy to address the unorganised sector.

Dealing first with the organised sector, the principal issues arise given the numerous legislations which operate. Illustratively, Indian employment law operates to protect employees who qualify as ‘workmen’ (defined under various enactments including in the main, the Industrial Disputes Act, 1947). Employees satisfying the statutory definition of a ‘workman’ are afforded protection and benefits under various statutes. However, different statutes define this concept differently as a consequence of which an employee entitled to a benefit under one statute may not always be entitled to benefits under another.

A significant issue employer’s face is with respect to ‘retrenchment’ and ‘lay off ’. The Industrial Disputes Act, 1947 includes a mechanism which allows for this but the process is onerous and injunctions against the employer are relatively easy to obtain. The result can be increased costs on an employer who, given business realities, has little option but to restructure and re-organise his business, in any event.

Added to this is the fact that employment law is a fairly sensitive issue in India and, until recently, there has been a palpable lack of political will to initiate reform. Most statutes are more than 50 years old and continue to apply even today with minimal amendments. Illustratively, the Factories Act, 1948, a statute which applies across India, was last amended in 1987.

Additionally, the multiple licences and registrations which an employer must obtain are not in sync with today’s globalised economy and the need for expeditious and efficient regulations.

Over the last 3-4 years there has been some progress on reform. Several committees have been considering extant employment laws in consultation with stakeholders (including industry associations and trade unions). Although much of this is still being discussed in terms of recommendations and prospective policies, there seems to be broad consensus that:

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1. Employees are entitled to and must continue to be protected. However, this protection should not impede business or the efficient allocation of capital. Nor should employees be protected to the extent that the law effectively precludes disciplinary action where it is warranted. For example, lay off and retrenchment of employees has always been a significant problem in India. There is general agreement that employees must receive due notice and compensation and that lay off and retrenchment must not be discriminatory or punitive but, the present regime which makes lay off and retrenchment very difficult to implement and occasionally also hampers genuine business restructuring must be rationalised in context of today’s imperatives; and 2. This process must be effected in stages, the first being harmonising the various statutes which operate. As a next step policy makers indicate that they would like to move to a single window system for obtaining licences and registrations and, ultimately, work towards a single National Labour Code.

While all this remains to be implemented the fact that the issues are being actively considered and consensus being sought is a significant step forward.

For completeness, employees in the organised sector who are not statutorily defined ‘workmen’ are governed by their respective employment contract and the general law of contract applies. In practice therefore employers may find it easier to retrench a number of managerial staff than dismissing a blue collared employee.

The unorganised sector is a significant contributor to the Indian economy and there are efforts being made to consider how workers in the unorganised sector should be protected. This has relevance even to the organised sector given the inherent linkages.

Illustratively, in the case of support services, supply chains, and distribution networks.

In sum, at present and for the foreseeable future the Indian employment law remains an intimidating challenge for any employer. The importance of the HR function cannot be over emphasised as far as concerns managing employee relationships and preventing a formal dispute. Any M&A transaction as well as any business restructuring must necessarily carefully consider employees and how they must be approached so as to prevent the transactions being stalled.

Meanwhile, the reform process continues and over the next few years we hope to see a legislative framework more in tune with today’s economy.

Bharucha & Partners brings to you a blend of rich experience, creativity and the energy of youth. Each of the partners has a proven track record of handling complex commercial transactions or disputes. Each associate has been groomed or selected as sharing these qualities and vision of the partners.

With five partners and thirty associates, we work across practice areas, and count leading international and Indian corporate houses, banks, financial institutions and funds among our clients.

Justin Bharucha can be contacted on +91 22 6132 3900 or via email at justin.bharucha@bharucha.in. While Abhira Gonge can be contacted on the same number, or alternatively by emailing abhira.gonge@bharucha.in.

Expert Guide : Labour & Employment Law - 53

Snapshot – Asia

India A bilateral agreement has been made with the Gulf Cooperation Council (GCC) in a bid to curb exploitation of Indian labour in the Gulf region and ensure a decent working environment for its diaspora. An estimated five million Indians are employed on contractual temporary visas abroad, mostly in Gulf countries and Malaysia, but they often do not have protection of labour laws in the host countries and are especially vulnerable to economic downturns and exploitation.

54 - Expert Guide : Labour & Employment Law

Hong Kong In January 2012, proposed amendments to the Employment Ordinance were submitted to the Legislative Council. This is a move that will make compulsory order for reinstatement or re-engagement of an employee who has been dismissed unreasonably and unlawfully, and to require the employer to pay a further sum to the employee for failing to comply with such an order. The remedies for unreasonable or unlawful dismissals have been criticised as lacking in many situation.

The likely practical effect of this amendment, if adopted, will be to increase the statutory penalties.

Expert Guide : Labour & Employment Law - 55

Expert Direct

UK Employment Lawyers Association (ELA) Richard Linskell +44 (0) 20 7427 1076 Richard.linskell@speechlys.com http://www.elaweb.org.uk/

UK Speechly Bircham LLP Andrew Howard +44 (0) 20 7427 6601 Andrew.howard@speechlys.com Adam Partington +44 (0) 20 7427 6777 adam.partington@speechlys.com http://www.speechlys.com/

Spain Sagardoy Abogados I単igo Sagardoy +34 91 542 90 40 is@sagardoy.com Carlota Riquelme +34 91 542 90 40 crb@sagardoy.com http://www.sagardoy.com/

tory - Europe Netherlands IBA Employment and Indutrial Relations Committee Els de Wind +31 (0) 20 6789 242 wind@vandoorne.com http://www.ibanet.org

Czech Republic Allen & Overy Michal Dusek  +420 222 107 159 Michal.dusek@allenovery.com http://www.allenovery.com/

Switzerland Niederer Kraft & Frey Ltd Adrian Kammerer adrian.kammerer@nkf.ch Michaela Zehnder michaela.zehnder@nkf.ch Laurence Uttinger laurence.uttinger@nkf.ch Allegra Sosso allegra.sosso@nkf.ch +41 (0) 58 800 8000 http://www.nkf.ch/en/

The Americas USA Jones Day Jessica Kastin, Esq +1 212 326 3923 jkastin@JonesDay.com http://www.jonesday.com/

USA Thompson Coburn LLP Arthur Sternberg +1 312 580 2235 asternberg@thompsoncoburn.com http://www.thompsoncoburn.com/

USA Waller Lansden Brian Clifford +1 800 487 6380 www.wallerlaw.com

USA McGuirewoods James P. McElligott, Jr +1 804 775 4329 jmcelligott@mcguirewoods.com http://www.mcguirewoods.com/

Asia China Dezan Shira & Associates Eunice Ku info@dezshira.com www.dezshira.com

India Bharucha & Partners Justin Bharucha justin.bharucha@bharucha.in Abhira Gonge abhira.gonge@bharucha.in +91 22 6132 3900 http://www.bharucha.in/

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