Happy New Year! On December 29, Governor Cuomo signed the bill eliminating the requirement under the Wage Theft Prevention Act that employers in New York provide annual wage notices to their employees. Although the bill currently provides that it will go into effect 60 days after it is signed (which would mean that it would take effect after the February 1 deadline to provide the wage notices for 2015), the Governor's approval memo accompanying the bill specifically notes that an agreed-upon chapter amendment will "accelerate the effective date of the notification rule changes in section 1 of the bill to remove the notice requirement on employers for the 2015 calendar year."
We will provide an update once the expected chapter amendment is enacted in January.
Effective December 22, 2014, employers in New York must grant leave to employees who also serve as volunteer emergency responders during times when the Governor has declared a state of emergency. Employees eligible for such leave include volunteer firefighters and volunteer ambulance service personnel who have given their employer prior written documentation regarding their volunteer status or whose duties as a volunteer firefighter or member of a volunteer ambulance service are related to the declared emergency. In general, the leave may be unpaid, but the employee may choose to use any form of paid leave to which he or she would be entitled under the employer's policies. The full text of the new law can be found here.
Following an employee’s return from such leave, an employer may request a notarized statement from the head of the volunteer fire department or volunteer ambulance service, certifying the period of time that the employee responded to an emergency.
An employer may be eligible for a waiver of the leave requirements if it can show that granting an employee leave would cause an undue hardship on the employer’s business. An undue hardship is defined as an accommodation requiring significant expense or difficulty, including a significant interference with the safe or efficient operation of the workplace or a violation of a bona fide seniority system. Factors to be considered in determining whether granting a leave constitutes an undue hardship include, but are not limited to:
the identifiable cost, including the costs of loss of productivity and of retaining or hiring employees or transferring employees from one facility to another, in relation to the size and operating cost of the employer;
the number of individuals who will need the leave; and
for an employer with multiple facilities, the degree to which the geographic separateness or administrative fiscal relationship of the facilities will make granting the leave more difficult or expensive.
It is believed that the latest version of the bill was signed into law because, unlike prior versions of the bill, it creates an exception for employers who can show that complying with the leave requirements would impose an undue hardship.
Although there have not been many reported instances in which employers in New York have terminated employees for missing work to respond to emergencies, supporters of the new law claim that volunteer emergency responders are sometimes reluctant to request leave to respond to an emergency. This law is intended to allow volunteer emergency responders to request leave during a declared state of emergency without fear of repercussions at work.
The minimum wage for employees in New York will increase from $8.00 per hour to $8.75 per hour effective December 31, 2014. The minimum wage for New York employees will increase again to $9.00 per hour effective December 31, 2015.
Employers in New York should also keep in mind that the minimum salary under state law for employees to qualify for the executive and administrative exemptions will increase from $600.00 per week to $656.25 per week effective December 31, 2014. The minimum salary under state law to qualify for the executive and administrative exemptions will increase again to $675.00 effective December 31, 2015.
New York employers who have already begun preparing to send out annual wage notices to their employees under the Wage Theft Prevention Act can safely stop their preparations. The bill eliminating the annual wage notice requirement was delivered to the Governor yesterday and it is expected that the Governor will sign it. The bill, as currently drafted, provides that the legislation will go into effect 60 days after it is signed into law, which would mean that it would take effect after the February 1 deadline to provide the wage notices for 2015. However, Bond's Government Relations lawyers brought this concern to the attention of the Governor's office in early December, while the Governor's office and the Legislature were discussing potential chapter amendments to the bill, and it is our understanding that one of the agreed-upon chapter amendments that will be enacted early in the next legislative session will eliminate the annual wage notice requirement immediately. So, we expect that employers will not have to issue the notices in 2015.
We will provide an update as soon as the Governor signs the bill, and another update once the expected chapter amendments are enacted in January. This is certainly great news for employers in New York, who will no longer have to engage in the costly and time-consuming process of issuing wage notices to all employees between January 1 and February 1 of each year.
Nearly six months ago, we reported that the New York Legislature passed a bill eliminating the requirement under the Wage Theft Prevention Act that employers provide an annual wage notice to their employees between January 1 and February 1. We monitored the bill regularly, hoping that we would be able to report that the Governor had signed the bill and that employers would be relieved of this onerous requirement in 2015. Unfortunately, the bill has not yet been delivered to the Governor, so at least as of now, the annual wage notice requirement remains in effect.
Based on the information we have been able to obtain, it appears that the Governor's office and the Legislature are currently discussing potential revisions to the bill that are unrelated to the elimination of the annual wage notice requirement. Aside from the elimination of the annual wage notice requirement, the bill that was passed on June 19 also increased the penalties for an employer’s failure to provide a wage notice upon hiring a new employee and for an employer’s failure to provide appropriate wage statements to employees, imposed significant consequences on employers who are found to be repeat offenders, and added provisions to the Limited Liability Company Law and the Construction Industry Fair Play Act. It is our understanding that amendments to some of those other provisions are being contemplated.
It is still possible that the bill will be signed by the Governor before the end of the legislative term. However, if the legislation goes into effect 60 days after it is signed into law (which is how the bill is currently drafted), it is already too late for the law to go into effect in time to relieve employers of the obligation to distribute the annual notice by February 1, 2015. Our firm has brought this issue to the attention of the Governor's office.
At this point, employers in New York should prepare to send the annual wage notice to their employees between January 1 and February 1, 2015. If the Legislature and the Governor give a nice holiday gift to New York employers by finding a way to eliminate this requirement for 2015, we will certainly let you know.
On July 5, 2014, Governor Cuomo signed the Compassionate Care Act, making New York the twenty-third state to legalize medical marijuana. This new law creates a medical marijuana program for individuals suffering from certain severe, debilitating, or life-threatening conditions (e.g., cancer, ALS, Parkinson’s disease, epilepsy, etc.). The goal of the program is to ensure that medical marijuana is available for certified patients with “serious conditions” and is administered in a manner that protects the public health and safety. To that end, the law will be regulated by the New York State Department of Health, which will certify physicians to administer the drug, register organizations to provide the drug, issue identification cards to qualifying individuals, establish the list of “serious conditions,” and regulate the price of the drug. This program is expected to be up and running within the next 18 months. In the meantime, employers should become familiar with the ways in which this law may impact the workplace.
Notably, the law creates certain protections for employees who legally use medical marijuana. In this regard, employers are prohibited from taking disciplinary action against employees because of their lawful use of the drug. In addition, employees lawfully using medical marijuana are deemed to have a “disability” under the New York Human Rights Law. As a result, employers who discipline or terminate an employee for lawfully using medical marijuana may open themselves up to a disability discrimination claim. Furthermore, employers will be required to consider making workplace accommodations for individuals who utilize medical marijuana.
While this aspect of the law will likely present new challenges for employers, there are certain things employers should be mindful of that will assist them in managing these situations:
The law does not prevent employers from enforcing policies and procedures prohibiting employees from performing their job duties while impaired by a controlled substance. Accordingly, employers can lawfully prohibit all employees, including those that utilize medical marijuana, from working while impaired. As a practical matter, an employer who is on notice that an employee is certified to use medical marijuana may find it helpful to request information from the employee’s doctor to determine if and to what extent the employee may be impaired in the performance of his/her job duties. The employer may need to consider whether accommodations can be provided to allow the employee to work unimpaired (such as modifying the employee’s hours of work based on his/her medical use regime).
The law does not require employers to allow employees to utilize or carry medical marijuana if it would violate federal law or put their business in jeopardy of losing a federal contract or federal funding.
An individual must obtain a registration identification card and must carry the registration card whenever the individual has marijuana in his or her possession. This registration card will make it easier for employers to verify whether employees are lawfully in possession of marijuana in the workplace. If an employee has marijuana in his or her possession and is not able to produce the registration card upon demand, the employee is not lawfully utilizing the drug and is not entitled to the employment protections detailed above.
In addition to a registration card, an individual must also have a valid prescription from a certified physician in order to lawfully use medical marijuana. Employers should be aware of this in the event an individual tests positive for marijuana use. That is, a positive result for marijuana may not necessarily be a test result that justifies adverse employment action.
Certified individuals are strictly prohibited from smoking medical marijuana. Therefore, if an employee smokes marijuana in the workplace or if the employer reasonably concludes based on other evidence that the employee is smoking marijuana recreationally (e.g., smelling of marijuana smoke), the employee will be outside the scope of employment protection.
Certified individuals are prohibited from consuming marijuana (in any form) in a public place. Public place is not currently defined; however, the Commissioner of Health was granted the authority to issue regulations defining “public place.” If the Commissioner defines “public place” to include the workplace, employers will not be required to accommodate employees by allowing them to consume the drug in the workplace (and, of course, if ingestion at work would result in impairment, this would not be required in any event).
Any final guidance to employers must await the regulations issued by the Commissioner of Health. However, it is not too early for employers to begin to consider how this new law will affect their workplaces. The most obvious change that will likely be necessary is to misconduct policies that address the use of drugs. Employers will need to ensure that their policies appropriately carve out an exception for (or otherwise do not subject to discipline) lawful medical use of marijuana.
On July 22, 2014, Governor Cuomo signed a bill that amends the New York Human Rights Law by adding a new Section 296-c entitled, “Unlawful discriminatory practices relating to interns.” The amendment prohibits employers from discriminating against unpaid interns and prospective interns on the basis of age, race, creed, color, national origin, sexual orientation, military status, sex, disability, predisposing genetic characteristics, marital status, or domestic violence victim status, with respect to hiring, discharge, and other terms and conditions of employment. The amendment further prohibits employers from retaliating against unpaid interns who oppose practices forbidden under the Human Rights Law or who file a complaint, testify, or assist in a proceeding brought under the Human Rights Law. The amendment also makes it unlawful for employers to compel an intern who is pregnant to take a leave of absence, unless the pregnancy prevents the intern from performing the functions of the internship in a reasonable manner. The amendment also prohibits employers from subjecting interns to sexual harassment or any other type of harassment based on a protected category. This legislation was introduced following a 2013 case in which the United States District Court for the Southern District of New York dismissed a sexual harassment claim asserted by an unpaid intern who alleged that her boss had groped her and tried to kiss her. In that decision, the Court was bound by the language of the statute that existed at that time and the court decisions interpreting that language, which provided that the Human Rights Law only applied to paid employees and did not apply to unpaid interns. The purpose of the legislation is to give unpaid interns the same right to be free from workplace discrimination and harassment as paid employees. Employers who have unpaid interns or expect to have unpaid interns in the future should consider revising their anti-discrimination and anti-harassment policies to explicitly provide that discrimination and harassment against interns will not be tolerated, and that complaints made by interns regarding alleged unlawful harassment will be investigated in the same manner as complaints made by employees. In addition, as we noted in a 2010 blog post, employers should also make sure that unpaid interns truly qualify as unpaid interns, and would not be considered "employees" who are entitled to the minimum wage and overtime protections of the Fair Labor Standards Act and New York wage and hour laws.
Under a bill passed by the New York Legislature, employers in New York will not have to issue annual wage notices to employees in 2015 and beyond. On June 19, 2014, a bill was passed in both the New York Assembly and Senate that eliminates the requirement contained in the Wage Theft Prevention Act that employers provide a wage notice to all employees by February 1 of each year. This is certainly a welcome development for employers in New York who found the annual wage notice requirement to be extremely burdensome and costly. The bill also increases the penalties for an employer's failure to provide a wage notice upon hiring a new employee and for an employer's failure to provide appropriate wage statements to employees, and imposes significant consequences on employers who are found to be repeat offenders. If Governor Cuomo signs the bill, the legislation will take effect 60 days after it is signed.
The bill does not change the requirement that employers provide a wage notice upon hiring a new employee. The Department of Labor has issued templates for wage notices that can be used by employers for this purpose. The bill increases the damages that can be recovered for an employer's failure to provide the initial wage notice within ten business days of an employee's first day of employment to $50.00 per work day that the violation occurred up to a maximum of $5,000.00 (up from $50.00 per work week up a maximum of $2,500.00). The bill also increases the damages that can be recovered for an employer's failure to provide appropriate wage statements to employees to $250.00 per work day that the violation occurred up to a maximum of $5,000.00 (up from $100.00 per work week up to a maximum of $2,500.00). An employer who is faced with a claim that it failed to provide the required wage notice or wage statement can still avoid liability by establishing that it made complete and timely payment of all wages due to the employee who was not provided the wage notice or wage statement.
If an order to comply has been issued to an employer who has previously been found to have violated the wage payment laws or to an employer whose violation is found to be willful or egregious, the employer will be required to report certain data regarding the wages paid to employees and the hours worked by employees (without employee identifying information), which the Department of Labor will publish on its web site. Employers who are found to have committed a wage payment violation for the second time in a six-year period could be liable for a maximum civil penalty of $20,000, which is double the maximum civil penalty that can be imposed for a first violation in a six-year period.
The bill also provides that an employer similar in operation or ownership to a prior employer who has been found to have violated the wage payment laws will be liable for the prior employer's violations. This provision prevents an owner (or owners) of a business entity from avoiding liability by dissolving the business entity and creating a new one that has essentially the same business purpose.
The bill adds a provision to the Limited Liability Company Law providing that the ten members of a limited liability company ("LLC") with the largest percentage ownership will be personally liable for all wages and salaries due to employees of the LLC. This new provision of the Limited Liability Company Law is similar to Section 630 of the Business Corporation Law, which provides that the ten largest shareholders of a corporation are personally liable for all wages and salaries due to employees of the corporation.
The bill also adds a provision to the Construction Industry Fair Play Act, requiring construction contractors and subcontractors who have been found to be in violation of the wage payment laws to notify all of its employees regarding the nature of the violations. The notification must be made by an attachment to the pay checks of all employees at all work sites.
On the whole, this legislation (if it is signed by the Governor) will be a positive development for employers in New York, who will no longer have to engage in the costly and time-consuming process of issuing wage notices to all employees between January 1 and February 1 of each year.
New York has enacted new legislation, which will have a significant impact on the state’s commercial transportation industry. The legislation was initially made effective on March 11, 2014, but was subsequently amended to incorporate some “technical corrections” and to include a new, later effective date of April 10, 2014. Known as the “Commercial Goods Transportation Industry Fair Play Act” (the “Act”), this new law is intended to curtail what New York government officials view as the “misclassification” of workers – as independent contractors, rather than employees – in the transportation industry. As summarized below, the legislation will not only significantly restrict the use of such independent contractors, but will also impose other new requirements applicable to New York businesses in the commercial goods transportation industry.
Why is New York Taking This Action?
In addition to the Act, New York previously enacted similar legislation in the construction industry, and, more generally, has established a multi-agency “task force” designed to curb the purported misclassification of workers in New York. Through these efforts, New York government officials are seeking to recoup “lost” revenue, e.g., employment-based tax withholdings not captured where there is a non-employment relationship between the business and individual service provider. In contrast, where there is an employer-employee relationship – now presumed to be the case for commercial drivers and businesses covered by the Act – there is an affirmative obligation to withhold and pay these taxes to the state.
The Act is therefore another step in the state’s effort to “crack down” on the use of independent contractors by New York businesses. It should also be noted by management that organized labor, particularly the Teamsters union, has been strongly supportive of this legislation. It can therefore be reasonably expected that the Teamsters and other unions will utilize this legislation as an aid to organizing workers in the transportation industry.
Presumption of Employment Status for Covered Commercial Drivers
The centerpiece of the new legislation is the establishment of a presumed employment relationship for certain drivers who provide “commercial goods transportation services for a commercial goods transportation contractor.” (These underlined terms are explained below.)
In other words, covered commercial drivers who provide these services are presumed to be employees under the law. It is then left to the respective business receiving such services to “rebut” this presumption by proving the driver in question is a bona-fide “independent contractor” or constitutes a “separate business entity.” As explained below, businesses seeking to disclaim an employment relationship with covered drivers must satisfy specific, multi-factor tests under either prong.
Businesses failing to rebut the presumption of employment status through these tests will face significant penalties. Additionally, the misclassification of workers can raise other significant legal issues, such as workers’ compensation insurance coverage failures, unemployment insurance contribution shortfalls, and improper income tax withholding and reporting.
The Act applies to all “commercial goods transportation contractors.” This term is broadly defined to include:
[A]ny sole proprietor, partnership, firm, corporation, limited liability company, association or other legal entity that compensates a driver who possesses a state-issued driver’s license, transports goods in the state of New York, and operates a commercial motor vehicle as defined in subdivision four-a section two of the transportation law.
The term “commercial goods transportation services” is defined as “the transportation of goods for compensation by a driver who possesses a state-issued driver’s license, transports goods in the state of New York, and operates a commercial motor vehicle as defined in subdivision four-a section two of the transportation law.” In turn, the referenced section of New York’s transportation law defines a “commercial motor vehicle” as including a “motor vehicle used on a highway in intrastate, interstate or international commerce [that] has a gross vehicle weight rating or gross combination weight of ten thousand one pounds or more, whichever is greater.”
Rebutting the Presumption of Employment Status
A covered business can rebut the presumption of employment status in one of two ways.
First, the business can show the driver is a bona-fide “independent contractor.” To do so, all of the following criteria must be met under the Act’s so-called “A-B-C” test:
A. the individual is free from control and direction in performing the job, both under his or her contract and in fact;
B. the service must be performed outside the usual course of business for which the service is performed; and
C. the individual is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.
Second, the business can show the driver is a “separate business entity.” To establish this alternative defense, the business must specifically show that each and every part of a detailed, eleven-factor test is met.
Significantly, one of the “technical corrections” to the Act made explicit that even if one of the above tests is otherwise met, a person performing transportation services will be presumed to be an employee if his/her services are not reported on an IRS Form 1099.
What are the Penalties for Non-Compliance?
The Act imposes new, significant penalties for businesses failing to properly treat covered drivers as employees.
Violations deemed to be “willful” are punishable by substantial civil and criminal penalties. Willful violations are defined as violations where a party “knew or should have known that his or her conduct was prohibited.” Civil remedies include a penalty of $2,500 per misclassified worker for a first violation, and a penalty of $5,000 per misclassified worker for subsequent violations. Criminal penalties include up to 30 days imprisonment or a fine not to exceed $25,000 for the first violation, and up to 60 days imprisonment or a fine not to exceed $50,000 for subsequent violations.
These civil and criminal penalties may also be imposed under certain circumstances against corporate officers and against shareholders who own or control at least ten percent of the corporation’s outstanding stock. Further, non-compliant businesses, as well as certain corporate officers and shareholders, may be “debarred” from public works contracts in New York for a period of up to one year for a first violation and up to five years in the event of subsequent violations.
Agency Information Sharing
In the event of a violation, the Act additionally mandates prompt information sharing among the New York State Department of Labor (“NYSDOL”), Workers’ Compensation Board, and Department of Taxation and Finance. Thus, a misclassification finding by one state agency will in all likelihood raise other significant legal issues before other state agencies.
Other Requirements
The Act imposes other additional requirements for New York businesses in the transportation industry, some of which appear to apply regardless of whether the respective business actually uses independent contractors.
For example, the Act expressly prohibits employers and their agents from retaliating “through discharge or in any other manner against any person in the terms of conditions of his or her employment” for:
making, or threatening to make, a complaint to an employer, co-worker or to a public body that rights guaranteed under [the Act] have been violated;
causing to be instituted any proceeding under or related to [the Act]; or
providing information to, or testifying before, any public body conducting an investigation, hearing or inquiry into any such violation of a law, rule or regulation by such employer.
Violations of this anti-retaliation provision are subject to the Act’s civil penalty scheme discussed above and to a private cause of action.
Additionally, the Act requires all commercial goods transportation contractors to post a notice describing:
the responsibility of independent contractors to pay taxes;
the rights of employees to workers’ compensation, unemployment benefits, minimum wage, overtime and other protections; and
the protections against retaliation.
According to the Act, this notice must also contain contact information for individuals to file complaints or inquire with the Commissioner of the NYSDOL about employment classification status, and must be provided in English, Spanish or other languages required by the Commissioner. It is expected that the NYSDOL will soon publish a model notice on its website. Businesses failing to comply with this posting requirement will face monetary penalties of up to $1,500 for a first violation and up to $5,000 for subsequent violations.
Conclusion
New York has significantly raised the stakes for covered businesses in the transportation industry and their use of independent contractors. These businesses should carefully consider the potential implications of such use, as well as the other requirements imposed by the Act.
Although the Act permits covered businesses to rebut the new presumption of employment status under certain, limited circumstances, management should carefully consider whether the necessary factors can indeed be met in the event of a legal challenge. Given that this legislation is brand new, it remains to be seen how the NYSDOL and other state regulators will interpret and apply these new tests.
That said, one point is clear: New York state regulators will have their “sights set” on the classification of workers as independent contractors within the commercial transportation industry. Be prepared!
On February 7, 2014, the Appellate Division, Fourth Department, issued a significant decision regarding restrictive covenants. In Brown & Brown, Inc. v. Johnson, the plaintiffs terminated the defendant-employee and then sued her for violating non-competition and non-solicitation provisions in her employment agreement, which contained a provision stating that Florida law would govern. The Fourth Department considered several issues, including: (1) whether to enforce the Florida choice-of-law provision for the restrictive covenants; (2) whether employers can enforce restrictive covenants against employees who were involuntary terminated; and (3) whether the court must partially enforce an overbroad restrictive covenant where the agreement expressly provides for such partial enforcement.
First, the Fourth Department considered the issue of whether the Florida choice-of-law provision in the agreement was enforceable. The court noted that choice-of-law provisions are generally enforceable in New York as long as the chosen law: (1) bears a reasonable relationship to the parties or the transaction; and (2) is not “obnoxious” to New York public policy. The Fourth Department concluded that while Florida law met the first prong of this test, it failed the second prong. The court explained that under New York law, restrictive covenants are enforceable if they are no greater than necessary to protect a legitimate interest of the employer, are not unduly harsh or burdensome to the employee, and do not injure or harm the public. In contrast, Florida law does not permit courts to consider the hardship to the employee in determining whether to enforce a restrictive covenant. Based on this difference, the Fourth Department ruled that the choice-of-law provision in the employment agreement was unenforceable, and proceeded to apply New York law to the dispute. Significantly, the Fourth Department’s ruling did not depend on the specific facts of this case, so it is unlikely that the Fourth Department would enforce a Florida choice-of-law provision in any employer-employee restrictive covenants.
Second, the Fourth Department considered defendants’ argument that plaintiffs could not enforce the restrictive covenants because they terminated the defendant-employee. Defendants relied on a Court of Appeals decision which involved an agreement that employees would forfeit their benefits under pension and profit-sharing plans if they competed with their employer after the end of their employment. The Court of Appeals held that the employer could not enforce the forfeiture-for-competition clause because the employees were involuntarily terminated without cause. In Brown & Brown, the Fourth Department refused to apply the Court of Appeals decision to create a per se rule that an involuntary termination without cause always renders a restrictive covenant unenforceable.
Third, the Fourth Department ruled that the non-solicitation covenant was overbroad and unenforceable because it prohibited solicitation of any clients of plaintiffs’ New York offices, regardless of whether the employee developed a relationship with those clients during her employment. Plaintiffs argued that the court should partially enforce the covenant because plaintiffs only sought to prevent the defendant-employee from soliciting clients with whom she developed a relationship during her employment. The Fourth Department disagreed and explained that partial enforcement is not justified where the covenant is imposed in connection with hiring or continued enforcement or where the employer knew the covenant was overbroad. The court ruled that several factors weighed against partial enforcement in this case. Specifically, the employee received the covenant upon hire and did not receive any benefit for signing the agreement other than continued employment. In addition, the Fourth Department held that the employer was on notice that the covenant was overbroad based on existing case law. Plaintiffs argued that partial enforcement was required because the employment agreement expressly provided for partial enforcement in the event that a court found the restrictive covenant unenforceable. The Fourth Department disagreed and found that plaintiffs’ position would permit employers to use their superior bargaining position to impose unreasonable restrictive covenants without any real risk that courts would deem them unenforceable in their entirety.
In light of this decision, New York employers should review any choice-of-law provisions governing their restrictive covenants. If these provisions select Florida law or any other state laws that vary substantially from New York law, they may not be enforceable in the Fourth Department or other New York courts. Employers should also review the scope of their restrictive covenants to determine whether they are overbroad under New York law. Based on the reasoning set forth in the Brown & Brown decision, New York courts may sever any overbroad restrictive covenants in their entirety from agreements, even if there is a provision for partial enforcement.
The following article was published in Employment Law 360 on February 14, 2014.
The Alex Rodriguez (“A-Rod”) saga is playing out like a classic Greek tragedy. With hubris-laced legal soliloquies and a sports media dutifully taking on its role as the Chorus, all that appears to be missing is the blind soothsayer. But if justice is truly blind, then perhaps seeing the legal future for A-Rod merely requires referencing some ancient legal doctrines that are right before our eyes.
With a mix of metaphor, the world watched as A-Rod took his swings at Major League Baseball, the Players Union, the Yankees, and just about anyone else he could blame other than himself. As A-Rod now contemplates his next proverbial at-bat, the Yankees, in particular, possess a little-known legal weapon that we have not heard anyone talking about. It is a legal doctrine that could dramatically shift the playing field and require A-Rod to not only forfeit all future contractual monies, but also provide restitution to the Yankees for all compensation and benefits earned during the years of his disloyal acts. Enter Faithless Servant Doctrine.
The mighty A-Rod, in a pure legal sense, is a New York employee like any other. Every employee in New York owes a duty of loyalty to his/her employer. The breach of that duty carries with it harsh, even Draconian consequences, including the forfeiture of all compensation, even deferred compensation that was paid to the employee during the period of disloyalty. Consequently, A-Rod beware: The Faithless Servant Doctrine, with its massive equitable forfeitures, may be centuries old, but it has recently seen a marked resurgence in New York with stunning results.
In William Floyd Union Free School District v. Wright, a Long Island school district (which was represented by Bond, Schoeneck & King) used the Faithless Servant Doctrine to sue a former assistant superintendent and a former treasurer. Both defendants pleaded guilty to grand larceny, admitting that they used their positions as school district officials to embezzle. The school district sought to recover the compensation paid to the two employees during the period of their theft, plus any deferred compensation that would have been owed to the defendants in retirement.
New York law regarding disloyal or faithless performance of employment duties allows the principal to recover “from its unfaithful agent any commission paid,” and “an employer is entitled to the return of any compensation that was paid to the employee during the period of his disloyalty.” On the appeal of the William Floyd case, the Appellate Division affirmed the ordering of the full forfeiture of compensation paid to the employees during the time they were stealing from the school district. The Appellate Division also ordered that the school district was permanently relieved of its obligation to pay contractual retirement benefits. In language now cited in other cases, the Court held: “Where, as here, defendants engaged in repeated acts of disloyalty, complete and permanent forfeiture of compensation, deferred or otherwise, is warranted under the Faithless Servant Doctrine.” In addition to the benefits forfeiture and recovery of the stolen funds, the school district recovered more than $800,000 in previously paid compensation to one of the defendants.
The William Floyd decision has appeared to breathe a new vitality into the Faithless Servant Doctrine. Two such cases are of particular note. In Astra USA Inc. v. Bildman, the Massachusetts Supreme Court interpreted and applied New York law, holding that New York’s Faithless Servant Doctrine permitted an employer to recover compensation it had paid to a high level executive who had been the subject of numerous sexual harassment complaints by other employees. Under Astra, the doctrine can reach misconduct that does not involve theft or financial damages to the employer. In upholding a multi-million dollar complete forfeiture the court aptly stated: “For New York … the harshness of the remedy is precisely the point.”
Just a few weeks ago, in Morgan Stanley v. Skowron, a New York federal court ordered the defendant, a former portfolio manager, to forfeit $31,067,356.76. In Morgan Stanley, the defendant engaged in insider trading, which violated the plaintiff corporation’s Code of Conduct as well as federal securities laws. In applying the forfeiture, the Court noted that the Faithless Servant Doctrine applies when an employee has either “breached his/her duty of loyalty or has engaged in misconduct and unfaithfulness that substantially violates the contract of service such that it permeates the employee’s service in its most material and substantial part.”
Like the defendant in Morgan Stanley, A-Rod’s use of performance enhancing drugs – as found by an arbitrator with possible preclusive effect – substantially violated his contract of services in the “most material and substantial part.” Put another way, insider trading – the ultimate unfair advantage in the securities industry – is no different in a legal sense than the use of performance enhancing drugs – the ultimate unfair advantage in professional baseball. And the use of such drugs may not even be the sole extent of the disloyal conduct.
If and when A-Rod chooses to step up to the plate again, it will be interesting to see if the Yankees and/or Major League Baseball bring out their new “closer.”
On December 30, 2013, the New York State Department of Taxation and Finance issued a Technical Memorandum providing guidance on a new tax incentive for employers who employ students in New York and pay them the state minimum wage rate. This tax incentive coincides with the three-stage state minimum wage increase. The New York minimum wage rate increased to $8.00 per hour on December 31, 2013, and is scheduled to increase to $8.75 per hour on December 31, 2014, and $9.00 per hour on December 31, 2015.
The minimum wage reimbursement credit took effect on January 1, 2014, and will end on December 31, 2018. It allows eligible employers, or owners of eligible employers, to obtain a refundable tax credit equal to the total number of hours worked by certain students during the taxable year for which they are paid minimum wage, multiplied by the applicable tax credit rate for that year. The tax credit rate is $.75 for 2014, $1.31 for 2015, and $1.35 for 2016 through 2018. If during this time, the federal minimum wage is increased to more than 85% of New York’s minimum wage, the tax credit rates will be reduced to an amount equal to the difference between New York’s minimum wage and the federal minimum wage.
An eligible employer is a corporation, sole proprietorship, limited liability company, or a partnership that is subject to certain New York taxes (i.e., personal income tax, franchise tax, etc.). A student qualifies for the tax credit if the student is:
16-19 years old;
employed in New York State;
paid at the New York minimum wage rate during some part of the tax year; and
enrolled full-time or part-time in an eligible educational institution during the period he or she is paid the New York minimum wage rate.
The educational institution does not have to be located in New York State, but it must maintain a regular faculty and curriculum, and must have a regularly enrolled student body in attendance where its educational activities are regularly carried on. Examples of educational institutions include secondary schools, colleges, universities, and trade, technical, and vocational schools. Correspondence schools, on-the-job training courses, and schools only offering courses through the Internet do not qualify as educational institutions.
Employers must obtain documentation to verify that the individual is enrolled as a student at an eligible educational institution, and must make such documentation available to the Tax Department upon request. Examples of acceptable documentation include:
a student identification card;
a current or future course schedule issued by the school;
a letter from the school verifying the student’s current or future enrollment; or
working papers (a Student General Employment Certificate – AT-19).
Employers should familiarize themselves with this new tax incentive, as many may employ students who qualify for the credit. To the extent employers do employ such students, they should immediately verify the student’s status and obtain the appropriate documentation. It is important to note that employers are prohibited from discharging an employee and replacing that employee with an eligible student in order to qualify for the tax credit. Additionally, a student who is used as the basis for this tax credit may not be used by an employer as the basis for any other tax credit.
