Department of Labor Clarifies Stance on Still-Pending Overtime Rule

By James Pieper

In 2016, a dramatic overhaul of the rules for eligibility and payment of overtime under the Fair Labor Standards Act (FLSA) was on the verge of taking effect before being halted by an injunction issued by a federal judge.

With a new administration taking over the Department of Labor, the status of the overtime revisions has been uncertain.  Nor was it known whether the Department would defend its authority to revise the rules in the subject litigation.

In a brief filed on June 30, the Department’s new leadership finally provided some clarity.  The Department defended its legal authority to adopt a new rule (as had been challenged by the plaintiffs), but did not defend the actual changes proposed by the prior administration.

Accordingly, although the rule remains in legal and administrative limbo, it is clear that it will not take effect in the form proposed in 2016.  Should the courts conclude that the Department does have authority to set the earning threshold (under which overtime must be paid to non-exempt employees) by administrative rule, then the new Department leadership will adopt a threshold lower than the amount of $47,476 that was set prior to the injunction.

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The Defend Trade Secrets Act

Last summer, Congress enacted the Defend Trade Secrets Act (“DTSA”), which created a federal civil cause of action for misappropriation of trade secrets. Recently, various courts have started to interpret the DTSA, and determined that it does not preempt existing state law, but gives trade secret owners the option to enforce their claims and receive more consistent outcomes than they would in state court. Prior to the DTSA’s enactment, manufacturers and sellers had to bring trade secret misappropriation claims in state court, unless the parties could establish diversity jurisdiction or an independent federal cause of action.  Because state interpretations of the Uniform Trade Secrets Act vary in every state, consistent relief was not always possible.  For example, the definition of “trade secret” and the types of remedies differ across states. However, the DTSA applies nationwide and provides a uniform statute for trade secret owners to rely on in federal court.

The DTSA has important features that will impact trade secret owners.  Notably, it defines “misappropriation” and “trade secret”, which aids in consistent enforcement across state lines.  Additionally, it creates a civil seizure mechanism, which allows courts to order the seizure of property to prevent the propagation or dissemination of the trade secret, even before a formal finding of misappropriation is established and without notice to the alleged wrongdoer.  Last, a whistleblower provision provides immunity to employees from criminal or civil liability under federal or state laws for disclosing a trade secret to an attorney or government official for purposes of reporting or investigating a suspected violation of the law or filing a lawsuit made under seal.

Most controversial is the civil seizure provision, and courts are reluctant to permit seizures unless the plaintiff establishes necessity. Also controversial, federal courts are turning to state courts for guidance in interpreting the DTSA, thus, defeating its underlying purpose of providing uniformity. However, these issues are likely to be resolved over time. Since its enactment, it is estimated that less than seventy cases have been brought under the DTSA, but the law provides an important option for those pursuing trade secret claims.

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A Business Entity on the Rise: The Public Benefit Corporation

Until recently, many entrepreneurs were struggling to use their businesses to create a positive social change, mainly because traditional corporate laws require a corporation’s purpose to focus on maximizing shareholder value. However, the public benefit corporation is a newer business structure that is legally required to consider how its decisions will affect the general public, in addition to how its decisions will maximize shareholder profits. Thus, public benefit corporations can serve the best interests of society while creating value for stockholders.

Approximately thirty-two states recognize benefit corporations. In 2013, Delaware adopted legislation that recognizes the public benefit corporation as an entity and it is currently one of the most popular states for incorporation. Delaware corporation laws require a public benefit corporation to have the corporate purpose of operating in a responsible and sustainable manner. Further, the benefit corporation must identify one or more public benefit purposes. Last, Delaware benefit corporations must report biennially to shareholders about the corporation’s overall impact on the shareholders’ financial interests and on the interest of those identified in the public benefit corporate purpose.

In 2014, Nebraska joined the ranks of the other states that recognize benefit corporations as a legal entity. Nebraska benefit corporations have the purpose of creating general public benefits and may also have specific public benefit purposes, such as the purpose of promoting the arts and sciences. Additionally, the benefit corporation must prepare an annual report for the corporation’s shareholders that identifies the ways in which the benefit corporation pursued a general public benefit during the year and any circumstances that hindered the creation of a general or specific public benefit.

Ultimately, lawmakers hope public benefit corporations will create jobs, improve communities, and use innovative approaches to solve society’s most challenging problems.

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Department of Labor Withdraws 2016 Guidance on “Joint Employment”

By James Pieper

On June 7, 2017, new Secretary of Labor Alexander Acosta withdrew guidance provided under the prior administration by the Department of Labor’s Wage and Hour Division that had staked out a broader interpretation of when “joint employment” exists pursuant to the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

When two or more employers “jointly” employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when “joint employment” is found to exist, all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.

Under a traditional “common law” approach to employment, such “joint employment” would only exist if both employers are able to exercise “control” over the employee’s work.  The 2016 guidance sought to recognize “broader economic realities of the working relationship” and thus “cover some parties who might not qualify as [employees] under a strict application of traditional agency law principles.”

Accordingly, the guidance indicated that a number of scenarios that have not been historically considered “joint employment” – including, particularly, franchisee, staffing-agency and subcontractor relationships – might give rise to “joint employment” under the FLSA and MSPA, thus broadening the potential legal exposure for entities that had in the past not been considered joint employers.  The intent of the Department of Labor to implement such a broader interpretation is now withdrawn.

Although the action reduces some of the potential legal risk, particularly for franchisors and franchisees – who had actively sought the withdrawal of the guidance – the potential for “joint employment” remains a complex area requiring careful attention to potential penalties.

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Federal Judge Orders IRS to Refund Tax Preparers for PTIN Fees

In 2014, tax return preparers brought a federal class action lawsuit challenging the legality of fees charged by the IRS for PTINs (Preparer Tax Identification Number). Regulations promulgated in 2010 and 2011 imposed requirements on tax return preparers including obtaining a specific PTIN and paying a fee associated with obtaining such PTIN. Currently, the application and renewal fee for a PTIN is $50.00.

The preparers in the class action argued that the fees are unlawful since tax preparers receive no special benefits from the PTIN and secondly the fee is unreasonable in comparison to the costs the IRS incurs to issue the PTIN.

On June 1, 2017, Judge Royce C. Lamberth of the United States District Court for the District of Columbia held that the IRS may continue to require PTINs but granted summary judgment in favor of the tax preparers stating, in part, that the IRS may not charge fees for issuing PTINs. Following a review of applicable case law, the Court found that PTINs are not a “service or thing of value” provided by the IRS. The IRS will be enjoined from charging fees in the future and is required to refund fees charged for the PTINs to all members of the class.

The order granting summary judgment is not yet a final judgment. Such final judgment will indicate the amount owed to each member of the class and may be subject to appeal by the IRS.

For more information, including court documents and the opinion rendered by Judge Lamberth see http://ptinclassaction.com/

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IRS Issues Tax and Reporting Relief for Proposed Fiduciary Standard Consistent with Department of Labor Regulations

By Monte Schatz

There have been a significant series of regulatory announcements and rulings related to the fiduciary duty and its application to employee benefit plans.  The final fiduciary duty rule became effective on June 7, 2016, and has an applicability date of April 10, 2017. The President by Memorandum to the Secretary of Labor directed the Labor Department to examine the impact of the fiduciary duty rule.  On March 2nd the DOL published 82 FR 12319 seeking public comments about questions raised in the Presidential Memorandum.  The March 2nd notice also provided that a 60-day delay in implementation would be effective on the date of publication of a final rule

The Principal Transactions Exemptions and the accompanying Best Interest Contract provisions, included as part of the fiduciary duty rule, also have an applicability date of April 10, 2017, with a phased implementation period ending on January 1, 2018. The BIC Exemption effectively states that the fiduciary advisor must sign a “Best Interests Contract” (BIC) with the client, stipulating that the advisor will provide advice that is in the Best Interests of the client.   The Principal Transactions Exemption allows compensation for certain transactions by certain broker-dealers, insurance agents, and others that will act as investment advice fiduciaries that would otherwise violate prohibited transaction rules that trigger excise taxes and civil liability.

Most investment industry groups’ concerns regarding any non-compliance during a “gap period” of the financial fiduciary rule focused on Department of Labor and its potential civil liability enforcement provisions as outlined under ERISA.  Additional concerns were raised concerning Internal Revenue Service enforcement provisions found in Internal Revenue Code §4975 prohibited transaction rules that provides for the imposition of excise taxes for violations of that rule.

As a result of delays of the Fiduciary Standard rules, the Department of Labor published Field Assistance Bulletin (FAB) 2017-01.  FAB 2017-01 provides that, to the extent circumstances surrounding its decision on the proposed delay of the April 10 applicability date give rise to the need for other temporary relief, including retroactive prohibited transaction relief, the DOL will consider taking such additional steps as necessary with respect to the arrangements and transactions covered by the DOL temporary enforcement policy and any subsequent related DOL enforcement guidance.

In Announcement 2017–4 the IRS stated, Because the Code and ERISA contemplate consistency in the enforcement of the prohibited transaction rules by the IRS and the DOL, the Treasury Department and the IRS have determined that it is appropriate to adopt a temporary excise tax non-applicability policy that conforms with the DOL’s temporary enforcement policy described in FAB 2017-01. Accordingly, the IRS will not apply § 4975 and related reporting obligations with respect to any transaction or agreement to which the DOL’s temporary enforcement policy, or other subsequent related enforcement guidance, would apply.

SOURCES:

http://www.asppa.org/News/Article/ArticleID/8480

https://www.irs.gov/pub/irs-drop/a-17-04.pdf

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IRS Issues Final Regulations for Foreign Owned Single Member LLCs

The Internal Revenue Service (“IRS”) issued final regulations that will increase reporting requirements for certain foreign owned single member limited liability companies (“LLC”). When a single member LLC is formed, for federal tax purposes, it is a disregarded entity by default. This means that income, loss, and subsequent tax obligations will pass through the entity to the owner. The final regulations change the default rule when a LLC is wholly owned by a foreign person, requiring the LLC to be treated as a domestic corporation separate from its owner.

By having these LLCs treated as a domestic corporation, separate from its owner, the LLC must obtain an Employer Identification Number (EIN) and annually file an information return, Form 5472. The LLC must also maintain records of reportable transactions with the foreign owner or foreign related parties. Ultimately, the IRS believes that this will ensure that disregarded LLCs aren’t used by foreign owners to shield assets from the IRS.

Although this change is designed to prevent abusive practices, this has a practical impact for foreign owners of a domestic LLC, ultimately increasing administrative requirements. For further information, the IRS regulation can be found at the following address: https://www.irs.gov/irb/2016-21_IRB/ar19.html

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