Pay Ratio Disclosures are an Employee-Relations Opportunity … Really

Most companies are now devoting substantial resources and effort to ensuring compliance with the SEC’s new rules requiring disclosure of the ratio of the CEO’s and median employee’s respective annual total compensation. Because the disclosure is required for fiscal years beginning on or after January 1, 2017, calendar-year-end companies must include it in their upcoming proxy statements. As the number crunching and parsing of new SEC disclosure guidance (see Doug’s Notes here and here) begins to take shape, these companies will soon get a sense of the magnitude of their ratio and, therefore, of any concerns it may raise. Discussions are also taking place regarding the extent to which companies can, or should, provide supplemental proxy disclosure that adds explanatory context to the mandated ratio disclosures. In the course of all of that analysis, it would be a shame to overlook “silver-lining” opportunities to engaging in proactive, positive dialogue with the company’s various stakeholders. And the most important constituency at most companies is the employees. Pay ratio disclosures may be disconcerting to employees for a variety of reasons. Most obviously, while the CEO’s total compensation has long been public information, its stark numerical contrast to median employee compensation could be expected to generate negative emotional responses from some members of the workforce. Less obvious, but perhaps as disconcerting, may be the realization by half of your employees that they are compensated below the median. This realization could be further exacerbated by negative comparisons to peer company compensation medians and ratios, which will likewise now be public. Failure to proactively address these issues could result in a disgruntled subset of...

The SEC Nixes Contractual Waivers of Whistleblower Recoveries

In April 2015, the SEC announced in a first-of-its-kind enforcement action that certain KBR, Inc. confidentiality agreements violated the whistleblower protections of the Dodd-Frank Act by requiring employees and former employees to first notify the company of a potential violation before contacting the SEC. (See this Doug’s Note.) In the past two weeks, the staff went a step further by bringing enforcement actions against BlueLinx Holdings, Inc. and against Health Net, Inc. for their respective requirements that departing employees contractually waive their rights to future whistleblower monetary recoveries. What happened… The SEC found that both BlueLinx and Health Net entered into agreements with departing employees that violated Rule 21F-17(a) under the Securities Exchange Act, which provides that: “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement….” Several provisions in various BlueLinx agreements were called into question, including the following: “[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets….Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you (emphasis added).” and “Employee further...

The NLRB Continues to Monitor Social Media Policies

According to this EmployNews report, the National Labor Relations Board continues to interpret the National Labor Relations Act to prohibit social media policies that restrict employees’ ability to publically complain about their working conditions, even when those communications may be disparaging to their employer. Most recently, Chipotle Mexican Grill bore the consequences of the NLRB’s efforts. The Chipotle case… A Chipotle employee published a series of tweets complaining about the company’s inclement weather policy, the cost of Chipotle’s food and the lack of relationship between its expenses and employee wages, then topped it off by complimenting a competitor’s pricing policies. Chipotle apparently took a dim view of the posts and asked him to delete them. After he was subsequently fired due to disputes with a manager, the employee filed an unfair labor practice charge with the NLRB contending, among other things, that Chipotle’s social media policy violated his right to engage in protected concerted activity. The ALJ agreed, broadly interpreting Section 7 of the NLRA to protect the employee’s compliments about Chipotle’s competitor’s food and pricing as complaints about the terms and conditions of his employment. According to EmployNews, the ALJ “had no difficulty concluding that tweets aimed at customers constituted protected concerted activity, even though there was little evidence that other employees were involved in the exchanges.” Action steps… The NLRB’s efforts to protect social media communications by employees has been picking up steam for several years, dating back at least to 2012. Since that time, numerous NLRB actions, including the Chipotle case, have made it clear that polices containing broad restrictions on employee social media use or vague...

FASB Improves Employee Share-Based Payment Accounting

As part of an ongoing Simplification Initiative, the Financial Accounting Standards Board (the “Board”) recently issued an Update to Accounting Standards Codification (ASC) Topic 718, which deals with stock-based compensation.  The update is meant to reduce cost and complexity while maintaining or improving the usefulness of the information provided in financial statements.  The areas for simplification include the income tax consequences of stock compensation, the classification of stock-based awards as either equity or liability, and the classification on the statement of cash flow.  The changes are summarized below. 1.    Accounting for Income Taxes Generally, for any stock-based award, a positive or negative difference between a tax deduction and the compensation cost that is recognized for financial reporting purposes results in an excess tax benefit or a tax deficiency, respectively.  Currently, excess tax benefits are recognized as paid-in capital when the tax deduction reduces the taxes that are payable, while tax deficiencies either are used as an offset to accumulated excess tax benefits or are recognized in the income statement.  The Board decided that all excess tax benefits and tax deficiencies should be recognized as income tax benefit or expense in the income statement, and should be treated as discrete items in the reporting period in which they occur.  The recognition of a tax benefit is no longer delayed until the benefit is actually realized through a reduction to taxes payable. This change certainly simplifies the accounting rules as it effectively eliminates the need to account for additional paid-in capital (APIC) pools, but some expressed concern that this may increase volatility in reported income tax expenses and effective tax rates. ...

Traps for the Unwary: A Look at Employees and Benefits in M&A Transactions

Employees drive the success of a company.  In fact, in some industries (technology, for example) talent acquisition can be a primary motivation for a transaction.  From identifying the target’s key employees, to assessing the potential liabilities and obligations associated with the target’s entire workforce, to integration and retention, business combinations give rise to a variety of complex employment and benefit issues that should be carefully addressed by the parties. An initial and fundamental consideration is how to structure the transaction.  In addition to tax, general allocation of liability and other considerations, a transaction’s structure also dictates the specific liabilities and obligations a buyer will assume with respect to employees.  For example, in a stock-based transaction like a merger or stock acquisition, the buyer automatically becomes the employer of the target’s workforce and generally assumes all of the target’s liabilities related to those employees, including compensation and employee benefits.  On the other hand, the buyer in an asset transaction has more flexibility to negotiate the employees it will hire and the liabilities it will assume from the selling company. In analyzing the employee-related consequences of a business combination and conducting due diligence, it is important to consider a multitude of issues, with some of the more challenging areas highlighted below.  Depending on the circumstances, these can be thorny issues that warrant negotiation to reallocate potential risk and liabilities and/or a purchase price adjustment. Benefit Plans For many benefit purposes under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code, and therefore also in an M&A scenario, the “controlled group” rules come into play.  Under these...

Think Twice Before Firing an Employee for Facebook Posts

Social media continues to play an important role in all aspects of a company’s internal and public communications (see this Doug’s Note).  Companies are utilizing social media to make SEC disclosures, coordinate targeted advertising and marketing campaigns and locate potential employees.  Employees, on the other hand, are using social media to network, seek new jobs and communicate with the people around them. This article discusses two recent National Labor Relations Board (NLRB) cases that provide guidance in determining the extent to which employee speech on social media is protected under the National Labor Relations Act (NLRA). Employees may file certain employment-related charges against their employer with the NLRB, which administers and enforces the NLRA.  The NLRB then investigates whether the charge has any merit.  Oftentimes, the employee and employer settle the dispute during the NLRB’s investigation.  For those charges that are not settled, the NLRB typically conducts a hearing in front of an Administrative Law Judge (ALJ).  Decisions by an ALJ are subject to the NLRB’s Board review, and Board decisions may be appealed to a federal appellate court. Three D, LLC d/b/a Triple Play Sports Bar and Grille In August 2014, the NLRB found that an employer unlawfully discharged two employees who participated in a Facebook discussion criticizing the employer’s handling of state withholding taxes.  See Three D, LLC d/b/a Triple Play Sports Bar and Grille.  The Facebook discussion was ignited by a former employee’s post about owing taxes due to an error in the employer’s calculation of withholding taxes. Two current employees participated in the discussion.  One employee “liked” the former employee’s initial post and the other...