It might read: “Is everyone OK with Bob’s carpet cleaning bid? We can get a really good deal if we sign with him today. Let me know ASAP.” You get a quick response and business is accomplished right from your desk, or your smartphone. There’s just one problem. It’s illegal. No, I don’t mean you’ll get arrested. I mean that voting by e-mail isn’t enforceable. Let’s say you are the President (or committee chair) of a local charity, chamber or foundation, and you send out that carpet cleaning e-mail. A majority of your board (committee) members approve without comment. You sign the contract.

Your regular meeting comes up the next week, and a couple of the members (who were on vacation when the e-mail went out) arrive with information about Bob the carpet cleaner. While he’s inexpensive, he’s also a convicted felon and he’s been known to say some pretty unflattering things about your organization. More importantly, a board member’s uncle is in the business and made a major contribution last year. Let’s give the contract to uncle Vinnie, they say; and before you know it, Vinnie is hired. But you already signed the contract in reliance on that e-mail.

What you now discover is that voting by e-mail is not enforceable, i.e. it doesn’t count. Result: you are personally on the hook for that contract you signed. Missouri statutes simply don’t permit a board or committee to vote by e-mail. People think I’m crazy when I tell them this. But the reality is that boards and committees cannot act by correspondence (e.g. e-mail); they can only act by meeting or by unanimous written consent. A meeting is defined by law as an event where everyone can be heard “simultaneously.” You need not see everyone, but everyone must be “present” so you can all hear the debate and everyone’s comments can be heard by everyone in attendance. It’s hard to believe that meeting at a coffee shop or patching in people by telephone works and a simple e-mail doesn’t; but it’s true.

Why, you say? First, remember that e-mail is, well, just mail. It’s correspondence. Very speedy correspondence, but still just a letter. Second, let’s remember that meetings were the only efficient way to accomplish business before the electronic age; so it’s partly historical (how would we feel if the founding fathers wrote and voted on the constitution by correspondence?). But, most importantly it’s about requiring everyone to be present for the debate. My example above shows what can happen when the open debate is missed. Comment alone is not debate. “Reply all” may seem like open debate, but it’s not. Bodies (boards and committees) are established to give a group of people responsibility and groups have always been required to meet and discuss as a critical part of making decisions.

In short, you need to know three things:

1. Meetings are unnecessary if all who are entitled to vote agree by (i.e. sign) a “written consent”, so the e-mail may be enforceable if everyone agrees, i.e. it’s a unanimous vote (and every e-mail is copied and kept with your meeting minutes).
2. If it’s not unanimous, make very sure that it is approved at the next board/committee meeting (and included in meeting minutes).
3. If it’s a major decision, skip the e-mail (or make sure your house needs a lot of carpet cleaning).

In your business (i.e. other than non-profit organizations) there may be instances when decision by e-mail is permissible, but only if the governing documents clearly spell it out, so check with your attorney first.

Identity theft is rampant in today’s society. As many as ten million individuals per year become victims of identity theft and the number of medical identity theft cases are on the rise. In response to this growing problem, several federal agencies jointly promulgated regulations that require certain entities to implement a plan to detect, prevent, and correct identity theft. The “Red Flags Rule” applies to various types of entities, including most healthcare providers. Thus, entities ranging from a small doctor’s office to a hospital must be in compliance with the new Red Flags Rule by the date on which the Federal Trade Commission (“FTC”) will begin enforcing the Rule.   After that date, an entity may be penalized up to $3,500 per violation. Thus, healthcare providers need to take steps to comply, including creating an Identity Theft Prevention Program.

Before understanding the Rule, a healthcare provider must determine whether it is subject to the Rule in the first place. Under the Red Flags Rule, any “creditor” that offers or maintains one or more “covered accounts” is required to develop and implement a written Identity Theft Prevention Program. A “creditor” is defined as any person who regularly extends, renews, or continues credit. Healthcare providers will be considered a “creditor” if they regularly bill patients after the completion of services, allow payment plans after services have been rendered, or aid patients in obtaining credit from other sources (see note).

Under the Rule, a “covered account” is defined as (1) an account a creditor offers or maintains that involves or is designed to permit multiple payments or transactions, and (2) any other account the creditor offers or maintains for which there is a reasonably foreseeable risk of identity theft. The second portion of the definition is very broad and may include records that an entity may not recognize as a “covered account.” For healthcare providers, this definition of “covered account” generally encompasses patient and employee records. Thus, the vast majority of healthcare providers are subject to the Red Flags Rule and must comply.

Development of Identity Theft Prevention Program

With proper guidance, a healthcare provider can establish an Identity Theft Prevention Program that will comply with the Red Flags Rule. The Red Flags Rule does not require any specific practices or procedures, because it provides flexibility to tailor a Program to the nature of the business and the risks its faces. In other words, the Program is scalable to the size and complexity of the entity and the nature and scope of its activities. In the case of a company at high risk for identity theft, such as a large hospital system, the Program may need more robust procedures, including strict verification procedures for each and every patient’s identity. However, such extensive procedures would be inappropriate for a low-risk company, such as a solo practitioner, who can identify and verify each patient. Thus, there are no set procedures for a Program, but it is a discretionary decision that should be made by someone knowledgeable about the business and its day-to-day operations.

Although the Red Flags Rule does not establish specific procedures, it does require that any Program include “reasonable” policies and procedures to:

• Identify relevant patterns, practices, and specific kinds of activity that may be “red flags” signaling possible identity theft;
• Detect red flags;
• Respond to those detected red flags to prevent and mitigate identity theft; and 
• Update the Program periodically to reflect changes in identity theft risks.

For red flag identification, a healthcare provider should review its own experiences with identity theft and incorporate that knowledge into the Program. Red flags should include concerns raised by patients — both internally and externally. Some examples of such red flags could be suspicious account activity, inconsistent personally identifying information, inconsistent medical histories, and possibly altered identification documents. For red flag detection, a healthcare provider should state what procedures will be in place in the day-to-day operations to detect red flags, which may include procedures to authenticate a new patient and verify the validity of any changed information. For prevention and mitigation of identity theft, a healthcare provider should take necessary steps such as notifying the real patient or law enforcement, monitoring an account and correcting the medical record. Lastly, a healthcare provider must periodically review and reflect on its experience with identity theft and update its Program to verify the effectiveness of the Program.

Even if the Red Flags Rule does not apply to your practice, it may still be advisable to develop an Identity Theft Prevention Program. In the event of a medical identity theft, the federal government and health insurance companies may require a healthcare provider to pay reimbursement for claims made. Furthermore, if a healthcare provider files a claim and later learns that medical identity theft has occurred without taking corrective measures, the provider may be subject to criminal and civil penalties based upon fraud. Importantly, medical identity theft also puts the life of the victim at risk, which plainly could lead to potential civil liability for a healthcare provider. False entries in a medical history can lead to improper medical treatment, denial or exhaustion of health insurance, or an individual’s uninsurability for life or health insurance. An Identity Theft Prevention Programis an important tool for a healthcare provider to minimize its liability and risks, and risks to its patients, even if it is not subject to the new Red Flags Rule.

The task of developing an Identity Theft Prevention Programmay seem daunting, but a provider should not feel overwhelmed. A successful Program for a healthcare provider will build on existing efforts already in use to combat fraud and protect patient privacy. A healthcare provider should review and adapt its current tools used to comply with HIPAA and state privacy, security, and breach notification laws to satisfy the new Red Flags Rule. Thus, with its current tools and available resources, a healthcare provider is already on the way to developing a compliant Identity Theft Prevention Program.

Implementation and Administration

Healthcare providers must be mindful of key issues regarding the implementation and administration of an Identity Theft Prevention Program. Staff training and delegation of duties may generate issues for a healthcare provider attempting to implement and administer such a Program. Internal staff must be trained as necessary. If a healthcare provider outsources or subcontracts portions of its operations that would be covered by the Red Flags Rule, then the Program must address how the provider will monitor the contractor’s compliance. Furthermore, periodic supervision and review after any incident of identity theft will be invaluable to the proper functioning of a Program.

Management and the board of directors of a healthcare provider are required by the Red Flags Rule to play a central role in the creation, implementation and continued administration of the Program. According to the regulations, either the board of directors, or an appropriate committee thereof, must approve the initial written Program. Other responsibilities include assigning specific responsibility for the Program’s implementation, reviewing staff reports about how the practice is complying with the Rule, and approving important changes to the Program. The board of directors should also receive at least annual reports regarding the administration of the Program. Thus, it is critical that a board of directors or management remain active in the administration of the Program to ensure compliance with the Rule. Mere creation of a Program will not shield a healthcare provider from civil fines under the Red Flags Rule.

Conclusion

When the FTC begins enforcing the Red Flags Rule, it will require any entity that regularly extends, renews, or continues credit concerning a “covered account” to develop and implement an Identity Theft Prevention Program. The Rule does not set specific procedures, but the Program must identify how the entity will:

• Identify red flags; 
• Detect red flags; 
• Prevent and mitigate identity theft; and 
• Update its Program.

As long as a healthcare provider begins with its current tools and available resources, it can develop a Program that complies with the Rule. In the implementation and administration, a healthcare provider must be mindful of certain issues, such as delegation of operations, and its board of directors and management must maintain periodic supervision. Although the task may seem daunting, a healthcare provider can successfully comply with the requirements of the new Red Flags Rule, if it takes the proper steps now.

This article was co-authored by Laura Gerdes Long & David Binder.

This HHS publication triggers two key deadlines, one commencing September 23, 2009, when employers and health care providers (“covered entities”) will be required to comply with the Act’s security breach notification requirements; and, the other, is February 22, 2010, the 180 day enforcement grace period announced by HHS. Accordingly, during this 180 day grace period, covered entities need to digest the new requirements, revise existing HIPAA policies and procedures and develop new ones, put in place a security incident response plan, train employees, confer with business associates about security breach response and negotiate modifications to existing business associate agreements. Employers and health care providers who discover a security breach after that date and fail to provide the required notices may be targeted for an enforcement action.

A security breach notification will only apply to “unsecured PHI”. PHI that is not encrypted or completely destroyed is considered “unsecured” by HHS. The only way, generally, that HHS has said that PHI would be considered “secured” is if it encrypted or completely destroyed. If that is the case, then the covered entity does not need to develop internal procedures for notification of security breaches. In any event, those practices should review their existing Notice of Privacy Practices to update it with respect to the new notification rule.

WHAT IS A “BREACH” REQUIRING NOTIFICATION UNDER THE RULE?

HHS has defined “breach” to mean a use or disclosure of unsecured PHI in violation of the HIPAA Privacy Rule. As we learned when the Privacy Rule was implemented, PHI generally cannot be used or disclosed without the individual’s prior, written authorization. However, the Privacy Rule also contains a laundry list of exceptions to the general rule. Consequently, covered entities may often have to scrutinize the Privacy Rule to determine whether a breach, indeed, even occurred. Hence, a breach will only occur if the following requirements are met:

• the information is “unsecure” PHI;
• the information was used or disclosed in an unauthorized manner (see, HIPAA Privacy Rule); and
• the use or disclosure poses a “significant risk of financial, reputational, or other harm to the individual”. To determine if such a harm has occurred, the covered entity must review factors such as:

(a) to whom the information was disclosed;
(b) the type of information disclosed;
(c) what steps were taken that mitigate the potential harm to the individual; and
(d) whether the use or disclosure falls under an exception listed in the statute. The exceptions are:

(i) Unintentional access by a covered entity’s or business associate’s employee. Such access must be in good faith, within the employee’s course and scope of employment and not result in further use or disclosure. HHS provided an example of a nurse mistakenly sending an e-mail with PHI to a hospital billing employee, who opened it in the normal course of business; however, the billing employee deletes the e-mail and notifies the nurse.
(ii) Inadvertent disclosure from one covered entity or business associate employee to another similarly situated employee. HHS explains that the information should not be further used and that “similarly situated” means both employees must be authorized to access the information. For example, a doctor and billing employee may be similarly situated, because they are both authorized to view PHI, but a doctor and a receptionist may not be or, for example, when a doctor inadvertently gives a patient chart to a nurse who is not responsible for the doctor’s patients.
(iii)The recipient would not reasonably have been able to retain the information. For example, a nurse gives out incorrect discharge papers, but immediately discovers the error and takes them back.

NOTIFICATION OF BREACHES

If a breach occurs, then the covered entity must notify the individual “without unreasonable delay”, but no later than 60 days after discovery of the breach. HHS notes that, if a business associate is an “agent” of the covered entity, the business associate’s discovery of the breach will be imputed to the covered entity.

If the breach involves 500 or more individuals, the covered entity must notify HHS at the same time it notifies the affected individuals. Breaches involving fewer than 500 individuals must be logged, and a log must be submitted to HHS by March 1st of the following calendar year.

There are also provisions for what needs to be done if a breach involves 500 or more individuals from an entire state or jurisdiction. Since business associates are impacted by the discovery and breach notification, covered entities should address those matters in their business associates agreements or vendor agreements, by rewriting or amending those agreements.

WHAT MUST THE NOTICE SAY?

The Notice must be written in plain language and contain five (5) subject areas:

1. a brief description of what happened, including the date of the breach and the date the breach was discovered, if known
2. the types of unsecured PHI involved in the breach (e.g., Social Security number, full name, date of birth, home address, account number, diagnosis)
3. steps that affected individuals can take to reduce the risk of harm from the breach
4. a brief description of the covered entity’s investigation, efforts to mitigate harm to affected individuals and steps taken to prevent a recurrence of breaches
5. contact information for people to ask questions and obtain information, including a toll-free telephone number, e-mail address, website or postal address.

HHS has devised electronic notification forms on its website for submitting notice of breach to the Secretary. These requirements are in accord with the Privacy Rule that requires each covered entity to take reasonable steps to mitigate the harmful effects of an unauthorized use or disclosure of PHI.

There are also provisions for substitute notice under the HHS rules.

THE EFFECT ON STATE SECURITY BREACH NOTIFICATION LAWS

HHS has said that the HIPAA requirements do not pre-empt state notice law and that covered entities will be required to comply with both sets of laws when both are applicable. For example, where a state law requires notification within five days, HHS says notice within this period also would satisfy the new HIPAA requirements, so the two laws do not conflict. Similarly, if a state law requires additional elements be included in a notice, HHS says there would be no conflict because a covered entity could develop a notice that satisfies both laws.

STEPS FOR COVERED ENTITIES

• Establish notice procedures for a security breach response plan
• Implement systems for detecting a security breach
• Maintain a breach log
• Train workforce members on their role in responding to a security breach
• Revise business associate agreements to address security breaches
• Revise HIPAA policies and procedures regarding training, complaints, and sanctions, as applicable
• Update address lists for patients and/or plan participants to reduce the number of return notices in the event of a breach.

This is only a short review of considerations. Consultation with an attorney is advised to ensure that all matters specific to your practice have been covered. If you have further questions or if you would like to set up an appointment to discuss your practice’s protected health information needs, please contact Laura Gerdes Long, Esq.

In a struggling economy, employers have to make difficult decisions pertaining to their businesses and employees. Faced with “hopefully” temporary losses in business, many employers are forced to terminate employees losing their experience and knowledge. On the other hand, if the employer elects to reduce hours, the employees receive lesser pay and are ineligible to collect unemployment benefits.

Fortunately, employers do have a unique alternative under the Missouri Employment Security Law whereby they can retain their hourly workforce and reduce hours while at the same time allowing their employees to receive a proportional supplement of unemployment benefits. This article applies only to such programs that involve hourly-paid employees.

Shared Work Program-Unemployment

Under Missouri law, employers can develop a shared work program with the Division of Employment Security of the Missouri Department of Labor and Industrial Relations. The program allows an employer to decrease the working hours of a specific group of employees, which includes a specified department, shift, or other unit of three or more employees.

The affected employees can continue to work for the employer at a reduced number of hours and also receive unemployment benefits in proportion to the reduction in hours and pay. For example, if the employer reduces work hours by 20% to 32 hours per week, the employee will receive 20% of her weekly benefit amount under unemployment insurance. Thus, an employee who earns $2,500 per month and is entitled to a $300 weekly benefit amount would receive 80% of her pre-plan wages and $60 in benefits each week under the plan. This program allows the employer to retain the knowledge and experience of the employees without having to drain the cash reserves of the company due to unneeded work hours.

Requirements to File – Missouri Law

A shared work plan under this program must satisfy the following requirements:

1. The plan applies to an affected unit of not less than three employees; 
2. The plan applies to at least 10% of the employees in the affected unit; 
3. The plan reduces the normal weekly hours of work of the employees by not less than 20% and not more than 40%; 
4. The plan describes the manner in which the employer treats the fringe benefits of each employee in the affected unit; 
5. The employer certifies that the implementation of a shared work plan is in lieu of temporary layoffs that would affect at least 10% of the employees in the affected unit and that would result in an equivalent reduction in work hours; and 
6. The plan must be approved by the collective bargaining agent if any of the employees in the plan are covered by a collective bargaining agreement.

Submission to Division of Unemployment

When an employer has drafted a shared work plan, it must submit the plan to the Division of Employment Security. The Division will accept or deny the plan within 30 days of receipt. If the plan is denied, the employer may either elect to exhaust its administrative remedies or file a new plan with the Division within 45 days. Any accepted plan remains in effect for only 12 full months.

The employer has the right to modify the plan to meet changed circumstances, but the modification cannot affect the expiration date originally set by the plan. The employer can always freely suspend the plan in order to return the employees to full-time employment. Given the restriction on plan modifications, it is critical for an employer to properly plan before implementing or modifying a shared work program.

Requirements to Maintain Plan

Once the plan is accepted by the Division, the employees affected still must satisfy the following requirements to receive unemployment benefits:

1. The individual is able to work, is available for work and works all available hours with the employer; 
2. The individual does not work more than the reduced hours specified in the plan; and 
3. The individual’s normal weekly hours of work have been reduced by at least 20% but not more than 40%, with a corresponding reduction in wages.

Under the shared work plan, the employee is under no obligation to seek other employment and will not be denied benefits on this ground. However, the employee may not receive shared work benefits for more than 26 calendar weeks during the 12-month plan.

Ramifications of Plan on Employer Tax Rates

Although the shared work program can aid the employer in reducing the number of employees who are terminated, the program will still affect the employer’s unemployment taxes in the same manner and to the same extent as other chargebacks of benefits. Thus, all benefits paid under the plan will be charged to the account of the participating employer for use in computing general tax rates. Although this will increase the employer’s tax rate, it may cause more or less of an economic impact than a termination depending upon the structure of the shared work plan. Therefore, an employer must carefully set the terms of the plan so it remains advantageous despite the increased unemployment tax rate.

With the shared work program, Missouri law provides employers with an opportunity to retain their full workforce through a reduction in hours and a proportional supplement of unemployment benefits. However, there are some drawbacks to the program such as the employer’s increase in unemployment tax rates. Depending upon the circumstances, the program may be a less attractive solution than an outright termination of employees. Despite these issues, the shared work program may provide Missouri employers and their employees a unique reduced hour program.

This article was co-authored by Ruth Binger & David Binder.

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Secondly, the EFCA forces companies to reach an agreement with the union within 90 days of the National Labor Relations Board certification of the union or either party can demand mediation. If an agreement is not reached at the mediation table within 30 days, the contract is referred to binding arbitration and the arbitration results will then be binding on both parties for two years.

Finally, the EFCA grants the Board the power to award liquidated damages at twice the amount of back pay and to impose civil penalties of up to $20,000 per violation.

These changes may seem overwhelming, unreasonable, and highly skewed in the union’s favor, yet the company is still in control. The company has the opportunity to create a culture now that encourages informed, engaged, and productive workers that have little incentive to organize.

Create your own competitive advantage in your industry by taking the actions below so the union walks away from your workforce and shows up at a competitor’s door instead. Wage your election campaign now by thinking and acting proactively!

1. Competitive Wages & Benefits—Outside & Inside

Companies should evaluate wages of similarly situated employees of other companies to determine if their workers are being paid a competitive wage. Similarly, companies should analyze their internal compensation system (salary/wage ranges and rates) to determine if compensation is set for “position” rather than individual and whether a uniform approach is used for length of service and experience. If there are disparities that cannot be justified, they should be evaluated.

2. Communication with Employees—What are the Wants?

Companies should allow employees to communicate with management regarding complaints and concerns. Methods of communication include having open door policies when appropriate, surveys, suggestion boxes, bulletin boards, job orientation, forms which communicate to the employee various hidden employee benefits, and company events such as picnics and holiday parties.

3. Education of Employees

Employees should be educated about what changes will occur should they unionize. Companies should point out that unionization brings changes to the company environment such as lack of ability to communicate directly with management, dues and fees which may go to international union efforts and political causes, fines for crossing picket lines, and employees being replaced if the union strikes.

4. Identification/Training of Supervisors

True supervisors may not vote in a union election. Thus, it is critical to identify who the supervisors are within the organization and define their job responsibility. Passage of the Re-Employment of Skilled Professional Employees and Construction Trade Workers Act (“Respect”) would cause workers who do not spend more than 50 percent of their time directly supervising others to lose their classification as a supervisor (currently only 10 to 15 percent) and thus be part of the proposed employee unit.

Analyze the duties of your employees to determine who is tasked with supervisory jobs and define their titles as such. Once identified, training, attitude and ownership mentality is crucial. Taking ownership of policies and decisions of management and not blaming unpopular decisions on management is essential to leadership.

Finally, train supervisors on the “do” and the “don’t do” of a union campaign—what to say and not to say, what management acts are prohibited and the importance of enforcing policies consistently.

5. Education of Management

Management should be educated as to the company’s position and strategy for dealing with union activity. Being familiar with whether competitors are facing unionization, having an ability to identify the major unions in your area, researching their organizing tendencies, strengths and tactics, and recognizing union advertising are critical.

Management should be able to respond to employees’ questions about union activity taking place within the company.

6. Obtain Legal Counsel

Legal counsel can help you review employment agreements, the company’s bulletin board announcements, confidentiality policies, and assist with the education of management about labor laws. Legal counsel can also help you train your management on how to wage a legal campaign. Legal counsel can also assist with terminating employees with a history of poor work performance.

7. Hiring & Promotion Policies—Who are the Agitators?

Companies should regularly review their hiring and promotion policies. Processes should include centralized final review by a human resource manager to ensure supervisors are consistent and use appropriate documentation. Poor and marginal employees almost always vote for a union; therefore, such employees should be terminated as soon as poor work performance is discovered.

Consistent and regular review processes that use objective determination to the extent possible and require specific examples and documentation in subjective cases will assist in indentifying both employees with stellar work performance and those with marginal work performance. Ensure that disciplinary action is reflected on employee’s performance evaluations.

8. Quality Working Conditions

Working conditions should be clean and safe. Companies should work to identify areas that could use improvement and maintain general safety standards.

9. Resolve Complaints Efficiently & Effectively

Companies should make sure the right people are placed in supervisory positions. Complaints by employees should be immediately and fairly resolved. The process should be viewed as fair and not needing the outside influence of a union. If employees complain about favoritism or disparate treatment by a supervisor, the company should address it immediately. Unions tend to exploit unaddressed employee complaints about supervisors when initially forming.

10. Teamwork

Employees that feel invested in a company as part of a team are less likely to be swayed by union leaders. Holding regular meetings where management communicates with the employees about the company and allowing communication by the employees regarding suggestions for process/ production, etc. improvements can help employees feel invested in the company.

Conclusion

Whether or not the Employee Free Choice Act is enacted, use this threat to improve your culture thus improving your productivity and profit. Study after study shows that when employees feel valued and heard, they don’t look to unions to protect them from the very one who is providing them the job. Likewise, with a 92 percent unorganized private sector, unions won’t throw “good money after bad” but will target work places that are more vulnerable to union representation.

Simply said, a union cannot create a vote of no confidence in management policy unless management gives it the keys.

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In the agrarian and manufacturing-oriented economy of the 1930’s and 1940’s, white collar workers had clearly defined decision-making responsibilities, were closer to management and were paid better than today. In such an economy, white collar workers were middle class in income, outlook, attitude and life.

In contrast, in a service-oriented economy, white collar workers are no longer middle class managers, but more likely to share traits associated with blue collar jobs such as repetitive, mechanical duties, rather than intellectual, creative responsibilities. Moreover, most white collar workers earn less than unionized blue collar workers and skilled craftsmen.

Summary. The Fair Labor Standards Act, as amended (“Act”), Section 13 (1)(1), provides an exemption from its minimum wage and overtime requirements for any employee employed in a bona fide executive, administrative or professional capacity (including any employee employed in the capacity of academic administrative, personnel or teacher in elementary or secondary schools or in the capacity of an outside sales employee).

Further, Section 13 (a)(17) of the Act provides an exemption from the minimum wage and overtime requirements for computer systems analysts, computer programmers, software engineers, and other similarly skilled computer engineers. The Act does not define terms, but charges the United States Department of Labor (“DOL”) with the duty to delineate and define white collar exemptions from “time to time.”

Test. Job titles are insufficient to establish exempt status. Whether an employee meets the exempt test is determined by whether the employees meet the (1) salary level test, (2) salary basis test, and (3) duties test under the Code of Federal Regulations (“CFR”). 29 CFR §541.2.

State Wage and Hour Laws. Employers in 18 states must check their workers’ status using both the new federal regulations and their own state law. States with laws governing overtime are Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Kentucky, Maryland, Minnesota, Montana, New Jersey, North Dakota, Oregon, Pennsylvania, Washington, West Virginia and Wisconsin.

Salary Level Test

Automatic Exemption for Highly Compensated Employees

Rule. Highly compensated employees who earn a total of at least $100,000 per year will not be entitled to overtime pay if “the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, professional or administrative employee” and is paid at least $455 per week on a salary basis. 29 CFR §541.601(a)-(b).

The primary duty must consist of performing office, non-manual work. Manual workers, no matter how highly paid, are not eligible for this exemption. 29 CFR §541.601(d). The total annual compensation of $100,000 or more may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52 week period.

This compensation does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits. Employer may use any 52 week period as a year. If employer does not identify the 52 week year period in advance, a calendar year will provide. 29 CFR §541.601(b)(4).

For example, the employer pays the employee $80,000 as a base and $20,000 in commissions. If the employee does not earn the commission amount under the plan, the employer, in all events, must pay at least the remaining $20,000 within one month of year end for the prior year.

For example, the employers must pay employees, who fail to work a full year, a pro rata portion of the minimum amount based upon the number of weeks that employee has been employed. 29 CFR §541.601(b)(3).

Salary Basis Test

Docking. An employee must regularly receive a predetermined amount of salary on a weekly or less frequent basis that is not subject to reductions because of quality or quantity of work performed. Within the salary basis test, the  no-docking rule has always caused considerable consternation. 29 CFR §541.602.

Docking Rule. Employers can make deductions from guaranteed pay only under narrow circumstances, including: (i) when an employee was absent from work for a full day for personal reasons, other than sickness or disability; (ii) for absences of a full day or more due to sickness or disability, (iii) if taken in accordance with a bonafide plan, policy or practice providing wage replacement benefits; or (iv) for FMLA leave, jury duty, or for infractions of safety rules of major significance.

Now, one can also dock employees for unpaid disciplinary suspensions for a full day or more imposed in good faith for infractions of workplace conduct rules (that are in writing) such as sexual harassment policies or workplace violence.

Window of Correction. Under 29 CFR §541.603(c), “improper deductions that are isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions if the employer reimburses the employees for such improper deductions.” Reimbursement can be made at any time, even five days before trial. Employers can preserve the exemption by taking advantage of the safe harbor provision.

Safe Harbor. Employers must issue a clearly communicated policy prohibiting improper deductions, which includes a mechanism for employee complaints and immediate reimbursement of monies if the complaint is found valid. The policy, either oral or written, must be issued before the violation. This protects the employer from both inadvertent and/or deliberate deductions. “Clearly communicated” is met, for example, by “providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.” 29 CFR §541.603(d).

If the employer fails to reimburse the employees for improper deductions after receiving employee complaints, final subsection (d) clarifies that the “exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.” Id.

Minimum Guarantee PLUS Extras. Under §541.604 an exempt employee may receive additional compensation for hours worked beyond a normal workweek so long as a reasonable relationship exists between guaranteed amount and the actual amount earned. Interestingly, in contrast, an employer may also prospectively make adjustments to salary with a like adjustment to scheduled hours to accommodate its business needs.

If, however, the salary changes are so frequent as to make the salary the functional equivalent of an hourly wage, the court will treat “salary” as a sham. Wal-Mart Stores, Inc., Fair Labor Standards Act Litigation, 2005 WL 226227 (10^th Cir. (Col.)).

Always Non-Exempt. Laborers or other blue collar workers who perform repetitive work using their hands, physical skills, and energy, are not exempt. Such non-exempt “blue collar” employees gain skills and knowledge through apprenticeship and on the job training and not through a prolonged course of specialized instruction. 29 CFR §541.3(a).

Thus non-management production-line employees and non-management employees in maintenance, construction and similar occupations, such as carpenters, electricians, mechanics, plumbers, ironworkers, craftsmen, longshoremen, construction workers, laborers, and similar workers must be paid overtime.

Further, first responders (police officers, sheriffs, state troopers, police investigators or detectives, park rangers, firefighters, paramedics and other public safety or emergency personnel) who perform work such as preventing, controlling, or extinguishing fires; rescuing fire, accident, or crime victims, preventing or detecting crimes, conducting investigations or inspections for law violations, and pursuing, restraining, and apprehending suspects are eligible for overtime regardless of rank or whether they also have some supervisory duties. 29 CFR §541.3(b)(i).

Duties Test

Bona Fide Executive Exempt Classifications.
29 CFR §541.100. Includes titles such as chief executive officer, controller, vice president, director.

Test.

Salary Basis Test. 29 CFR §541.000(a)(1). Is paid at least $23,660 annually ($455 weekly) salary and regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Duties Test. 29 CFR §541.100(a)(2).

• Primary duty consists of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof. Note, a customarily recognized department or subdivision must have a permanent status and a continuing function. 29 CFR §541.103.

• Customarily and regularly directs the work of two or more full-time employees or their equivalents (for example, one full-time employee and two half-time employees or four half-time employees).

• Has the authority to hire or fire other employees OR makes recommendations that carry particular weight as to the hiring, firing, advancement, promotion or any other change in status of other employees. (This is a new test.)

Examples of Management. 29 CFR §541.102. Management includes activities such as interviewing, selecting and training, setting and adjusting employees’ rate of pay and hours of work, directing the work of employees and maintaining production or sales records for use in supervision or control, etc.

Exemption of Business Owners. 29 CFR §541.101. Employees who own at least a bona fide 20% equity in the enterprise in which the employee is employed and who are actively involved in management. Employee does not have to meet the salary basis test nor supervise two or more
employees.

Supervision of Two Employees Test. 29 CFR §541.104.  Supervision can be distributed among two, three or more
employees. Each such employee, however, must customarily and regularly direct the work of two or more other employees or their equivalent. Further, with respect to a “shared employee,” hours worked by an employee cannot be credited more than once for different executives.

However, an employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager’s absence does not meet the requirement.

Particular Weight Test. 29 CFR §541.105. In determining “particular weight” factors to be considered include, but are not limited to, whether it is part of the employee’s job duties to make such suggestion and recommendation, the frequency with which such suggestions and recommendations are made or requested, and the frequency with which the employee’s suggestions and recommendations are relied upon.

Concurrent Duties. 29 CFR §541.106. A relief supervisor or working supervisor whose primary duty is performing nonexempt work on the production line in a manufacturing plant does not become exempt merely because the nonexempt production line employee occasionally has some responsibility for directing the work of other exempt employees when supervisor is not available. The analysis should be qualitative (i.e., the most important duty) rather than quantitative (i.e., the percentage of time spent performing management functions).

Administrative Exemption. Section 541.200 et seq.

Title Examples. Administrative employees assist with the running or servicing of the business. This category includes, but is not limited to, work in functional areas such as: tax, finance, accounting and budgeting, auditing, insurance, quality control, purchasing, procurement, safety and health, quality control, government relations, internet and database administration, legal, advertising and marketing, personnel management, human resources, employee benefits, public relations, and similar activities. 29 C.F.R. §541.201(b).

This would include an executive/administrative assistant to a business owner or senior executive, of a large business if such employee, without specific instructions or prescribed procedures, has been delegated authority regarding matters of significance. 29 CFR §541.203(d).

Salary. 29 CFR §541.200(a)(1). Is paid at least $23,660 annually ($455 weekly) and regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Duty. 20 CFR §541.200(a)(2)-(3).

• Primary duty consists of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and whose primary dutyincludes the exercise of discretion and independent judgment with respect to matters of significance.

Administrative Tips.

Factors. Work must include the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. §541.202(b) lists some factors to consider:

(i) whether the employee has authority to formulate, affect, interpret, or implement management policies or operating procedures;

(ii) whether the employee carries out major assignments in conducting the operations of the business;

(iii) whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business;

(iv) whether the employee has authority to commit the employer in matters that have significant financial impact;

(v) whether the employee has authority to waive or deviate from established policies and procedures without prior approval;

(vi) whether the employee has authority to negotiate and bind the company on significant matters;

(vii) whether the employee provides consultation or expert advice to management;

(viii) whether the employee is involved in planning long or short term business objectives;

(ix) whether the employee investigates and resolves matters of significance on behalf of management;

(x) whether the employee represents the company in handling complaints, arbitrating disputes or
resolving grievances.

Other Examples of Administrative Employees. 29 CFR §541.203. Insurance claims adjusters, certain employees in the financial services industry, executive or administrative assistants to business owners or senior executives of large businesses, persons leading teams to complete the employer’s major projects (project manager), purchasing agents with authority to bind the company and human resource managers are examples listed in the regulations of employees who commonly qualify under the administrative employee exemption.

Administrative duties also include working directly with the management or business operations of an employer’s customers. Thus, employees acting as consultants to clients or customers may be exempt.

Not Covered. Employees performing examining work, grading, or those working as comparison shoppers do not commonly qualify under the administrative employee exemption. 29 CFR §541.203(h). The exercise of discretion and independent judgment must be more than the use of skill in applying well established techniques, procedures or specific standards described in manuals.

Therefore, clerical or secretarial work, recording or tabulating data or performing repetitive recurrent or routine work is not considered exempt work. Further, the fact that the employer may suffer financial losses if employee fails to perform does not meet the test (operating expensive equipment, manager entrusted with large sums of money).

Professional: Learned and Creative. 29 CFR §541.300. Includes titles such as accountant, nurse, engineer, composer, singer, graphic designer.

Test. 29 CFR §541.300(a)(1).

Salary. Is paid at least $23,660 annually ($455 weekly). Regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Note: For teachers, licensed or certified practitioners of law and medicine, medical interns and residents covered under this exemption, the salary basis and salary requirements do NOT apply.

Duties for Learned Professional.

Learned Professional. 29 CFR §541.301. To qualify for the learned professional exemption, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This primary duty test includes three
elements:

• The employee must perform work requiring advanced knowledge (generally not obtained at high school level);

• The advanced knowledge must be in a field of science or learning (mechanical act classifications areexcluded); and

• The advanced knowledge must be customarily acquired course of specialized intellectual instruction.

Administrative Tips for Learned Professional.

• Work Requiring Advanced Knowledge. 29 CFR §541.301(b). The phrase “work requiring advanced knowledge” means work which is predominately intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine menial, manual, mechanical or physical work. Advanced knowledge cannot be obtained at the high school level.

• “Science or Learning”. 29 CFR §541.301(c). The phrase “field of science or learning” includes the traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades where in some instances the knowledge is of a fairly advanced type, but is not in a field of science or learning.

• “Customarily Acquired by Prolonged Study”. 29 CFR §541.301(d). The phrase “customarily acquired by a prolonged course of specialized intellectual instruction” restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree.

However, the word “customarily” means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees but who attained the advanced knowledge through a combination of work experience and intellectual instruction.

Thus, for example, the learned professional exemption is available to the occasional lawyer who has not gone to law school, or the occasional chemist who does not possess a degree in chemistry. However, the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship or with training in the performance of routine mental, manual, mechanical or physical processes.

The learned professional exemption also does not apply to occupation in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.

Duties for Creative Professional Exemptions. 29 CFR §541.302.

Creative Professional Examples. Includes titles such as actors, musicians, composers, painters, cartoonists, or persons holding more responsible writing positions in advertising agencies.

Test for Creative Professional.

• Primary duty consists of the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work. 29 CFR §541.302(a).

• “Recognized field of artistic or creative “endeavor” includes writing, acting and the graphic arts. Inventive work is distinguishable from work that primarily depends on intelligence, diligence and accuracy. Determination must be on a case by case basis.29 CFR §541.302.

Computer-Related Exemptions. 29 CFR §541.400.

Job Titles. Employees who qualify for this exemption are highly-skilled and have achieved a level of proficiency in the theoretical and practical application of a body of highly specialized knowledge in computer systems analysis, programming or related work in software functions.

Although job titles alone are not determinative of the exemption applicability, the DOL lists the following as common job titles for this exemption: computer programmer, systems analyst, computer systems analyst, computer programmer analyst, applications programmer, application systems analyst, application systems analyst/programmer, software engineer, software specialist, systems engineer and systems specialist.

Test.

Salary. 29 CFR §541.400(b). Is paid at least $23,660 annually ($455 weekly) OR $27.63 per hour. That is, this exemption does NOT have to meet the salary basis requirement to regularly receive a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed IF paid at least $27.63 on an hourly basis.

Primary Duty consists of:

• The application of system-analyst techniques and procedures, including consulting with users to determine hardware, software or systems functional specifications;

• The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on andrelated to user or system design specifications;

• The design, development, testing, creation or modification of computer programs related to machine operating systems; or

• A combination of the aforementioned duties, the performance of which provides the same level of skills. 29 CFR §541.400(b)(1)-(4).

Administrative Tips.

Trainees. 29 CFR §541.705. Does not include trainees learning to become proficient in such areas or employees in these computer-related occupations who have not attained a level of skill and expertise which allows them to work independently and generally without close
supervision.

Computer Manufacture/Repair. 29 CFR §541.401. Does not include employees engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment. Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs, e.g. engineers, drafters and others skilled in computer-aided design software like CAD/CAM but who are not in computer systems analysis and programming occupations are excluded from the exception.

No Degree Required. Level of expertise and skill required is generally attained through a combination of education and experience in the field. Although employees commonly have a bachelor degree, no particular degree is
required.

Cases.

Data Process Manager – Not Covered. A data process manager was held not to be a bonafide executive where his primary duty was operating relatively simple data processing equipment and he supervised only one full-time and one part-time employee. Brennan v. Carl Roessler, Inc., 361 F.Supp. 229 (D. Conn. 1973).

Information Support Specialist – Not Covered. An information support specialist who installed and upgraded hardware and software on workstations, configured desktops, checked cables, replaced parts and “troubleshooted” Windows problems, all pursuant to predetermined specifications in the system design created by others, was not exempt. Maintaining computer systems within predetermined parameters does not rise of the level of “theoretical and practical application of highly-specialized knowledge. Martin v. Indiana Michigan Power Company, 381 F.3d 574, 581 (6^th Cir. 2004).

With respect to an employee who had very similar duties to the Martin employee above, a Court held that the administrative exemption was also not applicable because the duties were not directly related to management policies or general business operations of the employer. Jackson v. McKesson Health Solutions, LLC, 2004 WL 2453000 (D. Mass.) See also Turner v. Human Genome Sciences, Inc., 292 F.Supp. 2d 738 (D. Md. 2003); Burke v. County of Monroe, 225 F.Supp. 2d 306 (W.D. N.Y. 2002); and Koppinger v. American Interiors, Inc., 295 F. Supp. 2d 797 (N.D. Ohio 2003).

Senior Network Administrator – Not Covered. Senior network administrator/project manager who assists the User Support Manager with projects, assumes responsibility for network activities and oversees other information technology department personnel, performs operation system installations, troubleshoots, system integrates, and schedules work pertaining to network problems and software upgrades is not exempt either as an administrative or professional exemption according to the Department of Labor. Opinion Letter, Wage and Hour Division. May 11, 2001.

Outside Sales Person. 29 CFR §541.500 Includes titles such as salespersons, contract negotiators.

Test.

Salary. The salary basis and salary requirements do NOT apply for this exemption. That is, this exemption does NOT have the salary basis requirement to regularly receive a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed, AND this exemption does NOT require payment of $23,660 annually ($455 weekly).

Duties. 29 CFR §541.500(a).

Primary duty consists of making sales or obtaining orders for contracts for services or for the use of facilities for which consideration will be paid by the client or customer. Customarily and regularly is engaged away from the employer’s place or places of business.

Administrative Tips.

Outside Sales – Away from Employer’s Business. 29 CFR §541.502. The DOL eliminated the percentage limitation for time spent on outside sales work. An outside sales person typically makes sales at the customer’s place of business or home. “Outside sales” do not include sales made by mail, telephone, or over the Internet unless such contact is used together with personal sales calls.

Promotional Work. 29 CFR §541.503(a). Promotional work may or may not be exempt, depending on the situation. If the promotion activities are directed toward consummation of the employee’s own sales, it is exempt. If promotional activities (manufacturer’s representative) are designed to stimulate sales that will be made by someone else, activities are not exempt sales work.

Replenishing Stock. 29 CFR §541.503(c). Arrangement of merchandise on shelves or replenishing of stock is not exempt work unless it is incidental to and in conjunction with the employee’s own outside sales.

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Reasons for Expanding Rule 144 Business.

As discussed below, the amendments to Rules 144 and 145, on balance, significantly reduce requirements for sellers and broker-dealers in processing sales of “control” and “restricted” securities in Rule 144 transactions. As amended, the Rule 144 restrictions no longer apply to the sale of debt securities. Prior to amendment, the primary task for the broker-dealer was preparation (for the customer) of Form 144 both in transactions for affiliates and for non-affiliates. After amendment, the requirement to file Form 144 for non-affiliates has been eliminated. Also, prior to amendment, the broker-dealer had to assure that sales, even by non-affiliates, met the limitations (discussed below) on volume of securities sold and manner of sale. As amended, however, those limitations no longer apply to non-affiliate sales. The amendments should make the process of sale of control and restricted securities easier and less fraught with danger for the small broker-dealer processing the transaction.

Just the elimination of manner of sale limitations on non-affiliates, by itself, may increase the ability of a broker-dealer to generate revenues. That is, prior to amendment, sales for non-affiliates could be made only in “brokers transactions,” i.e., agency transactions. As amended, sales for non-affiliates may be made in riskless principal transactions and in transactions directly with market makers, possibly allowing increased revenues for the broker-dealer. And since the non-affiliate customers’ holding periods have been significantly reduced, it is likely that a greater number of clients will seek to use Rule 144, thus also increasing the possibility for greater revenues from increased business. Small broker-dealers with contacts with (i) unregistered companies with a significant number of security holders, or with (ii) control persons of registered companies may want to consider offering Rule 144 services to those companies and security holders, or possibly even making a market in their securities, while of course maintaining a legal compliance program.

A Bit of Background

Federal and state securities laws make it illegal to sell securities in transactions which are not registered with the Securities and Exchange Commission (“SEC”), unless an exemption for the sale can be found. Any “seller”, including a broker-dealer acting for the owner of the securities, is liable to any suing purchaser to repay the purchase price to the purchaser, if the seller cannot prove an exemption is applicable. Such unregistered securities are generally called “restricted.” Other terms sometimes used are “legended” and “lettered.”

Although technically not labeled “restricted”, but similarly not freely tradeable and needing an exemption from registration are securities of publicly held companies, even though they have been registered, which are or have been owned by an “affiliate,” i.e., a control person, of the issuing company, usually an officer or director. They are also sometimes called “control” securities. To qualify as a non-affiliate, a person may not have been an affiliate during the prior three months.

The SEC adopted Rule 144 to allow purchases and sales through broker-dealers of such securities under specified and restricted conditions. Over the years since its adoption, broker-dealers have developed processes to implement Rule 144. The February 15, 2008 amendments will require broker-dealers to change those processes, but as changed, the broker-dealers’ efforts are simplified and reduced.

Rule 144 allowed holders of restricted and control securities to sell them only after holding them for certain periods of time (holding periods), only in restricted amounts (volume limitations), only in certain types of transactions (manner of sale limitations), only if certain information about the issuer was available to the public (publicly available information), and only if a Form 144 was filed with the SEC. These limitations continue after the recent amendments, but are altered and generally reduced in severity by the amendments. The amendments therefore will make it easier for clients and probably will bring about more requests for small broker-dealers to process Rule 144 transactions. In preparation therefore, small broker-dealers should be aware of the effects on them of such amendments and of changes they should consider in their operations.

For the below discussion, a “reporting company,” is one which is required to file and has filed all required periodic reports (excluding Forms 8-K) during the 12 month period preceding the sale of the restricted securities.

The below discussion will cover the Rules’ amendments, with at least a brief mention of the pre-amendment requirements for comparison purposes. This discussion will cover only federal requirements for exemptions for resales of control and restricted securities. The laws of Missouri and other states must also be complied with and should be checked.

The Amended Rule 144 Requirements.

Form 144. The amended Rule requires the filing of Form 144 in some cases, but significantly less frequently than before amendment. The Form 144 is signed and (in a legal sense) filed by the selling holder of the securities, but the assisting broker-dealer usually prepares the Form 144 and explains it and Rule 144 to the seller. That broker-dealer will now need to prepare and assist in filing the Form 144 less frequently because the threshold size of the sale, below which the Form need not be filed, has been increased. As amended, the Form 144 need be filed only for sales in excess of 5,000 shares or $50,000.00. Prior to the amendment, these thresholds were 500 shares or $10,000.00. Also, the requirement for filing Form 144 at all has been eliminated for sales by non-affiliates.

Volume Limitations. Rule 144 continues to set limits upon the amount of securities which may be sold by affiliates under Rule 144 in any three month period, but the amendment eliminates the volume limitations on non-affiliates. As thus applied to affiliates, both before and after amendment, volume limits never expire.

The volume limits restrict sale by affiliates within a three month period to the greatest of (i) one percent of the outstanding shares of the relevant class of the issuer, or (ii) the average weekly trading volume in such securities during the four calendar weeks preceding the filing of Form 144 or, if no such filing is required, the date of execution of the transaction, or (iii) the average weekly trading volume in such securities reported pursuant to an “effective transaction reporting plan”.

The February amendment provides also, however, that if the securities sold are debt securities, the limitation is the greater of the above-stated limits or, together with all sales by the seller of such class of debt securities within the preceding three months, ten percent of the principal amount of such class outstanding or tranche of such securities for the issuer.

Manner of Sale Requirements. Prior to the February amendments, Rule 144 transactions could be made only in “brokers’ transactions,” i.e., transactions in which the broker could only execute the order as agent for the seller, receiving no more than the usual and customary agency commission, and could neither solicit nor arrange for the solicitation of customers’ orders. The amendments reduce this restriction significantly. First, there are now no such restrictions on the sale of debt securities. Second, the Rule now adds to permitted methods of sale of non-debt securities (i) “riskless principal transactions”, where the offsetting trades are executed at the same price (exclusive of an explicitly disclosed fee) and the transaction is permitted to be reported as riskless under the rules of a self-regulatory organization, and (ii) transactions directly with a market maker of the securities.

Current Public Information Requirement. In sales by affiliates, “current public information” must be available concerning the issuer of the securities to be sold. Availability of “current public information” for a reporting issuer requires that such issuer have filed all required 1934 Act reports, except Forms 8-K, during the twelve months preceding the proposed sale. For the sale of securities of non-reporting issuers, there must be publicly available (usually meaning having been promulgated by the issuer to broker-dealers proposing to process transactions in the issuer’s securities) information describing the company, its business and management and its financial statements. Interestingly, this is the type of information generally found in private placement memoranda.

The nature of the current public information required was not changed in the February 2008 amendments. The current public information requirement, under the amended Rule applies always to sales by affiliates, and to sales by non-affiliates until the expiration of a one year holding period (amended from two years by the amendments).

Rule 145 – New Restrictions on Shell Company Securities.

Rule 145 concerns sales of securities obtained in “business combinations” such as mergers, stock for stock acquisitions and stock for assets acquisitions. Prior to amendment, Rule 145 imposed a “presumed underwriter” status on affiliates of both the acquired companies and the acquiring companies in such combinations. That underwriter status prevented such affiliates from selling their securities (“control securities”), even when such securities were registered under the 1933 Act in a registered public offering. Rule 145 also, however, allowed such affiliates to resell such securities under the limitations and restrictions of Rule 144.

Rule 145 was amended simultaneously with Rule 144 to eliminate this “presumed underwriter” status as to affiliates of the acquired company who received 1933 Act-registered securities of the acquiring company in a business combination registered under the 1933 Act. Such affiliates of acquired companies are now able to resell their control securities immediately upon obtaining them instead of after the one year holding period as previously required. Affiliates of the acquiring company, however, and those who become its affiliates, remain subject to all the Rule 144 resale conditions, including the holding periods discussed above. (If a business combination and its resultant securities issuances were not registered under the 1933 Act, and thus are in effect exempt private placements, the various restrictions applicable to restricted securities continue to apply.)

However, if either entity in the combination was a shell company, the presumption of underwriter status, together with its resale restrictions on affiliates, continue to apply to affiliates of both the acquirer and the acquired companies. And, importantly, Rule 144 is unavailable for the sale of securities of a company which was a shell when it issued the securities or at the time of the proposed resale.

Considerations for Small Broker-Dealers.

Small broker-dealers who process Rule 144 sales should take actions based upon the above changes. Some small broker-dealers who do not presently process Rule 144 sales may, in light of the easing of restrictions on such sales, and in some cases the reduction in possible liability of sellers and their assisting broker-dealers, want to consider making such sales a part of their business.

Amending Documents as Necessary. Sales under Rule 144 are frequently complicated and require the seller and the assisting broker-dealer to prepare and execute numerous documents. Normally, the broker-dealer requires the selling security holder to execute a representation letter setting forth the facts concerning his ownership (period held, relationship to the issuing company, etc.). The broker-dealer typically also requires the seller or the issuer to provide an opinion of the attorney of either the seller or the issuer, stating that, in light of the facts set forth in the representation letter, and possibly other facts, sale under Rule 144 by the broker-dealer is legal. And broker-dealers customarily furnish the issuer’s attorney with a letter establishing they have made the sales in conformance with Rule 144. Virtually all of these forms will require amendment to accommodate the changes to Rules 144 and 145. Also, though not mentioned in most articles about Rule 144, the broker-dealers should also require assurances of the attorney that the requested transaction will comply with relevant state securities laws.

Also, broker-dealers’ compliance manuals should have sections instructing their personnel concerning the requirements for Rule 144 sales. It is also possible that some sections of Rule 10b5-1 plans of holders of control securities may have provisions concerning Rules 144 and 145 sales. The text of these sections should also be amended to accommodate the Rule 144 and 145 changes.

A Possible Trap. One trap for the unwary broker-dealer is the new prohibition on the use of Rule 144 for the sale of securities of shell companies. Amended Rule 144(i)(1)(i)(B)(ii) prohibits the use of Rule 144 for the sale of the securities of a company that was ever a shell company. And even if the issuing company itself was never a shell company, it is conceivable that it was the acquiring company in a transaction involving a shell company, thus restricting (but not prohibiting) the use of Rule 144 for sale of its securities. Obviously, the forms above-mentioned should be amended to require the selling customer to indicate whether the issuer was ever a shell company, or was a party to a combination involving a shell company. However, some customers may not even know their company was a shell company, or involved with a shell company, in the past, the broker-dealer should also require the issuing company and the attorney giving the opinion to state that the issuing company was never a shell company.

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Wounded Service Members

Under the FMLA amendments, an eligible employee who is the spouse, child, parent or next of kin of a service man or woman is entitled to a total of up to 26 weeks of unpaid leave to care for the servicemember if he or she is receiving medical care for, or recuperating from, a serious injury or illness suffered while serving in the military. The term “next of kin” has not previously been used in FMLA and is undefined by the statute. Exactly who qualifies as a “next of kin” is likely to be defined under new regulations to be issued by the Department of Labor (“DOL”). A serious injury or illness is one that renders a servicemember medically unfit to perform his or her military duties. The 26 weeks of leave can only be taken during a single 12-month period (i.e., can not be taken in successive years due to the same injury or illness). Leave may be taken intermittently. The employer must allow the employee to take leave in increments as small as the shortest period of time that the employer regularly tracks in its payroll system (e.g., if a time clock is utilized by an employer, the increment can be measured in minutes). If a husband and wife are employed by the same employer, they may be limited to taking a total of 26 weeks of unpaid leave between them.

Reservists Called to Active Duty

Family members of reservists called to active duty due to a “qualifying exigency” will be entitled to take up to 12 weeks of unpaid FMLA leave when the servicemember is called up or while he is serving on active military duty. It appears that this leave can be used either to help prepare the servicemember for call up, or to deal with the kind of challenges faced by family of active duty reservists due to their absence from home. Again, the term “qualifying exigency” will have to be defined by DOL regulation.

Are My Employees Covered Under the New Provisions?

Generally, if you are an employer subject to FMLA, the new provisions will apply to your employees. An employee has the right to take unpaid leave under FMLA if he/she works at a site where his/her employer employs 50 or more persons, or if the employer employs 50 or more persons within a 75-mile radius of the employee’s work site.

Proactive Steps for Employers

If you are an employer subject to FMLA, it is important that you update your FMLA policies and your employee handbook to reflect these recent amendments to FMLA. You should also take action to immediately inform employees of the additional rights granted to them by these amendments. Danna McKitrick, P.C. would be pleased to assist your company with these tasks.

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The fact is that employee costs, and curbing those costs, are the “bottom line” for most employers. For years, employers have been struggling to control and minimize the rising costs of health care for their employees. Employers are increasingly forced to transfer health care costs to their employees through higher premiums, copayments and deductibles. Only in the past few years have employers realized that they can assist their employees in improving their overall wellness, while at the same time potentially reducing the employers’ health care costs. The methods that employers have begun experimenting with include implementing wellness programs, offering health risk assessments, and education.

Hard, Cruel Facts

Since 2000 U.S. healthcare cost increases have exceeded the overall inflation rate by a factor of two to five times. (National Coalition on Healthcare, Economic Cost Fact Sheets.)

At the same time, employees’ contributions to employer-provided health insurance have increased an average of 143%, with their out-of-pocket costs, including co-payments and deductibles, also increasing an average of 115%. Id.

Countless studies have shown that certain conditions impact employers’ costs, overall, and not only for health care.

• For example, survey findings recently reported in the Archives of Internal Medicine found that obese employee medical claim costs were seven times higher than average and those employees missed 13 times more work days. (Ostbye T., et al., Obesity and Workers’ Compensation, 167 Arch Intern. Med. 766-773 April 23, 2007).

• A study conducted by the Centers for Disease Control found that the cost increase for obese employees, combining medical costs and absenteeism,range from an additional $460.00 to $2,500.00 per employee. (Forbes, 10/05/2006, U.S. Companies Embrace Wellness Programs).

• Some estimates put the annual medical costs of smoking and the illnesses that link to it, such as cancer and heart disease, at $150 billion or more. (September 2007, HR Magazine, 115).

How wellness programs can help employers

With all of this bad news, what is an employer to do? Final federal regulations have been released for wellness programs and may provide one approach for improving employee health and potentially reducing health care costs. (71 Fed. Reg. 75014 (Dec. 13, 2006); 45 C.F.R. Part 146). These new, final rules and guidelines are detailed in the Health Insurance Portability and Accountability Act’s (HIPAA) non-discrimination and wellness program rules. These HIPAA regulations were issued, and will be enforced, by the Internal Revenue Service, the Department of  Labor, and the Department of Health and Human Services.

What is a wellness program?

A wellness program is defined as “any program designed to promote health or prevent disease.” (71 Fed. Reg. at 75035; 45 C.F.R. at § 146.121(f)). The wellness plan must make participation in the program available to all similarly situated individuals, and cannot condition a reward on an individual satisfying a standard based on a health factor. Id. For example, an employer can provide a waiver of co-payments for preventive care; reimbursement for participation in a smoking cessation program, without regard to success; rewards for attendance at monthly health education seminars; a diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes; and reimbursement of fitness center memberships. Id.

What are some employers doing?

Wellness programs take a myriad of forms. Some wellness programs include employers providing educational materials about health choices, health risk assessments or free gym memberships. Other plans integrate a variety of elements, including nutritional counseling, screenings, use of health data to target high cost diseases, and incentives to motivate physical activity.

Recently, Guardian Insurance, in conjunction with Healthways’ Whole Health Networks, started offering programs, including complimentary nutrition coaches, tai chi, yoga and pilates, and membership fees at gyms such as Bally’s Total Fitness, in addition to discounts for weight loss programs, Jenny Craig and Weight Watchers (Forbes/2007/05/29/pilates-yoga-taichi-leadmanage-ex).

Some of the nitty gritty (the regulations, a/k/a, “boring lawyer stuff”)

Under the HIPAA prohibition against discrimination on the basis of health status, there exist eight health factors:

• health status,
• medical condition (both physical and mental),
• claims experience,
• receipt of health care,
• medical history,
• genetic information,
• evidence of insurability, and
• disability.

What this means is that employees cannot be denied eligibility or charged a higher premium based on one or more of those health factors. It is essential that the employer be aware that the HIPAA non-discrimination rules generally prohibit group health plans from discriminating against individuals based on certain health factors. In other words, a plan cannot penalize an employee who is unsuccessful in ending their nicotine habit after attending a smoking cessation program. Similarly, an employee cannot charge greater premiums to employees with a body mass index over 25.

Thus, if a wellness program conditions a reward on satisfying some standard, based on such health factors, then the
regulations require the program to meet five criteria:

• the value of the reward must not exceed 20% of the cost of employee-only coverage (or 20% of the cost of the coverage in which any employee and any dependents are enrolled);
• the program must be reasonably designed to promote health or prevent disease;
• the program must give individuals an opportunity to qualify for the reward under the program at least once per year;
• the reward must be available to all similarly situated individuals, including a reasonable alternative which must be offered to those individuals for whom it is unreasonably difficult or medically unadvisable to participate; and
• the health plan must disclose the availability of the alternative standard in any plan materials describing the terms of the wellness program.

(71 Fed. Reg. at 75036; 45 C.F.R. § 146.121(f)(2).)

As for the fifth criteria, a wellness program must include some sort of alternative standard for employees who cannot reach a particular target. Sometimes employers have to fashion alternative standards on a case-by-case basis. For example, a premium discount may be offered to employees who walk five miles per week, but there must be an alternative, such as teaching a class about cardio fitness, instead, or offering swimming opportunities.Employers may also pay for employees’ gym memberships or nutritionist services, or give policy discounts to employees who lower their cholesterol. But if an individual is genetically predisposed to having high cholesterol, and provides verification from a doctor, that individual cannot be penalized.

This “alternative method” is a common sense approach, which HIPAA requires by using a “reasonably designed” standard to balance the needs of employers to experiment with various programs to provide employees incentive to participate, while at the same time, protecting employees from plans that are mere subterfuge for discrimination. Many examples of such alternatives and the kind of language that may be used to satisfy these requirements are  included in the comments to the Federal Rules at 71 Fed. Reg. at 75036-75038.

A summary:

Thus, Wellness Programs allow for a lot of experimentation by employers while, at the same time, providing employees an opportunity to receive an offered reward for their efforts at maintaining a healthy lifestyle. Of course, other laws may intersect with various provisions of the regulations, such as the Americans With Disabilities Act (ADA). Generally, to comply with the ADA, the incentives should be voluntary, and any medical information gathered in connection with the incentive should be kept confidential and separate from the employees’ personnel records.

In summary, by following a few simple rules and sometimes thinking “outside the box” in terms of developing a program to assist your employees with creating and maintaining a healthy lifestyle, employers may gain a group of employees who are healthier, less likely to become sick, and who are, hopefully, happier. Definitely, a win-win situation for both employees and employers.

Caveat: As usual, these rules can be complicated stuff. They are not all inclusive or applicable in all contexts and, although the author is a lawyer, she is not your lawyer. So, enjoy the article, but if you are ready to jump onto the wellness parade, please consult a lawyer qualified to advise you on these matters relative to your specific situation.

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Any sale of a security to a Missouri resident must either be registered with the U.S. Securities and Exchange Commission (“SEC”) and the Missouri Securities Commission, or have at least one specific provable exemption from each of those two requirements.

In 1953, the U.S. Supreme Court ruled that the “private offering” exemption of §4(2) of the Securities Act of 1933 (the “1933 Act”) required that the issuer prove that all “offerees” (not only purchasers) had sufficient investment sophistication and financial well-being (hereinafter “investment suitability”) to establish that they did not “need the protection of registration” under the 1933 Act. SEC v. Ralston Purina, 346 U.S. 119 (1953) But because of the illusory definition of “offerees” as including possibly every person who learned of an offering (not just those receiving an “offer” in the contract sense), the availability and thus the usefulness of the private offering exemption of Section 4(2), was thereafter seriously curtailed.

More Recent History: Viable Exemptions Federal Regulation D

In 1982, the SEC adopted Regulation D, under which, for federal exemption purposes, the federal restriction to investment-sophisticated persons and to only a small number of such persons were intended to apply only to purchasers. 17 C.F.R. §230.501, et seq. This switch of the applicability of these restrictions from “offerees” to “purchasers” caused a sea-change increase in the availability of §4(2)’s federal “private offering” exemption.

Missouri’s First Apparently Viable Exemptions

In 1956, Missouri adopted the Uniform Securities Act and replaced it in 2003 with the Revised Uniform Securities Act. Both include an exemption for a specific limited number of purchasers per year. (Mo.Rev.Stats. §409.402(b)(10)(1966)(fifteen per year) and §409.202-2(14) (2003)(25 per year), respectively.) These allowed issuers selling to Missouri residents to focus on purchasers rather than “offerees” under Missouri law as well as under federal law. This exemption is commonly called the state “limited offering” (and below sometimes called the “25 per year” exemption.

Federal and State Cooperation: The Regulation D Coordinating and Accredited Investor Exemptions

And more recently, the SEC and the North American Securities Administrators Association (“NASAA”) have developed a joint federal and state exemption for use by adopting states to grant exemptions from state registration requirements to issuers who comply with Rules 505 and 506 of Regulation D (hereinafter called the “Reg D Coordinating Exemption”). Missouri’s version is set forth in 15 CSR §30-54.210. Also, the SEC, NASAA and most states have cooperated in the adoption of an “Accredited Investor Exemption.” The Accredited Investor Exemption defines “accredited investors” as certain institutions and as persons with net worths of at least one million dollars or incomes singly of $200,000 or jointly with spouse of $300,000 in the prior two years and the present year. The Missouri Commission adopted the NASAA Accredited Investor Exemption in 2003, replacing a similar exemption it had adopted in 1989. The terms of all of Missouri’s 25 per year exemption, its Reg D Coordinating Exemption and its Accredited Investor Exemption require investment suitability of purchasers only. Also, under the terms of the Accredited Investor Exemption, there is no limit on the number of purchasers. All but the Accredited Investor Exemption prohibit use of “general solicitation” in selling efforts, discussed below.

The Method of Use of These Viable Exemptions

With the adoption of these “purchaser focused” exemptions, securities attorneys around the country developed a fairly consistent method of structuring offerings to meet these requirements. They generally advise their issuer clients to prepare a private placement memorandum, subscription agreement and suitability questionnaire (the latter of which seeks information about the financial status and investment sophistication of persons to be contacted). They then forward these documents to 30-50 (or so) persons (and more when using the Accredited Investors Exemption), together with a letter asking such persons, if they are interested, to review the private placement memorandum, and complete and return the subscription agreement and suitability questionnaire. The issuer may also have small meetings of issuer personnel with 10-12 persons contacted to discuss the investment and to give them the memorandum, subscription agreement and suitability questionnaire.

Then, only after a review of the completed suitability questionnaires, and upon determining that they established that the interested persons held the necessary net worth, income and possibly investment sophistication to be “suitable,” the issuer would accept the subscription of those persons who met the qualifications, and reject those who did not.

The Apparent Destruction of Viable Exemptions in Missouri

But a recent civil prosecution and order by the then-Missouri Securities Commissioner, Douglas Ommen, upheld on appeal by the Court of Appeals for the Western District of Missouri, appears to invalidate this method, and again requires that issuers have reasonable grounds to believe that, prior to contacting any persons, all persons contacted meet the requirements for investment sophistication, net worth and/or accreditation. (This writer was counsel for the unsuccessful respondent/appellant in this case.)

The Moses Case in a Nutshell

In his August 2004 Order, In the Matter of John Robert Moses, et al, Case No. CD-03-16, at page 21, Securities Commissioner Ommen ruled that, prior to preliminarily discussing a possible investment with six persons, the issuer must first determine that all such persons are accredited or otherwise qualified. The Commissioner considered all contacts to be “offers” and stated that “before an entrepreneur makes an offer under this [Missouri Accredited Investor] exemption, the law requires that he know the qualifications of the person . . . “ contacted, and that discussing the investment with six persons whose qualifications were not previously known constituted unregistered offers, causing the issuer to lose all of the above Missouri exemptions for those offers. (No sales had been made.)

On appeal of Commissioner Ommen’s Order, without addressing the wording of Regulation D or its purposes, or the wording or purposes of the Missouri Accredited Investor Exemption, the Reg D Coordinating Exemption or the “25 per year” exemption, the Court of Appeals simply quoted the Commissioner with approval. Moses, et al v. Carnahan, et al, 186 SW3d 889, 908 (Mo.Ct.App. W.D. 2006). And, without citing to the Moses case, the new Commissioner in a more recent Order (In the Matter of Caobo Company, et al, Case No. AP-06-32 (August 29, 2006) paragraph 12), appeared to require that in similar circumstances, the issuer, prior to solicitation, must have a prior contact or business relationship with the 157 Missouri residents who were solicited and a “reasonable basis. . . for believing that the individuals solicited met the accredited investor definition.”

The effect of the Commissioner’s and the Court’s holdings is to nullify the intended effect of all of these three most useful Missouri exemptions to avoid requiring that all “offerees” be known and believed before initial contact to be suitable as investors.

A main rationale for Commissioner Ommen’s holding was his concern that requiring “vetting” only of purchasers “would permit unlimited offers to any number of persons, so long as the promoter intends to rely on the accredited investor exemption at the time of sale.” (Order, p.20, Conclusion of Law 50). This, of course, is true. But that is how the exemption is intended to work. And arguably inappropriate persons are prevented from investing because only accredited or otherwise suitable persons are allowed to invest. But the Commissioner argued that he needs to be able to enjoin mass solicitations (“offers” in Commissioner Ommen’s view) into Missouri well before any sales are made. This writer, upon exhaustive research, has not found similar reasoning in any other case or authority.

A Deeper Analysis of Moses

The Commissioner’s opinion mixes the two concepts of “offer” and “general solicitation” to arrive at this result. Regulation D, and thus Missouri’s exemption coordinating with it, both explicitly prohibit general solicitation. (Regulation D, Rule 502(c).) And Missouri’s “25/year” limited offering exemption also prohibits general solicitation. (Mo.Rev.Stats. §409.2-202(14)(B) (2003).) Regulation D defines “general solicitation” as “including, but not limited to . . . any advertisement . . . in any . . . media.” Virtually all authorities discussing it assume general solicitation requires solicitation in mass numbers using media such as radio, newspaper, mass mailing lists, telemarketing, etc. But in his opinion in In re Moses, et al, Commissioner Ommen held that a meeting of six persons, ho were invited by one-on-one telephone and face-to-face communications, constituted “general solicitation” and an “offer” because the issuer’s president, by

. . . distributing the Note and advising interested persons to come to the [issuer’s] office to invest was in public (i.e., “general”) solicitation. Moses was not acquainted with any of those people who were in attendance. The Commissioner finds that Moses’ comments were made in a presentation format, not in the one-on-one informal manner described by Moses in his testimony . . . . While the number of participants [six] may be relevant as to whether the solicitation is public, it is not dispositive.

(Order at p. 18, Conclusion of Law 43. Emphasis added.)

This analysis, or mis-analysis, thankfully did not appear in the Court of Appeals opinion. However, such language may be used again by the Commission (e.g., see In the Matter of Caobo Co., et al, above) or by private plaintiff litigants to establish the presence of “general solicitation” in similar private circumstances.

None of these three Missouri exemptions, by their terms, requires the issuer to have any pre-existing knowledge of persons solicited for interest in investing. Of course, they do require the issuer to fully determine the status and suitability of every purchaser. But Commissioner Ommen’s opinion requires the issuer to determine the financial and investment sophistication status of every “offeree,” and by mixing the “offer” and “general solicitation” concepts, defines an “offeree” to include every person who is contacted by the issuer, directly or indirectly, concerning the sale of securities. If this interpretation is correct, it virtually precludes Missouri (and only Missouri) entrepreneurs from the single greatest advance in tended by the SEC and the Commissioners on Uniform State Laws in adopting Regulation D, the “25 per year” exemption and the Reg D Coordinating Exemption, respectively.

And the damage done by the Commissioner’s opinion in Moses does not stop with those exemptions. An even greater advance in raising entrepreneurial capital was the collaboration between the North American Securities Administrators Association (NASAA) and the SEC in creating the Accredited Investor Exemption (adopted by the vast majority of states, and finally adopted in the NASAA format by Missouri in 2003). By its language, this exemption deletes the prohibition on general solicitation if sales are made only to accredited purchasers. The reasoning of then-Commissioner Ommen is tortuous, but it appears to say: “well . . . the language of the exemption just can’t mean what it says.” And the Court of Appeals deferred to and accepted this conclusion. (186 SW3d 889,908)

The Severe Harm to Missouri Entrepreneurs

The three exemptions most available (at least, prior to Moses) to, and the most relied on by, Missouri attorneys for their entrepreneur clients in raising funds from non-institutional investors (i.e., “angels”) are the Missouri Accredited Investor exemption, the Regulation D Coordinating Exemption and the 25 per year limited offering exemption. The Accredited Investor Exemption is undoubtedly the most used. The availability of all these exemptions for sales to Missouri residents by Missouri companies, particularly in comparison to the availability of the virtually identical exemptions in the vast majority of other states, appears to be greatly reduced by Moses.

If the Commissioner and the courts in civil cases continue to accept Commissioner Ommen’s reasoning, Missouri entrepreneurs will be placed at a significant competitive disadvantage with those of the vast majority of other states.

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