Cross-Border Counselor

A recent trend in U.S. employment law has been the adoption of stricter and stricter tests for when a worker may be classified as an independent contractor rather than an employee. Independent contractor relationships are often less expensive and easier for employers to administer since employers are not responsible for providing healthcare benefits to independent contractors and do not have to pay employment taxes for their independent contractors. Many workers also prefer to be classified as independent contractors because they believe that they will have more freedom to work on behalf of multiple customers as independent contractors.[1] The actual legal test for whether a worker may be classified as an independent contractor varies significantly from state to state. While some states apply what is referred to as the “Control and Direction Test,” which, as the name suggests, puts a significant emphasis on the degree to which the company controls the manner in which the putative contractor’s work is performed, many U.S. states apply what is called the “ABC Test,” which is far stricter. States applying some version of the ABC test include California, Connecticut, Delaware, Illinois, Indiana, Massachusetts, Nebraska, Nevada, New Hampshire, New Jersey, Vermont, Washington, and West Virginia. The first part of the ABC test begins with the same concept as the “Direction and Control Test,” but applied more strictly. The worker must be free from control or direction by the company, both under the terms of the parties’ contract and as a matter of reality. U.S. courts repeatedly emphasize that it is the reality of the worker’s work for the company that matters, not just what the parties’ contract says. If the parties’ contract prohibits the company from exercising direction or control over the worker, but the company’s agents and employees in fact exercise such control, the worker will be deemed an employee not an independent contractor. The second part of the ABC test requires that the worker perform work that is outside the usual course of the hiring entity’s business. Put another way, the work the worker is performing for the company cannot be the same work that the company is primarily engaged in for its customers. For example, a company in the business of installing cable windows could not hire a worker to install windows as an independent contractor. However, a company in the financial services industry could hire a window installer as an independent contractor to install windows in buildings it owns or leases. The third part of the ABC test requires that the worker be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company. Put another way, the worker needs to have his or her own ongoing business with multiple customers and the work done for the company has to be the same kind of work the worker’s own separate business engages in on behalf of other customers. To refer back to the example in the second part of the test, the window installer needs to have his or her own separate business installing windows for other customers. The consequences for misclassifying workers as independent contractors can be dire. Many misclassified workers work long hours and can rack up substantial overtime. That computer programmer you retained as an independent contractor for $5,000 a week to assist with a project at crunch time and who worked 70 hours a week for 10 weeks could be owed an additional $32,000 over the $50,000 you already paid. What is worse, if you did not track the worker’s hours, a U.S. court will presume that the number of hours the worker claims to have worked is accurate. You could end up paying for 80 hours of work a week even if the worker only worked 60. In addition, companies will be held liable for unpaid employment taxes and, if the IRS thinks you intentionally misclassified workers, criminal penalties of up to a year in jail and up to a $500,000 fine. Companies that are required to comply with the Affordable Care Act will have to pay additional penalties for failing to provide health care coverage to employees where required. The independent contractor test in the United States is often significantly more strict than that in Canada. Canadian companies looking to retain independent contractors for their U.S. operations should take care to familiarize themselves with the increasingly strict independent contractor test in the United States. Those that ignore their independent contractor ABCs could face substantial liability. [1] This belief is actually erroneous. An employer and an employee can agree that the employee is free to work for other employers.

Canadian companies with interests in Cuba should take note of our recent eUpdate, Trump Administration Allows Lawsuits Against Persons Who Have Used Assets Confiscated by the Cuban Government, Imposes More Sanctions on Venezuela and Nicaragua, regarding new potential exposure to litigation in the United States. On April 17, 2019, the Trump Administration announced that U.S. courts may begin to hear lawsuits against persons who use assets that the Cuban government expropriated in the wake of the Cuban revolution in 1959 or since that time. While the underlying U.S. law (the Helms-Burton Act) has been in effect since 1996, all prior U.S. Presidents have chosen to exercise their discretion to waive that particular provision in the law, so this is the first time that such lawsuits have been allowed to proceed. This watershed event could have major and unprecedented implications for Canadian companies or individuals who have engaged in business in Cuba since 1959 if previously confiscated assets were involved. Such companies and individuals may now find themselves targeted by lawsuits in U.S. courts by the former owners of Cuban properties (such as mines, factories, hotels, and the like). Dorsey attorneys are available to assist Canadian businesses with addressing this significantly increased risk under U.S. law from doing business in Cuba. Our team has extensive experience assisting clients with addressing U.S. economic sanctions, including the trade embargo against Cuba, as well as representing clients in complex commercial litigation across the United States.

Under U.S. law, large employers have an obligation to notify their employees at least 60 days before a “plant closing” or “mass layoff.” This requirement can have serious implications for Canadian companies engaged in M&A deals with U.S. companies. The U.S. Federal Worker Adjustment and Retraining Notification Act (“WARN Act”) requires employers with 100 or more employees to give at least 60 days’ notice before a “plant closing” or “mass layoff” to employees affected by the action. Part-time employees who work less than 20 hours per week and employees who work fewer than 6 of the 12 months preceding the date when notice would be required do not count toward the 100 employee threshold. A “plant closing” is any “permanent or temporary shutdown of a single site of employment, or one or more facilities or operating units within a single site of employment” that results in an “employment loss” of 50 or more full-time employees during any 30-day period. A mass layoff is any layoff at a single work site which results in an “employment loss,” during any 30-day period, for: (a) at least 33% or more of the workforce and at least 50 full-time employees, or (b) at least 500 employees at the site. An “employment loss” is any loss in employment that lasts longer than six months. It is important to note that to constitute a “mass layoff,” both the 50 full-time employee threshold and the 33% of the workforce thresholds must be met. If fewer than 50 employees lose their jobs, it is not a “plant closing” or a “mass layoff” under the WARN Act. The penalties for failing to give the required notice under the WARN Act can be substantial. Employers must pay each employee to whom they failed to give notice a full day’s pay and benefits for every day of notice the employer failed to provide—that is, up to 60 days’ worth of back pay and benefits per affected employee. Employers are additionally liable for a penalty of up to $500 for each day the employer is in violation of the WARN Act’s notice requirements, up to a $30,000 maximum. In an M&A transaction, the seller is responsible for providing the WARN Act notice for any layoffs that meet the requirements of the statute and occur before the close of the transaction, and the buyer is responsible for providing the notice for any layoffs that meet the requirements of the statute and occur after the close of the transaction. This rule, unfortunately, can give buyers a false sense of security, especially in asset sale transactions. While the buyer is ordinarily not liable for the debts of the seller in an asset sale transaction, the buyer can be deemed a successor to the selling entity and liable for the seller’s failure to give WARN Act notice. Where the buyer purchases the seller’s assets intending to continue the seller’s business essentially intact, courts may deem the buyer responsible for the seller’s liabilities to its employees, including the seller’s liability to its employees for failure to provide the required WARN Act notice. U.S. courts will consider several factors when determining whether the buyer is a successor employer, including: (a) whether the work force is substantially the same; (b) whether there is a substantial continuity of the business operation; (c) whether the work is being performed in the same plant; (d) whether the buyer uses the same supervisors, machinery, and equipment that the seller used; and (e) whether the buyer makes the same products or offers the same services that the seller used to make or sell. While the sale of a business results in a technical termination of employment for all of the seller’s employees (the seller’s employees no longer work for the seller), the WARN Act does not treat such a technical termination of employment as a “loss of employment” if the employees are immediately employed by the buyer after closing. However, where the seller’s business is not sold as a going concern, the seller will be liable for failing to provide WARN Act notice to employees who suffer an employment loss on or prior to the close of the transaction, even if the seller thought the buyer would be hiring its employees if the buyer does not, in fact, do so. To complicate things even further, many states have their own “Mini-WARN” statutes, many of which are stricter than the Federal WARN Act. For example, the California WARN Act applies to employers who employ only 75 or more people, rather than the 100 employee threshold under the Federal WARN Act. The California WARN Act also defines a “mass layoff” as one involving 50 or more employees, regardless of the percentage of employees laid off. The New York WARN Act applies to employers who employ only 50 or more employees and requires employers to provide 90 days’ notice, rather than the 60 days’ notice required under the Federal WARN Act. The Federal WARN Act and its state law counterparts create many traps for the unwary M&A participant. Buyers and sellers alike should be aware and make sure they have knowledgeable legal counsel to avoid these pitfalls.

The SEC’s settlement with Tesla and Elon Musk teaches us some important corporate governance lessons on monitoring and vetting executive use of social media. As background, on August 7, 2018, the markets were surprised by a series of tweets initiated by Elon Musk, the CEO of Tesla, Inc., in which Musk mused about taking Tesla private at $420 per share (a significant premium to the then-market price), with funding secured. The stock price jumped, trading in Tesla stock was halted, and Tesla rushed to catch up with official announcements. The deal didn’t happen, and it was questioned whether Musk was really serious, and whether funding was really “secured.” The SEC commenced an investigation. On September 27, 2018, the SEC announced charges against Musk for securities fraud in connection with his tweets, which it said were inaccurate and misleading. Among the remedies sought was a permanent ban on Musk being eligible to serve as a director or officer of any public company, effectively seeking to sever him from Tesla, a company of which he is the heart and soul. Tesla’s stock dropped 14%. If this remedy was included by the SEC as leverage, that leverage worked, and on September 29, 2018, the SEC announced a settlement with Musk, as well as charges against and a settlement with Tesla. Tesla’s stock increased 17%. As part of the settlement, Musk will remain Tesla’s CEO and a director, but Musk and Tesla agreed that: Musk will step down as Tesla’s Chairman for at least three years and be replaced as Chairman by an independent director; Tesla will appoint two additional independent directors; Tesla will establish a committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and Musk and Tesla will each pay $20 million to harmed investors under a court-approved process. The SEC alleges that Tesla failed to implement adequate disclosure controls and procedures over Musk’s use of Twitter. Tesla had publicly announced in 2013 that Musk’s Twitter account would be among the means by which Tesla intended to release material information, Musk had amassed 22 million Twitter followers, and important information about Tesla had been released through this account, but the SEC says that Tesla had not adopted any specific policies regarding Musk’s use of Twitter, such as procedures to determine whether proposed tweets were accurate and complete, and whether they contained information requiring disclosure in Exchange Act reports. In effect, the SEC says Tesla had given Musk carte blanche to release material information about Tesla, without subjecting it to the normal controls to which other, more formal, types of disclosures would be subject, and as a result, the market was misled. Investors harmed included short sellers and those who purchased shares after Musk’s announcement temporarily drove up stock prices, only to see those prices drop afterwards. The SEC’s settlement with Tesla and Musk teaches us some important corporate governance lessons: If a public company allows its executives to use Twitter or other social media accounts to disclose material information about the company, it is not enough to notify the public that material disclosures may be made by these means. Companies must ensure that their disclosure controls and procedures adequately cover executives’ use of social media. In deciding what disclosure controls and procedures to implement, consideration should be given to such matters as: what topics are permitted or prohibited; procedures for review and approval of disclosures before they are made; the inclusion of risk factors or other cautionary or explanatory language to help prevent disclosures from being potentially misleading; coordination of social media disclosures with other company disclosures as needed to satisfy public reporting requirements; and monitoring actual disclosures and resulting market and media reactions for any surprises. Companies that do not allow executives to use social media accounts to disclose material information should adopt policies clearly prohibiting such use, and monitor executives’ use of social media for any inadvertent violations of policy.  

When one thinks of the law, one often thinks of hard and fast rules. Employers cannot fire employees for a discriminatory or a retaliatory reason. Employees must be paid at least minimum wage. And so on. The law governing hostile work environment claims in the United States, however, is not so easily defined and applied. At first glance, the elements of a hostile work environment sexual harassment claim seem definite enough. In order to prove a claim for hostile work environment sexual harassment, a plaintiff has to prove that he or she has been subject to behavior that is: Sexual in nature or directed at an individual solely because of his or her gender; Uninvited or unwelcome; Offensive to a reasonable person; and Severe or pervasive enough to adversely affect a person’s work environment. The first two elements are clear enough conceptually. Was the conduct sexual or about the plaintiff’s gender and was the plaintiff a willing participant in the conduct? Like anything in the law, there are tough cases. For example, what about someone who participates in the conduct at first, but stops participating later? The last two elements, however, are based entirely on the subjective feelings of the jurors in any given case. What exactly is offensive to a reasonable person? Who is this reasonable person and what is she or he like? When exactly would any particular conduct affect that person’s ability to do her or his job? When a judge instructs a jury in a hostile work environment case, she or he will tell the jury that, in order to find for the plaintiff, you must find that the conduct complained of is offensive to a reasonable person. When assessing this issue, the vast majority of jurors will ask themselves, “do I find the conduct offensive?” The reason for this is simple—most people consider themselves reasonable. If I find conduct highly offensive, then it is offensive to a reasonable person because I myself am reasonable. The difficulty with this standard is that it makes hostile work environment claims a moving target. What is offensive in a small rural town may not be offensive in a big city. What is offensive in a very socially liberal area may not be offensive in a conservative area, or vice versa. What is more, standards for what is or isn’t offensive change over time and across generations. A recent survey by The Economist/YouGov found that almost 25% of millennial men in the United States believe that asking someone out for a drink is sexual harassment. This statistic is, to say the least, surprising to many in older generations. What does this mean for companies looking to employ workers in the United States? First, it means you cannot be too careful. Even if you think that certain behavior is just harmless flirtation or joking around, you need to ask yourself, how confident are you that 12 strangers in the city where your employees live would agree with you? Sexual harassment verdicts frequently reach into the six and seven figures range when attorney fees and emotional distress damages are added to an employee’s lost wages. Are you willing to bet that kind of money on your ability to tell whether a sexually charged joke at work crossed the line? Furthermore, as a practical matter, it is not enough to have a case that will win a trial. Between document discovery, depositions, motion practice, trial preparation, and the actual trial, “winning” a sexual harassment case at trial will cost a company hundreds of thousands of dollars. To really win, your case has to be so good that a court will dismiss it as a matter of law. Recently such victories have become harder to come by. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, overturned a trial court’s order dismissing a harassment case where the plaintiff claimed she was hugged too much by her boss, but never complained of the hugging to her boss or human resources. Courts are increasingly unwilling to say what is or isn’t offensive to a reasonable person as a matter of law. As an employer, it is important to set policies that keep employees from coming close to what they consider to be “the line” and to address employees’ concerns regarding possible harassment quickly and thoroughly. You might think the behavior was harmless, but how much are you willing to bet that 12 strangers will agree with you? Well-crafted policies written in consultation with your employment lawyer can make it clear to your employees that your company has zero tolerance for inappropriate behavior. Wherever your employees think the line is, they shouldn’t even come close.

The United States isn’t the only country addressing its history of gender inequality, sexual abuse, and sexual harassment. However, the United States is having its own unique experience in doing so. For U.S. employers, the current focus on these issues poses challenges, but also opportunities to address problems of diversity and harassment in the workplace. Non-U.S. companies looking to hire employees in the United States should be aware of the issues facing U.S. employers and be prepared to address them. One major change in the U.S. workplace resulting from the #MeToo movement is that employees who allege sexual harassment are far more likely to be believed. According to a November 2017 Quinnipiac University poll, 60% of U.S. women report that they have been sexually harassed, but according to the Equal Employment Opportunity Commission (the U.S. Federal Agency charged with investigating claims of sexual harassment in the workplace), 90% of women who have been sexually harassed never formally report it. That second statistic is changing rapidly. The deluge of credible allegations of sexual harassment against previously well-regarded public figures such as Bill Cosby, Matt Lauer, and Charlie Rose has eroded the view that “nice guys” aren’t capable of such behavior and that sexual harassment is relatively rare. In the post #MeToo era, the presumption favors the accuser, and the burden is on the accused to prove that the harassment didn’t occur. Since the #MeToo movement began, the standard for what constitutes sexual harassment has changed as well. Sexually harassing behavior is legally defined, in part, as behavior that is “offensive to a reasonable person.” This definition is fluid and depends upon prevailing social norms. In the post #MeToo era, behavior that used to be considered merely crude or boorish can now qualify as sexual harassment. In early 2017, the Ninth Circuit Court of Appeals, which hears cases from Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington, held that excessive hugging in the workplace could constitute sexual harassment. Companies with U.S. customers also face public relations challenges over and above any legal liability resulting from sexual harassment allegations. U.S. customers are voting with their dollars, and if a company is perceived as turning a blind eye to sexual harassment in the workplace—or, worse, actively concealing it—many U.S. consumers and advertisers will cease doing business with the company. After numerous sexual harassment claims surfaced against then Fox News host Bill O’Reilly, more than a dozen marketers withdrew their ads from Mr. O’Reilly’s show, The O’Reilly Factor. Fox News had paid roughly $13 million to settle harassment claims against Mr. O’Reilly over the years, but it was the withdrawal of ad revenue that eventually led the company to fire Mr. O’Reilly. How can companies with U.S. employees adapt to this new reality? First, the bad news. As discussed above, what constitutes sexual harassment depends on prevailing social norms and those norms are rapidly changing in the United States. Employers cannot simply give employees a list of behaviors to avoid. Traditional anti-harassment training, which often focuses on such lists of bad behaviors, is not enough. Instead, employers must train their employees to be mindful of their impact on others and to be alert to signs that their behavior is unwanted or unwelcome. Employers should also establish strong anti-harassment policies and procedures for reporting workplace harassment. U.S. law provides employers with a defense to certain types of harassment claims where the employer has established an anti-harassment policy and procedure for employees to report harassment in the workplace, but the employee fails to do so. When employees do report harassment, employers should thoroughly investigate and make sure that the reporting employee is not subject to any retaliation—even if the employer determines that the harassment complaint is meritless. Finally, the revelations of the #MeToo movement—that sexual harassment and assault is pervasive and often goes unreported—have been deeply upsetting to many employees. Consider creating forums for discussion, such as pre-scheduled and moderated company meetings, where employees can express their concerns regarding these revelations without distracting co-workers from their jobs. The #MeToo movement has raised important issues regarding pervasive sexual harassment in the workplace. Companies that do not take this opportunity to assess their own practices are likely to face increased scrutiny and liability.

Earlier this week, a panel of Dorsey attorneys presented a webinar on the SEC’s recent guidance on cybersecurity disclosures and policies, which included a detailed walk-through of the SEC’s 2018 guidance, including issues related to enhanced disclosure, insider trading, and Reg FD policies. The panel also discussed the impact of the SEC’s guidance within the changing landscape of cybersecurity and current developments in shareholder litigation, SEC enforcement actions, and other regulatory and legislative initiatives such as the GDPR. The Equifax data breach is used as a case study to illustrate how the SEC’s guidance might play out in this broader context. The webinar recording and presentation materials are available on our website at www.dorsey.com/newsresources/events/videos/2018/06/seminar-playback-sec-guidance-on-cybersecurity.

Like Canada, the United States has federal legislation protecting employees with disabilities. While Canada has the Canadian Charter of Rights and Freedoms and the Canadian Human Rights Act, the United States has the Americans with Disabilities Act (“ADA”). While both Canadian and U.S. laws protect disabled employees from discrimination, the ADA has very specific procedures and requirements for accommodating employees with disabilities that even sophisticated U.S. employers frequently get wrong. Below is a discussion of several key concepts under the ADA that employers in the United States should know about. An employer has a duty to provide an employee with a “disability” with “reasonable accommodations” that will allow the employee to perform the “essential functions” of his or her job. The definition of each of these terms is essential to complying with the ADA. While the definition of a “disability” is complex, a rule of thumb is that a disability is any condition that interferes with a person’s life, except for the most minor interference. Basically, if an employee has any sort of health condition and either asks for help or the employer is put on notice that the employee needs help, the employer’s duty to accommodate is triggered. When in doubt, it’s a disability. An “essential function” is one where the reason the position exists is to perform the function. This can be tricky to define in edge cases; however, some easy examples are a data entry specialist’s ability to enter data into a spreadsheet, a manual laborer’s ability to lift a minimum amount of weight, or a receptionist’s ability to communicate with people visiting the employer’s premises. Examples of non-essential functions include a receptionist’s ability to lift heavy objects or a secretary’s ability to do data entry. These are abilities that are nice to have, but are not central to the job. Accurate and detailed job descriptions are important for defining a job’s essential functions. If a certain ability or function is not listed in an employee’s job description, it is much harder for the employer to claim that function is essential. Just because a function is described as essential in a job description does not mean that a court will agree, however. Employers must make sure that functions described as essential are in fact essential. A “reasonable accommodation” is an accommodation that allows an employee to perform his or her essential functions, and which does not pose an undue burden on the employer. What constitutes an undue burden depends upon the size and financial resources of the employer. A small company might not be required to buy an expensive piece of speech-to-text software to allow an employee who cannot type to work on a computer, but a large company with significant resources might be required to do so. Similarly, a large employer might be required to give an employee recovering from surgery several months of unpaid leave with job projection, while a small employer might be allowed to hire a replacement sooner if the small employer cannot function without someone in the role. Employers determine what accommodations to provide through the “interactive process.” When an employer is put on notice that an employee has a disability and may require an accommodation, the employer is obligated to start a dialogue with the employee and the employee’s healthcare provider regarding what accommodations, if any, would allow the employee to perform his or her essential job functions. Much of the art of ADA compliance lies in appropriately communicating with employees and their healthcare providers through the interactive process. Employers cannot simply tell the employee what accommodations they are willing to make upfront on a “take it or leave it” basis. Rather, employers must engage in a back-and-forth dialogue with the employee and his or her healthcare provider and at least consider accommodations suggested by the healthcare provider. Employers should never reject any but the most outrageous accommodation requests out of hand. An employer’s duty to accommodate under the ADA is one of the most difficult aspects of employment law in the United States. Even sophisticated employers can run into trouble, and employer’s new to U.S. law should line up outside legal support in advance to help them navigate.

The default rule in most U.S. states is at-will employment. This means that either the employee or the employer may terminate the employment relationship at any time, without notice, for any reason—other than a discriminatory or retaliatory reason. A reason is discriminatory if it is based upon an individual’s status as a member of a protected class, such as race, gender, national origin, or religion. A reason is retaliatory if it relates to an individual’s protected activity, such as whistleblowing or raising concerns regarding the terms and conditions of employment. Parties can opt out of the default at-will rule by entering into an employment agreement that provides the employee with severance unless the employee is terminated for “cause” or quits without “good reason.” Unlike Canada, which has a rich body of law explaining what does and does not constitute “cause,” it is completely up to the parties in the United States to decide what constitutes cause and put that definition into the employment agreement. Getting this definition right is extremely important, and Canadian companies with employees in the United States that do not pay close attention to such language might be stuck paying substantial severance to employees whom they would have a right to terminate for cause under Canadian law. Most U.S. employment agreements for high-level employees provide for severance benefits ranging from a few months to a few years of pay upon the termination of employment if the company terminates the employee without “cause” or the employee quits for “good reason” as defined in the employment agreement. The definition of “cause” can vary widely from agreement to agreement and is often the subject of intense negotiation between the company and the employee. Many agreements only allow the company to terminate for cause if the employee engages in extreme misconduct, such as a felony or an act of dishonesty that has a substantial negative impact on the company. Other agreements allow the company to terminate for cause if the employee fails to competently perform the employee’s job duties. Often times, the agreement will require that the employee be given notice and an opportunity to cure any failure that would otherwise constitute cause for termination. Some but not all agreements also allow the employee to quit and receive severance if the employee quits for “good reason” as defined in the employment agreement. “Good reason” is often defined to include a material reduction in the employee’s duties or compensation, or a requirement that the employee relocate. Good reason may also be tied to a change in control over the company, such that the employee’s right to quit for good reason and receive severance only arises if the company changes ownership. Canadian companies purchasing U.S. businesses can find themselves hamstrung by definitions of “cause” and “good reason” that make it very difficult to fire or even control wayward executives that were brought along as part of the deal. Cause definitions that require extreme misconduct by the executive tie the company’s hands in situations where the executive is merely performing poorly or not following the board’s directives. Good reason definitions that allow an executive to quit if the executive’s duties are changed or curtailed make it difficult to put new management in place where the executive and the board fail to see eye-to-eye on how the company should be run. U.S. courts tend to give the benefit of the doubt to the employee when assessing whether cause or good reason exists under an employment agreement, and companies that want to retain the right to terminate an employee for poor performance without paying severance should make sure that poor performance is explicitly included in the definition of cause. Alternatively, if a company is agreeing to a very employee-friendly definition of cause, it should be prepared to pay out the severance provided for in the employment agreement in all but the most extreme cases of employee misconduct. Business acquisitions usually start with the best of intentions and goodwill between the parties. No one goes into such a deal expecting it to go sideways. However, it is very important that Canadian companies looking to take on U.S. employees know what they are getting into in terms of severance obligations—and negotiate definitions of “cause” and “good reason” that reflect the company’s expectations.

In the United States, employers are required to pay employees overtime (1.5 times the employee’s hourly rate) for hours worked over 40 per week. In some states, such as California, employers are required to pay overtime if employees work more than 8 hours in a day. Like Canada, U.S. employees may be exempt from overtime requirements if they meet certain criteria. However, such exemptions under U.S. law are frequently more complicated than their Canadian counterparts, and even sophisticated U.S. employers frequently get them wrong. In 2016, U.S. employers spent nearly $700 million on class-action settlements of wage and hour claims. This does not include amounts U.S. employers spent paying judgments and attorneys’ fees. The three major categories of exempt employees under the U.S. Fair Labor Standards Act (which governs overtime pay) are the so-called “executive,” “administrative,” and “professional” exemptions: Similar to the Canadian exemption for managers, U.S. law exempts so-called “executive” employees from overtime. Employees must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent to qualify for the executive exemption. Such employees must also have the authority to hire or fire other employees, or the employee’s recommendations as to the hiring, firing, advancement, or promotion of other employees must be given particular weight. To qualify for the “administrative” exemption, an employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. The employee’s duties must be separate from the production of goods or rendition of services that the employer is in the business of providing. Accountants and human resources professionals can fall into this category. To qualify for the “professional” exemption, the employee must perform work requiring advanced knowledge that is intellectual in character and that usually requires some sort of prolonged course of study. Doctors, attorneys, and accountants with advanced degrees are good examples. For each of these exemptions, the employee’s job must require the exercise of discretion and judgment regarding matters of significance to the company. The authority to commit the company to large contracts or to spend significant amounts of the company’s money are good examples. Also, to qualify for any of these exemptions, employees must be paid a salary of at least $455 per week. There are additional exemptions for so-called “creative professionals,” “computer employees,” and “outside sales employees” as well. U.S. employers frequently misapply these exemptions. To qualify for the “creative professional” exemption, the employee’s primary duty must involve invention, imagination, and originality in a field of artists or creative endeavor. The key to this exemption is the distinction between creativity and technical skill. An employee that makes technical drawings or reproductions would not qualify, but an employee that creates original works of art would. The “computer employees” exemption is often a trap for employers. The mere fact that an employee uses a computer or is technically proficient with computer hardware or software is not enough. The employee must design, develop, analyze, or create computer software or hardware systems on behalf of the employer. Low-level tech support does not qualify, but computer programmers and systems designers do. Another frequently misapplied exemption is the “outside sales employees” exemption. Many U.S. employers mistakenly classify their in-house sales staff as exempt. However, to qualify for this exemption, a salesperson has to work primarily on the road, traveling to customers. Employees that primarily work a phone, either at home or at the employer’s office, do not qualify. All of these exemptions often sound clear on paper. The Vice President of Sales, the head of accounting, and the company’s in-house lawyer are all clearly exempt. But what about the assistant manager at a retail location? What about a mid-level accounting professional? Many employees fall into a gray area. The consequences of misclassifying employees can be severe. An employer that misclassifies its force of 50 salespeople could easily end up owing over a million dollars in overtime in a class action suit. These claims are also very expensive to research and litigate. If a company fails to record the hours worked of a misclassified employee, a U.S. Court will start with the presumption that the employee’s own testimony regarding his or her hours worked is accurate, and the employer will have the burden of proving otherwise. Canadian companies looking to operate or acquire businesses in the United States should carefully assess their own and their targets’ wage and hour practices and make sure they are consistent with U.S. law.

Harassment has been in the news a lot lately in the United States, with several high-profile terminations at well-known companies. Companies are losing millions of dollars, not just in settlements and verdicts, but in lost customers and bad publicity. The Equal Employment Opportunity Commission, or EEOC, is the administrative agency responsible for enforcing laws prohibiting workplace harassment in the United States. The EEOC has issued new guidance suggesting that conventional anti-harassment training isn’t enough. So what is an employer to do? Maintaining an effective harassment reporting procedure is simple, but not always easy. Often, it means a willingness by the company to put its money where its mouth is. This involves taking the time and spending the money to educate employees about harassment in the workplace, adopting procedures for employees to report harassment, and educating employees about those procedures. First, the company needs to demonstrate that it takes reports of harassment seriously. This means immediately investigating all complaints and taking swift remedial action where there is evidence of harassment. A track record of taking complaints seriously and dealing with wrongdoers promptly gives other employees confidence that their own concerns will be heard and acted upon. This means taking action against harassers, even if they are rock star performers. Second, the company needs to make its employees aware of its harassment reporting procedures. The best way to do this is during mandatory anti-harassment training and by having employees acknowledge in writing that they have received and reviewed a copy of the company’s anti-harassment policies, which should contain the reporting procedure. Training takes time and money, but it gets the word out and demonstrates the company’s commitment to its anti-harassment policies. In addition to the moral and morale benefits likely to result, an effective reporting procedure can also be part of a legal defense to a harassment claim. Employers can avoid liability if they have an effective reporting procedure that the accusing employee failed to utilize. Courts look at the same issues discussed above when assessing this defense. Does the company have a robust anti-harassment policy? How has the company handled prior complaints? What steps has the company taken to inform employees about its anti-harassment policy and reporting procedure? A hotline is meaningless if a company has a history of ignoring complaints or has failed to inform employees about it. A hotline is really just one tool in the anti-harassment toolbox. Employers should train employees to recognize and report harassment in the workplace, swiftly investigate and respond to complaints, and make sure that employees know how to report harassment. If these other components are not established, an anti-harassment hotline is just a dial-in circular file.

Canadian companies exporting products across the border into U.S. markets face significant risks of litigation or regulatory action arising from products sold and distributed in the United States. In a recent article, our colleague Kent Schmidt outlines ideas for managing these risks and creating a litigation risk profile around the four key areas of vulnerability: product liability claims, breach of warranty claims, false advertising and consumer protection claims, and claims related to collection, use, or compromise of consumer data and personal information. The full text of Kent’s article is available at www.dorsey.com/newsresources/publications/articles/2017/05/avoiding-unnecessary-us-litigation. For a more thorough discussion on how Canadian companies can avoid product-related claims in the United States, we invite you to attend one of Kent’s upcoming in-person Cross-Border Product Liability Seminars being held in Vancouver, BC (May 31), or Calgary, AB (June 1). For more information on the seminar and to register, please visit the event page: www.dorsey.com/newsresources/events/event/2017/05/cross-border-product-liability-seminar.