If U.S. businesses had any thoughts that a change in leadership at the Department of Labor would mean a change in the aggressive tactics employed under Secretary Hilda Solis, they were probably mistaken.
A little more than three months into the tenure of Thomas Perez, the department’s agenda has in many areas continued on the path set by Solis. Perez in a recent speech to the AFL-CIO’s convention ticked off the areas in which he vowed the Labor Department would remain aggressive.
They included worker’s rights, workplace fraud, enforcement of wage and hour laws, raising the minimum wage and the safety and health of workers. The department has also kept its sights on ERISA issues, including Employee Stock Ownership Plans, while the final status of the proposed fiduciary rule changes remains up in the air.
“It’s very much the stick vs. the carrot,” said Matthew Disbrow, a partner with the Michigan law firm of Honigman, Miller Schwartz and Cohn, who represents employers on regulatory issues including wages and hours rules. “That’s the world we live in today. Employers need to realize that best practices are a proactive analysis of internal programs.”
In other words, it’s best to be wary. Others are waiting a bit before characterizing the department’s attitude under Perez.
“I think we are in a period of transition,” said Marcia Wagner, an ERISA expert and managing partner of the Wagner Law Group in Boston. “I think we’ll know more in a month or so” as the future of the fiduciary standard becomes more clear.
Still, Wagner counsels her clients to make sure their compliance standards are high, saying the focus of the department will likely remain on enforcement.
“It’s cheaper to figure out what is the rule [and comply with it], than to play audit lottery,” Wagner said. “You can’t win audit lottery.”
Here, then, is look at the areas Disbrow and Wagner said they expect the Labor Department to most focus on.
The Labor Department’s road to put securities brokers under the same fiduciary rules as investment advisers has been bumpy.
The pushback against the change reached new heights last week when the House approved a bill to delay implementing the standard. Although it’s unlikely the Senate will follow suit, and President Obama has promised to veto it, it remains to see how the Labor Department will proceed.
The rule is designed to make sure brokers avoid conflicts of interests and work in the best interests of their clients. The move to delay the change is part of Republican efforts to undermine the 2010 Dodd-Frank law. The U.S. Chamber of Commerce backs the delay while other groups, like Better Markets, an independent, non-profit organization, said the new standard would protect consumers.
“The open question is,” Wagner said, “is the Department of Labor going to be plowing through on the definition of fiduciary. My guess is yes.”
She added that the handling of the rule would be an important sign to watch.
“How it’s issued and promulgated will be a litmus test for Secretary Perez,” Wagner said.
ESOPs and employee benefits
As part of its enforcement tactics, DOL has brought a number of actions against Employee Stock Ownership Plansand has sought total repayment of about $100 million.
Most recently, the department sued California Pacific Bank, alleging the San Francisco institution mismanaged the assets of its plan. The suit asks that $1.4 million be paid back.
The department also alleged that Sherwin-Williams used its ESOP only for tax advantages. The company agreed to pump $80 million into the $2.5 billion plan. Other high-profile cases involved the Chicago Tribune, Parrot Cellular and Maran Inc., a clothing manufacturer.
The ESOP Association, an industry trade association, has urged Congress to make clear that appraisers of ESOPs are not fiduciaries. It fears that if appraisers were covered under the fiduciary definition, conflict-of-interest questions would arise, leaving companies open to class-action lawsuits.
Wagner said she expected that the stock plans would remain on the department’s radar.
“ESOPs have been an area of concern for awhile,” she said. “I think you’ll see the DOL looking at whether fair value is met.”
She also said there would be more scrutiny and enforcement regarding filing of information about employee benefits plans, particularly series 5500 forms.
When Perez addressed the AFL-CIO convention earlier this year, one area he emphasized was cracking down on workplace fraud, especially the misclassification of workers as contract employees.
“We expand opportunity when we combat the unfair, illegal practice of misclassifying employers as independent contractors. Some people call the practice ‘misclassification.’ I call it what it is: workplace fraud,” Perez said in his speech. “Workplace fraud has three victims: the worker, of course; the employers who do the right thing but find themselves undermined by an unlevel playing field; and the government, which gets cheated out of unpaid taxes.”
In the last few years, states like Maryland – where Perez was secretary of labor, heading licensing and regulation from 2007 to 2009 – have stepped up enforcement of such violations. Proposals have been made to increase federal fines for violations.
Disbrow says it remains to be seen whether this becomes a front-burner issue over the next few months, but both he and Wagner agree that the department under Perez will continue to emphasize enforcement and investigation over working with employers.
Worker’s rights and wage/hour matters
Enforcement in this area has included extending minimum wage and overtime protections to home health care workers. The final rule, which affects 2 million workers, was finalized in September. The broadening of the Fair Labor Standard Act came after the U.S. Supreme Court had ruled the workers exempt from the protections.
“The intent is to protect more workers,” Disbrow said. “But it affects a lot of small and midsize businesses.” In the end, Disbrow said, the additional wages will be passed directly to consumers using home health care workers.
The department has also proposed rules that would mandate that government contractors hire more military veterans and those with disabilities. The Labor Department said the rules could lead to the hiring of than 750,000 people with disabilities (585,000) and veterans (200,000). Contractors with $50,000 or more in government contracts and at least 50 employees would be held to quotas mandating 7 percent of their workforce be people with disabilities and 8 percent be veterans.
There’s been a lot of talk about raising the minimum wage by the Obama administration. The president has backed setting it at $9 an hour from the current $7.25.
This summer, when fast-food workers around the country staged protests demanding $15 per hour, Perez supported a pay hike but at the more modest level sought by Obama.
With the protests generating media coverage and Democrats often floating the idea, the prospects for its passage are murky, at best, with the Republicans maintaining control of the House.
Disbrow doesn’t expect a major push to raise the minimum wage.
All the talk, he said, “is more for public consumption. … I don’t think Obama and the Department of Labor would spend a lot of political capital on it.”
Comment period for new regulations
When new regulations are proposed, the law calls for a period of public comment before rules are published and then finalized. This allows interested parties – employers, unions, lawmakers and anyone else – to study the proposals and weigh in on their possible effects.
There have been complaints that the 60-day comment periods for various proposals under Solis, and now Perez, have been inadequate. For instance, in 2011, under public and congressional pressure, the department extended the comment period for proposed changes to the Fair Labor Standards Act. Even the addition of 30 days drew fire from some lawmakers.
And it’s not just lawmakers and employers who see a problem. In July, the U.S. Circuit of Appeals for D.C., ruling in MBA v. Harris (Department of Labor), decided that a rule regarding overtime exemptions for mortgage loan officers was invalid because it was instituted without a public comment period.
“What you have is a very aggressive Department of Labor that is trying to push through what they think are very important changes,” Disbrow said.
Disbrow said proposed regulations are often complicated and 60 days is not enough time for anyone to study them, offer comment and for the Labor Department to evaluate the comments.
“Some would say the fix is in with short comment periods,” Disbrow said, although he did not go that far.