Finance Expertise

By Patricia Smith,2014-08-07 11:30
13 views 0
Finance Expertise

    Welcome to the Spring 2008 Edition of

    the Global Employment Law Ticker Spring 2008

    Orricks Employment Law Ticker is the only publication dedicated to In this issue: keeping in-house counsel and senior human ; Dismissals in Troubled Times: Avoiding the Legal Landmines resources executives informed on the most important employment law ; Important Developments in Arbitration developments and trends in the financial services industry. ; Firms' Signature to "Protocol for Broker Recruiting" May Bar

    Enforcement of Post-Employment Restrictive Covenants Against If you would like your Brokers Who Join Non-Signatories to Protocol colleagues to be included on our electronic distribution list, have ; Mandatory Vacation Policies in the Wake of Societe Generale comments about the Trading Losses: California Considerations publication, would like a copy of a case profiled in an article, or would like us ; Recent Developments in Sarbanes-Oxley Whistleblower Law to address a specific topic in the future, please contact Ticker editor ; Developments in China Michael Delikat (212-506-5230). ; Developments in the United Kingdom

    ; Developments in Japan

    ; Orrick’s Twelfth Annual Roundtable on Critical Employment Law

    Issues in the Financial Services Industry

    Dismissals in Troubled Times: Avoiding the Legal Landmines As the shock waves started by the subprime crises and concerns of a deep recession are felt across the financial services industry, reductions-in-force and executive separations in the financial services industry dominate the headlines. Indeed, over the past four months, a total of approximately 75,000 layoffs have been announced at virtually every major financial services firm, and approximately 110,000 employees have already been laid off across a broad spectrum of the financial services industry. In this difficult economic environment, where replacement jobs are scarce and those who are laid off may not be reemployed for an extended period of time, employee claims of wrongful termination, breach of contract and discrimination are increasing.

    Thus, it is crucial that employers manage the employee separation process carefully from start to finish and where possible, that they obtain enforceable releases from their departing employees. The legal landscape with regard to releases is, however, always evolving particularly with regard to compliance with the Older Workers’ Benefit Protection Act and thus, we offer the following tips to assist in ensuring that releases are fully compliant with all applicable legal requirements.

    ; Make sure the release language is "readily understandable"; that is, easily

    understood by the average individual eligible for the force reduction. In

    other words, to the extent possible, avoid the legal "jargon."

    ; Attach demographic information required pursuant to the Older Workers’

    Benefit Protection Act.

    ; Where a reduction takes place in successive increments over a period of

    time, supply cumulative information regarding the selections, so later

    terminees are provided ages and job titles for all persons who were

    employed at the beginning of the reduction and all persons terminated to


    ; Do not provide too much or too little demographic data. Rather, ensure

    that the demographic information provided consists of the group of

    employees who were compared and considered in making the selection

    decisions at issue, not a larger group or a smaller group.

    ; Include an integration clause in the separation agreement, but draft it

    carefully to avoid invalidating other agreements that are meant to survive

    the employment relationship such as confidentiality and non-competition


    ; Be careful in drafting covenants not to sue, or consider foregoing such

    covenants altogether, as they are often confusing and may render a

    separation agreement difficult to understand, thus forming the basis for

    invalidating the release.

    ; Remember that certain claims cannot be released including claims under

    the Fair Labor Standards Act, the Family and Medical Leave Act and the

    Uniformed Services Employment and Reemployment Rights Act.

    Following these pointers will go a long way to ensure that at least with regard to those employees who do sign separation agreements, their claims have been released to the


    fullest extent permitted by law, and employers do obtain some amount of closure in an otherwise turbulent time.

    Important Developments in Arbitration

    Supreme Court Rules that Parties Cannot Expand the Scope of Arbitral Review by Agreement

On March 24, 2008, the United States Supreme Court held in Hall Street Associates v.

    Mattel, Case No. 06-989, that the Federal Arbitration Act’s (the "FAA") limited grounds for

    review of an arbitration award cannot be expanded by agreement of the parties. Although not an employment case, the decision is applicable to agreements to arbitrate employment disputes. In Hall Street, the parties had agreed that the arbitrator’s decision

    could be vacated, modified or corrected where (1) the arbitrator’s findings of fact are not

    supported by substantial evidence or (2) where the arbitrator’s conclusions of law are erroneous. The Court held, however, that the provisions of the Federal Arbitration Act in Sections 10 and 11 are the exclusive basis for vacating or modifying an arbitration award, and the parties cannot expand the scope of review by agreement. Responding to the argument that "Hall Street and its amici say parties will flee from arbitration if expanded review is not open to them, the Court stated that ―whatever the consequences of our

    holding, the statutory text gives us no basis to expand the statutory grounds." Financial services firms that have adopted arbitration programs that contain judicial review provisions will as a result of this decision be unable to seek review of awards that are broader than that provided by the FAA and would be well advised to remove such provisions from their arbitration programs.

    FINRA Files Proposed Rule Change with the SEC Making Case Dispositive Motions in Arbitration Less Appealing

    On March 20, 2008, FINRA filed a proposed rule change with the SEC making case dispositive motions in both customer and employment arbitration substantially less appealing to movants. The proposed rule change provides that if a motion to dismiss a claim is filed and the claim is dismissed, the non-moving party may withdraw any remaining related claims without prejudice and may pursue all claims in court. Moreover, motions to dismiss must be decided by the full panel, if the panel grants such a motion it must be unanimous and accompanied by a "written explanation," if the motion is denied forum fees associated with the required hearing must be assessed against the moving party, and if the panel deems the motion frivolous, it "must" award reasonable costs and attorneys' fees to any party that opposed the motion.

    As FINRA states, the proposal "is designed to ensure that parties would have their claims heard in arbitration, by significantly limiting the grounds for filing motions to dismiss prior to the conclusion of a party’s case in chief and by imposing stringent sanctions against parties for engaging in abusive practices under the rule." All comments to the proposed rule must be submitted on or before April 10, 2008.


Firms' Signature to “Protocol for Broker Recruiting” May Bar

    Enforcement of Post-Employment Restrictive Covenants Against

    Brokers Who Join Non-Signatories to Protocol

    Thirty-nine financial services firms have signed the Protocol for Broker Recruiting (the "Protocol"), which allows brokers of the signatory firms, under certain circumstances, to take client lists with them when they leave to begin work for another signatory firm and to contact those clients without incurring liability. Other financial services firms were invited to sign the Protocol and enjoy the benefit of hiring brokers from signatory firms pursuant to the Protocol without incurring liability.

    Recent court decisions suggest that any firm that has signed the Protocol may be barred from enforcing a post-employment restrictive covenant against a former broker who takes a client list to a competitor and who begins to solicit those former clients while working for the competitor, regardless of whether the competitor has signed the Protocol a

    significant and unintended result of the Protocol. More than one court now has denied a Protocol signatory firm's motion for a preliminary injunction seeking to enjoin one of its former brokers who had joined a firm that had not signed the Protocol and who had allegedly taken client lists and solicited former clients in violation of the broker's non-disclosure and non-solicitation agreement. The courts have held that, because the plaintiff firms had agreed in the Protocol that departing brokers could take client lists with them to work at competitive financial service firms, the plaintiff firms' client lists cannot be considered confidential information. The courts also have held that, by entering into the Protocol and allowing departing brokers to take client lists, the plaintiff firms could not establish that they suffered irreparable harm, an essential element of their burden of proof.

    Mandatory Vacation Policies in the Wake of Societe Generale Trading Losses: California Considerations

    In January, the stunning news broke that Jerome Kerviel, a junior futures trader at Societe Generale, had caused approximately $7 billion in trading losses, the largest trading loss in history. Among other things, it is alleged that Kerviel engaged in a pattern of hidden trades and fictitious deals. Reportedly, Kerviel had not taken any time off work for eight months, and had only taken four vacation days in all of 2007. Prompted by the losses caused by Kerviel, the Financial Services Authority ("FSA"), the UK markets regulator, made a number of recommendations for investment banks to improve industry controls to minimize the risk of rogue traders. One of the key recommendations was that investment banks encourage or require traders to take two consecutive weeks of vacation annually. As the FSA explained, hidden positions are likely to come to light if a trader is unable to manage them for a two-week period. Indeed, as Kerviel reportedly stated to prosecutors, "A trader who doesn’t take vacation is a

    trader who doesn’t want to leave his book to someone else."

    In order to assist in the detection of fraud, financial services employers may want to audit their vacation policies and practices to determine whether traders are taking sufficient vacation time. Those employers without mandatory vacation policies may want to adopt them; those who already have mandatory vacation policies may want to ensure that they are being enforced.


    In the implementation and enforcement of mandatory vacation policies, employers must be mindful to comply with any state laws governing such policies. For example, in California, an employer may require that an employee take a minimum number of vacation days per year, and if they fail to do so, the employer may select a period and mandate that the employee take off that period for vacation. However, the employer must provide ―reasonable notice‖ prior to employer-mandated usage of vacation time,

    which generally means notice of no less than one full fiscal quarter or 90 days, whichever is greater.

    Recent Developments in Sarbanes-Oxley Whistleblower Law

    Over the past year, the Department of Labor (the ―DOL‖) has continued its trend of

    employer-friendly decisions in Sarbanes-Oxley (―SOX‖) whistleblower claims. However,

    as more cases make their way to the district court level, judges appear much less inclined than the DOL to dispose of cases on motions to dismiss or for summary judgment. There also have been a number of recent decisions by appellate courts examining the extent of SOX’s protections. Highlights of the recent decisions we believe

    are particularly relevant to the financial services industry include:

    Livingston v. Wyeth, No. 06-1939 (4th Cir. Mar. 24, 2008): In

    a groundbreaking case of first impression, litigated by Orrick, the Fourth Circuit affirmed

    the district court’s grant of summary judgment to Wyeth, becoming the first Court of

    Appeals to review a district court’s decision on the question of what constitutes "protected

    activity" under SOX. Livingston, a training director at Wyeth’s manufacturing facility in

    Sanford, North Carolina, alleged that Wyeth terminated his employment in retaliation for his internal complaints that Wyeth was going to miss an internal deadline for implementing a certain training documentation program which was being implemented as a result of a consent decree with the FDA.

    The Fourth Circuit held that Livingston’s complaints about the consequences of missing

    the impending deadline did not constitute protected activity because he did not have "a reasonable belief about an existing violation," rather, his complaints were too speculative and ultimately unrealized. In addition, his allegations did not concern a ―material fact‖ to

    a company with two dozen facilities and revenues of over $14 billion. In a footnote with broad implications, the Fourth Circuit also noted that under the language of the statute, violation of "any rule or regulation of the Securities and Exchange Commission" is limited to those violations involving fraud.

    Allen v. Stewart Enterprises, No. 06-60849 (5th Cir. Jan. 22, 2008): In this case the

    Fifth Circuit upheld the Department of Labor Administrative Review Board’s (the

    "ARB") legal finding of no protected activity. The three plaintiffs were all former employees of Stewart who worked in quality assurance and administrative functions. The plaintiffs variously complained about internal accounting policies, refund procedures, and compliance with an SEC guideline, SAB-101, which covered revenue recognition in financial statements. The Fifth Circuit held that the plaintiffs’ reports that Stewart’s

    financial documents did not comply with the SEC guideline SAB-101 were not protected because the guideline was not a "rule or regulation" of the SEC, and the plaintiffs knew that Stewart’s internal financial documents did not need to comply with SAB-101. In this

    regard, the court held the plaintiffs to a high standard for objective reasonableness on the basis of their expertise (one plaintiff was a CPA) and experience.

    With regard to the allegations about accounting policies and refund procedures, the court accepted the Administrative Law Judge's ("ALJ") and ARB’s factual findings that the


    plaintiffs did not reasonably believe Stewart was attempting to defraud its shareholders when it failed to disclose to shareholders information about computer glitches relating to customer refunds, interest calculations and billing problems, as Stewart was actively working to fix the problems and was not trying to cover them up. Therefore, the plaintiffs could not prove that Stewart acted with a mental state embracing intent to deceive, manipulate or defraud its shareholders, which the ARB held was required to demonstrate a reasonable belief of a violation of federal law relating to fraud against shareholders. O’Mahony v. Accenture LTD, No. 1:07-cv-017916-VM (S.D.N.Y. Feb. 5, 2008):

    O’Mahony, an Irish citizen who worked for Accenture in the United States for a number of

    years, left for an expatriate position in France. While there, she reported to Accenture management in the United States what she believed to be violations of the French social security contribution requirements and claimed that she suffered a reduction in her level of responsibility and compensation in retaliation for her complaints. Extending the extra-territorial reach of SOX, Judge Marrero denied the defendants’ 12(b)(6) motion, finding that the court had jurisdiction over claims of an Irish employee working in France. The court distinguished Carnero, a decision by the First Circuit holding that SOX did not apply to an Argentinean citizen working in Brazil who sued the U.S. parent corporation of his foreign employer, because O’Mahony was employed by the U.S. subsidiary of a

    foreign corporation, the alleged wrongful conduct of deciding not to pay the social security contributions occurred in the U.S., and the action was brought against the foreign parent and U.S. subsidiary. This decision has a potentially broad impact for global employers.

    Ryerson v. American Express Financial Services, Inc., 2006-SOX-74 (Feb. 29, 2008):

    In one of the few recent findings of merit at the DOL, the ALJ in this case found that a financial advisor reasonably believed he was reporting fraud. Ryerson, a second-career financial advisor, complained that language on a standard disclosure form provided to clients was fraudulent and misleading. He was concurrently experiencing performance issues, and was asked to re-write business plans and was told he would be terminated for his poor performance. Ultimately, Ryerson resigned prior to being terminated. The ALJ held that given the financial advisor’s experience and knowledge, it was reasonable for him to believe that the language on the client form was fraudulent and misleading to the point that it could constitute "fraud against shareholders."

    The ALJ also found that Ryerson suffered adverse employment actions when he was required to re-write business plans, given a compliance warning about them and informed of American Express’ intent to terminate his employment. However, the ALJ held that there was no causal connection between Ryerson's protected activity and his resignation in anticipation of his termination for poor performance, and therefore limited his damages to expungement of any references in his file to the requests to re-write his business plans and litigation costs and expenses.

    Leznik v. Nektar Therapeutics, 2006-SOX-93 (Nov. 16, 2007): In a case that was later

    settled, the ALJ in this case denied the employer’s motion for summary judgment. Leznik, an attorney working for Nektar Therapeutics, a pharmaceutical company, raised concerns about manufacturing problems, a lack of financial transparency in a project and other accounting issues, and was terminated for poor performance six months after her complaints. In denying the motion for summary judgment, the ALJ found that her reporting activities were protected, squarely rejecting the argument that reporting cannot be considered protected as a matter of law when it falls within a complainant’s ―normal job duties,‖ an argument that has met with varying levels of success in other ALJ cases.


Getman v. Southwest Securities, No. 07-60509 (5th Cir. Feb. 13, 2008): In a case

    familiar to many in the financial services industry, the Fifth Circuit recently upheld the ARB’s decision that Getman, a research analyst, did not participate in protected activity by allegedly refusing to sign off on the change of a stock rating from ―accumulate‖ to

    "strong buy" because the review committee Getman reported to "did not express an intent to change [her] rating [on the stock], and Getman never expressed a belief to any supervisor that changing the rating would violate any securities laws." Given the constantly changing complexities of SOX whistleblower law and the growth of case law in the federal courts, employers must continue to handle carefully any employee

    seeking whistleblower protections.

    Developments Affecting Financial Services Firms Outside the United States

    China: Expanded Entitlement to Severance Amounts Capped

    Employers should be aware of changes to severance entitlements under the new Labor

    Contract Law which came into effect on January 1, 2008. The circumstances in which severance must be paid have been expanded with the practical effect that severance must generally be paid whenever an employee is terminated other than for cause. Cause is limited to gross misconduct and similar circumstances. Mere gross incompetence, which can if certain conditions are met be grounds for termination, will now give rise

    to an entitlement to severance, as will the failure of an employer to offer to renew an expired fixed term contract.

    On the other hand, the amount of severance which was previously calculated based on the average monthly salary of the individual employee is now calculated based on an amount equal to the lower of the actual average monthly salary of the employee or three times the local monthly average salary (as issued by the local Labor and Social Security Bureau) multiplied by the years of service of the employee. Currently in Shanghai, three times the average monthly salary is just over US$1000 and middle and senior level professionals can expect to earn several times this amount. This cap on severance should therefore significantly reduce the financial burden of severance payments, particularly in the case of large scale reductions in force.

    China: Mandatory Annual Leave

    The Regulations on Paid Annual Leave for Employees entitle all People's Republic of

    China employees to a minimum period of annual leave each year. The entitlement is between 5 to 15 days of annual leave per year depending on the employee’s length of employment. According to an Explanatory Statement issued by the Labor and Social Security Bureau, the length of employment refers to the number of years the employee has participated in the work force regardless of years of employment with the current employer. The regulations also contain a provision stating that, where both parties agree, unused annual leave entitlements may be converted into monetary payments at three times the employee’s ordinary daily salary. Our understanding, based on discussion with the relevant labor authorities, is that payments in lieu of unused annual leave will be calculated using this formula. Employers should put systems in place to ensure that annual leave entitlements are consistent with each employee’s period in the work force and that employees utilize their annual leave entitlements to avoid potentially costly accruals.


United Kingdom: Temporary and Agency Workers

    Prevalent in almost every business, temporary and agency workers provide important cover in positions such as secretarial staff, customer support and IT personnel while receiving less security and fewer benefits than their permanently employed colleagues. For quite some time this issue of disproportionate treatment has been causing rumblings within the European Union, but a number of recent developments have signaled that important changes could be forthcoming this year.

    The Agency Workers Directive ("AWD") was first proposed in 2002 by the European Commission. Entailing the creation of a common legal framework across Europe to regulate the treatment and supply of temporary workers, it proposes minimum periods of temporary employment and the same terms and conditions for agency workers currently enjoyed by permanent employees. Benefits such as maternity rights, pay levels, working time and holidays would also be equalized. The July 2008 upcoming control of the EU presidency by France is expected to breathe a new priority and support into the passing of this historically stagnant Directive.

    In the UK, a private member’s bill – the Temporary and Agency Workers (Equal

    Treatment) Bill has caused a stir as many of the government’s own MPs have voted against the government line by supporting the bill, which in substance is quite similar to the AWD. Proponents of this legislation argue that it will result in the conversion of 1.4 million temporary workers into a well trained and steady long-term workforce in the UK; opponents argue that it will lead to 250,000 job losses and a less flexible labor market overall. The bill is unlikely to achieve royal assent without government backing, but the rebellion among Labour Party MPs has put significant pressure on the government to address this issue. In response, the Prime Minister has created a commission to investigate the issue.

    In the meantime, the employment tribunals and courts in the UK continue to seek ways of implying employment rights for this category of workers. James v. Greenwich, 2006 WL

    3933146 (Dec. 21, 2006), aff’d, 2008 WL 45607 (Feb. 5, 2008) is the latest in a line of cases which consider whether agency workers are in fact employees and therefore entitled to employment protection in the UK. Judgment was handed down in February 2008 from the Court of Appeal, holding that an agency worker will only be considered an "employee" of the end-user (or client) business and therefore entitled to benefits such as redundancy payments and the right not to be unfairly dismissed if it is necessary that a contract of employment be implied to give "business reality" to the situation. This only confirms that it is necessary for the end-user businesses to limit the perception of an employment relationship between themselves and the agency worker by encouraging the agency to exercise direct control over the worker when at all possible. United Kingdom: Immigration Overhaul

    The new UK immigration Points Based System ("PBS") went into effect on February 29, 2008, along with a licensing system for employers that want to directly recruit skilled workers from overseas into the UK. It is essential that global organizations seeking to hire or inter-office transfer employees into the UK be compliant with these new procedures, as the penalty for hiring an illegal worker has been raised to a ?10,000 maximum. Additionally, the Highly Skilled Migrants Programme of the new PBS is currently under judicial review by the High Court, as the new system could lead to 44,000 current migrant workers being forced out of the country. Information and guidance on


this new system and upcoming developments is available by contacting Orrick’s London

    employment law team.

    United Kingdom: Award Increases

    The annual increase in the level of statutory awards for UK employment claims took effect on February 1. The maximum unfair dismissal compensatory award is now ?63,000 and the maximum weekly pay for unfair dismissal basic award and statutory redundancy payment is ?330. The still relatively low cap on these claims means that employees continue to search for excuses for uncapped categories of claim (such as discrimination and whistleblowing) in order to maximise their damages.

    Japan: Managing Wage-and-Hour Inspections

    Foreign companies must be mindful of the compliance risks associated with failing to comply with the numerous Japanese labor regulations which govern overtime, health and safety, particularly given that the Japanese Labor inspectors are focused on ensuring that all overtime is paid given the excessive number of hours traditionally worked by employees and middle-management in Japan.

    A common misstep by foreign employers is the failure to implement an effective and appropriate system of distinction between exempt and non-exempt employees and in doing so, keeping in mind that ―exempt‖ status in Japan is limited to an extremely small group of senior managers and executives. Foreign employers also often fail to properly monitor the working hours of those who are non-exempt and to keep records of such hours. Failure to classify properly and to pay all overtime owed can result in significant financial sanctions and potential litigation.

    If faced with a wage-and-hour inspection by Japanese authorities, foreign companies must devote substantial resources including the active involvement of a team of human resources, finance and legal personnel in both the parent company and the Japanese subsidiary, to prepare for the inspection. Foreign employers should also work with their legal counsel to communicate with the labor inspectors throughout the inspection process and, if necessary, to implement changes to the manner in which they classify their employees and monitor hours worked. Such efforts will result not only in legal compliance, but, to the extent the employer is viewed as a model of compliance on wage-and-hour and work-life balance in Japan, may improve recruiting prospects for the foreign employer.

Japan: New Labor Contract Law

    Effective April 1, 2008, the "Labor Contract Law," prepared by the Ministry of Welfare and Labor, will strengthen employees’ rights under the current ―work rules‖ by converting the work rules into labor contracts. It is considered one of the most important pieces of labor legislation in Japan in 60 years, since the Labor Standards Law of 1947. The "work rules" is a document which the Labor Standards Law requires that any company employing 10 or more people prepare and file with the Labor Standards Office. It sets work hours, wages and other labor conditions, and details sanctions, dress codes and other matters related to employment.

    At present, the contents of the work rules are entirely at the employer’s discretion and an

    employee has no recourse with regard to the rules themselves. However, the basic


    articles of the new law as submitted to the Welfare and Labor Ministry on February 2 (by the Advisory Council), provide that without the consent of the workers, even if an employer changes the work rules, such changes do not change the controlling labor contract if the changes are to the disadvantage of the workers. That said, if an employer makes changes to the work rules which are rational, the working conditions set forth in the corresponding labor contract will accord with the changed work rules. The new Labor Contract Law will apply to all aspects of an employment contract from hiring to retirement, transferring to related firms, or shifting a worker’s contract to another


Orrick’s Twelfth Annual Roundtable on Critical Employment Law

    Issues in the Financial Services Industry

    New York CityJune 12, 2008

    Limited Space Available

    Orrick’s Twelfth Annual Roundtable on Critical Employment Law Issues in the Financial Services Industry will be held in New York City on June 12, 2008. This advanced, half-day program is offered to in-house counsel and senior human resources executives in the financial services industry. It provides a forum for you to interact with your peers at financial services firms who have day-to-day responsibility for claims prevention and resolution.

    Space for this program is limited. To receive an invitation, e-mail

    CLE credit is available for attendees.


Report this document

For any questions or suggestions please email