All employers should examine their use of labor and employment service providers to mitigate unwanted disclosure of fees paid to such providers.
To protect confidentiality and the integrity of the attorney-client relationship for all clients, Morgan Lewis will not engage in reportable persuader activities but will continue to offer a broad range of services in labor-management relations.
The US Department of Labor (DOL) on March 23 issued its long-anticipated final persuader regulations, which expand the circumstances under which employers and consultants, including lawyers and law firms, trigger sensitive reporting requirements under the Labor-Management Reporting and Disclosure Act (LMRDA). These final regulations have significant implications for all employers, not just those involved in union organizing, collective bargaining, or other union-related activity.
Any employer that hires a law firm or consultant that engages in reportable persuader activity for any client, even if not for every client, will trigger disclosure as to fees paid by all clients for broadly defined “labor relations advice or services” throughout the year. The DOL and the courts have interpreted “labor relations advice or services” expansively to include virtually all work in the labor and employment space, including potentially, litigation defense. As a result, a single lawyer can, by performing any reportable work for one client, trigger an obligation to report information on all of the clients for which the lawyer’s law firm performed any labor and employment work—even those clients for whom it performed no reportable persuader work. Filed reports are publicly available on the DOL’s website, allowing anyone to review how much an employer paid to a consultant or law firm in a given year for a broad range of labor and employment services, including potentially, litigation defense.
For example, if a lawyer engages in persuader activity, such as working with a company to assist it in defeating a union election campaign, for Client A, and the lawyer’s law firm provides sensitive advice to Client B on a workplace harassment investigation, the new regulations will obligate the law firm to report not only that it received fees (and the amount of such fees) for the work performed for Client A, but also to report that it received fees (and the amount of such fees) for the work performed for Client B, even though the work performed for Client B was not arguably persuader activity.
The new persuader regulations apply to all “arrangements and agreements as well as payments (including reimbursed expenses) made on or after” July 1, 2016. Because of the grossly overbroad and intrusive reporting obligations on client service and fees received, Morgan Lewis has decided that, effective July 1, it will not engage in any reportable persuader activity on behalf of any of its clients unless and until the regulations are invalidated or repealed. The firm will, however, continue to represent clients and provide a broad range of services in the labor-management relations area, including all matters before the National Labor Relations Board (NLRB), in collective bargaining and arbitration, in labor law and labor relations counseling, and strategic advice about corporate brand defense. This means that clients will be able to engage our lawyers across the full spectrum of labor and employment services—including most labor-management relational and advice activities that are not reportable work—without triggering a reporting requirement or being reported on by the firm. Protecting client confidentiality and maintaining the integrity of the attorney-client relationship are of crucial importance to us and to our clients. We believe this decision not to engage in reportable persuader activity strikes the best balance for our clients and for the firm.
Passed in 1959, the LMRDA requires employers, consultants, and lawyers to disclose to the DOL any agreement or arrangement to engage in activity that (1) has a direct or indirect object of persuading employees with respect to the exercise of their rights to organize and bargain collectively or (2) is undertaken to supply an employer with information concerning the activities of employees or a labor organization in connection with a labor dispute involving such employer. An employer that enters into a reportable arrangement with a consultant or lawyer is required to file an LM-10 report within 90 days of the close of its fiscal year. Consultants and lawyers make corresponding disclosures on DOL Forms LM-20 and LM-21. Form LM-20 must be filed within 30 days of entering into an agreement with an employer to engage in persuader activity and includes information concerning the nature and the terms of the arrangement. Any consultant or lawyer who files an LM-20 report also must annually file the LM-21 year-end report, which contains additional financial information.
The disclosures on the LM-21 report include the identity of and fees received from all clients for which the consultant or lawyer provided “labor relations advice or services” during the year. The DOL has made clear that “labor relations advice or services” goes beyond persuader activity and encompasses “all advice and services on matters having a bearing on the relations between an employer and his employees[,]” including “contract negotiations, employee training programs, development of vacation, overtime, and job evaluation policies” and, importantly, “advice on the various Federal and state laws bearing on the employer-employee relationship.” Most courts similarly have interpreted the LMRDA to require this broad reporting on the LM-21 report.
The DOL makes all filed reports available on its website in a database that may be searched by the name of an employer, consultant, or law firm.
All reports must be signed by chief executive and financial officers under penalty of perjury, with monetary and criminal penalties for failing to report or reporting false information. Specifically, the LMRDA imposes criminal penalties on any person who (1) willfully violates the LMRDA’s reporting requirements, (2) knowingly makes a false statement or representation of material fact in any required report or disclosure, (3) knowingly fails to disclose a material fact in any required report or disclosure, or (4) willfully makes a false entry in or conceals, withholds, or destroys any records required to be kept by the LMRDA. The LMRDA also imposes personal liability on the individuals required to sign reports for failing to file them and making knowing misrepresentations in them. The statutory penalty is a maximum fine of $10,000 or imprisonment for not more than one year, or both.
The LMRDA contains three primary exemptions to the reporting requirements in this area: representational activities, attorney-client privileged communications, and the provision of advice. The first covers the representation of an employer in collective bargaining negotiations and in judicial, administrative, or arbitral proceedings. The second exempts lawyers from reporting “any information which was lawfully communicated to such attorney by any of his clients in the course of a legitimate attorney-client relationship.” Both of these exemptions are not directly affected by the persuader regulations.
The third exemption, which covers the provision of advice, historically was interpreted by the DOL and courts to protect a wide range of consulting or advisory services provided to employers by consultants and lawyers from disclosure. Reporting only was triggered when a consultant or lawyer had direct, persuasive contact with employees (e.g., meetings or other direct communications). Consultants and lawyers were, therefore, able to provide a wide range of services for clients without triggering a reporting requirement.
The DOL’s persuader regulations reject the historical interpretation of the advice exemption, narrowing the definition of “advice” and significantly expanding the scope of reportable persuader activity. In addition to the direct employee persuasion, employers, consultants, and lawyers now must disclose activities that fall into four new categories of indirect persuasion:
The persuader regulations also amend and expand DOL Forms LM-10 and LM-20 but do not change Form LM-21. The DOL intends to address Form LM-21 in a rulemaking scheduled for September 2016.
The persuader regulations limit the advice exemption to “an oral or written recommendation regarding a decision or course of conduct.” The regulations provide that the following types of activities do not trigger a reporting requirement under the new definition of advice:
As mentioned above, the persuader regulations do not directly alter the exemptions for representational activities or attorney-client privileged communications. There is, however, an inherent tension (and seeming conflict) between the narrowed definition of “advice” and information that may be subject to the attorney-client privilege. Notably, the DOL does not consider privileged the fact of legal consultation, clients’ identities, attorney fees, and the scope of an attorney-client relationship.
To date, three separate lawsuits challenging the persuader regulations have been filed in the US District Court for the Eastern District of Arkansas, US District Court for the District of Minnesota, and the US District Court for the Northern District of Texas. The plaintiffs include law firms, trade associations, and businesses, among others. The plaintiffs collectively argue that the DOL exceeded its statutory authority in promulgating the final rule because it attempts to usurp state laws regulating the attorney-client relationship, it violates employers’ free speech and due process rights, and the regulations are too vague for a law that carries criminal sanctions. Each lawsuit seeks to enjoin the rule pending a decision on the merits and a declaration that the rule is invalid.
On April 13, the DOL issued a “special enforcement policy” memo stating that it would not require LM-21 filers to complete portions of the LM-21 form temporarily, including the portion that requires the identity and fees received from all clients for which the filer provided “labor relations advice or services” during the year. This policy can be rescinded with 90 days’ notice. The rationale for this special enforcement policy is unclear, but its issuance while the courts contemplate injunctive relief in the pending lawsuits suggests that it may last only as long as the litigation.
The new persuader regulations require employers to evaluate all law firms and consultants engaged for labor and employment work to determine whether those firms and consultants intend to engage in reportable work under the new regulations. As part of this evaluation, employers must consider a number of fundamental questions and must do so relatively quickly in light of the July 1 effective date:
How employers consider each of these issues will affect the law firms and consultants that employers engage going forward, as well as the types of services they engage those law firms and consultants to provide.
In response to the persuader regulations, Morgan Lewis has decided that it will not provide services that would trigger reporting under the new requirements. This decision is intended to protect the confidentiality and integrity of the attorney-client relationship for all clients that engage Morgan Lewis to provide services in labor and employment matters, including matters that have nothing to do with union organizing or collective bargaining.
We will be working closely on the implications for specific representations in the coming weeks. Watch for more information, including webinars, on this topic.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Harry I. Johnson, III
Ross H. Friedman