• 409A
  • Commentary/Opinions/Views
  • Deferred Compensation
  • Employment Agreements
  • Equity Compensation
  • ERISA Litigation
  • Executive Compensation
  • Family and Medical Leave Act (FMLA)
  • Fiduciary Issues
  • Fringe Benefits
  • General
  • Governmental Plans
  • Health Care Reform
  • Health Plans
  • International Issues
  • International Pension and Benefits
  • Legal Updates
  • Multi-employer Plans
  • Non-qualified Retirement Plans
  • On the Lighter Side
  • Plan Administration and Compliance
  • Qualified Plans
  • Securities Law Implications
  • Severance Agreements
  • Tax-qualified Retirement Plans
  • Uncategorized
  • Welfare Plans
  • Archives
  • November 2017
  • October 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • May 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • July 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • May 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • November 2013
  • October 2013
  • September 2013
  • August 2013
  • July 2013
  • June 2013
  • May 2013
  • April 2013
  • March 2013
  • February 2013
  • January 2013
  • December 2012
  • November 2012
  • October 2012
  • September 2012
  • August 2012
  • July 2012
  • June 2012
  • May 2012
  • April 2012
  • March 2012
  • February 2012
  • January 2012
  • December 2011
  • November 2011
  • October 2011
  • September 2011
  • August 2011
  • BC Network
    Wednesday, April 27, 2016

    Top Hat“Top hat” plans are plans employers maintain for a “select group of management or highly compensated employees.” These plans are exempt from many of ERISA’s protections, including eligibility, vesting, fiduciary responsibility and funding. Thus, they are often used to provide benefits to management employees over and above those provided under the company’s broad-based retirement plans.

    Choosing which employees may participate in a “top hat” plan is an important decision, as selecting employees who are ineligible for this type of arrangement may lead to violations of ERISA, penalties, increased taxes, and other liabilities. For years companies, courts, and even the Department of Labor (DOL) have struggled with defining the group of employees who can participate in a “top hat” plan. Two recent federal court cases provide insight into the current state of the law and the factors courts consider when assessing “top hat” status.

    In Bond v. Marriott International, Inc., Nos. 15-1160, 15-1199 (4th Cir. 2016) (Unpublished Opinion), the Fourth Circuit held that the plaintiff’s claims were time barred, thus avoiding a decision on whether Marriott’s deferred stock bonus awards program was a “top hat” plan. The Maryland district court, however, had determined that the plan was indeed a “top hat” plan (Bond v. Marriott Int’l, Inc., 296 F.R.D. 403 (D. Md. 2014). Former employees of Marriott asserted that a retirement awards program was not a “top hat” plan and thus subject to the ERISA vesting requirements. The plan used a prorated vesting formula based on each participant’s service until he or she reached age 65. The plaintiffs in the case, who did not fully vest in their benefits as they terminated employment before reaching age 65, argued that this reduction in benefits violated ERISA. The district court accepted Marriott’s reliance on the plan prospectus which stated the plan was “exempt from the participation and vesting, funding and fiduciary responsibility provisions” of ERISA, and Marriott’s granting of retirement awards to less than 2 percent of their total workforce each year.

    The plan sponsor also prevailed in another recent case, Sikora v. UPMC (12/22/15 W.D. PA), in which the court was called upon to review the criteria for “top hat” status. In Sikora, the district court made clear to be considered a “top hat”, a plan must plainly “cover relatively few employees…and…cover only high level employees.” A former vice president at UPMC sought benefits from his former employer’s non-qualified supplemental benefit plan. Upon his voluntary termination, the plaintiff sought a lump sum payout, but instead received a written decision from the plan administrator informing him that he forfeited his fully vested account balance. Plaintiff filed suit alleging various causes of action while the defendant’s contention was that the plan was a “top hat” plan and exempt from ERISA’s vesting and non-forfeiture provisions. The court granted summary judgment for UPMC based on a plan participation rate of 0.2% and the titles and high compensation of the eligible participants.

    Courts have received a variety of arguments discussing factors to be considered for when a plan should meet the “top hat” definition. For instance, in an amicus brief filed in Bond, the DOL asserted the Court should rely on its “bargaining power” interpretation. In 1990, the DOL released an Opinion Letter on this subject which set forth the last official statement of its view, which is that only those employees who “by reason of their position or compensation level, have the ability to affect or substantially influence, through negotiation or otherwise, the design and operation of their deferred compensation plan” are eligible to participate in a “top hat” plan. Remember, an Opinion Letter is not legal precedence, but merely expresses the DOL’s view of how the law should be interpreted.

    Bond does not accept the DOL’s views nor expressly reject them. Instead, for a more thorough examination of the factors courts should entertain (and a vigorous repudiation of the DOL’s “bargaining power” view), look no further than the decision in Sikora. There, the court relied on both quantitative and qualitative factors. First, in determining what is a “select group” hinges primarily on the percentage of the workforce participating in the plan. The court noted that several courts have found plans with less than 15% participation to be “select.” Next, the court determined whether the “select group” consists exclusively of high-level employees by considering the following factors: (1) purpose of the setting up the plan, (2) plan eligibility criteria, (3) job titles of participants, (4) average compensation of participants, and (5) whether participants are eligible to participate in other key management or incentive plans.

    More than 40 years after ERISA was enacted there is still no bright-line standard for determining “top hat” status. The area remains ripe for litigation as these recent cases demonstrate and a fertile field for employee counsel. Accordingly, we recommend regular review of top-hat plans to ensure they meet regulatory requirements and these outlined factors.

    Tuesday, November 17, 2015

    CFOAfter the change in securities disclosure laws back in 2006, it was a common statement that the CFO of a public company was no longer covered by the $1 million deduction limit on non-performance based compensation under 162(m) of the tax code. This was (and is) because of a disconnect between the securities laws and the tax code.

    The tax code says that the chief executive officer and each of the next four most highly compensated officers whose compensation is required to be disclosed pursuant to the securities rules are “covered employees” for purposes of the $1 million limit. The 2006 changes in the securities rules changed the disclosure rules to require disclosure of compensation of the principal executive officer (usually the CEO), the principal financial officer (usually the CFO), and the three most highly compensated executive officers other than the principal executive officer and the principal financial officer and up to two additional individuals in certain circumstances). The IRS said that lack of a reference to the “principal financial officer” in the tax code meant that CFOs, by and large, were exempt from 162(m).

    However, when legal regimes cross, it’s not always as simple as it seems. For smaller reporting companies (generally those with less than a $75 million in public float), the securities rules only require disclosure of the compensation of the principal executive officer (usually the CEO) and the next two most highly compensated executive officers (other than the principal executive officer). There is no reference to the principal financial officer (by title) in these rules.

    In recent guidance (a Chief Counsel memo, to be specific), the IRS stated that, for a smaller reporting company, a CFO can be subject to 162(m) if he or she is among the two most highly compensated executive officers (other than the principal executive officer). Given the interaction of the tax code and the securities rules, this makes sense, and smaller reporting companies were likely already observing this rule. However, it serves as an important reminder to confirm any conclusion that involves the interaction of two different legal regimes.

    Monday, November 2, 2015

    With all the rulemaking required under the Dodd-Frank Act, it can sometimes be hard to keep up with the status of the various rules.  Below is a handy chart that details the current status of the various executive compensation rulemakings.  We plan to update this periodically for additional rulemakings, so be sure to come back and visit from time to time.

    Last Updated: November 2, 2015

    Provision Summary Status of SEC Rulemaking
    Say on Pay; Say on Golden Parachutes
    § 951
    Requires advisory vote of shareholders on executive compensation and golden parachutes; advisory vote on frequency of say on pay
    • Final rule: adopted January 25, 2011; SEC Rel. No. 33-9178
    Compensation Committee Independence
    § 952(includes comp consultant conflicts)
    Requires stock exchanges to adopt listing standards that require:

    • compensation committee members to be “independent;”
    • each committee must   have the authority to engage compensation advisers and before selecting any adviser, the committee must take into consideration specific independence factors; and
    • the committee must be directly responsible for the appointment, comp and oversight of the advisers and the company must provide funding.

    Requires disclosure of whether the committee obtained advice of a comp consultant, and whether the work raised a conflict of interest and how it was addressed

    • Final rule: adopted June 20, 2012 requiring exchanges to adopt listing standards; SEC Rel. No. 33-9330
    • SEC approved listing standards in January 2013 exchanges subsequently adopted the required listing standards
    Clawback Policy
    § 954
    Requires the company to develop, implement and disclose its policy for recovery of excess incentive-based compensation
    • Proposed rule: released July 1, 2015; SEC Rel. No. 33-9861
    Pay versus Performance
    § 953(a)
    Requires disclosure of the relationship between executive compensation “actually paid” and the company’s financial performance
    • Proposed rule: released April 29, 2015; SEC Rel. No. 34-74835
    Pay Ratio – Internal Pay Equity
    § 953(b)
    Requires disclosure of: (1) the median of the annual total compensation of all employees (except the CEO); (2) the annual total compensation of the CEO; and (3) the ratio of the amount in (1) to the amount in (2).For purposes of the ratio, the amount in (1) equals one (1:450), or, the ratio may be expressed as a narrative (the CEO’s annual total compensation is 450 times that of the median annual total compensation of all employees)
    • Final rule: released August 5, 2015; SEC Rel. No. 33-9877 (first reporting period for fiscal year beginning January 1, 2017 – typically disclosed in the 2018 proxy statement); new Reg. S-K Item 402(u)
    § 955
    Requires disclosure of whether any employee or director may hedge or offset any decrease in the fair market value of company stock
    • Proposed rule: released February 9, 2015; SEC Rel. No. 33-9723
    Chair and CEO positions
    § 972
    Requires disclosure of chairman and CEO structure
    • No planned guidance for this provision; see Reg. S-K Item 407(h)
    Monday, October 12, 2015

    A recent case from a federal court in the Northern District of Georgia provides an interesting perspective on the termination of a nonqualified retirement plan with a traditional defined benefit formula offering lifetime annuity payments. In Taylor v. NCR Corporation et. al., NCR elected to terminate such a nonqualified retirement plan. The termination decision not only precluded new entrants to the plan and the cessation of benefit accruals for active employees, but it also affected retirees in payout status receiving lifetime payments. Those retirees received lump sum payments discounted to present value in lieu of the lifetime payments then being paid to them.

    At the time NCR terminated the plan, its provisions apparently provided that the plan could be terminated at any time provided that “no such action shall adversely affect any Participant’s, former Participant’s or Spouse’s accrued benefits prior to such action under the Plan. . . ” The plaintiff was a retiree receiving a lifetime joint and survivor annuity of approximately $29,000 annually. As a result of the plan’s termination, NCR calculated a lump sum benefit for the plaintiff of approximately $441,000, with the plaintiff ultimately receiving a net payment of approximately $254,000 after federal and state income tax withholdings.

    The key allegations made by the plaintiff, as recited by the court, were (1) that the lump sum payment caused the plaintiff to incur a significant taxable event and (2) that the plaintiff objected to the use of a discount factor to reduce the value of the lump sum payment being made to him.

    The court rejected the first claim by citing widely established precedent that tax losses do not fall within the relief available under ERISA. The court also rejected the plaintiff’s complaint about the actuarial reduction, citing an Eleventh Circuit decision, Holloman v. Mail-Well Corp., in which the Eleventh Circuit seemed to conclude that the power to accelerate a stream of benefit payments necessarily included the ability to discount the value of those future payments to a present value lump sum.

    The court faulted the plaintiff’s allegations for simply complaining about the use of an actuarial reduction.  The court stated that the allegation “that the present value reduction factor decreased his further monthly payments as correct, but irrelevant” as a present value decrease of future payments was “precisely the purpose of applying a present value reduction factor.” Furthermore, the court said that the allegation that “the use of the present value reduction factor was, in itself, improper because it amounted to a reduction of his future monthly payments under the plan” was “incorrect as a matter of law.”

    The most interesting aspect of this case is how willing the court was to read a broad grant of authority into a very simple and concise reservation of an employer’s right to terminate a nonqualified retirement plan. The court was willing to infer that the power to terminate necessarily includes the power to commute annuity payments to lump sums and to discount the value of those annuity payments using appropriate actuarial assumptions, including discount rates. This case did not survive NCR’s motion to dismiss. The court indicated that it may have at least survived that stage of the litigation had the plaintiff alleged that the actuarial assumptions used by NCR were improper, rather than simply complaining about the mere use of such factors.


    Thursday, July 9, 2015

    Guy GrabbingLast week the Securities and Exchange Commission (SEC) proposed a new Rule 10D-1 that would direct national securities exchanges and associations to establish listing standards requiring companies to adopt, enforce and disclose policies to clawback excess incentive-based compensation from executive officers.

    • Covered Securities Issuers. With limited exceptions for issuers of certain securities and unit investment trusts (UITs), the Proposed Rule 10D-1 would apply to all listed companies, including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies. Registered management investment companies would be subject to the requirements of the Proposed Rule only to the extent they had awarded incentive-based compensation to executive officers in any of the last three fiscal years.
    • Covered Officers.   The Proposed Rule would apply to current and former Section 16 officers, which includes a company’s president, principal financial officer, principal accounting officer (or if none, the controller), any vice-president in charge of a principal business unit, division or function, and any other officer or person who performs policy-making functions for the company. Executive officers of a company’s parent or subsidiary would be covered officers to the extent they perform policy making functions for the company.
    • Triggering Event. Under the Proposed Rule, the clawback policies would be triggered each time the company is required to prepare a restatement to correct one or more errors that are material to previously issued financial statements and would be applied to covered officers even in the absence of any misconduct. Changes to a company’s financial statements that arise for reasons other than to correct an error (g., change in accounting principles, revision for stock splits and adjustments to provisional amounts related to a prior business combination) would not trigger any required recovery action.
    • Three-Year Lookback. A company would be required to recover excess incentive-based compensation received by covered officers within the three completed fiscal years prior to the date the company is required to prepare the accounting restatement. Under the Proposed Rule 10D-1, an accounting restatement would be treated as required on the earlier of: (1) the date the company concludes or reasonably should have concluded that its previously issued financial statements contain a material error; or (2) the date a court, regulator or other authorized body directs the company to restate a previously issued financial statement to correct a material error. For example, if a company that operates on a calendar year determines in November 2018 that a previously issued financial statement contains a material error and files the restated financial statements in January 2019, the recovery policy would apply to all excess incentive-based compensation received by covered officers in 2015, 2016 and 2017.
    • Incentive-Based Compensation. Under the Proposed Rule, incentive-based compensation is any compensation that is granted, earned or becomes vested (in whole or in part) due to the achievement of any financial reporting measure (g., revenue, operating income and EBITDA) or performance measures based on stock price and total shareholder return. Incentive-based compensation generally would not include salary, discretionary bonus payments, time-based equity awards, non-equity awards based on achievement of a strategic measure (e.g., consummation of a merger) or operational measures (e.g., completion of a project) or bonus pool awards where the size of the pool is not based on satisfaction of a financial reporting measure performance goal. However, if a covered officer earns a salary increase based (in whole or in part) on the attainment of a financial reporting measure, the increase could be considered a non-equity incentive plan award and subject to recovery under the Proposed Rule 10D-1.

    For purposes of applying the three-year lookback period, incentive-based compensation would be deemed received in the fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant occurs after the end of that period. Consequently, the date of receipt would depend upon the terms of the award. For example, if an award is granted based on satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when that measure was satisfied. However, if an equity award vests upon satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when it vests. Any ministerial acts or other conditions necessary to effect issuance or payment (e.g., calculating earned amounts or obtaining board of approval) would not be determinative of the date the incentive-based compensation is received by the covered officer.

    • Determining Recoverable Amount.    The amount subject to recovery would be the amount of incentive-based compensation received by a covered officer that exceeds the amount the officer would have received had the incentive-based compensation been determined based on the accounting restatement. Although the Proposed Rule does not specify a means of recovery, it does offer guidelines for determining the recoverable amount under different types of incentive-based compensation arrangements.
      •  Cash Bonus Pool Awards. The company would reduce the size of the aggregate bonus pool based on the restated financial reporting measure and if the reduced bonus pool is less than the aggregate amount of individual bonuses received from it, the excess amount of an individual bonus would be the pro rata portion of the deficiency. If the aggregate reduced bonus pool would have been sufficient to cover the individual bonuses received from it, then no recovery would be required.
      • Equity Awards. The method of recovering equity awards would depend on the status of the award. With respect to shares, options or SARs still held by the covered officer at the time of recovery, the recoverable amount would be the number received in excess of the number that should have been received applying the restated financial reporting measure.   If the options or SARs have been exercised but the covered officer still holds the underlying shares, the recoverable amount would be the number of shares underlying the excess options or SARs applying the restated financial measure. However, if the shares have been sold, the recoverable amount would be the sale proceeds received by the covered officer on the excess number of shares. In all situations, the covered officer’s payment of any applicable exercise price would be taken into account.
      • Nonqualified Deferred Compensation. The covered officer’s account balance or distributions would be reduced by the excess incentive-based compensation contributed to the nonqualified deferred compensation plan and any interest or earnings accrued thereon. In addition, for retirement benefits under pension plans, the excess incentive-based compensation would be deducted from the benefit formula, and any related distributions would be recoverable.
    • Exceptions to Recovery. Proposed Rule 10D-1 provides for two limited exceptions to recovery.
      • Impracticable Recovery. Recovery would not be required if determined by the company’s committee of independent directors (or in the absence of such a committee by a majority of the independent board members) to be impracticable because the direct costs of recovery would exceed the amount subject to recovery. However, before concluding that recovery would be impracticable, the company must make a reasonable attempt at recovery and furnish the exchange with documentation of its efforts. This and all other determinations made by a company under Proposed Rule would be subject to review by the listing exchange.
      • Violation of Home Country Law. Recovery also would not be required if it would violate the company’s home country law; however, the company would be required to obtain an opinion of home country counsel (acceptable to the applicable national securities exchange or association) that recovery would result in such a violation. In an effort to deter countries from changing their laws in response to this exception, the Proposed Rule would limit application of this exception only to laws adopted prior to the date of publication of the Proposed Rule in the Federal Register.

    Under either exception, a company would be required to disclose why it decided not to pursue recovery of the excess incentive-based compensation.

    • Prohibited Indemnification or Reimbursement. A company would be prohibited from mitigating or otherwise entering into an arrangement designed to avoid or nullify the effect of any required recovery, including indemnifying a covered officer against the loss of excess incentive-based compensation or paying or reimbursing the officer for the purchase of an individual third-party insurance policy to fund potential recovery obligations.
    • Disclosure Obligations. The recovery policies would be a required exhibit to the company’s annual report on Form 10-K. Additional disclosures would be required in the company’s annual report and any proxy and consent solicitation materials requiring executive compensation disclosure if at any time during its last completed fiscal year the company either prepared an accounting restatement that required recovery action or had an outstanding balance of excess incentive-based compensation. The SEC also proposes requiring a company to make the appropriate amendment to the Summary Compensation Table for the fiscal year in which the amount recovered was initially reported and be identified by footnote.
    • What’s Next. The Proposed Rule is subject to a 60-day comment period following its publication in the Federal Register. The SEC is soliciting comments on virtually every aspect of the Proposed Rule so the final version of the rule could possibly reflect significant changes. Exchanges will have 90 days after the adopted version of Rule 10D-1 is published in the Federal Register to file its proposed listing rules, which must be effective no later than one year following that publication date.

    Listed companies must adopt recovery policies within 60 days after the exchanges’ rules become effective and begin enforcing such policies on all incentive-based compensation received by covered officers (current and former) as a result of satisfaction of a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1.   Failure to adopt and enforce the required recovery policies would subject a company to delisting.


    See also this client alert Securities group posted on

    Thursday, April 9, 2015

    ChartCompanies should be aware that at least some major accounting firms are questioning whether discretionary aspects of clawback policies trigger variable accounting for compensatory equity awards granted by those companies. Existing accounting guidance (ASC 718-10-30-24) would seem to suggest that clawback features should not disrupt fixed accounting treatment because of their contingent nature.

    Now, however, PricewaterhouseCoopers and KPGM, at least, are publicly expressing concerns about clawback policies focusing on their discretionary, rather than contingent, nature. A 2013 PricewaterhouseCoopers survey of 100 companies indicated that nearly 80% of those companies had clawback policies that had problematic discretionary provisions. A clawback policy could involve discretion as to what circumstances it may apply; whether it should be applied; and, if applied, how severely it should be applied. It seems that all aspects of discretion may be problematic. Companies adopting or modifying existing clawback policies should evaluate the potential risks of discretionary provisions and consider consulting with their independent accountants before adopting or revising those policies. This will be particularly true for public companies when it comes time to evaluate compliance with the much-anticipated SEC guidance on clawbacks that will finally implement the Dodd-Frank legislation of 2010.

    Friday, September 5, 2014

    Our sister blog, Start-Up Bryan Cave, recently posted about when and why to use the an 83(b) election.  The post has a good discussion of the advantages and disadvantages.

    One item it does not mention is the company’s deduction, which is taken if and when the 83(b) election is made.  In the absence of an election, the deduction occurs when the property vests.

    Of course, for the company to take the deduction, it has to know that the election has been made.  Even though the IRS rules require the recipient to give a copy to the company, another valuable planning point is to make sure that the agreement itself also requires the recipient to provide a copy of the election to the company.

    Thursday, August 21, 2014

    Institutional Shareholder Services, or ISS, invites U.S. companies to verify the data it uses to evaluate proxy statement equity plan proposals.  ISS previously announced a move to a “balanced scorecard” approach for its evaluation of equity plan proposals.  Data verification is included as a key feature of this approach.

    Data verification allows companies to preview, and if necessary update, the data used by ISS in its vote recommendation.  Some companies have been frustrated when reviewing ISS vote recommendations that include inaccurate or misconstrued data.  This program is designed to improve the quality of information used by ISS.  See “FAQs:  Equity Plan Data Verification” for details about the program.  Below is a summary of some key features:

    How to Participate

    • The data verification program is optional.
    • It is open to U.S. companies who have filed definitive proxy materials after September 8th, 2014 with an equity plan proposal (new or amendment) on the ballot.
    • The data verification program does not apply to other compensation plan proposals such as cash and bonus plan proposals.
    • To participate in the program, the company’s proxy materials must be filed at least 30 days in advance of the meeting date.
    • Data verification is only available to company contacts who register in advance to participate in the data verification program with ISS.


    • Companies will have only a short period to verify their equity plan data – approximately two business days to review and respond.
    • The window period is expected to open within 12 business days following the filing of the company’s definitive proxy materials.

    What Data

    • ISS reviews definitive proxy filings, 10-Ks, 10-Qs, and 8-Ks, “among other documents” to gather data for its vote recommendation.
    • Data submitted for the program must be consistent with relevant publicly-disclosed filings.
    • ISS includes a list of data verification questions for companies to use in advance.  The questions are helpful insight into the ISS “balanced scorecard” approach.  The questions cover four areas:

    1.      Equity Plan Provisions – includes definitions and provisions covering stock option repricing, cash buyouts of underwater stock options, share recycling, limits on full value awards, fungible share counting provisions, evergreen share reserves, dividend/dividend equivalent rights, change in control definitions, triggers and effect on time-based and performance-based awards, and tax gross-ups.

    2.      Outstanding Stock and Convertibles – includes data covering the number of common shares outstanding, shares issuable upon exercise of outstanding warrants, conversion of debt, and outstanding weighted average common shares in the past 3 fiscal years in the computation of basic EPS.

    3.      Equity Grant Activity – includes data regarding time-vesting options, stock appreciation rights, full value and performance-based awards granted or earned in the past 3 fiscal years.

    4.      Shares Reserved and Outstanding Under Equity Compensation Program – includes number of shares reserved under the proposal, shares remaining available under all equity compensation plans, and shares subject to outstanding awards.


    460326385If your company is a publicly-traded U.S. company, or a company covered under ISS’ U.S. policy, with an upcoming equity plan proposal, consider participating in the ISS equity plan data verification program.  Remember that contacts at your company will need to register in advance (multiple contacts are permitted) and be prepared to act quickly to verify, and make any necessary corrections, to your company data.

    In advance of filing your definitive proxy statement, consider reviewing the ISS verification questions and include the data, where appropriate, in clear and concise proxy statement disclosures.

    Wednesday, July 2, 2014

    Employment Termination and ReleaseSeparation agreements almost always contain release provisions whereby one or both parties agree to waive claims that they may have against the other party; when the employee releases claims, he or she typically gains compensation or a benefit that he or she is not already entitled to receive.  In a world in which every terminated employee is a potential plaintiff, employers should have a good grasp on how to draft a valid and enforceable release in a separation agreement.  Here are five tips every employer should consider when drafting this type of a release.

    Tip No. 1:  Offer Valid Consideration

    In order to have a valid and enforceable release agreement, the employer must provide the employee with payments or benefits the employee is otherwise not entitled to receive.  Therefore, payments or benefits the terminated employee is otherwise entitled to receive either by law or pursuant to an employment agreement generally do not satisfy the consideration requirement.  For example, conditioning the employee’s release on the receipt of his final paycheck, earned commissions or vacation pay specified by an employee handbook or other policy will not constitute valid consideration.  While severance pay is the most common type of consideration, it is not the employer’s only option.  Valid consideration can also include notice pay (i.e., pay in lieu of notice), continuation of health benefits at the employer’s expense (note, there are tax issues associated with this approach), bonuses, unearned vacation pay, outplacement services or use of office services (e.g., secretarial, computer access, etc.), or relocation expenses reimbursement, among others..

    Again, the most common type of consideration offered in exchange for an employee release is severance pay.  However, as mentioned above, this severance pay has to be something other than what the employee is already entitled to receive.  For example, if the employer has a severance plan written into an employee handbook in which the employee is entitled to receive one week of severance for each year of service and the payment is not conditioned on a release of claims, the severance payment offered in exchange for a release must exceed what the employee is already entitled to receive.  However, there is a simple way around this issue – the written severance plan can expressly condition the receipt of severance upon the employee executing a release.  This is discussed in more detail in Tip 2.

    In sum, when drafting a release, the employer should always ask:  Is this benefit or payment something the employee is already entitled to receive?  If it is, then it is not valid consideration and the release will be unenforceable.

    Tip No. 2:  Condition Severance on the Execution of a General Release and Compliance With Other Contractual Provisions

    If the employer negotiates the payment of severance in an employment agreement, it should always require the employee to execute a release as a condition of receiving severance (note the timing rules for this requirement discussed in Tip 3).  By failing to include this provision, the employee could collect severance and still sue the employer for breach of the agreement, discrimination, or other claims under the employment relationship.  Besides conditioning the payment of severance on signing a release, the employer should also condition payment of severance on compliance with other contractual provisions of the agreement such as provisions relating to the return of the employer’s documents and property, non-disparagement, noncompetition, nondisclosure of confidential information, and nonsolicitation of customers and employees.  Not only does this approach incentivize employees to honor their post-employment contractual obligations, but it also potentially avoids litigation by giving the employer the option to simply discontinue severance payments if the employee breaches the agreement.

    Tip No. 3:  Comply with Section 409A of the Internal Revenue Code

    So far it seems simple—condition receipt of severance payments upon the execution of a release waiving employment claims such as disability discrimination, age discrimination, etc.  It seems fair to say that severance payments don’t begin until the employee returns the release agreement.  However, this type of arrangement creates potential issues under 409A of the Internal Revenue Code (“Section 409A”).  Under Section 409A, the concern is that the employee could wait to execute the release until the year following his or her termination in order to control the year in which he or she receives (and is taxed on) the severance payments.  Because the severance is taxable when actually paid, the employee could hold on to a release and defer taxation in a manner the IRS deems abusive.  The penalties for failure to comply with 409A are harsh (including a 20% excise tax).  Although it is the employee who is ultimately penalized, these issues are typically brought up by employee’s counsel during negotiations.

    There are two common solutions for addressing the problem raised above.  First, payment could begin upon a fixed cut-off date following termination of employment so long as the release becomes effective before that date.  While this solution is relatively easy to implement, employees may not get their payments as quickly as they would like.  Alternatively, the separation agreement could call for severance to begin upon return of the signed release within a fixed window (90 days maximum) following termination of the employment.  To avoid the problem of the employee holding on to the release to affect the year the severance is taxable, the agreement would need to provide that if the release consideration period spans two calendar years, then the severance payments will be made (or commence, as applicable) no earlier than the first day of the second calendar year.  While this approach is potentially more desirable for the employee, it can be harder for the employer to administer.

    Legal counsel experienced with drafting 409A separation agreements can avoid potential liability by including “safe harbor” provisions or restructuring the agreement.  Accordingly, employers should always consult counsel with Section 409A expertise when an employment agreement or separation agreement provides for any form of severance.

    Tip No. 4:  Use Clear Language in the Release

    To the extent possible, draft an agreement that is simple and comprehensible.  The agreement does not need to be a formal, lengthy agreement.  Generally for claims to be effectively waived by agreement, the release must be “knowing and voluntary.”  To avoid a potential challenge from an employee that their release was not “knowing and voluntary,” an employer should use clear language in the release.  Furthermore, an employer should give an employee a reasonable amount of time to consider the release and afford the employee the opportunity to consult separate counsel.  Note that the time period for considering and revoking a release might be governed by statute, and many states have specific statutory requirements that must be met in order to obtain an enforceable release.

    Tip No. 5:  Be as Specific as Possible, but Consider the Requirements of Each Waived Claim

    Depending on the jurisdiction, a court may construe employee releases narrowly, limiting them to claims explicitly released.  To avoid the potential challenge of the agreement being overbroad, employers should, if possible, include a release of specific claims (e.g., ADEA, ERISA, Title VII, etc.).

    As a result, employers should consider the requirements implicated by each released claim.  For instance, a waiver of Age Discrimination in Employment Act (ADEA) claims must comply with the requirements of the Older Workers Benefit Protection Act, 29 U.S.C. §§621 et sq. (“OWBPA”).  Under OWBPA, the waiver must be “knowing and voluntary”, as described in the statute.    While courts have not traditionally applied the OWBPA requirements to non-ADEA claims, given the particular requirements of the OWBPA, it may be beneficial for an employer who is asking for a release of ADEA and non-ADEA claims to draft a release that complies with the OWBPA requirements.

    Concluding Thoughts:

    While this list is not by any means exhaustive, it highlights some of the most important considerations in drafting a valid and enforceable release in a separation agreement.  As a concluding thought, while obtaining a release can be very desirable, an employer should be tactful in asking for a waiver of claims.  Asking for a waiver in a separation agreement could inadvertently suggest that the employer believes that employee has a claim against it.  To avoid any unnecessary litigation, an employer should be thoughtful in its approach to negotiating a release and always consult counsel with expertise in employment law.

    Thursday, March 6, 2014

    As we have noted previously, March 15 is tax “Code Section 409A Day.”  For employers with calendar fiscal years, that is generally the last day an amount can be paid and still qualify as a short-term deferral that is exempt from 409A’s stringent timing and form of payment requirements.  But what does one do when March 15 falls on a weekend, as it does this year?  You likely aren’t cutting payroll checks on a Saturday.  Can you wait until Monday to pay?

    The answer is no.  The rules are clear that the payment generally has to be made by the 15th day of the 3rd month (hence, March 15) of the year following the year in which either the right to the compensation arises or the compensation is no longer subject to a substantial risk of forfeiture (and note that for this purpose, the 409A definition is different than the Section 83 definition).  (The deadline can be different if an employer has a non-calendar year fiscal year, but the concept is essentially the same.)

    There are a few exceptions.  First, if making the payment by the deadline is administratively impracticable and such impracticability was not reasonably foreseeable when the right to the compensation arose, then payment can be made after the deadline, as long as payment is made as soon as practicable.  Of course, for 2014 it is difficult to argue that the impracticability wasn’t foreseeable simply because you didn’t happen to look into next March in your Outlook, iCal, or Gmail calendar.

    A company can also pay late if the payment would jeopardize the company as a going concern and the payment is made as soon as practicable after the payment would no longer jeopardize the company.  As you can probably tell, that is a pretty high standard.

    Finally, if you’re dealing with a public company, and the payment would not be deductible under 162(m), then the public company can pay as soon as the payment would be deductible.  Here, however, you have to establish that a reasonable person would not have anticipated the application of 162(m) to the payment to be able to take advantage of the delay.

    Regrettably, there is no exception permitting a delay in payment merely because the 15th of the month happens to fall on a Saturday, Sunday, or holiday.

    So the bottom line is that you should make sure that any payments you want to qualify as short-term deferrals get paid by Friday the 14th.  Unless you qualify for one of the exceptions, waiting until Monday is not an option.