Wyatt Employment Law Report

Persuader Rule Update

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By George J. Miller

Judges HammerBy now, I assume most employers and others who keep up with developments in labor and employment law are familiar with the U.S. Department of Labor’s (DOL) controversial “persuader rule” that was set to take effect on July 1 of this year.  For those who are not familiar with it, here is a summary of what all the fuss is about, followed by some recent court developments.

In 1959, Congress amended the National Labor Relations Act (NLRA) by passing the Labor Management Reporting and Disclosure Act (LMRDA).  The main purpose of the LMRDA was to rid organized labor of corruption and also make it more democratic.  However, the LMRDA also requires labor consultants (including lawyers) to file reports with the DOL identifying their employer clients and the details of the terms of their engagement, including fees paid for their services, if an object of the engagement, either directly or indirectly, is to persuade employees whether or how to exercise or not to exercise their rights to organize or bargain collectively under the NLRA.  The law also requires employers who engage consultants for such purposes to file a similar report.  These filings are a public record.  Willful violations of the LMRDA’s reporting requirements are criminal and are punishable by a fine of up to $10,000 or a year in jail, or both.

However, the LMRDA contains an exception from the reporting requirement for consultants’ “advice” to employers in such matters.  Shortly after the LMRDA was enacted, the DOL issued guidance stating that if a labor consultant (including an attorney) did not communicate directly with employees regarding their rights to organize or bargain collectively under the law, but communicated solely with company management, then that work fell within the advice exception.  Under this interpretation of the advice exception, consultants could prepare union election campaign materials (letters, memoranda, speeches, information about unions, etc.), or union avoidance materials (policies and procedures, employee handbooks, etc.) for their clients to consider using to persuade employees not to organize, and this activity did not have to be reported.  That this work could be done on a confidential basis was especially important to labor lawyers and their clients, because of the importance of the attorney/client privilege and a lawyer’s independent ethical obligation of confidentiality to clients, which includes an obligation not to divulge even the clients’ identity, let alone details about the terms of their engagement, without the clients’ permission.

Then, in 2011, after 50 years of uncontroversial application of the existing interpretation of the advice exception, the DOL issued a Notice of Proposed Rulemaking which changed the DOL’s position on the advice exception.  That proposed rule (“Rule”) became final in April of this year and would have affected engagements with employers entered into on or after July 1 of this year.  The Rule eliminates the safe harbor created by the previous interpretation of the advice exception.  Under the Rule, even if a consultant does not communicate directly with employees, the consultants’ work is reportable if it has an object, either directly or indirectly, to persuade employees regarding their rights under the NLRA.  Thus, if a consultant were to prepare materials for an employer to disseminate to employees in a union election campaign, that would be reportable.  But even if the employer prepared the material itself, and the consultant simply advised the employer how to make the material more persuasive, that would also be reportable.  Moreover, work performed when there is no active union organizing campaign could be reportable, such as drafting or revising a union free policy or perhaps even an employee handbook.

Under the Rule, if a consultant were to engage in even a single instance of reportable activity for a client, then all work for that client performed that year and all fees received from that client that year, would have to be reported, including work that is otherwise not reportable, such as advice.  But it gets worse. If a consultant were to perform any persuader work for even a single client, then the consultant would have to disclose details of the consultant’s work for all of the consultant’s clients, regardless of whether the consultant performed any persuader work at all for those clients.  In addition, the consultant would have to disclose all disbursements of fees received from clients, including salaries paid to the consultant’s employees.

At the end of March of this year, three lawsuits were filed in federal courts in Texas, Arkansas, and Minnesota, seeking injunctions to prohibit the DOL from enforcing the Rule.  As of today, two of the three courts have issued decisions.  The first decision came from the Minnesota court on June 22nd.  The plaintiffs in that case were a number of law firms and an association of law firms which practice labor and employment law. They based their motion for an injunction on mostly legal arguments and did not present any factual evidence to support their claims other than some affidavits.  The court held that the plaintiffs would likely succeed on the merits of their claim that the Rule is inconsistent with the LMRDA.  However, the court held that the plaintiffs had not proved that they were likely to succeed on the merits of their other claims, which were based upon the First Amendment and other legal doctrines.  Despite agreeing with the plaintiffs that the Rule is likely inconsistent with the LMRDA, the court declined to issue an injunction, reasoning that the plaintiffs had not proven that enforcing the Rule against them would cause them irreparable harm, which is one of the requirements to obtain an injunction.  The court concluded that, “. . . it is preferable to let the regulation take effect and leave plaintiffs to raise their arguments in the context of actual enforcement actions.” Labnet, Inc. et al v. United States Department of Labor, et al, Case No. 16-CV-0844, pp. 33-34 (D. Minn., June 22, 2016).  The plaintiffs have until about August 21st to appeal this ruling to the U.S. Court of Appeals for the Eighth Circuit.  So far they have not done so and, in light of the subsequent ruling in the Texas case, they may decide not to do so.

On June 27th, the U.S. District Court for the Northern District of Texas at Lubbock issued a nationwide injunction against the DOL, prohibiting it from enforcing the Rule, pending a final decision on the merits of the case.  Independent Federation of Business, et al. v. Thomas E. Perez, et al, Case No. 5:16-CV-00016 (N.D. Texas, June 27, 2016).  In contrast to the Minnesota case, the original plaintiffs in the Texas case were five business associations with hundreds of thousands of employer members, the vast majority of which are small businesses.  In addition, right after the case was filed, the Attorneys General from ten states intervened as plaintiffs to assert claims which included a claim that the Rule encroached upon the authority of the states to regulate the conduct of lawyers and would compel lawyers to choose between complying with the rule–on pain of criminal sanctions–and violating their ethical obligations to their clients.  In further contrast to the Minnesota case, at the hearing on the plaintiffs’ motion for a preliminary injunction the plaintiffs presented the testimony of eight witnesses, including a past President of the American Bar Association, a former Member and General Counsel of the National Labor Relations Board, a well-known expert on legal ethics, and two labor lawyers, who all testified as expert witnesses.  The DOL called no witnesses, which meant that the testimony of the plaintiffs’ witnesses was undisputed.

The Texas court agreed with the Minnesota court that in promulgating the Rule the DOL likely exceeded its authority because the Rule is inconsistent with LMRDA.  However, in addition the Texas court held that the plaintiffs would also likely succeed on the merits of their other claims that (a) the DOL acted arbitrarily and capriciously and abused its discretion, (b) the Rule violates the plaintiffs’ rights of freedom of speech and association protected by the First Amendment, (c) the Rule is void-for-vagueness, in violation of the due process clause of the Fifth Amendment, and (d) the Rule violates the federal Regulatory Flexibility Act because the DOL underestimated the economic cost to employers and labor consultants to comply with the Rule.

The crux of both the Texas and Minnesota courts’ problem with the Rule is the DOL’s position that persuader activity and advice are mutually exclusive concepts: persuader activity cannot be advice and vice versa.  In other words, in the DOL’s view of the Rule, advice necessarily does not have an object of  persuasion.  However, according to the courts, the DOL’s position makes the advice exception of the LMRDA superfluous and thus reads the advice exception out of the statute.  This exceeds the DOL’s authority, which is limited to implementing the statute, not changing it.  In the courts’ view, some forms of advice contemplated by the LMRDA must have an object to persuade, or else there would be no need for the statutory exception.  In other words, the advice exception of the statute is intended to preclude the reporting of advice even if the advice has an object of persuading employees.  In contrast, consultants who communicate directly with employees about unionization and collective bargaining–so called direct persuader activity–are not giving advice to their clients and therefore are not shielded from filing reports.

The DOL has 60 days from the date of the Texas court’s decision to appeal to the U.S. Court of Appeals for the Fifth Circuit.  As of today it has not filed a notice of appeal.  In the alternative, the DOL could ask the court to set the case for a trial on the merits; but considering the weight of the plaintiffs’ evidence at the injunction hearing, the length and strength of the court’s decision (it runs to 90 pages), and the absence of evidence presented by the DOL at the hearing (they did not even file the administrative record from the rulemaking proceeding), the outcome of a trial seems a foregone conclusion.

In the Arkansas case, the plaintiffs’ motion for an injunction was argued to the court on May 9th, but the court has not yet issued a decision.

The upshot of the above is that the nationwide injunction issued by the Texas court temporarily relieves employers and their labor consultants (including lawyers) from reporting the details of the type of work that was not reportable under the previous interpretation of the advice exception.  Whether or not such work will eventually have to be reported remains to be seen.  This creates uncertainty and means that employers and their consultants should be cautious about engaging in any persuader activity until there is a final decision by a court of last resort.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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