On June 27, a federal court in Texas enjoined the United States Department of Labor (“DOL”) from implementing its new interpretation of the “Persuader Rule.”1 In a sweeping 86-page rebuff to the DOL, the court opined that the DOL’s new interpretation of the “Advice Exemption in Section 203(c) of the Labor-Management Reporting and Disclosure Act” (“New Rule”) is “defective to its core” and thus preliminarily enjoined implementation of the New Rule nationwide. This decision is critically important to employers because it preserves their right to confidential legal representation, without government interference. Prior to this decision, the DOL’s New Rule and its significant reporting obligations were set to take effect on July 1, 2016.
By way of background, the Labor-Management Reporting and Disclosure Act of 1959 (“LMRDA” or “the Act”) has long contained provisions requiring persons engaged in persuading employees concerning the exercise of their rights to organize and engage in collective bargaining pursuant to an agreement or arrangement with the employees’ employer to report the details of those agreements and arrangements. These provisions are known as the Persuader Rule.
Traditionally, a person engaged in reportable persuader activity only if he or she had direct contact with employees. The work of labor consultants, including law firms, who had no direct contact with employees, but assisted employers in advising them on how to run their union avoidance campaigns, was considered exempt from reporting under the “advice exemption” found in Section 203(c) of the LMRDA.
On March 23, 2016, DOL released its revised interpretation of Section 203(c)’s advice exemption. The DOL’s New Rule classifies certain activities engaged in by law firms and employer associations as “indirect persuader activity” subject to reporting and public disclosure.
In its June 27 decision, the Texas district court concluded that the New Rule would irreparably harm the lawyer-client relationship by destroying client confidences. Senior Judge Sam R. Cummings issued a nationwide preliminary injunction, finding that the New Rule was likely to violate the plain language of the statute, which protects “advice,” including “persuasive” advice, from disclosure. The court thus rebuffed the DOL’s rejection of the bright-line rule in place for over 50 years – and first promoted by President John F. Kennedy’s Solicitor of Labor – which predicates the reporting obligation on whether the attorney has direct contact with employees. The court held that “advice” and “persuasive advice” overlap and are not mutually exclusive concepts subject to vague balancing tests that depend upon a regulator’s conclusion of whether communications might have been made with an intent to persuade employees concerning their option to form a union or to engage in collective bargaining.
- The court also held that the New Rule likely is arbitrary, capricious and an abuse of discretion in that it unreasonably conflicts with state ethics rules governing the practice of law.
- The court further held that the New Rule likely violates employers’ free speech and association rights protected by the First Amendment, as a content-based restriction that seeks to examine the “advice” message given to employers via a vague test with potential criminal penalties.
- The court also found that the New Rule likely violates federal law in that the DOL grossly underestimated the compliance costs to small businesses, which could amount to $60 billion over 10 years, and failed to perform a benefit-cost analysis, which federal law requires before so costly a regulation may be imposed upon the employer community.
A federal court in Minnesota also found that the New Rule likely conflicts with the LMRDA, but did not issue an injunction, concluding that irreparable harm was not present.2 The Texas court, in contrast, considered the testimony of eight witnesses, including that of Dennis Duffy, a BakerHostetler Labor and Employment attorney in Houston, Texas, whom the court recognized as a nationwide expert in legal ethics and the rules of professional conduct. The court, citing more than five pages of Mr. Duffy’s testimony, concluded that irreparable harm was present in that the disclosure requirements would violate lawyers’ duty of confidentiality and loyalty to clients and detrimentally impact employers’ right to counsel.
The Labor-Management Reporting and Disclosure Act Background
In 1959, Congress passed the LMRDA in an effort to curb union and management corruption, racketeering and other misconduct that persisted following the passage of the Wagner Act in 1935 and the Taft-Hartley Act in 1947.3 The Act, among other things, requires labor relations consultants and other “persons” – including an employer’s legal representatives – to report to the DOL information about certain financial transactions, agreements and arrangements under which the person seeks to persuade employees concerning the exercise of their right to organize or engage in collective bargaining. See 29 U.S.C. §§ 402(d), 433. These reporting obligations were designed to prevent the practice of hiring “middlemen” to pose as employees when, in fact, their role was to persuade employees not to join a union and to provide information concerning employees’ organizing activities to the employer.4
Specifically, Section 203(b) of the Act requires labor relations consultants and other persons to report any agreement under which they engage in “persuader activity.” Persuader activity is any activity “where an object thereof is, directly or indirectly, to persuade employees to exercise or not exercise, or persuade employees as to the manner of exercising, the right to organize and bargain collectively through representatives of their own choosing . . . ” or any activity that involves “supply[ing] an employer with information concerning the activities of employees or a labor organization in connection with a labor dispute involving the employer,” except for information to be used solely in conjunction with a judicial, administrative or arbitral proceeding. 29 U.S.C. § 433(b).
The DOL’s implementing regulations provide that agreements under which a labor relations consultant or other person performs persuader activities, or “persuader agreements,” must be reported in two ways. 29 C.F.R. § 406. First, within 30 days after entering into any persuader agreement, the persuader must file a report containing a detailed statement of the terms and conditions of the agreement. The DOL has developed Form LM-20 to facilitate the continual reporting of persuader agreements. The following specific information must be reported using Form LM-20:
- The full legal name and address of the employer with whom the agreement or arrangement for persuader services was made;
- The date the persuader agreement was made;
- The names and titles of all persons who participated for the employer in making the persuader agreement;
- Whether the purpose of the activities undertaken pursuant to the persuader agreement was to persuade employees as to the exercise of their bargaining rights or to supply an employer with information related to a labor dispute;
- A detailed explanation of the terms and conditions of the persuader agreement – if any part of the persuader agreement is contained in a written contract or other writing, it must be provided;
- A detailed explanation of (1) the nature of the persuader activities performed or contemplated, (2) when the activities were or are to be performed, (3) the extent of any performance predating the report and (4) the names and addresses of all persons who have participated or will participate in persuader activities; and
- The group of employees and labor organization to be persuaded or concerning whose activities information is to be provided to the employer.
Both the president and treasurer of the reporting organization must sign the Form LM-20. Form LM-20 is publicly available on the DOL’s searchable website.
Second, for any fiscal year in which a person is required to report a persuader agreement via Form LM-20, the person must also file Form LM-21, which requires reporting of (1) receipts of any kind received directly or indirectly from employers on account of labor relations advice or services, and (2) disbursements of any kind made directly or indirectly in connection with such services. The following specific information must be reported using Form LM-21:
- The full legal name and address of the reporting individual or organization;
- All addresses where any records necessary to verify information contained in the report are located;
- Receipts of any kind received directly or indirectly from employers for the rendering of labor relations advice or services, and disbursements of any kind made directly or indirectly in connection with these services – Form LM-21 makes clear, and the courts have confirmed, that a reporting organization must disclose receipts for all labor relations advice or services performed for any employer, regardless of whether persuader activities were performed for the employer;5
- The name and address of each employer from whom receipts were received for the provision of labor relations advice or services;
- The termination date of any persuader agreement entered into with any reported employer and the total amount of receipts from that employer related to labor relations advice or services;
- The total of the receipts from all employers related to labor relations advice or services;
- The salaries, allowances and other disbursements (including reimbursed expenses) to all officers and employees of the reporting organization in connection with labor relations advice or services provided to any employer;
- The total of all disbursements to officers and employees in connection with labor relations advice or services provided to any employer;
- Any disbursements made for office and administrative expenses in connection with labor relations advice and services (including the cost of heat, light, rent, telephone, office supplies, etc.);
- Any disbursements related to publicity in connection with labor relations advice or services;
- Any fees paid for professional services in connection with labor relations advice or services provided to any employer (including fees for auditing, economic research, investigations, legal fees, etc.);
- The total amount of all loans made by the reporting organization in connection with labor relations advice or services provided to any employer;
- The total of all disbursements made by the reporting organization in connection with labor relations advice or services provided to any employer; and
- The total and purpose of any disbursement made for reportable persuader activity and the name of any employer for whom the disbursement was made.
As with Form LM-20, the reporting organization’s president and treasurer must sign Form LM-21, and Form LM-21 is publicly available on the DOL’s website.
For failing to report or making false reports, the Act imposes significant penalties on organizations required to file Forms LM-20 and LM-21 and the individuals required to sign them. Under the Act, any person who (1) willfully violates the Act’s reporting requirements; (2) knowingly makes a false statement or representation of material fact in a report; (3) knowingly fails to disclose a material fact in any report; or (4) willfully falsifies, conceals, withholds or destroys any records required to be kept is subject to criminal penalties. 29 U.S.C. § 439. The Act provides for a maximum fine of $10,000, imprisonment for not more than one year or both.
Three types of activities are not considered persuader activity and are therefore exempt from the Act’s reporting requirements: representational activities, attorney-client privileged communications and the provision of advice. 29 U.S.C. §§ 433(c), 434. “Representational activities” include the representation of employers before any court or administrative agency, in arbitration, or in collective bargaining. 29 U.S.C. § 433(c). Additionally, attorneys are not required to report “any information which was lawfully communicated to such attorney by any of his clients in the course of a legitimate attorney-client relationship.” 29 U.S.C. § 434. Finally, “giving or agreeing to give advice” to an employer is exempt from the Act’s reporting obligations. 29 U.S.C. § 433(c).
Since 1962, the DOL has interpreted the advice exemption to protect a wide range of consulting and advisory services from the Act’s reporting obligations. Under the DOL’s historic interpretation of the advice exemption, as long as a person had no direct contact with employees, and the employer was free to accept or reject any written materials prepared by the person for distribution to employees, the person was not involved in persuader activities but was merely giving exempt advice, and his or her activities triggered no reporting obligations.6
The Department of Labor’s New Interpretation of the Advice Exemption
The DOL’s new interpretation of Section 203(c) significantly narrows the advice exemption and correspondingly expands the kinds of activities that trigger the Act’s reporting requirements. The new interpretation focuses on the Act’s language requiring reporting of any agreement or arrangement pursuant to which a person undertakes “directly or indirectly” to persuade employees with regard to the exercise of their collective bargaining rights. 29 U.S.C. § 433(b). Seizing on the distinction between direct and indirect persuasion, the DOL now interprets the Act to require reporting not only when a person has direct contact with an employer’s employees with an objective to persuade, but also when a person has no face-to-face contact with employees but engages in activities behind the scenes where an objective is to persuade employees concerning their rights to organize and collectively bargain (known as indirect persuader activities).
Importantly, under the DOL’s new interpretation, an employer’s right to accept or reject persuasive materials prepared by a person for an employer’s use no longer shields those indirect activities from reporting under Section 203(c)’s advice exemption. Under the final rule, exempt advice activities are “limited to those activities that meet the plain meaning of the term: an oral or written recommendation regarding a decision or course of conduct.”7
The DOL attempts to explain the new bounds of the advice exemption in several ways. According to the DOL’s final rule, an attorney’s actions are within the narrower bounds of the new advice exemption when the attorney “counsels a business about its plans to undertake a particular action or course of action, advises the business about its legal vulnerabilities and how to minimize those vulnerabilities, identifies unsettled areas of the law, and represents the business in any disputes or negotiations that may arise.”8 The DOL further explains: “A lawyer or other consultant who exclusively counsels employer representatives on what they may lawfully say to employees, ensures a client’s compliance with the law, offers guidance on employer personnel policies and best practices, or provides guidance on NLRB or National Mediation Board (NMB) practice or precedent is providing ‘advice.’”9 Additionally, a lawyer’s interaction with and revision of persuasive materials created by the client does not trigger reporting so long as the revisions are limited to those ensuring the legality of the message, and not enhancing its persuasiveness.10
According to the DOL, if an attorney acting pursuant to a single agreement or arrangement engages in both advice and indirect persuader activity, the entire agreement becomes reportable.11 Where there is a question about whether any activity is exempt advice or reportable indirect persuader activity, the DOL will determine whether the consultant had a “reportable objective” when performing the activity by examining the “totality of the relevant circumstances.”12
Activities That Will Trigger Reporting Obligations Under the Department of Labor’s New Interpretation
The DOL has also outlined four new categories of indirect persuader activities that were not reportable under its historic approach to Section 203(c)’s advice exemption, but will be reportable under its new, narrower interpretation. Under the DOL’s New Rule, the following activities would trigger reporting obligations:
- Planning, directing or controlling supervisors or managers;13
- Providing persuader materials;14
- Conducting a seminar for supervisors or other employer representatives;15 or
- Developing or implementing personnel policies or actions.16
The DOL’s guidance concerning the activities that trigger reporting under its New Rule is not well developed and, given the complexity of day-to-day labor relations practice, leaves doubt regarding what conduct will trigger the Act’s reporting obligations. There is no doubt that, considering the significant criminal penalties and fines at stake, the DOL’s new interpretation and enforcement efforts could become a powerful weapon for unions and their counsel in limiting the resources available to employers to resist attempts by unions to organize their workforce.
The Preliminary Injunction Issued June 27, 2016
The National Federation of Independent Business, the National Association of Home Builders, a local chamber of commerce and several Texas business groups filed suit against the DOL and others on March 31, 2016, seeking a preliminary and permanent injunction barring implementation of the DOL’s New Rule.17 Ten states – Texas, Arkansas, Alabama, Indiana, Michigan, Oklahoma, South Carolina, Utah, West Virginia and Wisconsin – intervened as plaintiffs in the lawsuit. The United States Chamber of Commerce filed an amicus appearance in support of the plaintiffs.
A hearing was held on the plaintiffs’ motion for a preliminary injunction, and eight witnesses testified on behalf of the plaintiffs. The court concluded that the plaintiffs established a likelihood of success on five separate arguments to block the new Persuader Rule. Senior Judge Sam R. Cummings first determined that the DOL likely exceeded its authority under the LMRDA by effectively eliminating the statute’s advice exemption contrary to the plain language of Section 203(c), which provides an express exemption for advice. The court concluded that the DOL’s position that advice and persuasion activities are mutually exclusive is contrary to the statute and ordinary language. The court recognized that advice and persuasion activities overlap, and that the DOL’s position that the concepts are mutually exclusive would render the 203(c) advice exemption superfluous. Thus, the DOL’s New Rule violates basic principles of statutory construction.
The court found that even if the LMRDA were ambiguous, the DOL’s New Rule is likely arbitrary, capricious and an abuse of discretion in that it unreasonably conflicts with state rules governing the practice of law. The court found that the DOL’s New Rule alters more than five decades of the DOL’s previous interpretation of the LMRDA without adequate explanation. The New Rule undermines the practice of law and the confidential lawyer-client relationship and creates an unnecessary conflict with state law rules governing the confidential attorney-client relationship. The court cited at length state-law requirements of confidentiality concerning the identity of lawyers’ clients, the fees paid and the terms of the engagement. In support of his findings on this point, Senior Judge Cummings recognized BakerHostetler Labor and Employment partner Dennis Duffy as an expert on legal ethics, the rules of professional conduct and the impact of the DOL’s New Rule on the ethical obligations of attorneys in all states. The court also relied on the testimony of William T. Robinson III, former American Bar Association (ABA) president, as an expert concerning the ABA’s position on the ethical implications of the DOL’s New Rule.
Senior Judge Cummings next determined that the New Rule likely violates employers’ free speech and association rights protected by the First Amendment. The regulation is content-based in that it seeks to examine the content of the “advice” message given to employers. Employers have a First Amendment right to express opinions concerning union organizing and to hire and consult attorneys. The judge found that the DOL failed to demonstrate a compelling government interest for the overbroad regulation or make any investigation, findings or studies that would suggest such a compelling need. The court suggested that no compelling government interest was at stake based on the DOL’s New Rule that seeks to change the status quo more than 50 years after the enactment of the LMRDA. In a similar vein, the court frowned upon the DOL’s proposed balancing test predicated on the DOL’s ipse dixit concerning whether certain activities “implicitly” reference unions or “affect employees’ exercise of their rights.” The court held that employers’ rights of free speech and association, coupled with the criminal penalties at issue, likely render the New Rule void for vagueness in violation of the Fifth Amendment.
Finally, the court determined that the New Rule likely violates the Regulatory Flexibility Act because the DOL grossly understated the economic impact of the New Rule on small businesses. The court relied on testimony from the DOL’s former Chief Economist, who estimated that the total compliance costs for employers could be $60 billion over 10 years.
Senior Judge Cummings found that the New Rule causes irreparable harm by unnecessarily interfering with employers’ right to receive full and complete legal advice concerning union campaigns. Once again, the court relied on the unrebutted testimony of Dennis Duffy concerning the legal profession’s confidentiality and fiduciary obligations to clients. The court cited Mr. Duffy’s testimony that the DOL’s purported mutually exclusive dichotomy between advice and persuasion does not lend itself to a bright dividing line in the dynamic situation of counseling clients.18 The court concluded that the New Rule is “defective to its core” and fails to provide notice to employers, lawyers and other interested parties as to what activities relating to persuasion are actually covered by the advice exemption.
The court’s preliminary injunction offers a welcome respite for employers faced with new and potentially burdensome interference with their right to counsel. Employers should continue to closely monitor the New Rule and be prepared to take protective steps in the event the preliminary injunction is overturned. The New Rule also faces legislative challenges. Republicans in the House of Representatives introduced legislation invoking the authority of the Congressional Review Act that, if passed, would keep the Persuader Rule from being enforced on July 1, 2016, even absent the injunction issued on June 27.19 On May 18, the House Education and Workforce Committee approved the legislation, moving it to a vote of the full House. For more information concerning this quickly developing matter, please contact the undersigned author, other members of BakerHostetler’s Labor Relations team or your usual BakerHostetler contact.