Author: Site Staff

Big pharmaceutical firms are applauding separate federal court decisions to deny class-action status for lawsuits alleging Bayer Corp. and Wyeth Pharmaceuticals misclassified workers’ status.

Both lawsuits were brought by former employees who contend the companies should have assigned them nonexempt status, thus entitling them to certain privileges including compensation for overtime as well as meal and rest breaks.

In the Wyeth case, U.S. District Judge Stephen Wilson in Los Angeles dismissed the lawsuit October 26 before the plaintiff could file for class-action status. Two weeks before that, U.S. District Judge John Walter in Los Angeles denied plaintiffs in the Bayer case class-action status.

The rulings are significant because they could affect the way employers categorize scores of pharmaceutical representatives working in the industry and influence the outcome of several pending lawsuits involving high-profile pharmaceutical companies.

Wyeth and Bayer attorneys invoked an outside-salesperson exemption rule, which was enacted by the U.S. Department of Labor, to argue their cases, according to Michael Banks, a partner at Morgan, Lewis & Bockius in Philadelphia, which represented both companies.

The DOL stipulates several factors must be met before a company can assign the exempt status to its employees. The employees should regularly work off site with the primary responsibility of making sales. Both Wyeth and Bayer believe the plaintiffs in these cases met the requirements during their tenure at the companies and therefore were not eligible for either overtime payments or breaks, explains Richard Rosenblatt, a Morgan, Lewis & Bockius partner in its Princeton, New Jersey, office.

“Pharmaceutical sales professionals should not be treated differently from any other person who engages in outside sales, whether it’s a widget or a copy machine,” Rosenblatt says. “The Bayer decision reflects the common-sense conclusion that there is no legislative, regulatory or societal purpose for doing so.”

Pharmaceutical companies rely heavily on field agents rather than conventional in-house salespeople to service doctors, who are their primary customers. The situation looks promising for the pharmaceutical industry, yet Banks believes there could be appeals in the future.

Indeed, San Diego-based class-action law firm Cohelan & Khoury, which also represented the Bayer plaintiffs, wouldn’t specify whether the plaintiffs would appeal. But attorney Jason Hill says pharmaceutical representatives are chronically misclassified because employers want to save money.

“Applying the outside-salesperson exemption status to this group of workers is incorrect because these agents are not actually engaged in selling,” Hill says. “Therefore, they do not meet the requirements stipulated by the DOL.”

He says the agents’ primary duty is to increase prescriptions for specific pharmaceutical products among doctors. Making direct sales to patients is not part of their job. “They are primarily there to raise brand awareness and to carry out marketing efforts,” he explains.

Hill believes pharmaceutical company lawyers arguing in other pending cases may look to follow the strategy used in the Bayer and Wyeth cases.

“I am hoping they do because the argument is like a house of cards that will eventually fall onto itself,” he notes.

—Gina Ruiz

Dear Ready and Willing:

Public companies are under intense scrutiny by Wall Street analysts, shareholders and the public, and it is critical that HR understand the significant ramifications of being a public company, particularly in the following areas:

• Compliance

• Impact on company culture and communications with employees

• Compensation program direction

Compliance

There are many Securities and Exchange Commission requirements relating to compensation and benefits. Companies file many public documents with the SEC, starting with the S-1 public offering filing, which requires business and financial data as well as a detailed executive compensation section.

The SEC revised its proxy disclosure rules in 2006 to require multiple tables that apply to public companies and those going public, as well as the compensation discussion & analysis (CD&A) detailing the company’s compensation philosophy, which private companies often do not have.

Once public, the company must file the following documents containing compensation-related information:

• Annual report (10-k): Data on stock-based compensation and stock plans, including stock options and relevant stock-based compensation under Financial Accounting Standard No. 123R.

• Annual proxy: Extensive executive compensation disclosures similar to the S-1 filing, including the CD&A.

• Forms 3, 4 and 5: Ad-hoc forms filed for every stock-related transaction for company officers and board members.

• 8-k filings: Ad-hoc filings reporting important company news that must be divulged to shareholders as soon as it occurs, e.g., an executive or board director joining or leaving the company; any significant executive compensation matter.

Public companies also must comply with Sarbanes-Oxley, including documentation of appropriate internal controls. Usually the HR department must conduct a thorough review to ensure compliance.

Impact on company culture

The most significant impact relates to how public-company executives communicate with employees. It remains vital to keep people informed; however, executives must be careful what they say—and when and how they say it. It is common for the CEO to hold employee meetings either live or via video for viewing by employees on the day quarterly earnings statements are announced.

HR needs to be cognizant of employee-morale implications of a rising or falling stock price. With executive compensation in the public eye, there can be morale issues based on perceptions of high levels of compensation during negative events such as layoffs.

Equity-based compensation plan design

Publicly traded stock provides a new form of “compensation currency” that can be used as an incentive and retention tool for top performers who are not necessarily part of senior management. Clearly, this needs to fit with the company’s overall compensation philosophy and must be affordable. Conversely, equity-based programs previously offered might be curtailed if the number of shares available is more limited due to dilution concerns.

Clearly, HR in a newly public company assumes significantly greater accountability, and HR leaders need to prepare their staff to accept this accountability.

SOURCE: Larry Schumer, director, compensation, Buck Consultants, Boston, October 5, 2007.

LEARN MORE: In July 2007, software vendor SuccessFactorsbecame the latest HR services firm to file an IPO.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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Dear Workforce Newsletter

EMPLOYMENT LAW FIRMS

Employment law firms with national and global reaches are much in demand these days, as myriad legal issues confront employers in a global economy.

Barbara Brown, chair-elect of the American Bar Association’s labor and employment law section, says she sees a lot of growth in the employer-defense niche of the legal world. In a characterization that won’t please many employers, she said the field is “very vibrant at the moment,” with federal and state court caseloads growing in the area of employment law.

Among those areas of growth are cases of overtime-rule disputes and claims of unpaid compensation for “off-the-clock” work performed, discrimination, whistle-blower retaliation and allegations of unpaid benefits and compensation brought by employees who have jumped from job to job.

A big legal issue in California, says Brown, involves claims that rest and mealtime breaks required by the state labor code haven’t been provided by some employers.

The U.S. Supreme Court, meanwhile, is expected to rule in 2008 on arbitration procedures for discrimination cases. And Brown expects a future federal law banning discrimination against employees based on sexual orientation.

Meanwhile, the largest employment law firms have been adding offices overseas in recent years. To tap into the global market for their services, they’re setting up shop in places like London, Paris and China.

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HR executives seem to be generally satisfied with the way in which health care benefits and pension plans are administered, but they are not altogether happy when it comes to handling talent management.

These are some of the findings in the Watson Wyatt 2007 HR Technology Trends report, which surveyed 182 large and midsize companies with median HR budgets of $1,668 per employee; the median HR budget in the United States is $1,633 per staffer.

Survey participants cite frustrations with process efficiencies and quality of services as the primary reasons for their dissatisfaction with talent management administration. Much of the discontent is embedded in the relative newness of comprehensive talent management systems, says Nov Omana, founder of consultancy Collective HR Solutions.

“We have been perfecting health care and pension plan administration for quite some time,” he notes. “That’s not the case with talent management, so we still have some ironing out to do.”

Another likely culprit for the dissatisfaction is that sometimes vendors peg themselves as comprehensive talent management suite providers when they really are not, deflating client expectations when the systems don’t perform accordingly. 

Technically speaking, a true talent management platform should cover five key areas: recruitment, compensation management, performance management, succession planning and career development.

“I can’t think of a single provider that performs all of these functions,” Omana notes. “There are some that do a beautiful job at several of these tasks, but not all five.”

The Watson Wyatt report, released in late October, also reveals that succession planning, specifically, is slated for a dramatic transformation. Some 33 percent of survey respondents say they plan to drop manual entry succession planning systems in favor of automated technology platforms, according to Brian Wilkerson, national practice director for talent management at Watson Wyatt.

Many employers let succession planning languish, but that’s changing based primarily on pressure from company boards of directors who seek a talent pool and an increased awareness of the correlation between sound succession planning and a company’s financial success.

“When you think about it, succession planning is one of the most critical aspects of talent management,” Wilkerson says. “Companies that have a strong program in place are ensuring a stable future for themselves.”

Brian Stern of the Shaker Consulting Group says he is not surprised by the pending evolution of succession planning programs. He notes, however, that there could be bumps along the path because—unlike recruiting or compensation—succession planning means different things to different companies.

“Talent acquisition, for instance, has very specific goals, such as how many people a company wants to hire,” Stern says. “Succession planning is fuzzy.”

Some companies will want it as a tool for simple tasks, like planning who will assume responsibilities once a certain individual retires. Other employers, however, will leverage succession planning for more complex strategies, like identifying and developing high-potential groups within the company.

Stern suggests that employers pinpoint exactly what their needs are before embarking on any upgrades of their succession planning systems. “That way companies can avoid unpleasant surprises along the way,” he notes.

—Gina Ruiz

Employees in the Kansas City, Missouri, area are opting out of employer-sponsored health insurance in favor of individual coverage, a trend that could spread to other regions, according to brokers and the local offices of BlueCross BlueShield of Kansas City.

Roger Foreman, chief marketing officer at the health insurance organization, says a surge in applications for individual health insurance during the past year has coincided with small employers dropping coverage and large employers shifting more of the cost to employees.

Foreman says 18 percent of the group’s customers have chosen individual coverage, compared with the 9 percent average across BlueCross BlueShield plans nationwide.

The rise in the cost of family coverage is a major factor, he says. Parents are opting to be covered as an individual under their insurer, then buy health insurance for their children in the individual market. This has caused a boom in the number of individual policies being taken out for children, which represents 40 percent of new business in the individual market, Foreman says.

“As we spoke to people, they would say dependent costs are getting so high, I can’t afford to cover my children,” he says.

It costs about $60 to $80 a month per child to buy health insurance through BlueCross BlueShield of Kansas City. For parents with one child, individual coverage can be less expensive than family coverage through an employer, especially if an employer offers a high-deductible health plan, says Jim Heckman, a broker in Kansas City.

“It’s the same cost if a person has one kid or four,” he says. “Especially if you have one child, it’s less expensive to go on an individual plan rather than a group plan.”

In recent years, health care cost increases have stabilized, allowing small employers to continue to offer health care. The cost that employees pay in premiums has increased at a higher rate at large companies, according to the Kaiser Family Foundation. Premiums paid by employees at large employers increased by 6.4 percent last year; at small employers, the increase was 5.5 percent.

Employees opting out could increase health care costs for employers, says heath care consultant Brian Klepper, if sick children remain under an employer’s health plan while the healthy ones turn to cheap individual coverage.

“The way it often works is that if you have a fragmented market, the people who hang in there are the ones who can’t get coverage anywhere [but through their employer],” Klepper says. “And that ends up being bad risk.”

Klepper says companies are better off finding health care savings in ways that don’t shift costs to employees.

In anticipation of what BlueCross BlueShield believes will be a growing market, the health insurer developed, with the help of health care technology company Benefit Focus, a Web service called Blue Direct, which makes it easier for people to apply online for health coverage.

“In the next three to five years, you are going to see a lot more about this market,” he says. “It’s the only real growth opportunity in the insurance business.”

—Jeremy Smerd

With just weeks remaining before the biggest changes in pension funding rules in more than 30 years become a reality, it looks as if Congress will leave the law intact despite a change in leadership on Capitol Hill.

As is often the case with legislation as massive as the 1,099-page Pension Protection Act, the House and Senate are considering technical corrections to the bill, which was signed into law in August 2006 and goes into effect January 1.

The reform measure, designed to shore up the pension system, was dense, complicated, controversial and developed by Republican majorities that no longer exist. But Congress isn’t revisiting its substance.

“They have very deliberately tried to make this a pure technical correction,” says Kyle Brown, retirement counsel at Watson Wyatt in Washington. “For a pension bill, it was pretty contentious. I don’t think there’s a whole lot of interest in reopening those discussions.”

In fact, there’s not much momentum for bill modifications, which would tweak an underlying measure requiring companies to fund 100 percent of their pension liabilities, curb credit balances and limit the smoothing of interest rates.

As of early December, House and Senate committees had not voted on correction bills. They could still be attached to other tax legislation.

Another bill in the mix would have a much more profound impact. Written by Reps. Earl Pomeroy, D-North Dakota, and Eric Cantor, R-Virginia, it would delay implementation of reforms until January 1, 2009, to give the Departments of Treasury and Labor time to write regulations related to the bill.

So far, few of the final rules have been promulgated, leaving companies unsure how to meet the law’s requirements.

Pomeroy lashed out about the delay at a House hearing in late October on an unrelated issue—401(k) fees. The congressman took advantage of the opportunity to give government officials at the meeting a piece of his mind.

“Regulations haven’t been completed yet in critical areas,” Pomeroy said.

Some guidance exists, but not enough, according to Robert Davis, senior manager at Deloitte Consulting in Washington. He likens the situation to a jigsaw puzzle.

“We’ve got some of the border parts together and some the interior pieces, but the funding rules are the core, and we don’t have that yet,” he says. “It’s going to be hard for employers and their plan sponsors to fully comply.”

Although the business community asserted that pension reform would increase the costs and volatility of defined-benefit plans, they have been bracing for the changes for 16 months.

That contributes to the corporate lobby holding back its support for Pomeroy’s proposed delay.

“At this point, it might be more confusing than helpful,” Davis says. “The response has been more tepid than some might have thought.”

But Washington will have to be patient with companies that make mistakes in revising their pension plans, according to Brown.

“You have to hope that government agencies will respect that a good faith effort has been made with a lack of guidance,” he says.

—Mark Schoeff Jr.

Wachovia Securities, in a move to hang on to as many brokers as possible in its merger with A.G. Edwards & Sons, is attempting to woo independent recruiters with a lucrative offer to encourage them to stop picking off Edwards’ reps and moving them to rival broker-dealers.

For certain recruiters, Richmond, Virginia-based Wachovia wants to increase the commission it pays to 10 percent of brokers’ previous years’ fees and commissions, almost doubling the industry norm of a 6 percent commission.

The agreement is surprising and almost unheard of, recruiters and brokerage executives say.

Of course, there’s a catch to get that extra commission. Recruiters have to sign a contract that prohibits them from moving St. Louis-based A.G. Edwards’ reps to other firms. The 10 percent commission would be for future recruiter business with Wachovia and would max out at $75,000.

Wachovia began offering recruiters the deal last month, and one recruiter who turned it down says he sees the offer as having two potential meanings.

“The increase in fees for recruiters confirms the war for talent,” says Danny Sarch, a recruiter in White Plains, New York. “It makes sense that firms have to pay more to get recruiters to pay attention to them.”

But the offer could also “speak to an element of fear that A.G. Edwards guys are at risk.”

Wachovia declined to comment on the deal it proposed to recruiters, but said it was “pleased” with its retention levels of Edwards’ reps.

“The attrition rate is very much in line with where it was at this point in the Prudential Securities merger,” Tony Mattera, a spokesman for Wachovia, wrote in an e-mail.

The firm merged with Prudential Securities of New York in 2003.

Among higher-producing brokers, the attrition rate is “slightly better than it was at the comparable point in the Prudential deal, which ended up being about 3 percent,” he says.

The move is “smart business on Wachovia’s part,” says Mindy Diamond, president of Diamond Consultants, an executive search firm in Chester, New Jersey, that works with financial advisors and reps.

Before the deal was offered, recruiting by Wachovia branch managers could be somewhat haphazard because the branch manager determined the recruiter’s commission, she says.

Diamond declined to say whether she signed the agreement with Wachovia.

At the end of May, Wachovia Corp. of Charlotte, North Carolina., the parent of Wachovia Securities, said that it was buying A.G. Edwards for $6.8 billion. The deal closed October 1.

Wachovia, which has 10,700 reps and advisors across a variety of platforms, has been built on numerous acquisitions. At the time the merger was announced, A.G. Edwards had about 6,600 reps and advisors.

Somewhere between 300 and 400 of those reps have moved to other firms, says one industry recruiter, who asked not to be identified.

For some, Wachovia’s acquisition of A.G. Edwards has turned quite contentious.

A common criticism of the deal has been that the two cultures are not likely to mix, with A.G. Edwards being an independent regional firm run by its family owners for most of its history and Wachovia a national behemoth owned by a bank.

Ben Edwards III, the former CEO who retired in 2001, caused a stir in June at Edwards’ shareholder meeting when he read a speech criticizing the deal.

In October, A.G. Edwards filed lawsuits against at least 10 of its former brokers and employees in an effort to stop the drain of client assets. Bitter fights erupted in California over Edwards’ loss of reps and employees to Stifel Nicolaus & Co., also of St. Louis.

And there have been some big winners in the race to grab Edwards’ reps, according to industry sources. For example, Merrill Lynch & Co. has had the most success, so far bringing in almost 100 reps and advisors, one industry source said.

Merrill Lynch declined to confirm the number of reps and advisors it has recruited so far from Edwards. The New York company is making “an aggressive effort to attract select wealth management employees from A.G. Edwards,” Erik Hendrickson, a Merrill Lynch spokesman, wrote in an e-mail. “It is a firm for which we have great respect, and a talent pool whom we believe comes from a background and culture similar to that of ours here at Merrill Lynch.”

Another big winner is LPL Financial Services of San Diego and Boston, which has recruited about 80 advisors from A.G. Edwards but could bring in as many as 100 by the end of the year, another industry source says.

Some in the industry are surprised at how aggressive Merrill Lynch has been at pursuing Edwards’ reps. Recruiters and brokerage executives view Merrill’s move as payback for Wachovia Securities’ pursuit of brokers formerly with the Advest Group of Hartford, Connecticut, which Merrill acquired in 2005.

Up to 20 percent of the firm’s original 515 reps left before the deal closed that December. Many of those were bigger producers.

Merrill’s pursuit of Edwards’ reps has been unusual, industry sources say.

For example, Merrill Lynch recently offered a $300,000-producing broker an upfront bonus of 170 percent of his previous year’s fees and commissions, according to one head of recruiting at a rival brokerage firm, who asked not to be identified. A deal at that level for a lower-end producer at a wirehouse is “almost unheard of,” the executive says.

Diamond doesn’t agree with the assessment that Merrill is looking for payback against Wachovia regarding what happened with Advest.

“Every firm was hot on the trail of those guys,” she says.

The reality of the brokerage business dictates aggressive moves by many firms, Diamond says.

“When a broker is recruited away, there is extra motivation for that firm to go get a top team” from that rival broker-dealer, she says.

Filed by Bruce Kelly of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

Plan sponsor/manager	U.S. District Court	Status
ABB	Western Missouri	Awaiting trial second quarter 2008
Bechtel	Northern California	Denied motion to dismiss May 2007
Boeing	Southern Illinois	Awaiting trial second quarter 2008
Caterpillar	Western Missouri	Awaiting trial
Deere	Western Wisconsin	Dismissed June 2007
Exelon	Northern Illinois	Delayed June 2007
Fidelity Investments	Western Wisconsin	Dismissed June 2007
General Dynamics	Southern Illinois	Awaiting trial August 2008
General Motors	Southern New York	Awaiting trial (no date set)
Kraft Foods Global	Southern Illinois	Denied motion to dismiss May 2007
International Paper	Southern Illinois	Awaiting trial second quarter 2008
Lockheed Martin Southern	Illinois	Awaiting trial September 2008
Northrop Grumman	Central California	Dismissed one claim May 2007
RadioShack	Northern Texas	Awaiting trial (no date set)
United Technologies	Connecticut	Dismissed one claim August 2007

–Originally published in Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

More health insurers have adopted New York Attorney General Andrew Cuomo’s doctor ranking model, thereby agreeing to fully disclose to consumers, physicians and plan sponsors the cost and quality metrics they use to rank doctors.

Minnetonka, Minnesota-based UnitedHealthcare Services Inc., along with New York-based insurers Group Health Inc. and Health Insurance Plan of Greater New York, are the most recent insurers to agree to apply the principles from the New York attorney general’s model.

They join Cigna Healthcare, a unit of Philadelphia-based Cigna Corp.; Hartford, Connecticut.-based Aetna Inc.; and Empire Blue Cross Blue Shield, a unit of Indianapolis-based WellPoint Inc., in committing to implement the doctor ranking model.

“We are witnessing the insurance market correcting itself,” Cuomo said in a statement. “Leaders in the insurance industry are setting the standard for rating doctors by using a model that was created with the input of physicians and consumers.”

Under the model, insurers must make certain that doctors’ rankings are not based on cost alone and must disclose the extent to which cost factors into their rankings. The insurers also must rely on national standards to measure quality and cost efficiency and take several steps to ensure more accurate physician comparisons.

The doctor ranking model was a joint effort by the attorney general, the Chicago-based American Medical Association, the Medical Society of the State of New York and several consumer advocacy agencies. It is the result of Cuomo’s investigation of physician ranking programs and concern that the rankings were based on cost alone.

“Having three of the largest insurers in the country pledging to adopt the principles of the attorney general’s model … is an important victory for consumers everywhere,” Debra L. Ness, president of the National Partnership of Women and Families, said in a statement.

The agency is one of the consumer advocacy organizations that helped build the model.

Dr. Reed Tuckson, executive vice president and chief of medical affairs for UnitedHealth Group, said in a statement that UnitedHealthcare is committed to the transparent information model because physician performance assessment programs play a key role in improving health care quality and cost efficiency.

Filed by Kristin Gunderson Hunt of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

Going well beyond what federal law requires, most U.S. employers now allow 401(k) plan participants to immediately sell matching contributions made in company stock, according to a recent survey.

The Hewitt Associates survey of 300 employers finds that among companies that match salary deferrals exclusively with company stock, 67 percent allow participants to diversify immediately.

That’s a huge change from 2005, when less than one-quarter of employers allowed the immediate sale of company stock contributed as a 401(k) match. That also exceeds requirements of a 2006 federal law that requires companies to allow employees to divest company stock contributed as a match after three years.

That diversification requirement was triggered by the meltdown of one-time energy giant Enron Corp., which exclusively matched 401(k) plan participants’ contributions with Enron stock and then required participants to hold the shares until age 50.

That meant participants were powerless to take action and sell those shares as Enron’s woes became public. Ultimately, the shares became virtually worthless, resulting in tremendous financial losses to many participants.

Additionally, the survey found that fewer employers now exclusively match salary deferrals with company stock, with just 23 percent doing so this year, down from 36 percent in 2005.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, please e-mail editors@workforce.com.