When a company is considering a merger or weighing the idea of an acquisition, it is crucial to assess the impact on operations and, specifically, on labor and employment issues.
Deal attorneys and bankers focus on the underlying value analysis and purchase documents, which clearly are important.
However, liability for labor and employment issues can be created by acts or omissions and rarely is avoided solely by virtue of indemnification clauses or seller warranties in deal documents.
Put simply, our legal system operates in large part to protect the “little guy,” which in the employment context, means the employee, not the company. This means that, despite the iron-clad separation of entities from a financial perspective, if operations continue following deal closure, an acquiring entity may be held liable for workplace obligations agreed to by the seller-predecessor or for acts or omissions creating liability prior to the close of the purchase.
The Employee’s Right
How can this be, you ask? Remember the little guy. If they felt like they were wronged before the deal closed, they will chase both companies (especially if the selling entity was in financial distress). From a legal standpoint if, from our employee’s perspective, nothing changed after the deal closed — same physical office, same managers, same processes — it is possible the buyer may be found liable for the wrongdoings of the predecessor entity.
The idea is that a company should not be able to escape liability to its employees solely by changing its corporate name and closing a deal. Someone needs to make sure the little guy’s wrongs are righted.The way the courts often do it is by extending that liability to the “new” entity. The question is, how does “NewCo” avoid this? Ensure labor and employment are key components of due diligence, including the following:
Wage and hour. If you are the seller, conduct internal policy and practice audits on wage and hour issues as part of due diligence. These audits can reveal existing procedural violations that could mushroom into “bet the company” class actions if not cured (or expressly carved out of the purchase price!). Some examples of such issues are pay stub compliance, meal/rest break issues, and employee or contractor misclassification. One of the most frequently overlooked areas of exposure is unpaid vacation or paid time off for employees of the selling entity — all of whom would technically be terminated (and thus owed these monies) in an asset purchase. Even if the buyer hires every one of them.
Employment agreements. Know your obligations to employees, no matter the role. High-level executives who are key to the transition often have change in control or severance provisions in employment agreements that trigger significant payouts in an asset deal. If the buyer wants to retain these folks, the terms of new employment should be agreed-upon before closing. The buyer also should be conscious of any restrictive covenants — if key personnel are departing as part of the deal, make sure you are protecting your assets by limiting their ability to go across the street and start a competing concern. Even in California, noncompetition arrangements are available for limited purposes in the context of a purchase or sale of a business.
Turnover/hiring practices. Prepare yourself for WARN Act obligations, which require extended notice/payout periods, even if employees are not going to miss a day of work because they are being hired by NewCo. Diligence should include a discussion of which entity will be handling WARN and COBRA notices. And once NewCo takes over, to help avoid the type of pass-through liability described above in the context of an asset deal, it should follow standard hiring practices for each of the “old” employees. Assess them like any other new hire, and ensure all paperwork is completed to establish the new business relationship.
Labor union issues. Make sure you know about the seller’s union agreements or activity. Ask whether there have been organizing drives or union activity.If there is any organized labor, ask to see all collective bargaining agreements and review all grievances. The CBAs may contain clauses obligating the buyer to assume the terms contained therein and the seller to expressly disclose the potential of a deal. If you are not planning to transition the organized operations to NewCo post-close, you may be responsible for posting a bond to cover the withdrawal liability for the multi-employer pension plan into which the seller previously contributed. This can be hundreds of thousands (or even millions) of dollars, and it is held in escrow for five years.
Immigration. Understand your employee base. Does the selling entity have employees for whom it has sponsored work visas? If so, there needs to be an assessment of transferability and a discussion regarding that process. Does the deal involve international payments or taxes or transfers of operations that will necessitate analysis of non-U.S. issues?
Any company considering a merger or acquisition is acutely focused on the potential effect on its balance sheet from a pure numbers standpoint. It is axiomatic that a business’s largest asset (or liability) can be its workforce. Remember that effectively transitioning operations requires careful planning and educated decision-making as to how, or if, NewCo will be adopting the prior workforce and the policies and practices that applied to it. In order to make responsible decisions regarding the value of any prospective transaction, and the risks associated with it, both sides should look beyond the balance sheet to the people on the ground.
As these issues highlight, diligence regarding matters of potential exposure stemming from the labor and employment function is crucial when assessing the true net impact of a potential deal on your company’s bottom line. The little guys can have a huge impact; don’t overlook that in your focus on the paperwork.
Despite the Bureau of Labor Statistics reporting that 10.7 percent of all wage and salary workers in the U.S. are union members in both the private and public sector, union membership of public sector employees at the federal, state and local levels is well above that at 34.4 percent.
Just in local government, the rate of union membership is 40.1 percent and includes teachers, police officers and firefighters. In contrast, only 6.5 percent of private sector employees belong to unions. That number is significant because average private sector compensation costs average $34.19 per hour, compared to an averageof $49.23 per hour in state and local government — a 30 percent difference in private to public employment costs.
So how do public sector unions achieve such important gains when some of these same unions don’t have the ability to strike? First, let’s take a quick history lesson.
The New York state Legislature was one of the first states to pass labor laws protecting women and children. Labor unions continued to gain strength in the subsequent decades, resulting in the passage of the Railway Labor Act in 1926, allowing railroad employees to unionize, and the 1935 National Labor Relations Act, which guaranteed basic rights of private sector employees to organize into labor unions and encourages collective bargaining — generally defined as the negotiation between an employer and a labor union on issues of wages, hours and working conditions.
Notably, the NLRA did not extend those protections to employees in the public sector for fear that public employees would strike, leading to paralysis of government until their demands were met. In 1943, the New York Supreme Court in Railway Mail Ass’n. v. Murphy, said, “Nothing is more dangerous to public welfare than to admit that hired servants of the state can dictate to the government the hours, the wages, and conditions under which they will carry on essential services vital to the welfare, safety and security of the citizen.”
Please read: Labor Relations in the Public Sector, Part 1
Today, most states have laws that formalize the bargaining process for some or all public employees, and some states permit only “meeting and conferring” on work-related issues. Only 11 states allow public employees to strike. Of those, most prohibit striking for essential employees and in cases where striking would endanger public health and safety.
For example, New York’s Taylor Law grants public employees the right to organize and elect union representatives, but also makes work stoppages punishable with fines and jail time. Some states prohibit collective bargaining for teachers while others prohibit all public sector collective bargaining.
The Power of Public Sector Unions
Without either limited or no ability to strike, public sector unions may try to leverage their power to help elect the very politicians who sit across from them at the bargaining table and influence legislation that affects public employees’ wages and availability of jobs. According to the California Fair Political Practices Commission, the California Teachers’ Association spent more than $211 million from 2000 to 2009 on political campaigning — more than any other donor in the state and as much as the pharmaceutical industry, the oil industry and the tobacco industry combined. In 2005 alone, the CTA spent $54 million to defeat initiatives intended to cap the growth of state spending and make it easier to fire underperforming teachers.
Politicians who attempt to limit the power of public sector unions and their lobbying arms need to come to the table prepared to make realistic changes. A case study of how not to negotiate with a public sector union is the Chicago Teachers’ Union strike in 2012, which was in response to some of Chicago Mayor Rahm Emanuel’s initiatives. Emanuel campaigned to improve the education of Chicago schoolchildren and used his political might to pass an aggressive education-reform bill without consulting the teachers’ union.
The CTU brought other public unions to their cause and engaged in a 10-day strike. After an unsuccessful attempt to get a court order to force teachers back to work, both sides reached an agreement. While Emanuel did get a longer school day and longer school year, the teachers got an average raise of 17.6 percent over four years, health insurance increases, seniority pay increases and raises for additional education.
In jurisdictions where striking is prohibited, there are ways to reach final resolution of negotiations if parties disagree. These include arbitration, mediation, fact-finding and bargaining without a final resolution mechanism.
In arbitration, a neutral third party facilitates discussions, examines the facts and makes a binding determination. In mediation, the parties agree on a professional who facilitates discussions and proposes solutions that both parties can accept or decline. In mediation/arbitration, the parties jointly choose a mediator and if both parties fail to come to an agreement, the mediator becomes the arbitrator. Fact finding is a labor dispute resolution measure where an independent “fact finder” examines the arguments of both parties and offers a nonbinding resolution. In the public sector, as many state and local governments are in poor financial health, the fact finder generally sides with the employer and finds the unions’ proposals unreasonable to allow the employer to control costs.
Unions strive to secure good outcomes for the employees they represent during the initial stages of negotiations. Allowing a dispute to lead to arbitration takes the decision away from management and labor. Since arbitrators must adhere to certain standards, the awards are somewhat predictable. Generally, arbitrators reach decisions that neither labor nor management view as the best solution. In a world where labor-management cooperation has become so important, having someone with no vested interest in the outcome decide a union and agency’s fate is a poor outcome that can take years for the parties to repair.
It is encouraging to see that some state and local governments and unions are using tools borrowed from the private sector that help lead to voluntary agreements. The following are important methods that increase the likelihood of fair, voluntary agreements:
• Engage employees at the workplace.
• Use interest-based bargaining techniques in contract negotiations, where both sides declare their interests and then work together to draft agreements that align common interests and balance disparate interests.
• Share information and consult with unions on long-term strategies. Since most labor agreements are in effect for at least three years, a government’s labor relations strategy should align with its own short- and long-term financial planning and overall strategy. Given the repetitive nature of the bargaining process, successful labor-management relationships have management communicate with and involve stakeholders regularly, not just during negotiations.
Bargaining involves transparent communication between labor and management regarding terms and conditions of employment. Effective bargaining is usually measured by whether labor and management can reach an agreement without involving a third party. By demonstrating interest in building rapport, exploring alternatives, refusing to put limits on the number of topics for negotiation, and coming to the table with the goal of a solution, management can maximize the chance of a favorable outcome without compromising the operations of government.
Animosity and being at odds no longer have to be the norm when coming to the table to negotiate public sector union-labor agreements.
Dale Pazdra, director, human resources for Coral Springs, Florida.
By creating an environment that supports greater collaboration and problem-solving, the needs of both labor and management can be better understood. A climate of trust will grow when collaboration includes opportunities to increase employee engagement. Based on the input of three labor-relations experts, there are multiple ways to increase employee engagement and improve the effectiveness of labor relations.
Jeff Ling, executive vice president of human resources consultancy Evergreen Solutions LLC, suggests three best practices that sustain a culture of engagement: transparency in communication, allowing employees to partner with you and asking for assistance to finding solutions to organization problems.
Labor relations that are built on trust and open dialogue create lasting partnerships thatare more meaningful and focused on mutual results. Employee engagement flourishes in an environment of transparency where knowledge and organization information is frequently shared. For labor relations to remain strong, communications must be ongoing, transparent and meaningful.
Ling, who has worked in HR consulting for more than 25 years and leads Evergreen’s HR consulting practice, has devoted a majority of his career to advising public sector clients in all HR areas including employee engagement.
He said that transparency can only be achieved when leadership is willing to engage in ongoing communication. It is also important to share successes (what the organization is doing right) and failures (how the organization has learned from its mistakes).
Also read: Labor Relations in the Public Sector, Part 2
Ling added that it is important to openly share the reasons behind changes in key leadership roles and the overall strategic direction. At the municipal level of government, public-safety budgets can garner a larger portion of the organization’s overall financial resources. Establishing trust between organization and labor union leaders is the key to having a sustainable long-term financial outlook.
Ling also added that transparency in communication is key to having strong levels of engagement.
“It’s necessary to provide future direction and strategic outlook during non-negotiating years,” Ling said.
Engaging Employees in Key Decisions
Including represented groups in organization focus groups on employee matters helps fuel ongoing collaboration. Offering employees the opportunity to influence changes in employee benefits or policies actively involves them in organization decisions and increases overall engagement.
Jackie Wehmeyer, human resources director for the city of Margate, Florida, described a time when an economic downturn resulted in decreased revenues as the city’s health care costs continued to rise. It was important to educate the union representatives on the drivers behind the cost of insurance and invite them to be part of a working group to evaluate plan design options, she recalled.
Although the design of the insurance plan isn’t a subject of labor negotiation, the act of asking for input demonstrated the organization’s commitment to employee engagement and willingness to seek their input on matters of importance.
Involving union representatives in other key decisions such as procuring new technology, vehicles, equipment and employee insurance coverage also is important to the organization’s ongoing commitment to employee engagement.
“It’s all about trust,” said Wehmeyer, who has 15 years of labor-relations experience representing management in multiple successful collective bargaining processes. “When employees and union representatives have the freedom to provide input, they feel more compelled to work together effectively.”
Collaborating to Find Solutions
Leaders from both sides need to challenge the status quo and begin to lean on employee groups to creatively solve problems and develop solutions to increase collaboration. International Association of Fire Fighters Union President Brian Powell experienced this firsthand when a prolonged recovery from an economic recession resulted in some cities not being able to deliver meaningful pay increases that were needed to motivate union employees.
Powell, who is president of Local 3080 of the IAFF in Broward County Florida, said that instead of making unrealistic requests, union representatives collaborated with city leadership to identify other sources of funds (including the use of state funds for benefit enhancements) that could help subsidize the cost of the pay increases.
“The union has to be willing to sit down and listen and the city’s leadership needs to do the same,” Powell said. “It’s important for each side to prove the request is fair and have ongoing dialogue to develop possible solutions.”
This strategy helped both sides meet existing challenges and enabled pay increases to be delivered sooner.
Without collaborative labor-management relations, productive dialogue is limited and results in longer, less effective negotiations. When labor unions are willing to develop a broader understanding of financial limitations, such as the need to have adequate financial reserves for unforeseen emergencies, the dialogue can become more solutions-oriented.
Based on these shared experiences, human resources professionals who are seeking a more effective labor relations strategy should consider opportunities to increase employee engagement levels.
“Building relationships needs to begin long before the start of labor negotiations,” said Powell, who has more than 15 years of collective-bargaining experience. As a union leader, he negotiates collective-bargaining agreements with multiple municipal organizations in South Florida. “Collaboration and open dialogue help build trust and increase mutual understanding,” he said.
Focusing on communication, involving employees in key decisions and collaborating to solve organization problems are all best practices for building a foundation of trust that leads to stronger employee engagement.
Positive outcomes will increase during labor negotiations when organization and union leaders seize opportunities to collaborate, learn from each other and remain committed to open and honest communication.
At a time when careers in government are increasingly underscored with public and political pressure, Kirsten Wyatt is sounding the alarm about the public sector workforce.
“The government needs to wake up and realize there’s a talent war,” said Wyatt, executive director of the Oregon-based Engaging Local Government Leaders, a nonprofit promoting diversity, education and networking among local government employees on a national level. “If you’re going to be competing for entry-level or jobs you want to fill with talent you can then nurture, you need to put in more effort.”
Public sector agencies from the massive federal government to tiny rural townships face unique challenges when competing with private businesses for talent. Recruiting and retention is a recurring concern for the skill set often associated with public service employees. And it’s no secret that private sector companies typically offer substantially higher wages and more flexible work schedules. And there are other factors coming into play.
Prime among them is the so-called silver tsunami, a wave of baby boomers exiting the workforce into retirement. Studies show some 10,000 boomers retire every day, leaving a huge gap for public sector employers to fill.
According to the U.S. Office of Personnel Management, the average age of a full-time federal employee is 47.5 years, with 45 percent of the workforce over 50 years old.
The Congressional Research Service indicates 52 percent of public workers are age 45 to 64 compared to 42.4 percent in the private sector.
Federal workers are older than state and local government employees, too, studies show. Of those age 45 to 64, 56.7 percent are federal, 52.1 percent are local, and 49.7 percent are state employees.
In a 2018 survey by the Center for State & Local Government Excellence, public sector HR directors report higher numbers of retirements in 2018 over 2017.
Another challenge: Public agencies depend on tax base or bond-measure revenues to create new jobs and rehire for open positions. Hiring freezes are not uncommon even in flush economic times.
Nannina Angioni
“When taxpayer dollars are on the line, protections and processes come into play that an untrained, private sector employee would not even consider,” said Nannina Angioni, a labor and employment attorney and partner of the Los Angeles-based law firm Kaedian LLP.
Angioni said it can be costly and time consuming to find employees with public sector experience for entry-level positions given the increased ethical considerations, regulatory issues and legal obligations that typically don’t apply to private sector workers.
Still another challenge: enticing people to technology jobs. While millennials exhibit technological advantages being digital natives, it’s also one reason they are scarce in government workplaces with antiquated systems where they can’t sharpen their skills, said Kris Tremaine, a senior vice president focusing on the federal public sector at ICF, a global consulting and technology services company.
Although millennials will comprise 75 percent of the workforce by 2025, they currently make up only 10 percent of the federal sector technology workforce, said Tremaine.
Kris Tremaine
Eighty-two percent of the Center for State & Local Government Excellence’s survey respondents indicated recruitment and retention as a workforce priority. They’re finding it difficult to fill positions in policing, engineering, network administration, emergency dispatch, accounting, skilled trades and information technology.
“When it comes to recruiting talent, you need to go where the talent is,” said ELGL’s Wyatt, adding that while many public sector HR departments continue to advertise jobs in newspapers, potential talent is hanging out on social media.
While Wyatt calls many job ads “boring,” she also notes successful efforts such as one produced by the city of Los Angeles for a graphic designer. The ad appeared as if a child drew it with a crayon. It went viral.
Fort Lauderdale, Florida, human resources professional Jody Blake posts jobs on social media featuring eye-catching images of palm tree-lined beaches or building plans.
To fill vacancies in Fort Lauderdale’s 2,500-member workforce, Blake uses Twitter, Facebook, LinkedIn, ZipRecruiter and Indeed.
She’s had the most success with LinkedIn, especially for stormwater and wastewater engineers. She posts jobs on engineering group sites at no cost and uses LinkedIn’s Recruiter Lite program to maximize her efforts.
“I believe in getting the word out any way you can,” she said. “Even if people aren’t interested themselves, they may know someone who is.”
The public sector should take a page from the private sector in hiring practices, including internships, career fairs, meet-ups, events, social activities and using more technology, said Tremaine. Blake, meanwhile, also seeks people with a passion to make a difference. Jobs emphasizing social good attract millennials who want to be part of making a difference “such as in helping Americans stop taking opioids or climate change issues,” Tremaine added.
Wyatt said, “You can work in sustainability, be a librarian, police officer or an engineer and all work for a local government with that public service ethos at the core of your job every day.”
Millennials Embrace Collaboration
Human-centered open plan designs supporting teamwork where employees of different skill sets gather is important, said Tremaine.
While millennials skip from job to job often for higher pay, “some want clearer paths to growth and an understanding of where they fit in the organization,” Tremaine said, adding they prefer a coaching-mentor relationship to a boss.
Streamlining onerous paperwork and a protracted timeline involved in public sector employment may attract more employees, Tremaine said.
So too would the ability to leave a job and return “and not lose all of your benefits while drawing private sector best practices into the government,” she added.
Jody Blake
Fort Lauderdale attracts many people looking for a switch after many years working in the private sector. While they made more money in private industry, they seek the security of the public sector, Blake said.
The city of Weston, Florida, took a different approach 21 years ago by outsourcing most positions per its charter.
“Probably 70 percent or more of a government budget is the cost is to pay employees,” said City Manager John Flint.
Only 10 positions for the city of Weston are in-house: six department directors, a city manager, two assistants and a clerk. An assistant city manager handles necessary HR functions such as insurance and payroll contributions.
Law enforcement is provided through the Broward County Sheriff’s Department. Other city jobs are filled by government outsourcing services such as C.A.P. Government, Calvin, Giordano & Associates, Municipal Technologies, and Weiss, Serota, Helfman, Cole & Bierman.
“All of the people here are by invitation and not by right. If the people assigned to us don’t meet our expectations, it is easier for us to replace them. I don’t have to spend my time managing people. I can manage the city and spend more time with our elected officials and residents,” said Flint, adding Weston’s approach offers greater flexibility and efficiency.
Some outsourced employees have been with the city before its incorporation in 1996 when it was a community development district, said Flint. When the city changes service providers (which hasn’t happened in a decade), Flint ensures the incoming provider retains the current employees and keeps their salaries and benefits at least equal to the previous provider.
Kaedian LLP’s Angioni said that once they are hired, many public sector employees stay in their job for decades for the perks of consistent work hours, minimal demands outside of their set schedules, union benefits, rights to reinstatement, pensions and appeal rights to disciplinary actions.
Career Moves
The public sector also offers the ability to try different careers while retaining benefits in one organization.
An agency might consider moving someone who’s been an analyst in community development for a few years into public utilities for another few years to increase their knowledge base and broaden their skills.
Such moves keep employees “engaged, excited and continually learning” while also giving departments “a fresh set of eyes,” Wyatt said. That’s important to retention, given the hundreds of thousands of dollars spent on employee wages, benefits, training and development over a five-year span, she added.
John Flint
To retain employees in one of the most difficult public sector jobs — solid waste collection — Greenville, South Carolina, Solid Waste and Recycling Manager Mildred Lee treats a crew to lunch monthly to show her appreciation and elicit their input.
She’s retained employees by leading an effort to convert solid waste collection from five to four days. A supervisory mentoring program for all frontline solid waste employees has transitioned two into management.
A 2018 survey by the Center for State & Local Government Excellence noted that more than 45 percent of the respondents offer flexible scheduling, 65 percent support employee development and training reimbursement, 37 percent host wellness programs or on-site fitness facilities, and 34 percent provide some form of paid family leave.
Wyatt said she receives increasing feedback about the value the midprofessional generation places on paid family leave.
Kansas City, Missouri, recently finished a one-year paid family leave pilot program. It was utilized primarily by male police officers. It’s the hardest job for which to recruit and is typically dominated by young men, said Wyatt.
“You look at the long-term impact that has on employee morale and loyalty and who you choose to work for with everything else being equal,” she added.
As the public sector starts to see the dismantling of retiree benefits, one useful tool may be adopting the Individual Medicare Marketplace for retiree health care programs, “a model generally far more affordable for retirees while offering cost savings for employers,” says Marianne Steger, director of public sector strategy at Willis Towers Watson and former health care director for the Ohio Public Employees Retirement System.
Retaining employees has meant offering low-priced health insurance, a generous retirement plan, educational incentives, annual reviews typically with pay increases and the ability to start off at a good rate of vacation time accrual, said Fort Lauderdale’s Blake.
Blake offers advice to new hires on how to improve their profile to increase their promotion chances. Employees are surveyed on the work culture. Employees are called community builders while residents are called neighbors.
Wyatt and her husband Kent — both former public sector employees — founded ELGL after noticing local government education, training and networking was siloed based on job title. Its 4,000 members nationwide represent a cross-section of entry-level employees to mayors and city managers.
“It helps when librarians can learn from planners and cops can learn from finance directors,” said Wyatt.
Their organization provides collaboration and cross-departmental training through a technology network connecting public sector employees in one part of the country to others elsewhere to help deal with problems for which others have found solutions.
It also provides online content, monthly webinars, regional pop-up conferences and a national conference. Informal meet-ups are held on college campuses to introduce local government careers to college students.
Further, it focuses on increasing the number of women and people of color into local government leadership to reflect U.S. community demographics.
While there is much focus on age demographics in public service, Wyatt said what most people in a public service career want is no different than anyone else: “feeling recognized for a job well done, independence and learning something that takes them to the next step in their career.”
Wyatt has seen some members go through a career crisis as they contemplate a move to the private sector for more pay and better fringe benefits.
“They choose to stick with government,” she said. “They built a network that supports them and reminds them it’s work worth doing and that’s powerful.”
When Alex Smith was hired as the chief human resources officer for the city of Memphis in 2016, she had never previously held a public sector job — one of the reasons she was selected.
City leaders wanted to bring fresh eyes to the team to address the ongoing problem of how to attract and retain the best talent to city jobs. Smith found that many of the city’s human resources processes were still paper-based and data was stored in siloed databases, which added time and confusion to hiring and talent management.
“I knew we needed to automate some of these processes,” said Smith, who previously held private-sector HR jobs with Brightstar Corp. and Target Corp. One of her first suggestions was to implement a cloud-based HR technology system that would streamline hiring and better manage candidates and employee data. After some negotiating, the chief information officer and head of finance agreed, and they adopted a cloud-based human capital management system from workplace software giant Oracle.
“It was a huge win,” Smith said.
The technology eliminated many of the manual tasks like copying addresses into multiple databases and producing monthly trend reports.
“Now I can focus on tasks that matter the most and I can track hiring data in real time,” she said. It also streamlined the candidate experience and helped her expand the city’s social recruiting and brand recognition. “It is helping us to be more proactive in attracting talent,” she said.
A few years ago, this kind of story — of a public sector agency investing in cloud-based HR technology and social recruiting platforms — would have been unusual. The public sector has a reputation for being slow to adopt HR technology to empower workers and streamline HR tasks, said Sean Morris, a principal at Deloitte covering human capital trends in the public sector. “There is a history of under-investing in human capital by government due to limited budgets.”
Public sector HR people also don’t have a seat at the funding table, which means there is no one to champion their cause, said Sean Osborne, vice president of product management for public companies for Acendre, a cloud-based talent management software company that serves the public sector. “We often find that HR doesn’t have the budget or authority to effect real change.”
Even when these agencies have funding for technology upgrades, the siloed nature of government agencies and opposing funding priorities can quickly push HR investments to the end of the line, Smith added. “If HR is competing with the police or fire departments for project funding, police and fire will always win.”
This lag effect is about more than just money. There is also a change management challenge. In government, many senior leaders and IT staff have been in those roles for years and they have a set way of doing their jobs and making decisions. Moving to the cloud is a completely different way of managing technology and data, and there is a lot of resistance to change, especially from employees who fear their jobs will be at risk.
Technology and Talent Are Getting Old
These delays have had a long-term impact on recruiting talent management trends across the public sector. Many public sector agencies still rely on paper-based recruiting and onboarding steps, which are cumbersome and can add weeks to the hiring process. “Millennials and Gen Z don’t understand why it would take that long,” Morris said, noting that the negative experience may cause them to look elsewhere for work. These organizations also lack tools and transparency to effectively support career development, or to use people analytics as part of business and talent decisions. All of this is making it difficult for public sector agencies to attract and retain talent, said Morris. “That has put them in the situation they are in now.”
That situation is a rapidly aging workforce and a recruiting environment that makes it difficult to attract and retain young talent. Data from the Office of Personnel Management shows that less than 7 percent of the federal workforce is millennials, even though they make up 35 percent of the workforce nationwide; and 44 percent of federal workers are over the age of 50, which means they are inching ever closer to retirement with few younger staff ready to take their place.
“If HR is competing with the police or fire departments for project funding, police and fire will always win.”
— Alex Smith, CHRO, City of Memphis
This combination of aging talent and outdated technology is making it difficult for them to compete for young talent, said Daniel Torrens, global public sector HCM strategist for SAP SuccessFactors. “Candidates have a lot of choices today, and public sector organizations haven’t been building their brand or engagement strategies.”
These pressures are forcing public sector agencies to shift their attitude about cloud-based HR technology and to prioritize these transitions as they consider their future talent development and workforce management needs.
“Government CIOs no longer question whether they should move to the cloud, it’s all about, ‘How do we get there,’ ” Torrens said.
That’s good news for vendors. Torrens noted that four years ago, these agencies were still paying off their on-premise solutions and wouldn’t even consider a move to the cloud. But in the past 18 months that has changed. “We are having a lot more conversations about how to build a business case and get funding to adopt the cloud.”
Talent Needs Force the Issue
Fully 81 percent of public sector respondents now consider the cloud to be one of the top three technologies for ROI potential, according to the 2018 SolarWinds “IT Trends Report.” Almost as many (79 percent) see cloud as a top three solution to achieve productivity and efficiency benefits.
To support these interests, many public sector organizations, including government, education and health care, have adopted a cloud-first policy to replace legacy systems and design new more agile service-based solutions, said Sherry Amos, director of market development for education and government at Workday.
HR is also gaining more visibility in decision-making as public organizations acknowledge that talent management is a strategic issue that needs to be addressed. “In the past, finance drove all of these acquisitions,” Amos said. “But HR now has a seat at the table.” This is giving public sector HR leaders an opportunity to shape the future of workforce management and the technologies their organizations will use to support them.
This is where the challenge of moving public sector HR into the cloud shifts to the vendors, Morris said. The decision to move to the cloud is only the first in many steps for public sector clients. “If a vendor wants to support customers in the government cloud space, they have to federalize their tool.”
FedRAMP and Title 5
The majority of government organizations have to meet a very unique set of rules and requirements for adopting any cloud-based solutions, and they rely on vendors to adapt their systems accordingly. These include ensuring all data centers meet FedRAMP, the Federal Risk and Authorization Management Program requirements, which include an extensive list of rules for security assessment, authorization and continuous monitoring of cloud products and services.
“Meeting FedRAMP is a high barrier to entry in this space,” Osborne said. Vendors also have to adapt their platforms to meet Title 5 rules regarding administrative personnel, which cover issues such as pay schedules, job titles and priority hiring for veterans and people with disabilities. It can take months and a significant financial investment to adapt current HR platforms for a public sector workplace environment.
The majority of civil government organizations have to meet a unique set of rules and requirements for adopting cloud-based solutions.
Vendors also face a ton of pressure to get it right — because if they screw up things like data security it could result in national security risks. “Any time you move a large swath of data to a new environment you have to do your research because no system is foolproof,” Morris said.
The challenges are significant, but the effort to meet regulations and cater to this clientele is clearly worth it. “The federal government is the largest employer in the country,” Osborne said. And since most of these agencies are only just now considering cloud-based HR technology solutions, the commercial opportunities are bountiful. “The time is ripe right now for public sector organizations to move to the cloud,” said Eva Woo, global vice president of solutions management for SAP SuccessFactors.
Public Sector Tipping Point
The enormous sales potential is causing vendors across the HR technology industry to pay closer attention to the needs of public sector clients and to prioritize meeting regulatory requirements and adapting their customer management processes for a public sector environment. That includes adapting their sales and marketing strategies for longer procurement cycles.
“It can take two years just to secure funding and execute procurement,” Amos said. Public sector clients also tend to pursue a phased approach to their transition to the cloud, starting with low-risk systems to demonstrate safety and performance before moving to more mission critical systems that support HR and finance.
Morris noted that SAP and Oracle were among the first HR cloud-based solution providers to embrace public sector clients and their regulatory and procurement needs, though other vendors have been quickly following suit. He believes that the next three to five years will see a flurry of cloud-based HR projects across the public sector, including local and federal government, education, health care, and other agencies that need a better, faster and more transparent HR solution to deal with their recruiting and talent management needs.
Morris encourages vendors to make the continued investments in meeting regulations and to hire people with experience in public sector HR and IT who can help them navigate the complex procurement process. “The public sector is a massive market, but you have to play the long game,” he said. These agencies know they have to make investments in cloud-based HR solutions, but they will need vendors who can help them get there.
Vendors may also need to provide more IT support and education. City of Memphis’ Smith noted that many public agencies don’t have the head count or expertise to manage a cloud transformation on their own, so they will rely on vendors to fill gaps. “Having partners who will support training and change management needed on these projects is very important.”
These clients may have more needs than private sector companies, but the vendors who can support them and prove they understand how the public sector environment works will be will be best positioned to win these clients in the future.
The first-ever ISO standard for human capital reporting was passed in November 2018. Officially titled the “Human Resource Management — Guidelines for Internal and External Human Capital Reporting,” it was scheduled for publicationDec. 18.
Some background: ISO is the International Organization for Standardization. It is a worldwide federation of national standards bodies — the ISO member bodies.
The member body for the United States in the ISO is ANSI — the American National Standards Institute. The work of preparing international standards is normally carried out through ISO Technical Committees. In this case, the work was done by Technical Committee 260.
In 2011-12, there was an ANSI effort to create a human capital reporting standard for the United States. Those of us involved in the early ANSI work were disappointed when it failed to progress; we had hoped that an ANSI standard would eventually lead to an ISO standard. Although the ANSI effort was ultimately tabled, a subsequent ISO group formed to tackle the issue, resulting in the standard that was finalized Nov. 22.
Having an ISO standard is a much bigger deal than merely having an ANSI standard. Here’s what Jac Fitz-enz, who is often referred to as the Grandfather of HR Analytics, has to say about standardization: “An ethical code, a body of research, specialized education and performance standards are the basis of a profession. The adoption of ISO standards supports human resources’ claim to be a profession. It’s been a long, difficult journey from the founding of the American Society for Personnel Administration by 28 far-sighted people in 1948, but now the goal is within reach.”
Why Standardization?
We’re willing to guess that HR professionals are asking some variant of one or more of the following:
• I work in a small firm, nonprofit organization or government agency; how can this possibly be relevant to me?
• Can I just ignore this?
• Is this standard a threat to me (and/or my employer)?
• Is there some way that I (and/or my employer) can benefit from this new development?
In order to answer these concerns, let’s first discuss some additional background that helps put this standard into context.
Why Has This Standard Emerged?
The fundamental source of value creation in advanced economies such as the United States has shifted from tangible assets to intangible assets. Tangible assets have a physical form — machinery, buildings, land and inventors — whereas intangible assets are nonphysical, such as patents, goodwill and brand recognition.
Financial services firm Ocean Tomo reported that in 1975, 83 percent of the market value of S&P 500 firms was accounted for as tangible assets, with the remaining 17 percent of assets attributable to intangible assets.
A mere 40 years later, this ratio had flipped: In 2015, only 16 percent of the market value of S&P 500 firms was accounted for as tangible assets and the remaining 84 percent was attributable to intangible assets.
Since human capital is the fundamental source of most intangible assets, there is a much greater need today for measuring, monitoring, tracking and understanding how well people are being managed and developed. A broad array of stakeholders — executives, investors and employees themselves — want to know more about the people side of the businesses with which they are involved.
In light of this, “Workforce reporting is rethinking how organizational value should be understood and evaluated,” said Stefanie Becker, HR project director, HR strategy and planning for SAP SE. Beckeralso convened the working group initiated by the German Mirror Committee in the ISO Technical Committee 260 and oversaw the drafting of the human capital standard.
Stefanie Becker
“The new ISO standard about workforce reporting assists organizations to move toward a more data-driven decision-making process across all facets of workforce management,” Becker said. “By using it for the public reporting, organizations can also fulfill the requirements of investors and other stakeholders by offering more transparency on their most valuable resource, human capital.”
And, indeed, investors are beginning to demand more insights on the people side of business. For example, the Human Capital Management Coalition, which is led by the UAW Retiree Medical Benefits Trust and includes 26 influential institutional investors representing more than $2.8 trillion in assets, “engages companies with the aim of understanding and improving how human capital management contributes to the creation of long-term shareholder value,” according to the coalition’s mission statement.
Cambria Allen
Cambria Allen, corporate governance director for the UAW Retiree Medical Benefits Trust, said, “The Human Capital Management Coalition filed its rule making petition with the U.S. Securities and Exchange Commission in 2017. We presented the investor case for more effective disclosure of human capital information from our portfolio companies and urged a multi-stakeholder effort to develop reporting standards that would provide shareholders critical access to relevant and reliable quantitative and qualitative data.
“This data will allow us to better understand and assess how well portfolio companies are managing their talent,” Allen said. “The work of the ISO represents an important contribution to this dialogue.”
In short, if there was doubt previously about demands in the investor community for reporting on the people side of the business, it is now clear investors view such information as central to their work.The time has more than come for a standard for reporting on the people side of the business.
Overview of the Standard
Before getting into the details of the standard, a high-level view reveals some key facts that inform answers to the previous list of questions. First and foremost, the standard is about guidelines. There is nothing mandatory or compulsory about it, so there’s no need for anyone to get up in arms about it.
Second, the standard provides guidelines for both internal and external reporting and for large and small businesses, so there is something here for everyone. Some components are more appropriate for internal reporting or more relevant only to larger businesses.
Third, it represents the culmination of a tremendous amount of effort by a large and well-informed group of HR leaders from a wide range of backgrounds. There is a lot of wisdom, free advice and counsel built into it.
And fourth, the standard is very broad. So there may be parts of it that seem irrelevant for your organization. Our advice is not to be tempted to throw out the baby with the bathwater. Use what you can and what will be most valuable for your organization.
The standard provides guidelines on the following core human capital reporting areas:
• Compliance and ethics.
• Costs.
• Diversity.
• Leadership.
• Organizational culture.
• Organizational health, safety and well-being.
• Productivity.
• Recruitment, mobility and turnover.
• Skills and capabilities.
• Succession planning.
• Workforce availability.
Lee Webster, who served as the secretariat of the ISO Technical Committee 260 that created the standard, said, “This document is a first step. It will evolve, and additional definitions and formula will be added in future versions. We’re only at the 50-yard line. There’s still lots more work to do.”
What the Standard Suggests for Internal and External Reporting
The standard is a 44-page document that contains lots of narratives, definitions and background discussion. Most useful for beginning to understand what it’s all about is Table 2 of the standard, which provides a summary of the recommendations for both internal and external reporting for both small and large organizations. The table on this page summarizes the standards’ recommendations for external reporting.
What This Means to Your Organization
The demands for better management, accountability and transparency with regard to human capital will only continue to grow in the coming years. This is the inevitable result of the increasing role that human capital plays in the creation of economic value. Within that context, the standardization of human capital measurement and reporting is a natural development.
This is good news, we believe, for those HR professionals and employers who have a good story to tell. But there is no getting around that this is not a happy development for some: those who would prefer to be able to keep stakeholders in the dark regarding their “people track record.”So this is not a universally positive development for everyone. But it is certainly one that will benefit the “good guys.”
Our advice is to give the new ISO Standard careful consideration. There may be components of it that are not relevant to your organization (at least currently). But it is also the breadth of the standard that ensures there is something for every type of organization, including yours.
In Integrity Staffing Solutions v. Busk, the Supreme Court held that the FLSA only requires employers to compensate employees for time spent performing pre-shift (preliminary) and post-shift (postliminary) activities that are “integral and indispensable” to an employee’s principal activities.
What are “integral and indispensable?” Those activities that are (1) “necessary to the principal work performed” and (2) “done for the benefit of the employer.”
In Busk, for example, the court held that post-shift security screenings were not “integral and indispensable” for an Amazon warehouse employee, because such screenings are not “an intrinsic element of retrieving products from warehouse shelves or packaging them for shipment,” and the employer “could have eliminated the screenings altogether without impairing the employees’ ability to complete their work.”
In light of these standards, consider Mireles v. Hooters of Am., LLC, filed late last year in a Houston federal court. A Hooters waitress claims that her employer unlawfully withholds pay for “postliminary” activities.
According to the lawsuit, Hooters requires its “Girls” to be “approachable, upbeat, and attentive to the needs of the guests as she socially engages with and entertains each individual guest at the front door and on the floor.” Accordingly, it requires that they spend substantial post-shift time “conversing with customers about topics unrelated to Defendants’ food and beverage offerings or local attractions, and spending substantial time waiting for managers to reconcile their sales receipts and tips towards the end of each shift.”
Are these waitresses entitled to be paid? Who knows. The point to be made runs much deeper.
There is a fine line between what is “integral and indispensable.” If the waitresses are required to be “attentive to the needs of the guests” and “socially engaging,” then I can craft an argument that time spent schmoozing post-shift should be compensated, just as I can make the point that such activities have nothing to do with the principal work of serving wings and beer. These off-the-clock cases are difficult, expensive and risky. If you lose, you’re not just paying your lawyer, but also the plaintiffs’ lawyer.
In other words, before you decide that your employees’ pre-shift and post-shift time is non-compensible, stop, take a deep breath, and call your employment lawyer.
New year, same old employers earning themselves nominations for my annual race to the bottom.
Darryl Robinson, the only African-American employee in his Marriott Vacations Worldwide office, claims he was subjected to repeated racial harassment during his 11 months of employment.
Robinson alleges that a director of sales repeatedly asked him to dance to music by Michael Jackson during sales meetings.
While complimenting his staff, the director of sales said, “Daryl looks ready to breakdance.”
Robinson claims that the company did not provide him a cubicle like every other sales rep, but instead required him to work out of a cramped storage closet without air conditioning.
Robinson suggested that there was no need for him to a take part in team building exercise involving employees’ baby photos, since he was the only African-American in the office. A colleague told him that if he opted out, she’d just use a photo of Buckwheat. True to her word, she inserted a Buckwheat photo and asked the team: “Who do you guys think this is?”
For its part, Marriott Vacations Worldwide provided a solid “no comment.”
2019 is off to a rousing start. Do you have an employer to nominate as this year’s Worst Employer? Email me at jhyman@meyersroman.com, or drop a comment below.
It’s one of the questions I get most often from clients.
So, let’s take a quick run through the rules of docking employee’s pay for exempt employees.
Generally speaking, it violates the Fair Labor Standards Act to dock (that is, take a deduction from) the salary of an exempt employee. Under the FLSA,an exempt employee earns their entire salary for a work week as soon as that employee works even one minute during that week.
The logic is simple. Once you start deducting from an exempt employee’s salary for minutes or hours not worked, you are not treating that employee as salaried, but as hourly. And, hourly employees are not exempt. Therefore, if you don’t pay an exempt employeetheir entire salary for every work week in which any work is performed, then you are treating them as hourly and they are not exempt.
There are, however, seven limited exceptions permitting deductions from an exempt employee’s weekly salary:
When the exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability.
For absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability.
While an employer cannot make deductions from pay for absences of an exempt employee for jury duty, attendance as a witness, or temporary military leave, an employer can offset any amounts received by an employee as jury fees, witness fees, or military pay for a particular week against the salary due for that particular week.
For penalties imposed in good faith for infractions of major safety rules.
For unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules imposed pursuant to a written policy applicable to all employees.
For any time not actually worked during the first or last week of employment.
For any time taken as unpaid FMLA leave.
It is critical for employers to understand these rules. A mistaken deduction could prove costly. Generally speaking, if an employer makes an improper deduction from an exempt employee’s salary, the exemption will be lost during the time period during which the improper deduction was made. Critically, the lost exemption does not only apply to the affected employees, but also to all employees in the same job classification working for the same managers responsible for the actual deduction.
Before you consider deductions from an exempt employee’s salary, consult with your employment counsel to make sure you have these rules covered and the deduction is proper.
Suppose one of your employees believes that she was discriminated against because of her protected class.
She files a charge of discrimination with the EEOC, and in support of the charge, provides the agency information from your confidential personnel files that she had copied. In response, you fire the employee for violating your confidentiality policy? She then files a new charge, alleging that her termination was in retaliation for her protected activity of gathering evidence in support of her discrimination claim.
Does her retaliation claim succeed?
Lawyer answer: it depends.
Most recent answer: The 4th Circuit Court of Appeals, in Netter v. Barnes.
Under the opposition clause, unauthorized disclosures of confidential information to third parties are generally unreasonable.…
However, the participation clause offers more capacious protection for conduct in connection with Title VII proceedings. Application of the participation clause must account for the evidentiary difficulties many plaintiffs face when pressing claims of workplace discrimination.…
That said, we cannot conclude that Netter’s unauthorized inspection and copying of the personnel files constituted protected participation activity for a straightforward reason. She violated a valid, generally-applicable state law [against the] “knowingly and willfully examin[ing]…, remov[ing,] or copy[ing] any portion of a confidential personnel file” without authorized access. “[I]llegal actions” do not constitute “protected activity under Title VII.”
We are loath “to provide employees an incentive to rifle through confidential files looking for evidence.”
In other words, because Title VII’s anti-retaliation provisions do not permit an employee to engage in illegal activities, and because this employee’s state law prohibits the copying of confidential personnel files, Title VII does not protect her copying in this case.
That said, your mileage on this issue will vary based on your jurisdiction and the nature of the how the employee gained the information.
Courts generally balance the following factors to determine whether the employee’s gathering of the documents was reasonable, and therefore protected:
How the documents were obtained
To whom the documents were produced
The content of the documents, both in terms of the need to keep the information confidential and its relevance to the employee’s claim of unlawful conduct
Why the documents were produced, including whether the production was in direct response to a discovery request
The scope of the employer’s privacy policy
The ability of the employee to preserve the evidence in a manner that does not violate the employer’s privacy policy.
For example, in Niswander v. Cincinnati Ins. Co., the 6th Circuit held that an employee who purposely rifles through confidential personnel records to locate evidence to support a discrimination claim cannot support a retaliation claim.
Yet, in Kempcke v. Monsanto Co., the 8th Circuit permitted the retaliation claim based on the fact that the employee had innocently stumbled across the evidence of potential discrimination in a computer that his employer had issued to him.
What does all of this mean for you?
First, review your company privacy policy to ensure that it sufficiently covers employee personnel files so that you can rely upon it if you have to terminate an employee for engaging in some self-help to support a discrimination claim.
Second, before you take any action, check in with your employment counsel to discuss the circumstances and the potential risks of stepping into a retaliation claim.
