Massachusetts’ New Equal Pay Law

Last month, Massachusetts Governor Charlie Baker signed into law the “Act to Establish Pay Equity”, which will go into effect starting July 1 of next year. The Act is considered ground-breaking in the U.S. for its additions to the state existing equal pay legal framework.

The Act has three main provisions that add to or change existing equal pay law. The first provision, which is creating all the news, creates a new prohibition against employers from asking prospective employees for their salary history. The purpose of this provision is to end ongoing pay disparity when employees who are paid less than their counterparts move jobs. Preventing prospective employers from asking for salary history should hopefully prevent pay disparity from continuing into a new job.

This provision does not prevent a prospective employee from volunteering their salary history (although employers should not try and skirt around the law by soliciting a prospective employee to volunteer that information – it should be solely of the applicant’s own volition). Nor does it prevent an employer from verifying that volunteered salary history with the prospective employee’s former employers. However, the Act does not speak as to whether an employer may ask prospective employees for their salary expectations (i.e., what they expect to be paid in the position they are applying for). We will likely have to wait for further guidance from the OAG on this point.

A subsection of the first provision also prohibits employers from having “pay secrecy” policies. As a result, employers cannot discipline employees for asking their co-workers about the pay and benefits they receive. Of course, an employer is not required to inform an employee of the pay and benefits his or her co-workers receive.

The Act creates a private right of action in employees for violations of the prohibition on salary history questions and pay secrecy policies. Unfortunately, the damages that could be recovered for violation of the salary history prohibition are unclear at this point.

The second provision of the Act amends Massachusetts’ existing equal pay laws to clarify what kind of pay discrepancies between “comparable work” are justifiable. The Act explicitly allows for pay discrepancies based on:

  •           Seniority, although employers may not deduct time taken off pursuant to FMLA leave or maternity and paternity leave from an employee’s seniority
  •           Geography
  •           Education or training
  •           Job performance based on sales, revenue, or other quantifiable metrics
  •           “Merit” based systems

“Merit” based systems will likely prove to be an avenue of litigation for aggrieved employees, as poorly-designed systems leave open the possibility for gender-based disparities.

The second provision also amends the statute of limitations for equal pay claims from one year to three years, with a new three-year statute of limitations applicable to each paycheck that violates the equal pay laws. The Act also clarifies that pay discrimination claims are not subject to the administrative filing requirement with the Massachusetts Commission Against Discrimination.

Finally, the Act reaffirms that employers have an obligation to eliminate gender-based pay discrimination. However, it also now provides an affirmative defense against equal pay litigation if the employer can show that it, within the past three years prior to the commencement of litigation, has completed a good faith self-evaluation of its pay practices and has made “reasonable progress” in eliminating gender-based pay discrepancies. An employer is not entitled to the defense if it cannot show that its self-evaluation was reasonable in scope or that it has made reasonable progress in eliminating any gender wage gap. Unfortunately, the vagueness of this affirmative defense will probably lead to litigation in every wage discrimination case over whether an employer’s efforts were “reasonable”. It should also be noted that the affirmative defense is only available against claims of wage discrimination, and not against claims of violations of the prohibitions against salary history questions or pay secrecy policies.

Startups are uniquely positioned to implement these new changes, since they are on the “ground floor” hiring their first employees. However, founders should be careful not to carry over things from the way they were done at their old “real job”, like asking applicants for salary history or discouraging employees from sharing details of their compensation packages with one another. In any event, when hiring its first employees, a startup should consult with an attorney to establish best practices for hiring, setting compensation, and other aspects of human resources.

“White-Collar” Overtime Exemption Levels Raised

The U.S. Department of Labor announced last week that, starting December 1, 2016, revised overtime exemption rules in the Fair Labor Standards Act would go into effect. Specifically, the “salary level” for the white-collar overtime exemption would increase from $455 per week (for an annual salary of $23,660) to $913 per week (for an annual salary of $47,476).

The “white-collar” exemption exempts employers from having to pay overtime (or time-and-a-half) to employees for every hour worked over 40 hours in a workweek, provided that the employee is employed in a “professional”, “administrative”, or “executive” capacity, and meets three tests:

  • the “salary basis” test: simply, that the employee is paid a salary or fee, rather than paid an hourly wage
  • the “salary level” test: that they are paid at least the new salary discussed above 
  • the “standard duties” test: varies depending on the capacity the employee is employed in:
    • for “executive”: the primary duty must be managing the enterprise or a customarily-recognized department or subdivision of the enterprise comprising at least 2 full-time employees
    • for “administrative”: the primary duty must be the performance of office or non-manual work directly related to the management or operations of the employer or the employer’s customers, and must also include the exercise of discretion and independent judgment with respect to matters of significance. Certain academic administrative personnel are exempt from the salary level requirements.
    • for “professional”: the primary duty must be the performance of work that requires advanced knowledge in a field of science or learning (usually requiring a degree) or that requires invention, originality, or talent in a recognized field of artistic or creative endeavor. Doctors, lawyers, and teachers are specifically exempt from the salary level requirements 

The DOL also raised the annual salary level for the “highly compensated employee” exemption (subject to a less stringent duties test) from $100,000 to $134,004. 

The salary levels for both the white collar and highly-compensated employee exemptions will now also automatically increase every three years based on inflation.

The FLSA itself only applies to companies that have annual gross revenue of $500,000 or more; companies that are hospitals, residences providing medical or nursing services, or schools are subject to the FLSA regardless of gross revenue. Additionally, regardless of the company’s revenue, employees whose work involves interstate commerce are also subject to the FLSA.

If your startup or your employees are subject to the FLSA and you are currently relying on the white-collar or highly-compensated employee exemptions, you will want to confirm if the salaries you pay to those workers now fall below the new salary level requirements. If so, you have two options: one, increase salaries to the new requirements, or reclassify the employees as non-exempt and begin tracking their hours worked in order to pay overtime if necessary. If you decide to reclassify employees as non-exempt, you can either choose to pay overtime, or control the hours employees work and redistribute them to ensure employees don’t work overtime (including hiring more workers if there is more work than can be handled by your current workforce in a 40-hour week).

Congress Already Considering Improvements to Title III Crowdfunding

Although Title III equity crowdfunding finally, after much delay, has finally gone into effect this week, Title III itself and the related regulations adopted by the Securities and Exchange Commission have long been criticized for putting too much restriction on the companies that are likely to use Title III. However, members of Congress are already putting forward new legislation intended to address some of the widely-perceived shortcomings of Title III.

Congressman Patrick McHenry, a sponsor of one of the original bills that ultimately became the JOBS Act, has introduced the Fix Crowdfunding Act (H.R. 4855), which seeks to increase the utility of Title III equity crowdfunding and address some of the grey areas in the law and regulations, particularly where it comes to the responsibilities of the funding portals that will host equity crowdfunding offerings. Among the Fix Crowdfunding Act’s provisions:

Funding Cap: Title III currently limits companies to raising no more than $1 million in any 12 month period using equity crowdfunding (the cap is not exclusive to other exemptions, so companies can also raise additional money via Regulation D or Regulation A exemptions). The Fix Crowdfunding Act would raise the cap to $5 million in any 12 month period. 

Funding Portal Liability: Title III imposes liability for material misstatements or omissions on an “issuer” that cannot show that it could not have known of the misstatement or omission despite the exercise of reasonable care. However, in its regulations the SEC declined to clarify whether funding portals would be considered “issuers” for the purpose of misstatement or omission liability. As a result, funding portals are currently liable for any misstatements or omissions made by issuers that use their platform; it is specifically this grey area that has dissuaded crowdfunding sites such as Indiegogo and EarlyShares from setting up Title III platforms. The Fix Crowdfunding Act clarifies that a funding platform is not considered an issuer, and has no liability unless the platform itself makes a material misstatement or omission or knowingly engages in fraudulent conduct; under this scheme, in order to make a portal liable for an issuer’s misstatement or omission, a plaintiff would have to prove that the funding portal had knowledge the issuer’s misstatement or omission.

Section 12(g) Investor Cap: While the JOBS Act raised the cap on shareholders to 2000 (including 500 non-accredited shareholder) before a company triggers reporting obligations under the Exchange Act, and specifically directed the SEC to conditionally or unconditionally exempt shareholders who purchase in a Title III offering, the SEC chose to impose a condition on this exemption, providing that a company with more than $25 million in assets could not exempt crowdfunding shareholders from the 12(g) cap. The Fix Crowdfunding Act would overrule this condition.

Special Purpose Vehicles: Some platforms, such as AngelList and OurCroud, use special purpose vehicles as part of their fund-style investment process — individuals place their money in a SPV, which bundles investors’ money that is then invested in a startup. SPVs have the benefit of streamlining startups’ cap tables, as there is legally only one investor. The Fix Crowdfunding Act would remove the exclusion on SPVs. 

Testing the Waters: Finally, the Fix Crowdfunding Act would enable companies to “test the waters” — that is, to obtain non-binding investor interest in a potential equity crowdfunding offering without having to undertake the effort and expense of making the required regulatory filings with the SEC prior to soliciting interest.

The Fix Crowdfunding Act has been referred to the House Committee on Financial Services; keep an eye on the legislation to see if it makes it out of committee to the full House of Representatives.

Federal Trade Secret Law On The Way

While the three traditional pillars of intellectual property law — copyright, trademarks, and patents — are protected by federal law (although copyright and trademark do have some state law analogues), trade secret law has always been solely in the domain of state law. However, yesterday President Obama signed into law the Defend Trade Secrets Act, which would finally create a federal law protecting trade secrets. 

A trade secret is usually some sort of information, process, or know-how that gives a company a competitive advantage — think the formula for Coca-Cola, one of the most famous and longest-running trade secrets. Trade secrets are like patents, except where the information, process, or know-how must be published in a patent, trade secrets derive their value from the fact that they are not publicly known; moreover, whereas a patent expires and its information enters the public domain, trade secrets can exist as long as they can be kept secret (of course, that means once the secret’s out, trade secret protection is lost forever).

The law protects trade secrets by allowing trade secret holders to sue a party that steals, or misappropriates, a trade secret for monetary damages (and to continue to keep the information secret if has not been publicly released). However, companies have had to resort to state courts to bring such lawsuits, and with large multinational corporations increasingly relying on trade secrets, state courts are seen as an inadequate forum to settle such large companies’ disputes over trade secrets. Accordingly, the Defend Trade Secrets Act creates a federal civil cause of action for misappropriation of trade secrets. 

The impact of the Defend Trade Secrets Act may be minimal on startups and small businesses, which are often too small to put into place the protections and procedures for the safekeeping of trade secrets (because in a small company everyone generally has a need to know everything, which can make it difficult to compartmentalize and secure information) — startups often tend to focus their IP strategies on the traditional categories of copyright, trademark, and patents. But for those startups and small businesses for whom trade secrets are an integral part of their IP strategy, the Defend Trade Secrets Act gives an avenue to access the federal courts — which often move quicker than state courts and typically have judges more well-versed in IP law.

New “Exit” Securities Exemption In New Transportation Bill

 Last month, Congress passed a transportation bill called the Fixing America’s Surface Transportation Act (or FAST Act), signed into law by President Obama. However, buried in the bill was an addition to the Securities Act of 1933. The addition codifies an “unwritten” exemption from the registration requirement for the resale of securities, called “Section 4(a)(1-1/2)” because it combined the exemptions of both Section 4(a)(1), which exempted securities transactions by any person or entity other than an issuer, underwriter, or dealer, and Section 4(a)(2), which exempted transactions by an issuer not involving a public offering.

The new exemption, which is inserted into the Securities Act as Section 4(a)(7), exempts resales of restricted securities so long as the transaction meets several requirements: 

1) The securities must be resold to an accredited investors

2) There can be no general solicitation for the resale 

3) If the company that originally issued the securities is not subject to reporting requirements, then the seller and prospective purchaser must have access to reasonably current information about the company, including the equity structure, the directors and officers, and financial records

4) The seller is not a subsidiary of the issuer

5) Neither the seller nor anyone being paid in connection with the transaction is a bad actor as defined under Regulation D

6) The original issuing company is not a blank check, blind pool, or shell company 

and 7) The class of securities involved in the resale have been outstanding for at least 90 days prior to the transaction.

Section 4(a)(7) provides another statutory resale exemption, in addition to Rule 144, the traditional codified resale exemption. Section 4(a)(7) provides greater flexibility than Rule 144, including having no cap on the amount of securities that can be resold in any one transaction, no holding period for the seller to qualify with, no requirement to report the transaction, and most importantly, an preemption from state registration requirements pursuant to NSMIA. 

However, Rule 144 has benefits over Section 4(a)(7), including allowing resales to any person or entity, unlike Section 4(a)(7)’s requirement that the purchaser be an accredited investor. Moreover, securities resold under the Section 4(a)(7) exemption remain restricted securities, unlike in a Rule 144 transaction which unrestricted the securities.Therefore, a purchaser who acquires securities in a Section 4(a)(7) transaction must find an exemption if they wish to resell.