When encouraging employees to wash their hands is not enough!

As the COVID-19 virus spreads rapidly throughout the world, and the possibility of a pandemic declaration inches closer each day, much of the advice to employers so far has focused on generic “good hygiene” recommendations from health departments. This advice is of limited utility for employers who have already faced or will soon confront coronavirus cases in their workforce. Companies and government agencies are scrambling to keep up, and difficult but nuanced decisions must be made now. “Wash your hands” simply won’t cut it when you have a confirmed COVID-19 case in your midst.

Baker McKenzie’s COVID-19 Rapid Response Team takes the opposite approach – providing practical, jurisdiction-specific guidance that employers can use to deal with their most pressing COVID-19 issues. This client alert supplements our extensive guidance in our Coronavirus Resource Center, by providing US employers with specific responses to common questions about the virus.

This alert is based on lessons learned in past pandemics. After the H1N1 outbreak in 2009 rose to the level of a pandemic, the EEOC issued an employer resource titled “Pandemic Preparedness in the Workplace and the Americans with Disabilities Act.” We have updated the EEOC’s 2009 guidance to provide employers with answers on what they can and cannot do in addressing the COVID-19 epidemic, in the form of a FAQ and examples.

The FAQ focuses on the Americans with Disabilities Act (“ADA”) because the ADA is the primary law regulating medical examinations and inquiries for US-based applicants and employees. For example, the ADA and state discrimination statutes, which generally protect applicants and employees from disability discrimination, regulate:

  • What questions an employer may ask an employee who calls in sick, in order to protect the rest of its workforce when a pandemic appears imminent?
  • Whether employers may require employees to submit to body temperature testing, and when?
  • Whether an employer may require employees to stay home if they have symptoms of the pandemic virus?
  • When employees want to return to work, whether employers may require the employees to provide health care provider notes certifying their fitness for duty?

To be sure, other federal, state and local laws govern health-related issues in the workplace, such as the OSHA-mandated obligation to provide a safe workplace for employees or protective equipment and procedures for certain positions, the National Labor Relations Act’s collective bargaining obligations, or leave laws such as the Family and Medical Leave Act. Those laws should not be disregarded, but the crux of the matter for most employers today is whether and when testing and medical inquiries are permitted. Such questions fall under the ADA’s umbrella if the employer has 15 or more employees (and is therefore covered by the ADA).

The ADA is relevant for three reasons: (1) the ADA regulates disability-related inquiries and medical examinations for all applicants and employees, including those who are not disabled; (2) the ADA prohibits covered employers from excluding individuals with disabilities from the workplace for health or safety reasons unless they pose a “direct threat” to themselves or others, which means a significant risk of substantial harm even with reasonable accommodation; and (3) the ADA requires reasonable accommodations for disabled individuals during a pandemic, unless providing an accommodation would constitute an undue hardship. And with that ….

Before a pandemic is declared, what can we do to prepare?

Q: I heard that COVID-19 most severely impacts persons with underlying health conditions, including those with compromised immune systems or chronic respiratory illnesses. Before a pandemic or local health emergency has been declared, can I ask my employees if they have underlying health conditions that the CDC or WHO says could make them more susceptible to COVID-19 complications?

A: No. Asking an employee to disclose a compromised immune system or a chronic health condition is a disability-related medical inquiry because the response is likely to disclose the existence of a disability. The ADA does not permit such inquiries in the absence of objective evidence that pandemic symptoms will cause a direct threat. Such evidence is typically lacking before a pandemic / health emergency occurs.

While there is much debate about when a pandemic should be declared, health experts generally agree that a “pandemic” is a global “epidemic” in which there is sustained human-to-human transmission of the virus worldwide, with the virus no longer contained to specific geographic regions. The declaration of a pandemic describes the breadth of the virus’s spread, but does not describe its severity.

This is an important distinction when evaluating whether an infected employee constitutes a “direct threat” in a workplace. Under the ADA, a “direct threat” means “a significant risk of substantial harm to the health or safety of the individual or others that cannot be eliminated or reduced by reasonable accommodation.” If an employee poses a direct threat despite reasonable accommodation, he or she is not protected by the non-discrimination provisions of the ADA.

Q: How can I plan for employee absences and staffing shortages if I can’t ask employees about their underlying health conditions before a pandemic is declared?

A: You can ask questions that are not disability-related. A question is not disability-related if it asks about potential non-medical reasons for absences during a pandemic (e.g., lack of public transportation) instead of just medical reasons (e.g., chronic illnesses that increase the risk of complications). The question should be posed so that employees only answer “yes” or “no” without specifying the factor(s) that apply to them. The answer need not be anonymous.

Below is a sample ADA-compliant survey published by the EEOC to plan for employee absenteeism:

ADA-COMPLIANT PRE-PANDEMIC EMPLOYEE SURVEY

Directions: Answer “yes” to the whole question without specifying the factor that applies to you. Simply check “yes” or “no” at the bottom of the page.

In the event of a pandemic, would you be unable to come to work because of any one of the following reasons:

  • If schools or day-care centers were closed, you would need to care for a child.
  • If other services were unavailable, you would need to care for other dependents.
  • If public transport were sporadic or unavailable, you would be unable to travel to work.
  • If you or a member of your household fall into one of the categories identified by the CDC as being at high risk for serious complications from the COVID-19 virus, you would be advised by public health authorities not to come to work (e.g., pregnant women; persons with compromised immune systems; older people; people with certain underlying health conditions like heart disease, lung disease and diabetes).

Answer: Yes_______

Answer: No________ .

Q: Can I require new hires to submit to post-offer medical exams to determine their general health status?

A: Yes, so long as: (1) all new hires in the same job category are required to complete the same medical examination and (2) medical information from the examination is maintained in a separate medical file and is treated as a confidential medical record.

Example A: A fabrics importer employer implements a pandemic plan after the WHO and CDC confirm that a pandemic may be imminent because COVID-19 is infecting people in multiple countries, but has not begun “community spread” in North America. Much of the employer’s international business is in the affected regions. The employer announces that all newly-hired employees who will be required to travel to and work in affected regions must undergo medical examinations that include procedures to identify medical conditions that the CDC associates with an increased risk of complications from COVID-19. Because the employer administers the medical exams post-offer to all newly hired employees in the same job categories, the medical exams are ADA-compliant.

Q: If a post-offer medical examination reveals that an applicant has a medical condition that puts her at increased risk of complications from COVID-19, can I rescind the applicant’s job offer?

A: No, unless the applicant would pose a “direct threat,” based on reasonable medical judgment that relies on the most current medical knowledge and/or the best available evidence such as objective information from the CDC or state or local health authorities. The finding must be based on an individualized assessment of the individual’s present ability to safely perform the essential functions of the job, after considering, among other things, the imminence of the risk; the severity of the harm; and the availability of reasonable accommodations to reduce the risk. Before concluding that an individual poses a direct threat, the employer must determine whether a reasonable accommodation could reduce the risk below the direct threat level.

Example B: The same fabrics importer employer offers an applicant an office position at its US headquarters. The position does not involve regular contact with employees who travel to the affected virus regions. The applicant’s post-offer medical examination (which is the same as the examination given to all US headquarters employees) reveals that the applicant has a compromised immune system due to recent cancer treatments. Given the fact that the position does not involve regular contact with employees who travel to the affected region, and that COVID-19 has not spread to North America, the applicant likely would not face a significant risk of contracting the virus at work and does not pose a “direct threat” to himself or others in this position. Under the ADA, it would be discriminatory to rescind the applicant’s job offer based on the fear or possibility of a pandemic.

Q: Can I prohibit employees from traveling to non-restricted areas for vacation?

A: Employers generally may not regulate employees’ lawful off-duty conduct during non-work hours. A federal appellate court recently held that a company’s termination of an employee who planned to travel for personal reasons to a region of Africa experiencing an Ebola outbreak – because the employer feared the employee would become ill and infect other employees upon her return – did not violate the ADA. The employer in that case acted based on a potential, future disability, which the court held is not protected by the ADA. While the employer may have been acting on fear rather than facts, employers generally should not impose restrictions on employees’ travel to non-restricted areas for personal reasons. Instead, employers should educate their workforces about the potential dangers associated with travel during a pandemic.

A pandemic has been declared: how can we protect our workplace and employees?

Q: Can I send employees home if they display influenza-like symptoms during a pandemic?

A: Yes. The CDC and WHO have stated that employees who become ill with symptoms of influenza-like illness at work during the COVID-19 epidemic should leave the workplace. Advising such workers to go home is not a disability-related action if the illness is akin to seasonal influenza or the COVID-19 virus. You can also send an employee home under the ADA if the illness is serious enough to pose a direct threat. But if your workforce is unionized, make sure you consider your CBA-related obligations.

Q: During a pandemic, how much information can I request from employees who report feeling ill at work or who call in sick?

A: You may ask such employees if they are experiencing COVID-19-like symptoms, such as fever or chills and a cough or shortness of breath. You must keep all information about employee illness confidential in compliance with the ADA.

These inquiries are not disability-related. If a pandemic becomes severe, the inquiries, even if disability-related, are justified by a reasonable belief based on objective evidence that the severe form of COVID-19 poses a direct threat.

Q: During a pandemic, may I take my employees’ temperatures to determine whether they have a fever?

A: Generally, measuring an employee’s body temperature is a medical examination. If COVID-19 is deemed to be a pandemic, or if COVID-19 becomes widespread in the community as assessed by state or local health authorities or the CDC, then employers may measure employees’ body temperature. However, employers should be aware that some people with COVID-19 will not have a fever. Other persons may try to hide fevers by taking common fever-reducing medications before being tested. Additionally, employers should try to make the temperature checks as least invasive as reasonably possible.

Q: When an employee returns from travel during a pandemic, do I have to wait until the employee develops COVID-19 symptoms before I can ask the employee if he or she traveled to a COVID-19 affected region or otherwise about his or her exposure to COVID-19 during the trip?

A: No. These would not be disability-related inquiries. If the CDC or state or local public health officials recommend that people who visit specified locations remain at home for a period of time (currently 14 days) until it is clear they do not have COVID-19 symptoms, an employer may ask whether employees are returning from these locations, even if the travel was personal.

Q: During a pandemic, may I ask employees who do not have COVID-19 symptoms to disclose whether they have a medical condition that the CDC says could make them especially vulnerable to COVID-19 complications?

A: Probably. If COVID-19 turns out to be mild like seasonal influenza or the H1N1 virus in the spring/summer of 2009, making disability-related inquiries or requiring medical examinations of employees without symptoms is prohibited by the ADA. However, employers should allow employees who experience flu-like symptoms to stay at home, which will benefit all employees including those who may be at increased risk of developing complications. If an employee voluntarily discloses (without a disability-related inquiry) that he or she has a specific medical condition or disability that puts him or her at increased risk of COVID-19 complications, you must keep the information confidential, but may ask the employee to describe the type of assistance he or she thinks will be needed (e.g. telework or leave for a medical appointment). You should not assume that all disabilities increase the risk of COVID-19 complications. If, as it appears likely, a COVID-19 pandemic becomes more severe or serious according to the assessment of local, state or federal public health officials, employers may have sufficient objective information from public health advisories to reasonably conclude that employees will face or constitute a direct threat if they contract COVID-19. Only in this circumstance may employers make disability-related inquiries or require medical examinations of asymptomatic employees to identify those at higher risk of COVID-19 complications.

Q: Can I encourage employees to work remotely as an infection-control strategy during a pandemic?

A: Yes. Remote working is an effective infection-control strategy that is often granted as a reasonable accommodation. And employees with disabilities that put them at high risk for complications of COVID-19 may request remote working privileges as a reasonable accommodation to reduce their chances of infection during a pandemic. If your employees work under a CBA, be sure to consider its limitations on your ability to require remote work.

Q: Okay, can I require my employees to wash their hands three times per day for at least 20 seconds each time?

A: Yes. Requiring infection control practices, such as regular hand washing, coughing and sneezing etiquette, and proper tissue usage and disposal, does not implicate the ADA.

Q: During a pandemic, can I require employees to wear personal protective equipment (e.g., face masks, gloves, or gowns) designed to reduce the transmission of pandemic infection?

A: Yes. An employer may require employees to wear personal protective equipment during a pandemic. However, if an employee with a disability needs a related reasonable accommodation under the ADA (e.g., non-latex gloves, or gowns designed for individuals who use wheelchairs), the employer should provide these, absent undue hardship.

Q: What instructions should I give to an employee who is symptomatic at work?

A: Employees who are in medical distress or who have severe symptoms should seek emergency medical care. If symptoms are not severe, tell them “go home and contact your health care provider or the local health department for further instructions.” Employees who suspect they may have been exposed to the virus and feel sick with fever, cough, or difficulty breathing should get medical care. They should call the office of their health care provider before going and tell the health care provider about the employees’ travel or other exposure and symptoms. The health care provider will give instructions on how to get care without exposing other people to potential illness. While sick, employees should avoid contact with people, not go out, and delay travel to reduce the possibility of spreading illness to others. More information from the CDC available here.

Q: What instructions should I give to an employee who is symptomatic at home?

A: If employees are in severe distress, they should seek emergency medical care. If their symptoms are mild, they should contact their health care provider or the local health department for further instructions.

Q: Hurrah – scientists have developed an effective COVID-19 vaccine! Can I require all of my employees to take the vaccine regardless of their medical conditions or their religious beliefs during a pandemic?

A: No. An employee may be entitled to an exemption from a mandatory vaccination requirement based on an ADA disability that prevents him or her from taking the vaccine. Similarly, under Title VII of the Civil Rights Act of 1964, once an employer receives notice that an employee’s sincerely held religious belief, practice, or observance prevents him or her from taking the vaccine, the employer must provide a reasonable accommodation unless it would pose an undue hardship as defined by Title VII (“more than de minimis cost” to the operation of the employer’s business, which is a lower standard than under the ADA). Generally, employers should encourage employees to get the vaccine rather than requiring them to take it.

Q: During a pandemic, do I have to continue to provide reasonable accommodations for employees with known disabilities that are unrelated to the pandemic, barring undue hardship?

A: Yes. An employer’s ADA responsibilities to individuals with disabilities continue during a pandemic. Only when an employer can demonstrate that a person with a disability poses a direct threat, even after reasonable accommodation, can it lawfully exclude him or her from employment or employment-related activities.

If an employee with a disability needs the same reasonable accommodation at a remote worksite that the employee had at the workplace, the employer should provide that accommodation, absent undue hardship. In the event of undue hardship, the employer and employee should cooperate to identify an alternative reasonable accommodation.

Example C: A call center employee with low vision has a screen-reader on her work computer as a reasonable accommodation. In preparation for remote working during a pandemic, the employer issues notebook computers to all call center employees. In accordance with the ADA, the employer provides the employee with a notebook computer that has a screen-reader installed.

Q: During a pandemic, can I ask an employee why he or she has been absent from work if I suspect it was for a medical reason?

A: Yes. Asking why an individual did not report to work is not a disability-related inquiry. An employer is always entitled to know why an employee has not reported for work. Consult the CBA if one applies.

Example D: During an influenza pandemic, an employer directs a supervisor to contact an employee who has not reported to work for five business days without explanation. The supervisor asks this employee why he is absent and when he will return to work. The supervisor’s inquiry is not a disability-related inquiry under the ADA.

Q: During a pandemic, can I ask an employee’s health care provider to tell me if the employee tested positive for the COVID-19 virus, even if the employee refuses to give permission?

A: Yes. While HIPAA normally would prohibit a health care provider from sharing a patient’s protected health information with a third party employer, HIPAA contains an exception for disclosures necessary to prevent a serious and imminent threat. Health care providers may share patient information with anyone as necessary to prevent or lessen a serious and imminent threat to the health and safety of a person or the public – consistent with applicable law (such as state statutes, regulations, or case law) and the provider’s standards of ethical conduct. See 45 CFR 164.512(j). The Office for Civil Rights, U.S. Department of Health and Human Services, has confirmed that providers may disclose a patient’s health information to anyone who is in a position to prevent or lesson the serious and imminent threat, including family, friends, caregivers, and law enforcement without a patient’s permission. HIPAA expressly defers to the professional judgment of health professionals in making determinations about the nature and severity of the threat to health and safety. See 45 CFR 164.512(j).s.

The pandemic has ended: now what?

Q: Can I require employees who have been self-quarantined during a pandemic to provide a doctor’s note certifying their fitness to return to work?

A: Yes. Such inquiries are permitted under the ADA either because they would not be disability-related or, if the COVID-19 pandemic is truly severe, they would be justified under the ADA standards for disability-related inquiries of employees. Always consider CBA obligations if they apply.

As a practical matter, however, doctors and other health care professionals may be too busy during and immediately after a pandemic outbreak to provide fitness-for-duty documentation. Therefore, new approaches may be necessary, such as reliance on local clinics to provide a form, a stamp, or an e-mail to certify that an individual does not have the pandemic virus.

The post US: Practical Guidance for Dealing with Coronavirus in the Workplace appeared first on Global Compliance News.

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Many employers in the US are grappling with appropriate efforts to contain and protect the workforce against COVID-19. Those efforts include employee and visitor screening activities that range from requiring all personnel to provide an affirmation upon admission to a worksite to taking vital signs or other hands-on screenings. But are those screening activities lawful under applicable privacy and confidentiality laws in the US? And what should employers do when they have reason to suspect someone is infected? Are there obligations to inform other employees or health authorities?

HIPAA

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) imposes restrictions on disclosures of protected health information only on a covered entity’s or business associate’s workforce. As such, unless a disclosure is made by or on behalf of an employer’s Group Health Plan, HIPAA should not generally apply to the scenarios described above, since the Group Health Plan is considered to be a separate legal entity under HIPAA, and we assume that none of these activities would be paid for by the Group Health Plan under covered insurance transactions. Business associates are generally persons or entities that perform functions or activities on behalf of a covered entity, such as a Group Health Plan, which as noted should not be implicated here. Accordingly, HIPAA’s Privacy Rule does not apply to the collection, use, or disclosures of individually identifiable health information made by an employing entity in the context of worksite COVID-19 screening activities.

BIPA

The Illinois Biometric Information Privacy Act (BIPA) restricts the collection, use, or other processing of biometric identifiers by entities (including employers), unless certain requirements are met. Those requirements include, among others, informing individuals that biometric information is being collected or stored; informing individuals about the purpose and length that this information will be retained; obtaining a “written release” for the collection, use, and storage of that information; and establishing and posting a policy on these issues. In the context of an employer performing COVID-19 worksite screening activities seeking to obtain body temperature through a hand-held thermometer or a scan for temperature, BIPA should not apply because the term “biometric identifier” generally refers to “retina or iris scan, fingerprint, voiceprint, or scan of hand or face geometry.” Photographs or human biological samples used for testing or screening, or demographic data, are specifically excluded. Performing temperature scans or other basic screening activities should, therefore, not fall within the definition of “biometric identifier” that triggers the application of BIPA, unless specific data is collected.

Other State Privacy Laws

At the state level, several states have generic medical confidentiality laws, but those laws should generally not restrict worksite screening activities. California, for example, has the Confidentiality of Medical Records Act. This law generally restricts the disclosure of “medical information” without first obtaining authorization, subject to numerous statutory exceptions. The term “medical information,” however, refers to “individually identifiable information, in electronic or physical form, in possession of or derived from a provider of health care, health care services plan, pharmaceutical company, or contractor regarding a patient’s medical history, mental or physical condition, or treatment.” An employer performing worksite screening activities would generally fall outside the scope of this definition. Texas also has the Medical Record Privacy Act that imposes similar restrictions on medical information. That statute, however, specifically exempts an “employer” from its scope.

Americans with Disabilities Act

Finally, even if worksite screening activities are permissible, employers must still take steps to protect the confidentiality of affected employees. Title II of the Americans with Disabilities Act (ADA) (42 USC § 12101 et seq.) establishes the basic rule is that, with limited exceptions, employers must keep confidential any medical information they learn about an applicant or employee (42 USC § 12112(d)(3)(B)). Information could be confidential, even if it contains no medical diagnosis or treatment course, and even if it is not generated by a health care professional. For example, an employee’s request for a reasonable accommodation for COVID-19 treatment or recovery may be considered medical information subject to the ADA’s confidentiality requirements.

ADA also restricts an employer from requiring a medical examination, or making certain disability inquiries of employee, unless that examination or inquiry is shown to be job-related and consistent with business necessity. Employers may, however, perform voluntary medical examinations as part of a worksite employee health program, and inquire about the ability of an employee to perform job-related functions. (42 USC § 12112(d)(4)). The extent and frequency of those medical examinations in the context of COVID-19 worksite screening, and the mandatory or voluntary nature of those activities, should, therefore, be carefully considered with counsel.

Regulatory Guidance for Employers

The Centers for Disease Control and Prevention recommends employers take the following steps at worksites:

  • Separate sick employees. If upon arrival to work, an employee becomes sick, separate that employee from others, and send them home immediately. This includes visitors and other non-employees.
  • Actively encourage sick employees to stay home, and not return to the workplace until they are free of fever (100.4° F [37.8° C] or greater using an oral thermometer), signs of a fever, and any other symptoms for at least 24 hours, without the use of fever-reducing or other symptom-altering medicines (e.g. cough suppressants).
  • Do not require a healthcare provider’s note for employees who are sick with acute respiratory illness to validate their illness or to return to work. This is because healthcare provider offices and medical facilities may be extremely busy, and unavailable to provide documentation in a timely way.
  • Review and be prepared to follow a “Business Infectious Disease Outbreak Response Plan” based on the present condition in each worksite.
  • Coordinating with state and local health officials is strongly encouraged. Since the intensity of an outbreak may differ according to geographic location, local health officials will be issuing guidance specific to their communities.

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Employers and their workforce are waking up to news this morning of further US travel restrictions given the COVID-19 pandemic. This time, the restrictions affect most travelers from the European Union (EU). The following are highlights of what you need to know today:

Foreign nationals who have visited the Schengen Area in the past 14 days will not be permitted to enter the United States under Presidential Proclamation.

Similar to recent presidential proclamations that restrict travelers who have visited China or Iran, the Presidential Proclamation that President Trump signed yesterday suspends the entry of most foreign nationals who have been in the Schengen Area at any point during the 14 days prior to their scheduled arrival to the United States. The countries in the Schengen Area are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland. The proclamation is effective at 11:59 p.m. Eastern Daylight Time on March 13, 2020. The proclamation does not apply to persons aboard a flight scheduled to arrive in the United States that departed prior to 11:59 p.m. Eastern Daylight Time on March 13, 2020.

This restriction does not apply to travelers coming from the UK.

While the Presidential Proclamation does not explicitly create an exception for UK residents, the President stated during his televised address last night that the restrictions do not apply to travel from United Kingdom. However, the proclamation is clear that the latest travel restrictions apply to “all aliens” who were physically present within the Schengen Area during the 14-day period preceding their entry to the United States. This suggests that EU nationals will not be allowed to transit to the United States via the United Kingdom as an alternative to direct travel from the EU to the United States. Those traveling from the United Kingdom who have recently visited the Schengen Area should consider postponing travel until it is clear that they will be permitted entry into the United States.

Please continue to watch for government announcements and our future alerts as more specific information is released.

This restriction also does not apply to legal permanent residents (“green card” holders), immediate family members of US citizens, and other individuals who are identified in the proclamation.

The exemptions generally fall into the following categories:

  • Immediate relatives (parent, spouse, child, siblings of a certain age) of US citizens or green card holders;
  • Specific nonimmigrant visa holders: Crew members, diplomats, government officials;
  • Members of the US armed forces and their family; and
  • Individuals whose entry would be deemed in the national interest or to promote law enforcement objectives.

US citizens, green card holders, and exempted foreign nationals traveling from the EU will be routed through selected airports for enhanced screening procedures.

Details should be released in the coming days. However, return travelers should expect a health screening at an airport upon arrival and may be placed under quarantine for 14 days depending on their health and travel history.

The following airports are currently designated as airports with CDC quarantine stations:

  • John F. Kennedy International Airport (JFK), New York
  • Chicago O’Hare International Airport (ORD), Illinois
  • San Francisco International Airport (SFO), California
  • Seattle-Tacoma International Airport (SEA), Washington
  • Daniel K. Inouye International Airport (HNL), Hawaii
  • Los Angeles International Airport (LAX), California
  • Hartsfield-Jackson Atlanta International Airport (ATL), Georgia
  • Washington-Dulles International Airport (IAD), Virginia
  • Newark-Liberty International Airport (EWR), New Jersey
  • Dallas-Fort Worth International Airport (DFW), Texas
  • Detroit Metropolitan Airport (DTW), Michigan

What Steps Should Employers Take Now?

  •  Determine whether any of your employees are currently in Europe, whether they fall into any of the exemptions, and whether it is possible for them to return before the proclamation takes effect.
  • Evaluate how the travel restriction will impact your employee population from a business and personal/family perspective.
  • Consider travel to non-European US Consulates for essential immigration-related travel (e.g., visa renewal).
  • Plan for employees “stuck” in Europe and ensure your company has a policy in place for remote work given the potential employment, tax and immigration concerns.
  • Develop a broader communication that outlines what the proclamation does – and doesn’t – mean based on the current information available.

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On January 30 2020, the World Health Organization (WHO) declared that the coronavirus (officially named COVID-19) outbreak constituted a public health emergency of international concern. The full impact of the outbreak and the resulting precautionary measures around the world remains to be seen but will likely have several implications on business operations, particularly for the travel, financial services and professional services industries, manufacturing facilities and supply chains. Companies will need to consider their obligations in response to government announcements, the level of business disruption, and other commercial risks arising from the coronavirus.

In this article, Baker McKenzie lawyers consider the immediate impact on capital markets, including contractual implications for securities offerings, ongoing disclosure requirements, practical effects, and the approaches of stock exchanges and regulators around the world.

You can also stay up to date with further developments at our Coronavirus Resource Center.

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Welcome to the first of our series of year-end analyses of the year in securities regulation and enforcement.

First, we will consider the past year “by the numbers,” the statistics that the Securities and Exchange Commission (SEC), or more specifically, its component Divisions and Offices, release annually. Later parts of the series will consider some of the specific areas of focus for the SEC Enforcement Division in bringing enforcement actions in the past year, and how that informs our future expectations.

This analysis will take a look at enforcement actions, penalties and disgorgement, examination statistics, as well as the data issued by the Office of Whistleblower. As you will see, the SEC is canny in how these numbers are released and any careful review will generally require resort to several SEC reports, issued over months, in several documents, to make actual sense of what the statistics mean for considering the past conduct and for the evaluating the future. Some of that material is not yet available, but we will update this document as the data is released. Further, the Commission routinely changes whether and how certain data is released from year to year, so comparing performance is complicated.

The post US: Looking Back & Looking Ahead: Financial Regulation and Enforcement 2019/2020 appeared first on Global Compliance News.

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As the 2019 Novel Coronavirus (COVID-19) spreads into the broader economy, human resource professionals are finding that grappling with the consequences are more complicated in union-represented workforces. In a union workforce, the employer must determine what it has already agreed it will do, the extent of its freedom to address the scenarios created by COVID-19, and the legal framework within which it must act. Below we offer several considerations for employers to adopt.

First, examine the collective bargaining agreement. This will allow you to determine the extent of the company’s freedom to act independently and expeditiously. The place to start is to determine management’s right to schedule work, to idle the plant, to send workers home and to lay-off employees. Determine the restrictions, if any, in these rights, such as call-in pay or weekly guarantees.

  • Examine the lay-off and recall procedures in the event some, but not all, employees will be sent home. Determine when the company must follow these methods and when the company has the right to pick and choose affected employees.
  • Examine the temporary vacancy provisions to determine when and how the company must fill short term vacancies.
  • Review leave of absence provisions including Family and Medical Leave, paid sick leave, and personal absences to determine eligibility criteria and scheduling limitations.
  • Review paid time-off entitlements eligibility and scheduling limitations.
  • Review the short-term disability welfare plan to determine eligibility, duration, and rate of pay.
  • Review policies or contract provisions regarding disability, accommodations, fitness for duty examinations, and return to work policies.
  • Review the work rules (discipline policy) and the health and safety policy to determine employees obligations to report medical diagnosis which pose a threat to coworkers.
  • If the workplace has a mixed workforce, review the project labor agreement or subcontracting/services agreement to determine which entity controls the operation of the worksite.

Second, consider discussions with responsible union officials. While the company may be free to act unilaterally under the NLRB’s recent decision in MV Transport, it should prepare a written policy to address:

  • An employee exposed to COVID-19
  • An employee who is symptomatic while at work
  • An employee who contracts COVID-19
  • Co-workers of employees in the above categories
  • Return-to-work criteria and process
  • The shutdown of operation by public health officials
  • The shutdown of operations by management
  • The shutdown of operation due to lack of materials or supplies
  • The recall, reinstatement or restarting of operations in phases if desired

Even if bargaining with the employees’ representative is not required, employers may find it beneficial to review its COVID-19 response policy with responsible union officials before implementing it. Employers should avoid negotiating the policy and should make clear to the union that the review is not bargaining.

Finally, the company should review the legal requirements that govern the workplace. Many cities have enacted paid leave ordinances in the absence of state laws. Local district judges may have addressed fitness for duty and return to work examinations when employees have communicable diseases. And, while it is still over the horizon, the company should consider how it will address the administration of vaccinations should one be developed.

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This alert covers the following governing laws: English, PRC, New York, Australian, Hong Kong, Singaporean and South African

Since the COVID-19 coronavirus was first reported in Wuhan, China, in December last year, countries around the world have sought to impose travel bans, quarantine citizens and isolate the infected in an attempt to stop the spread of the new virus. The outbreak has developed into a global threat and on 30 January 2020, the World Health Organization declared that the outbreak constituted a public health emergency of international concern.

Worldwide, the full impact of the outbreak and the resulting emergency measures on international trade remains to be seen but our clients have reported substantial business and operational disruptions, including closures of workplaces and ports, disruptions to supply and distribution channels, shortage of labor and weakened regional demand.

Given the unexpected nature of the outbreak, attention has focused on the prospect that parties to affected commercial contracts may invoke force majeure provisions in those contracts in order to excuse delay or non-performance.

This alert discusses force majeure and the coronavirus from the perspective of PRC law and several of the more frequently adopted common law systems governing international commercial contracts, focusing on the main differences in the latter.1 We also outline several alternative remedies that may apply depending on the governing law of the relevant contracts.

Affected contracts

Numerous force majeure claims involving a Chinese buyer or supplier have already been reported in the world media2 and it seems likely that claims with a wider ambit will follow as the ripple effects of the outbreak spread globally.

Any contract with a specific force majeure clause may be the subject of a claim. Contracts governed by a civil law framework which grants force majeure remedies, whether or not they are written into the contract, may also be the subject of the claim. This includes the PRC.

Force majeure claims are particularly relevant for contracts with a long-term or ongoing supply and in the following markets:

  • Commodity contracts (including iron ore, coal and copper);
  • LNG contracts;
  • Ship building contracts;
  • Supply contracts for textiles, foodstuffs and mechanical equipment;
  • Contracts for electrical equipment and electronic components;
  • Medical equipment manufacturing contracts.

The effect of the outbreak on suppliers is perhaps most obvious. With emergency measures impacting on goods, workers and logistics, many suppliers appear unable to fulfil their contracts within the prescribed time or at all. But invoking force majeure may also be of interest to buyers, either because taking delivery under the contract has been impacted or due to disruptions in downstream markets.

The PRC government has acted on force majeure specifically, with the quasi-governmental China Council for the Promotion of International Trade (CCPIT) announcing on 30 January that it would offer “force majeure certificates” to help companies deal with disputes with foreign trading partners arising from government control measures. To date, it has been reported3 that thousands of certificates have been issued purporting to shield Chinese companies against liabilities for non-performance. We discuss the effects of these certificates on contracts with different governing laws below.

What is force majeure?

The concept of force majeure (FM) derives from French civil law and has been carried across to several other civil law jurisdictions. It’s also of wide application in common law jurisdictions and is frequently used in commercial contracts governed by such common law systems because of the limited remedies otherwise available to the parties when the contract becomes impossible, difficult or onerous to perform due to events outside the affected party’s control.

Whether the source of FM rights is legislation or the terms of the contract, FM regimes typically operate by excusing non-performance by a party of its contractual obligations where non-performance is caused by a defined FM event.

Determining whether an event is a FM event normally involves applying the objective test found in the relevant law or written in the contract. However, most FM regimes are “open” or inclusive in the sense that the event does not need to be specifically listed as a FM event, provided it meets the requirements of the objective test.

Civil and contractual FM regimes often differ in practise. Contractual FM can be, in scope and remedies, either wider or narrower than the more inflexible civil law schemes, depending on the bargaining power of the parties at the time the contract was entered into and how that translated into the drafting of the particular contract.

For example, many contractual FM provisions will include a list of examples of FM events. Generally it will be easier to bring a FM claim if the event is listed (although typically the other requirements of the objective test must still be met). While epidemics are uncommon in modern times, recent memory includes SARS, Ebola and various severe flu outbreaks. Epidemics arise frequently enough though that the parties may have specifically included “epidemic” or “pandemic” as listed FM events or they may be subsumed within more general terms such as “disease” or “illness”. Similarly, emergency measures to address or contain an outbreak may be listed or covered under general terms such as “government action,” “government order,” “national or regional emergency” or “quarantine.”

It’s also common, particularly in certain markets, to include in contractual FM a (potentially long) list of excluded FM events. Depending on the drafting, if the event, or potentially one of multiple events, causing the non-performance is excluded, FM remedies may be precluded. Both buyers and suppliers will often use this type of drafting to allocate risk to the affected party of events which are outside their control and might otherwise technically meet the definition of a FM event but are generally seen as attendant risks of doing business in that market, such as economic downturns and other financial hardships.

Below we consider FM under PRC law, the most likely applicable civil law jurisdiction and from the common law perspective.

PRC law perspective

FM exists as a doctrine under Article 180 of the General Rules on the Civil Law and Articles 117 and 118 of the PRC Contract Law. The regime applies automatically to commercial contracts governed by PRC law where the contract contains no FM provisions.

Test/Causation

A FM event is an objective event or situation which is (1) unforeseeable (at the time of entering into the contract), (2) unavoidable in terms of occurrence or impact and (3) impossible to overcome.4

There must be a causal link between the FM event and the affected party’s failure to perform (i.e., the affected party must establish that the FM event must have caused the non-performance). It’s not necessarily required that the FM event must be the direct cause immediately resulting in the non-performance. If there are too many steps between the FM event and the non-performance it will be difficult for the affected party to satisfy causation.

Requirements for claim

The affected party must notify the counterparty of the FM event promptly or in a timely manner stating their claim for an exemption of liability and providing proof of the existence of the FM event and the impact of the event on the affected party’s non-performance. There remains some uncertainty under PRC law as to whether such notice must be given before non-performance actually materialises. Accordingly, it’s advisable to do this where possible.

Where such prompt or timely notice is not given the affected party may become liable for losses suffered by the counterparty which could have been avoided had such notice been given.

Mitigation

The affected party’s obligation to mitigate the effects of the FM event has been expressed as a “best efforts” obligation implied under the third limb of the above test. If the affected party fails to utilise its best efforts to overcome the impact of the FM event on its non-performance it may not invoke FM.

Exemptions

Under the Contract Law, FM does not apply (1) where the contract is entered into after the FM event, (2) to non-performance of monetary payment obligations; or (3) if the FM event occurs after the affected party delays performance.

Remedies

FM remedies under the Contract Law are (1) the affected party is excused from civil liability, including damages, in relation to its non-performance (or delay); and (2) either party may terminate the contract where the essential purpose of the contract cannot be realised as a result of the event of FM.

While not expressed in the Contract Law, decisions of the PRC courts in the wake of the 2003 SARS outbreak demonstrate a willingness by the courts to also grant modification of the contract terms, though under a different doctrine – see alternate remedies below.

“Force Majeure” Certificates

These have been issued by the CCPIT to numerous Chinese companies in relation to the coronavirus outbreak as above. Typically, to obtain such a certificate, the affected party must provide the CCPIT with documents evidencing the occurrence of the relevant event. Typically, CCPIT issued certificates will only certify the occurrence of the event, which may qualify as an FM event under general circumstances but would usually refrain from certifying it as an FM event.

The purpose of these certificates is to facilitate the invoking of FM remedies where the contract requires the provision of such a certificate issued by a relevant government authority as a prerequisite to the bringing of the FM claim. Such certificates will not be binding on PRC courts either as to the existence of the relevant FM event or the effect of the event on the affected party’s non-performance.

So are they of any practical use where not required by a contract? Perhaps only to add a level of authenticity when accompanying FM claims submitted to foreign counterparties. Certainly we do not recommend relying on them alone as a virtual shield against liability as implied in several media reports.

Common law perspective

FM is a creation of the contract in common law jurisdictions. Where the contract is governed by a common law system the relevant courts will generally recognise the parties’ freedom to agree wide or narrow FM relief. Generally, FM provisions are interpreted by focusing on the actual language used with the result that each particular case rests on its own contractual language and set of facts. Another complication is that the term “force majeure” is also sometimes used to refer to other provisions frequently applying to exceptional supervening events such as “hardship” clauses and those creating a framework for making amendments to the contract for material changes in circumstances.5

Test/Causation

What constitutes an FM event and the precise objective test depends on the specific wording of the provision. As noted above, the definition of FM is generally inclusive but some clauses are exhaustive instead. If the contract provides that a FM event must “prevent” performance, the affected party must generally demonstrate that its performance has become legally or physically impossible and not merely more difficult or more expensive. By contrast, if the provision refers to the event “hindering” or delaying” performance then the threshold will generally be lower and FM may be satisfied if performance remains possible but has become substantially more onerous.

While common law systems generally take a consistent approach, variations (some subtle) persist and it’s important to approach interpretation of each FM provision with regard to the corresponding case law.

Until fairly recently, English courts applied a test of unforeseeability to FM events and while there is authority that this is no longer the case, other common law courts may still impose such a requirement. Hong Kong and Singapore courts have tended to follow the English courts’ approach. Conversely, English courts have found that the affected party must also generally have been “ready, willing and able” to perform the contract but for the FM event. English courts have also tended to take a dim view of claims that a change in economic or market circumstances affecting the profitability of a contract may be a FM event.

Certain New York courts have tended to interpret FM provisions narrowly, reflecting the terms of the agreement and the intent of the parties, though there is also authority that “known practices within the industry” is important, particularly in specialist industries like oil and gas. This may, depending on the drafting, place additional emphasis on the specific list of FM events as a whole as a New York court might decline relief if an unlisted event is not of the same kind or nature. Some New York courts have interpreted FM provisions even more narrowly by requiring that the event be listed and that the event be unforeseeable, although authorities to the later proposition appear mixed.

Requirements for claim

FM provisions commonly contain a notification requirement, which can operate as a “condition precedent” precluding relief if the relevant notice is not given in the necessary timeframe. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to declare FM.

Mitigation

FM provisions commonly requires the claiming party to show that is has taken all reasonable endeavors to avoid or mitigate the event and its effects (a highly fact sensitive enquiry).

Exemptions

These are a matter of drafting and can doom an otherwise valid claim.

In some markets, it’s common practise to exclude changes in the relevant market or demand. This can increase the challenge for a buyer who wishes to claim FM but cannot show it was unable to accept delivery of the supply, particularly if it has taken advantage of falling prices and already sourced the supply from elsewhere.

Remedies

These are a matter of drafting and need to be sufficiently certain to be enforceable. Typically, the affected party is excused from relevant non-performance while the FM event (or its effects) persist. Again, depending on the drafting, this can take effect as an extension of time or general suspension of the affected party’s obligations.

If non-performance caused by the FM event is prolonged (or permanent) then the drafting may provide for termination of the contract with the financial consequences for the parties set out in the provision. Where such termination right is mutual, the affected party may need to consider carefully whether to invoke FM at all, especially if preserving the economic benefit of the contract is more valuable than losing the contract.

Long-term supply contracts may provide for more complex scenarios, with some contracts requiring supplies to be made at a later date to maintain total quantities while others effectively cancel the affected supply (leaving the supplier with the headache of a quantity it may be unable to sell in circumstances where prices have fallen).

Alternate remedies to FM

Aside from the typical FM provisions outlined above, the affected party may have alternate remedies, depending on the governing law of the contract.

Some examples:

  • For English law contracts, the affected party might claim relief under the doctrine of frustration, which permits parties to cease performing contractual obligations where it becomes impossible to do so in circumstances entirely beyond the remit of the parties. While frustration tends to have limited application and is even more difficult to establish where the contract does contain FM provisions, this could be a potential avenue for relief where emergency measures have made the supply permanently unavailable or the necessary skilled labor to perform a contract became unavailable due to travel restrictions or illness.
  • For PRC law contracts, the doctrine of “change of circumstances [situation]” may apply where a FM remedy is not available.6 The doctrine operates where (1) there is an unforeseeable and material adverse change to the fundamental assumptions upon which the parties relied when they entered into the contract, (2) the change is outside the sphere of regular commercial risks, and (3) such change would make continued performance of the contract on its original terms egregiously inequitable to the affected party. While the judicial process is more complex than for a FM claim, the affected party may apply for the contract to either be terminated or modified (something not generally available for a FM claim based on the civil law).

Recommended actions

If, whether as buyer or supplier, you have entered into commercial contracts that have or may be affected by the outbreak, we recommend the following actions:

  • Review each contract carefully, with particular regard to the governing law and FM provisions, including any time bars or other procedural requirements.
  • Form a preliminary view on whether any FM provision is “open” or exhaustive in relation to the list of FM events and whether the outbreak and/or resulting government crisis measures are covered/excluded.
  • If you may need to invoke a claim, consider your obligation to mitigate the effect on non-performance and what steps you can take. Starting a mindful dialogue with the counterparty may be an important part of the process.
  • Consider any potential flow on effects from the invoking of a claim such as termination of the contract.

Aside from your legal position, there are generally going to be several other important matters of concern:

  • For a counterparty who receives a FM claim they do not think is valid, there is the issue of enforcement of the contract, particularly if it does not provide for international arbitration.
  • There are the reputational risks and potential damage to long-term supply relationships with foreign buyers and suppliers. Even where there is no legal basis for FM relief, parties who receive FM claims may wish to be flexible about amending or restructuring (e.g. by postponing deliveries) the contract to accommodate the affected party.
  • Declaring FM or receiving a FM claim may impact on insurance arrangements.
  • Buyers who are part of a chain of supply contracts may themselves need to declare FM in response to a supplier’s declaration in order to avoid being in breach. Each contract in the chain may of course be on different terms or subject to entirely different governing laws and this can create substantial challenges for the buyer, especially where their downstream contract has less favourable (or no) FM provisions. There may also be separate time bars or other procedural requirements as above.

Clearly if you are entering into new contracts during this period you should consider the FM provisions with particular care.

Conclusion

With the full impact of the coronavirus likely to play out for some months yet and the potential for the outbreak to spread into new regions, this is an issue seemingly becoming more important by the week.

If you would like to discuss any of the issues raised in this alert please contact us. Further news, regional law perspectives and other information can be viewed at Baker McKenzie’s Coronavirus Resource Center.


1 This alert covers commercial contracts governed by the following common law legal systems: New York law, English law, Australian law, Singapore law and Hong Kong law.

2 https://www.ft.com/content/e3d6b116-4975-11ea-aeb3-955839e06441; https://www.wsj.com/articles/coronavirus-toll-on-shipping-reaches-350-million-a-week-11581366671; https://www.reuters.com/article/us-china-health-lng-prices/free-falling-lng-prices-wreak-havoc-on-trade-amid-coronavirus-fears-idUSKBN2010P9

3 https://www.chinadaily.com.cn/a/202002/17/WS5e4a38eaa31012821727818d.html

4 不能预见、不能避免、不能克服的客观情况(事件)

5 These are also sometimes referred to as Material Adverse Effect (MAE) clauses in certain jurisdictions.

6 Some commentators have argued that the remedies are reconcilable particularly following Supreme People’s Court decisions in relation to the 2003 SARS outbreak.

The post Coronavirus Outbreak: Global Guide to Force Majeure and International Commercial Contracts appeared first on Global Compliance News.

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Companies should give thoughtful consideration to their disclosure of human capital management, or HCM, topics as more companies trend toward increased disclosure of environmental, social and governance matters in their annual proxy statements and other public disclosures.

HCM is increasingly becoming a key area of focus for stockholders and proxy advisory firms, as well as the US Securities and Exchange Commission, which proposed a new disclosure requirement for human capital measures last year as part of its ongoing effectiveness review and modernization project for corporate reporting and disclosure.

Although there is no requirement to provide HCM disclosure at this time, companies have begun to provide voluntary disclosure in response to growing demands from stockholders and proxy advisory firms for more information on human capital issues. Now is a good time for companies to understand and consider HCM disclosure and governance trends and how they may impact practices going forward.

Importance of HCM

Companies have long recognized the importance of human capital as key to creating value. HCM generally refers to the manner in which a company manages its workforce in a variety of areas — such as recruitment, retention, talent development, training, health and safety, productivity, diversity and inclusion, and culture — which together form an integral part of a company’s competitive strategy driving long-term value and risk mitigation.

In recent years, shareholders, proxy advisory firms and regulators have paid more attention to the value of human capital as an intangible asset combined with the link between effective HCM and lower employee turnover, higher productivity and improved long-term company performance.

Investors have historically lacked the data needed to assess HCM performance, which has prompted calls for increased disclosure by companies as to how this highly valuable intangible asset should be measured and assessed.

SEC Proposal for Required HCM Disclosure

On Aug. 8, 2019, the SEC proposed amendments to certain disclosure requirements under Regulation S-K, including Item 101 on the description of the business, as part of the regulator’s project to update and modernize corporate reporting and disclosure requirements.1

The proposed amendment would require companies to include, as a disclosure topic, a description of the company’s human capital resources, including any human capital measures that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the company’s business. These human capital measures might include, depending on the nature of the company’s business and workforce, measures or objectives that address the attraction, development and retention of personnel.

Currently, Item 101(c)(1)(xiii) requires disclosure of the number of people employed by the company, which dates back to a time when companies relied significantly on plant, property and equipment to drive value.

The proposed amendment reflects a principles-based approach, understanding that the human capital measures and objectives considered material for any particular company should depend on the nature of the company’s business and workforce, while the exact measures or objectives included in a company’s disclosure may evolve over time and depend on the industry.

The SEC has solicited comments on the proposed human capital disclosure, including specific questions, such as:

  • How to define human capital, and

Whether to provide other nonexhaustive examples of measures or objectives that may be material, such as:

  • The number of full-time, part-time, seasonal and temporary workers;
  • Stability of the workforce (e.g., voluntary and involuntary turnover rates);
  • Average hours of training per employee per year;
  • Human capital trends (e.g., competitive conditions and internal rates of hiring and promotion);
  • Worker productivity; and
  • Progress that management has made with respect to any established objectives regarding human capital resources.

Calls for HCM Disclosure by Investors

In addition, companies have been faced with calls from institutional investors for HCM disclosure in recent years. In 2017, a group of institutional investors sent a letter to the SEC urging companies to disclose additional information about their HCM policies, practices and performance, including categories of information regarding workforce demographics, stability, composition, skills and capabilities, culture and empowerment, health and safety, productivity, human rights, compensation and incentives.2

Since then, institutional investors continue to identify HCM as a key issue to discuss during shareholder engagement and are asking companies for more information around their HCM strategy and process. In particular, BlackRock Inc. views HCM as “a potential competitive advantage” and expects “disclosure around a company’s approach to ensuring the adoption of the sound business practices likely to support an engaged and stable workforce.”3

The California Public Employees’ Retirement System states that “proper management of human capital is vital to the success of companies we invest in,” and “we seek to understand their strategies surrounding workforce, diversity, culture, and organizational decision-making.”4

Similarly, proxy advisory firms Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC have incorporated ESG issues into their proxy voting guidelines, in addition to separately assessing board gender diversity and gender pay gap.

The particular methodologies for how ISS and Glass Lewis intend to take into account individual measures and objectives for HCM when making voting recommendations to investors remains to be seen as the framework for HCM disclosure continues to evolve.

Impact of HCM Disclosure on Directors

With an increased emphasis on HCM reporting and disclosure, directors are being asked to exercise more oversight over HCM matters. This is in stark contrast to several years ago when directors were focused on the oversight of executive compensation and succession planning while relying on management to be responsible for issues affecting the employee population generally.

Today directors need to be prepared to answer questions from institutional investors on HCM matters as frequent topics include demographic data of the employee population, retention, talent management, organizational culture, diversity and inclusion, health and safety, productivity and compensation.

Companies should consider having the full board provide general oversight of HCM matters and allocating specific oversight responsibilities to the compensation committee or other appropriate committee as needed.

The compensation committee is often best suited to oversee HCM strategy and implementation but this will typically involve an expansion of the traditional role and duties of the compensation committee which may require changes to the compensation committee charter to reflect such duties.

To further demonstrate a broader role of HCM oversight, some companies have changed the title of the compensation committee to the “compensation and human resources committee” or “compensation and management development committee” or similar variation.

As a general framework for expanding HCM oversight by compensation committees, the compensation committee should work with management to identify the HCM components and key performance indicators that create value for the company while giving consideration to any particular HCM issues that are important to the company’s investors which can be gathered through shareholder engagement.

Once those key HCM components are identified, the compensation committee should coordinate with management to establish goals for each component, including identifying areas of risk, and determine how to measure and periodically assess the company’s achievement of those goals.

It is important to maintain the committee’s role as one of oversight and monitoring rather than day-to-day management. Compensation committees may also wish to engage independent advisers to further ensure that the appropriate components of HCM for the company are properly being considered. The compensation committee should provide periodic reports to the full board on the status of HCM initiatives.

Ultimately the board will need to formulate responses to requests and comments from institutional investors as part of shareholder engagement and determine the extent to which HCM measures should be disclosed in the annual proxy statement, annual report or other public disclosures.

Growing Trend of HCM Disclosure in Proxy Statements

In response to growing pressures to provide more information on HCM to investors, many companies are taking action to voluntarily provide HCM disclosure in their annual proxy statements as a way to stay ahead of the issue as disclosure practices and requirements continue to evolve.

One of the most frequent topics of disclosure is a company’s description of the board’s oversight of HCM, as well as corporate culture. It appears that the boards at many companies are retaining general oversight responsibility while assigning certain responsibilities to the compensation committee or other committees as appropriate.

Some companies disclose specific components of HCM that are subject to board or compensation committee oversight, which can be helpful to give investors an idea of those HCM matters that are important to directors. At this stage, many companies are not disclosing details as to how the board or committee exercises its oversight over HCM matters.

In addition, many companies are starting to provide disclosure of a general commitment to HCM matters, with some companies identifying key performance indicators in certain areas but not necessarily quantifying them or providing a sense of the extent to which the company is making progress in achieving its goals.

Without mandated disclosure by the SEC, companies are taking varying approaches to the disclosure of HCM in proxy statements in areas that are important to investors, such as retention, talent management, organizational culture, diversity and inclusion, health and safety, productivity and compensation, as well as demographic data of the employee population.

In a recent study, EY reviewed the human capital disclosures contained in the proxy statements of 82 companies in the Fortune 100 as of Sept. 5, 2019.5 Approximately 40% of the companies surveyed included general disclosure of board or committee oversight of HCM matters.

With respect to the type of HCM information disclosed, the following percentages of companies surveyed included disclosure in the following areas:

  • 50% included workforce diversity disclosures, with under one-third of those companies providing some measure of workforce diversity;
  • 34% included workforce compensation disclosures, with most of those companies discussing pay equity and efforts to eliminate gender and diversity pay gaps, while 40% disclosed measurement data of pay equity, such as gender pay ratio and minority pay ratio;
  • 22% disclosed culture initiatives;22% included workforce health and safety disclosures, with less than half of those companies disclosing any key performance indicators;
  • 22% included workforce skills and capabilities disclosures, with half of those companies providing at least one quantified key performance indicator; and
  • 6% included workforce stability disclosures, with most of those companies disclosing key performance indicators, and only a few companies quantifying them.

While more companies are providing HCM disclosure in their proxy statements, some companies have started incorporating HCM-related performance metrics into their executive compensation programs. HCM, together with other ESG measures, are most commonly found as a metric under short-term incentive plans provided to executive officers and, to a lesser extent, long-term incentive plans.

HCM metrics as key performance indicators are typically weighted at very small percentages in incentive programs or may be combined with other nonfinancial performance metrics while this practice continues to evolve.

As a further sign of boards becoming more involved in HCM matters, many companies are highlighting the HCM experience of directors in their proxy statements. EY found that 44% of the companies surveyed disclosed human capital-related experience in at least one director biography, with some referring to diversity and inclusion, culture initiatives or background in human resources.

Moving Forward

With investors calling for more information on how HCM is measured and assessed, and the SEC considering a proposed amendment to add human capital measures as a disclosure requirement, many companies are proactively addressing these issues by providing voluntary HCM disclosure in their annual proxy statements, which can be one of the most effective tools to communicate with investors and demonstrate a company’s commitment to HCM.

Now is the time for companies to revisit their HCM disclosure or consider adding HCM disclosure for the first time as they prepare their proxy statements for the 2020 proxy season.

Article first published in Law360 on 24 February 2020.


1 SEC Proposed Rule No. 33-10668, “Modernization of Regulation S-K Items 101, 103, and 105,” Aug. 8, 2019, https://www.sec.gov/rules/proposed/2019/33-10668.pdf.

2 Human Capital Management Coalition SEC petition for rulemaking, July 6, 2017, https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.

3 BlackRock, Investment Stewardship, Protecting and enhancing our clients’ assets for the long term, https://www.blackrock.com/corporate/about-us/investment-stewardship#engagement-priorities.

4CalPERS, Human Capital, https://www.calpers.ca.gov/page/investments/sustainable-investments-program/human-capital.

5 EY, How and Why Human Capital Disclosures are Evolving, Nov. 15, 2019 https://corpgov.law.harvard.edu/2019/11/15/how-and-why-human-capital-disclosures-are-evolving/.

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Baker McKenzie is pleased to present the 2020 edition of the Global Employer: Focus on US Immigration & Mobility.

Whether you need information about a specific US visa type, or are looking for a high-level overview of employer obligations related to the movement of foreign nationals under US immigration and employment law, this handbook covers a wide range of topics and serves as a go-to desk-side guide for US employers.

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Schrems II case – the data importer perspective

Following our previous analysis of the consequences of the opinion of the advocate general Hendrik Saugmandsgaard Øe (a.g.) in the Schrems II case, from the data exporter perspective (available here), we now focus on the implications of the same with respect to the position of the data importer.

Indeed, in the following paragraphs, we will turn our attention to the content of the Controller to Processor Standard Contractual Clauses (SCC) and, in particular, to some of the obligations imposed on the data importer, notably, Clauses 4(d); 5(a); 5(b) and 5(d). We will consider these obligations in light of the a.g.’s opinion in order to explain their ‘new’ meaning and scope.

Appropriate Security Measures – Clause 4(d)

Although the content of the obligation under Clause 4(d) is directed to the data exporter, its text has an impact on the activities of the data importer as well. Indeed, the exporter is required to agree and warrant that “after assessment of the requirements of the applicable data protection law, the security measures [put in place by the data importer] are appropriate” to protect the data that the latter is processing on its behalf. The clause, therefore, implies that (following a periodical request from the data exporter) the data importer regularly supplies a report indicating all the security measures that the importer has in place, in order for the exporter to be able to assess whether said measures are appropriate to its purposes. In light of the principle of transparent and accurate processing, in fact, the analysis on the importer/processor shall be performed or at least reviewed on a regular basis.

Moreover, the data importer has a number of additional information requirements towards the data exporter, including:

Non-Compliance – Clause 5(a)

The main obligation of the importer is enshrined under Clause 5(a) that requires the same to agree and warrant that it will process personal data only on behalf of the exporter and in compliance with its instructions and the Clauses. Clause 5(a), quite frankly also considers the possibility that the importer may not be able to comply with its obligations: indeed if “for whatever reasons” the importer cannot honour its obligations, Clause 5(a) requires it to inform promptly the data exporter. It is indeed not an easy task for the importer. In line with the principle of good faith in contractual relationship, the importer shall make the exporter aware of any and all circumstances that may hinder the protection of personal data in the course of the processing activities it performs. Clause 5(a) is a prerequisite for the accountability of the exporter/controller, which, following the receipt of said information, can decide the consequent actions. The range of said actions is the widest possible, up to the termination of the contract.

Changes in Legislation – Clause 5(b)

This clause is structurally similar to the one just mentioned and imposes an obligation on the data importer to notify the data exporter when a change in the applicable legislation is likely to negatively affect the capacity of the importer to comply with its obligations. Again, the consequences of said notification are for the exporter to define, being the data controller the one in charge of deciding purposes and modalities of data processing (including data transfers). What is relevant in all those circumstances is that the exporter is made aware of such changes, so that it can act accordingly and in a timely fashion.

Requests for Disclosure – Clause 5(d)

Another similar obligation is the one included in Clause 5(d), according to which the importer has a duty to inform the exporter, without undue delay, on all those circumstances where it is the addressee of specific requests or actions – i.e. a legally binding request for disclosure by a law enforcement authority; any accidental or unauthorised access; a data subject request. The idea behind this Clause is for the exporter to be in control of what happens on the importer side; indeed, it is relevant to remember that the importer is a data processor and the exporter/controller is responsible before data subjects for its compliance with the data protection laws.

Finally …

In conclusion, the a.g. suggests increasing the exporter’s scrutiny on the importers data processing activities. It is indeed the importer’s obligation to facilitate the data exporter in performing its analysis of the importer’s factual compliance. Following this line of thoughts, the importer will be expected to provide all necessary information to support the exporter in this effort.

It is of paramount importance, for the data importer, to make sure to set up an assessment and reporting process, to enable a timely identification of all non-compliance situations, and to become aware of circumstances relating not only to the data processing itself, but also to external factors. For example, the disclosure of requests from national security agencies, or changes in national legal regime. In parallel, the data importer should also make sure to open and maintain proper communication channels with its exporters and effectively comply with its duties under the SCC.

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