Baker's Choice: January 2006

2005 has come and gone, but it left a lingering imprint on many issues that directly impact Levine & Baker clients. Here's a brief rundown, with some useful links that speak to the most interesting of these concerns. Also: a practice piece on recent California wage and hour issues, and information about the new 2006 edition of my book on stock options.

• Fair warning: Employers that ignore California wage and hour regulations do so at their peril. In December, both Wal-Mart and FedEx were hit by multimillion dollar judgments for California wage and hour violations. A Los Angeles court ordered FedEx Ground to pay $5.3 million in damages and $12.3 million in attorneys’ fees for misclassifying drivers as “independent contractors” rather than employees. An Alameda County jury punished Wal-Mart for flouting the meal break requirement, bringing in a verdict for $57 million in compensatory damages and $115 million in punitive damages. Such huge awards send a clear message to employers: mind those wage and hour laws or suffer the consequences! We have some thoughts on how these cases affect our clients; here's a short practice piece (PDF, 125KB) to help you analyze your company's situation.


• As usual, there was no shortage of year-end breast-beating over executive compensation. We're all accustomed to the annual whining about executive compensation packages in the press, but complaints at the end of 2005 were much more substantive than usual as the University of California found itself under scrutiny for its seemingly abusive packages for senior execs at a time when student fees are up and faculty and staff salaries are down. Another big story focused on the hidden costs of tax gross-ups for corporate executive payouts. Congress also weighed in with proposed legislation in November: although the Protection Against Executive Compensation Abuse Act is unlikely to get much immediate traction, its introduction in the House underscores the ongoing pressure for disclosure and control of executive pay packages.


• New proposed tax regulations for nonqualified deferred compensation are six of one, half dozen of the other. The proposed regulations to Section 409A (published at the end of September 2005) are causing headaches for executive severance arrangements, which in some cases may be taxed long before any separation from employment occurs. At the same time, most stock options and stock appreciation rights will escape deferred compensation treatment. As to acceptable methods for valuing options in privately held companies, the jury is still out; however, new IRS Notice 2006-4 provides some much-needed flexibility for choosing fair market value standards until all of the issues are resolved in final regulations. Note on bonus deferrals: even under the new regulations, short-term deferrals survive; it's OK to take your 2005 bonus up to (but no later than) March 15, 2006.


• Other legal items worth noting: Don't forget that health expenses incurred through March 2006 are now eligible for reimbursement under your 2005 cafeteria plan. . . SB 833, the California “junk fax” law went into effect as of January 1, 2006, imposing penalties (including criminal penalties) on any person or entity that sends an unsolicited fax to a California resident. . . Anyone who cares about the future of the separation between church and state in America needs to take note of the decision in Kitzmiller v. Dover Area School District (12/20/05), where a Pennsylvania federal district court held that "intelligent design" is religion, not science, and accordingly could not be required to be taught in public school. The elegantly written opinion provides a primer on constitutional law standards for construing the establishment clause. Rick has had an interest in this area of the law ever since he argued (and won) Christian Science Reading Room v. City and County of San Francisco twenty years ago; he'd be happy to share his thoughts on the issues raised by the Kitzmiller case if you give him a call.


• L&B in the news: The November 2005 issue of Bloomberg Law Reports took particular note of the firm's victory in a recent NASD arbitration, Williams v. Bank of America Inv. Svcs. -- check our website for more info on the case. Also, I'm pleased to let you know that the Seventh Edition of my book, The Stock Options Book will be available this month. Feel free to download a sneak-peek of the table of contents. As always, I appreciate feedback. Please let me know if you have questions or comments on the material.


• And finally, on a personal note, many thanks to all of you who wrote or called to congratulate us on our new firm. We're delighted with the way things are going, and look forward to continuing to work with all of you in the new year and beyond.