Friday, May 29, 2015

Things to Consider When Doing Business in Arizona: Unique Aspects of Arizona Law – From Cumulative Voting to Blue Pencils, Blind Trusts and Guns at Work

By Richard Lieberman and Bruce B. May

Arizona is a great place to do business. It boasts an excellent regulatory environment, envious climate, skilled workers, fair tax rates, good transportation facilities, and a growing pool of consumers. In addition, CNBC ranked Arizona among the top fifteen of its “America's Top States for Business 2014” list, giving it high marks for a growing and independent workforce, good access to capital, and a solid infrastructure.

Companies seeking to do business in Arizona should understand some key differences about Arizona law that might surprise them. Below are some highlights and links to important resources.

Forming a Company:

The Arizona Corporation Commission (ACC) regulates and approves the formations of Arizona’s corporations and limited liability companies. Filings with the ACC can be made by fax, and good standing certificates are generally available online. Information and simple forms are available through the ACC’s website (, but those forms do not often contain all the provisions advisable for business owners to consider for their organizational documents.

Partnerships are under the auspices of the Arizona Secretary of State’s office ( The Secretary of State’s office requires original signatures, so it does not permit online or fax filings.

For Arizona corporations, note that:
  • cumulative voting is mandatory in the election of directors, per the state’s constitution. This cannot be waived by the shareholders.
  • actions by consent without a meeting of the directors or the shareholders currently require unanimous consent.
Limited liability companies formed in Arizona do not have the same restrictions.

Company Relocation Assistance:

Businesses seeking to relocate to Arizona may wish to contact the Arizona Commerce Authority (, which spearheads the state's efforts to attract new business and expand businesses already existing in the state. The Greater Phoenix Economic Council ( assists with development efforts in the greater Phoenix metropolitan area, while the Tucson Regional Economic Organization ( does so in the Tucson region.

Arizona and local entities provide a variety of tax incentives that may be available for companies seeking to relocate to or expand in Arizona. Public incentives, however, must pass muster under the Arizona constitution’s prohibition on public gifts, by demonstrating sufficient public benefits.

Capital Formation:

Arizona laws on capital formation resemble those of most other states with respect to exemptions from the registration requirements under the securities laws, including having a “Regulation D” exemption known as “Rule 126” of the state’s securities regulations. Arizona recently adopted a “crowdfunding” statute that will exempt those offerings from the registration requirements once effective this summer.

Persons being compensated for assisting in the offer or sale of securities may be required to register as a securities dealer or salesman, and issuers may be subject to those requirements if the securities are not sold in a private exempt offering.

In connection with the offer or sale of securities from or within Arizona, each participant in that offering may have joint and several liability for any material misstatements or omissions made. Accordingly, care should be taken to prepare appropriate disclosures and offering materials and to comply with the applicable offering restrictions.

Additional information on Arizona’s securities laws and available exemptions is also available at

Employment Law:

Arizona’s minimum wage is higher than the Federal rate. It is currently $8.05 per hour, which is a favorable to that of many other states, however.

Arizona law prohibits the employment of unauthorized immigrants, and mandates the use of the federal “E-Verify” system. Employers that violate these provisions face stringent penalties imposed by the state, which may include revocation of license(s) to do business and criminal charges, among other sanctions.

Arizona, per its constitution, is a “right to work” state, meaning no worker can be forced to join a union. As a result, Arizona has a low percentage of unionized workers.

Arizona has laws permitting workers to bring weapons to their workplace, with some exceptions, so long as they are locked in a vehicle and out of sight. Employers may designate certain areas where those vehicles must be parked.

Arizona has also authorized, by voter initiative, the use of medical marijuana. The impact of that statute in the workplace continues to evolve.

Non-compete agreements can generally be enforced if they are reasonable in restricting the kind of work, the geographic scope, and the time limits on those restrictions. Because it is a “facts and circumstances” type of test, case law can help determine what may be a reasonable restriction, but the enforceability of those restrictions may be subject to the discretion of a trier of fact.

Of special note, not just for non-compete agreements, but for all Arizona contracts, is what is commonly known as the “Blue Pencil Rule.” That “rule” of judicial interpretation provides that an Arizona court will not rewrite language in a contract that is invalid. Instead, the court will cross out the invalid part (with its proverbial blue pencil) and attempt to construe the remainder of the text. If it can be enforced with that deletion, the provision (and contract) can stand. If not, the provision, and perhaps the whole agreement, may be invalid. Counsel can advise as to potential methods for addressing these issues.

Arizona law permits employers to require that employees notify them of “intolerable working conditions,” and to give the company time to remedy the situation. Failure to comply with those provisions can bar a suit for state law violations.

Finance and Banking Issues:

For commercial loans, parties can agree in writing on the applicable rate of interest.

Arizona is a “community property” state. To bind the marital community to any guaranty and suretyship obligations or with respect to any transaction for the acquisition, disposition, or encumbrance of an interest in real property (other than unpatented mining claims), both spouses must sign that obligation. Otherwise, the guaranty is binding only on the sole and separate property of the spouse signing that document.

Real Estate:

Real estate liens are typically documented through a deed of trust, rather than a mortgage. For foreclosure actions under a deed of trust, the borrower has a right to reinstate the loan up until the day preceding the sale, upon payment of the amounts then due, plus accrued costs and expenses as permitted by law. Judicial foreclosure actions do not have the same reinstatement rights, but a significant disadvantage of those actions is the longer time typically required to complete the judicial foreclosure process, and the borrower will have a redemption period following the sale.

Arizona has a “blind trust act,” which applies to deeds or conveyances of an interest in real property by a trustee. That act requires disclosure of the name and address of the beneficiaries for whom a grantor or grantee holds an interest in that property, among other items.

Note the provisions discussed in “Finance and Banking” above with respect to community property issues for their impact on real estate transactions.

Arizona law prohibits “deficiency actions” against borrowers for property up to 2.5 acres that is used for one or two family dwellings, and the property is sold pursuant to a deed of trust. If it is sold pursuant to the judicial foreclosure statutes, a deficiency action is prohibited if the loan was to purchase the property (including a refinance without any “cash out” features).

Real property transactions are typically handled through third-party title and escrow companies. Title insurance is issued by Arizona licensed underwriters in accordance with posted rates.

Arizona law prohibits certain liens, claims or encumbrances recorded against property that are determined to be without a “colorable” basis. Violation of that statute imposes, among other things, no less than treble damages.

Documents to be recorded with the county recorders must exclude certain personally identifiable numbers, like social security numbers, as well as to meet other formatting requirements.

Arizona prohibits the sale of the subdivided property, generally defined as six or more lots, without notice to the Arizona Real Estate Department, issuance of a Public Report and delivery of the Public Report to a prospective purchaser.

Arizona’s laws governing subdivisions is sufficiently comprehensive that it is deemed “substantially equivalent” to the Interstate Land Sales Full Disclosure Act. Arizona also regulates, among other things, condominiums, time shares, cemetery sales, residential landlord/tenant relations and master planned communities.

Any party receiving any commission, fee or compensation for services in the sale of real estate as a “broker” or “finder” (broadly defined) must be licensed in Arizona. The exception for seller-owned property is narrowly construed. There is no reciprocity with other state licensed brokers.

In construction contracts, Arizona law restricts the ability to alter the statutorily mandated payment procedures for contractors and subcontractors, unless required disclosures are made in the contracts and construction plans.

Arizona has a rich Native American history, and relics, historical sites, burial grounds and funerary objects are subject to regulation at all levels of government. Encountering those items can impede development.

Contractors, suppliers, laborers and others, including certain other professionals engaged in construction, have lien rights with super-priority.

Municipalities have the power to encourage development with certain tax reductions and abatements under the Government Property Lease Excise Tax (GPLET) statutes and tax rebates and other inducements provided they can satisfy certain constitutional constraints, including the gift clause noted above. Development can also be aided by the use of community facilities districts.

Commercial leases are subject to termination by the tenant in the event of certain circumstances that would render the premises uninhabitable, unless the lease contains alternative provisions.

Rents or other sums collected under commercial and other leases are subject to a “transaction privilege tax” as referenced below (generally understood as a “rent tax”). There are mechanisms for the landlord to avoid successor liability.

Estate Planning:

Arizona is a community property state, which can have implications on how assets are titled and treated upon disposition.

Arizona allows holographic wills and codicils meeting certain requirements.

“Do Not Resuscitate” or DNR instructions must be on orange paper and be either wallet or letter-sized to be enforceable.


Arizona state courts have adopted a streamlined disclosure and discovery system that helps expedite the time it takes to conclude a matter. In addition, each of the county court systems has implemented a mandatory, but non-binding arbitration program for matters with amounts in controversy under a specified threshold established for the respective county in which the litigation is filed.

Legal Opinions:

Arizona practices in rendering legal opinions typically follow national trends, although Arizona practitioners frequently add certain additional assumptions, qualifications, and limitations in those opinions to address unique areas of the law. For example, Arizona firms often include an assumption that the documents on which the opinion is being rendered contain the mutual intent of the parties and that there are no verbal statements that modify those documents. This is in light of the Darner Motors v. Universal Underwriter’s case and its progeny. Practitioners from other jurisdictions often inquire as to the need for that qualification. Additional information on typical Arizona practice for legal opinions can be found in the amended report of the State Bar of Arizona’s Business Law Section on Opinions in Business Transactions, at 38 Ariz. Law Journal 47.

Tax Issues:

Arizona taxes income, property, and sales/use of goods, but does not have a sales (transaction privilege) tax on services. Rates are considered to be fairly favorable to those of many other states, and a plethora of sales tax exemptions exist for many industries, such as health care, mining, and film production. Information on taxes is available through the Arizona Department of Revenue (

Note that business asset purchasers may be liable for certain unpaid state taxes of the former business, including unpaid transaction privilege taxes.

Arizona and many municipal jurisdictions impose transaction privilege taxes on the sale of commercial real property within two years of its improvement or substantial renovations for additional improvement. Because those amounts can be significant, owners are encouraged to evaluate those issues in connection with proposed transactions. This tax is often referred to as the “speculative builder’s tax.”

The foregoing are examples of the variety of ways in which Arizona law presents a unique approach to commercial and other areas of the law. Before conducting business in Arizona, a company should seek legal counsel. The attorneys of Jennings, Strouss & Salmon, PLC welcome the opportunity to provide additional guidance to those seeking to do business in our state.

The information in this article is of a general nature and is for informational purposes only. It is not intended to serve as legal advice for any particular circumstances, which could result in different conclusions, and does not constitute a client/attorney relationship. If you would like additional information or to discuss a particular legal issue, please contact the author at or 602-262-5935.

Wednesday, May 20, 2015

FERC Approves Gas Modernization Policy November 2014, the Federal Energy Regulatory Commission (“FERC”) proposed a PolicyStatement on Cost Recovery Mechanisms for Modernization of Natural GasFacilities in Docket No. PL15-1 that would allow interstate pipelines to recover the costs of modernizing their facilities through an approved cost tracker or surcharge mechanism. Following its review of substantial initial and reply comments, FERC issued an order on April 15, 2015 implementing the Policy Statement effective October 1, 2015.
The various filed comments demonstrated a sharp disagreement between the pipelines and their customers regarding: (1) whether pipelines should receive a financial incentive for complying with EPA and PHMSA safety and environmental regulations; (2) whether the proposed policy was premature, since EPA and PHMSA have not implemented any regulations and there is considerable uncertainty about the effects of this type of tracker; and (3) whether the tracker would contravene the need for traditional Section 4 rate cases. Despite the contrasting views within the industry, FERC approved the Policy Statement with little modification.
In the final Policy Statement, FERC recognized that although its general policy is to prohibit cost trackers, this tracker was justified in order for pipelines to have a mechanism by which to recover costs of replacing “aging, unsafe and leak-prone facilities.” Under the Policy Statement, FERC will require each pipeline requesting a tracker to satisfy five standards:
  1. Review of Existing Rates: The pipeline must demonstrate that its existing rates are just and reasonable. FERC declined to require that the rate review be conducted through a Section 4 proceeding. It instead stated that pipelines could propose alternative approaches for rate justification. FERC encouraged a full exchange of information with the pipeline’s customers to ensure justification of its base rates, and stated that it will establish appropriate procedures on a case-by-case basis to resolve any issues of material fact based on the substantial evidence on the record.
  1. Defined Eligible Costs: The pipeline must specifically define the costs that it intends to recover through the tracker mechanism. However, this list of costs could be modified at a later date. FERC found that by requiring pipelines to clearly define their included costs, rate transparency will be ensured. The pipeline must also demonstrate that the costs that it seeks to recover are limited to one-time capital costs that are either necessary to comply with federal or state regulations or are necessary to improve pipeline facility efficiency. Reoccurring maintenance costs or testing costs to identify upgrades must be excluded from the mechanism. FERC suggested, however, that a pipeline could include a provision in its proposed tracker that explicitly excludes an amount representing its ordinary system costs.
  1. Avoidance of Cost Shifting: A pipeline must design its mechanism to protect its captive customers from cost shifts in the event that shippers leave the system. To do so, FERC suggested that a pipeline might agree to set a floor on the billing determinants that it uses to design the surcharge. FERC stated that it would review the billing determinants used by each pipeline on a case-by-case basis.
  1. Periodic Review: A pipeline must provide for periodic review of its mechanism to ensure that it and the underlying base rates remain just and reasonable. To meet this goal, FERC suggested that pipelines make their trackers temporary. If the mechanism terminates before recovering its costs, the pipeline could either seek to recover remaining costs in its next Section 4 rate case or file to extend the tracker. FERC stated that it will not require pipelines to file a full Section 4 rate case to review the mechanism; rather that it “remains open” to reasonable proposals for achieving such review.
  1. Shipper Support: A pipeline must work collaboratively with its shippers to seek support for its cost recovery proposal, but FERC declined to require a minimum level of customer support to warrant implementation. Instead FERC found that, as long as a pipeline demonstrates that its proposed mechanism is just and reasonable under Section 4 and meets the Policy Statement guidelines, the proposal may be accepted, even if some customers voice opposition.
Although FERC found that compliance with these five factors should protect shippers from being exposed to excessive costs, the final Policy Statement clearly sided with the pipelines’ requests for flexibility. Thus, affected shippers will need to be vigilant in reviewing the justness and reasonableness of a pipeline’s proposal beginning at the pre-filing collaborative stage. Given the ability of pipelines to submit their tracker mechanism filings on October 1, 2015, we expect that some pipelines will commence pre-filing discussions with their shippers as early as this summer. If you have questions or would like more information on the issues discussed in this article, please feel free to contact us.

Wednesday, May 13, 2015

Jennings, Strouss & Salmon Elects John C. Norling as Managing Attorney

PHOENIX, Ariz. (May 13, 2015) – Jennings, Strouss & Salmon, P.L.C., a leading Phoenix-based law firm, is pleased to announce that John C. Norling has been elected Managing Attorney. Norling succeeds J. Scott Rhodes, who stepped down from the position after six years to focus on his thriving legal ethics and professional responsibility practice. Rhodes will also resume the position as the firm’s General Counsel, which he held prior to being elected as Managing Attorney in 2009.
“During my tenure as Managing Attorney, I have seen the firm grow and flourish. We are in a great position to expand our services to clients, while continuing to provide exceptional and cost-effective legal work,” said Rhodes. “I strongly believe that leadership change is essential to the evolution of any law firm. John Norling has the insight and innovation to guide the firm’s future.”
Norling has held numerous leadership roles in the firm, including serving as a member of the Management Committee and as chair of the Corporate, Securities and Finance Department. As Managing Attorney, he will oversee all firm operations and focus on maintaining Jennings, Strouss & Salmon’s long-lasting reputation as a leader in the Arizona legal, business and non-profit communities. Norling will also support the growth of the firm’s Washington, D.C. office and its thriving energy and utilities law practice.
“I am honored to have been elected as the Managing Attorney of a firm with the reputation and esteemed history of Jennings Strouss,” stated Norling. “I have the utmost respect for Scott Rhodes and thank him for the remarkable leadership and service he has devoted to our firm. Scott has been, and will continue to be, a tremendous asset for Jennings Strouss. We are well-positioned for the future and I look forward to working with each and every member of the firm as we continue to grow and expand the services offered to our clients.”
Prior to joining Jennings, Strouss & Salmon in 2013, Norling served as Member-in-Charge of Clark Hill’s Arizona office. He was also a partner at Norling, Kolsrud, Sifferman & Davis PLC.
A Phoenix native, Norling’s legal practice is focused on advising clients on all aspects of their operations, including commercial transactions, real estate, business organizations, corporate law, mergers and acquisitions, federal and administrative compliance, business contract negotiations and advertising law. He serves as the de facto outside General Counsel for many of his clients, providing advice on issues ranging from day-to-day operations to strategic planning.
Norling is also recognized as an industry leader in the representation of automobile dealerships. He advises dealer clients on the legal, regulatory and practical aspects of the operation of a retail automotive dealership. As part of his practice, Norling serves as General Counsel to the Arizona Automobile Dealers’ Association and several dealer advertising associations.
About Jennings, Strouss & Salmon, PLC
Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in Phoenix, Peoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; legal ethics; litigation; professional liability defense; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit and follow us on LinkedIn, Facebook and Twitter.
The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit

Monday, May 11, 2015

An Innocuous Audit That Has The Potential to Create Enormous Liability: Arizona’s Department of Economic Security’s Employment Audits Can Have Expensive Repercussions

A tax audit letter from a government agency can sink even the hardiest of business owner’s stomach. Yet, a tax audit letter from the Department of Economic Security (DES) may not create the same sense of dread. These audits typically involve low dollar amounts, which may lure business owners into a false sense of security. However, a DES audit should put business owners on high alert. Although the dollar amounts may be low, a determination by DES that a business’ independent contractors are actually employees creates precedent that can lead to additional scrutiny at the state and federal level. Such a determination may be used against the business by Arizona’s Department of Revenue, the Department of Labor, the Internal Revenue Service, and even a disgruntled worker claiming unpaid overtime. In short, ignore that audit letter at your peril.
The crux of the audit will likely be whether DES concludes that a business’ independent contractors are actually employees. That test involves looking at the substance of the parties’ relationship and the hiring party’s degree of direction, rule or control. The regulations on the matter provide twelve indicia of direction, rule or control, which are:
(1)        Whether the hiring party has any authority over a contractors’ assistants;
(2)        The extent of the contractors compliance with the hiring party’s instruction;
(3)        Whether the hiring party requires any oral or written reports;
(4)        Whether the hiring party requires the work to be performed at a specific location;
(5)        Whether the hiring party requires that a specific individual perform the service;
(6)        Whether the hiring party establishes the work sequence / order that the work is performed;
(7)        Whether the hiring party has the right to discharge the contractor;
(8)        Whether the hiring party sets the hours of work;
(9)        Whether the hiring party provides any training;
(10)     The amount of time the contractor spends working with the hiring party;
(11)     Whether the hiring party provides the contractor with tools and materials; and
(12)     Whether the hiring party reimburses the contractors’ expenses.
The regulations also provide six additional factors that tend to show independent contractor status. These factors are:
(1)        Whether the contractor makes him or herself available to the public;
(2)        Whether the compensation is tied on a per project basis;
(3)        Whether the contractor can realize a profit or a loss;
(4)        Whether the contractor is contractually obligated to perform a project; and
(5)        Whether the contractor has simultaneous contracts with other hiring parties.
In analyzing these factors, DES will review documents, interview contractors, and interview the hiring party’s principals and employees. DES may even visit the hiring party’s place of business. It is critical that DES receives accurate information during this process. Loyal employees may provide incorrect information because they are “only trying to help,” and the independent contractors may be less than honest because they have a vested interest in being reclassified as employees. Audits, and even appeals, have been adjudicated based on an incomplete or incorrect statement from a principal, contractor, or employee.
When contacted by DES, Arizona business owners should seek the advice of competent legal counsel to prevent a small problem from multiplying into a business-threatening concern.

Friday, May 8, 2015

CFTC Plans To Lighten Regulatory Burdens on End-Users Trading Commodity Options


On April 30, 2015, the Commodity Futures Trading Commission (“Commission” or “CFTC”) issued a notice of proposed rulemaking to amend its commodity trade option regulation. The proposed changes are intended to reduce recordkeeping and reporting obligations for physical commodity option transactions between commercial end-users which are not Swap Dealers (“SDs”) or Major Swap Participants (“MSPs”).  The Commission also proposed what it called a “non-substantive” amendment to remove a reference in the commodity trade option regulation to a previously-vacated position limits regulation. Many energy market participants are hoping such change is a signal that the Commission will similarly remove commodity trade options from new position limits proposed in another pending rulemaking process. 
The most significant modifications to the commodity trade option regulation proposed on April 30th include:
  • Elimination of the annual Form TO filing requirement for commodity trade options;
  • Removal of a provision in the CFTC’s existing regulation that, in the absence of no-action relief granted previously by CFTC Staff, would have required an non-SD/MSP trade option counterparty to report its trade options immediately to a Swap Data Repository (“SDR”) on a transaction-by-transaction basis if it reported any other kind of swap to an SDR in the past calendar year; and
  • Addition of a provision requiring non- SD/MSP trade option counterparties to provide notice by email to the CFTC’s Division of Market Oversight (“DMO”) within 30 days after entering into trade options, whether reported or unreported, that have an aggregate notional value in excess of $1 billion in any calendar year.  In the alternative, a non-SD/MSP may provide notice by email to DMO that it reasonably expects to enter into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year.
There is a 30-day comment period now open to voice support for or opposition to these proposed changes.

Thursday, May 7, 2015

Negotiating Exclusive Use Provisions in Commercial Leases

Alan P. Christenson
The exclusive use provision in a retail or restaurant lease is often a hotly-negotiated provision.  On one hand, a retail or restaurant tenant wants to protect its business by prohibiting competitors from operating in the same shopping center. Office tenants are also pushing more and more for exclusive use rights to protect employees from being recruited by competitors. On the other hand, the owner of a shopping center or office building wants flexibility to lease to tenants of its choice.

In negotiating an exclusive use provision, a tenant and landlord will need to agree to the scope of the tenant’s exclusive right. In retail leases, the scope may be defined in terms of specific items.  For example, an electronics retailer will want an exclusive use to sell the items it generally sells, such as personal computers or household appliances. A restaurant may want an exclusive right for the general type of food it sells, such as Italian, Thai, or Mexican, or may consider framing its exclusive right in terms of percentage of sales. For example, a pizza restaurant may want to prohibit any other restaurant in the shopping center from deriving more than a certain percentage of its gross sales from the sale of pizza.

An exclusive use right in itself is not as valuable to a tenant if the lease does not address what happens if that right is breached. As such, a tenant and landlord will need to agree on what that remedy will be. That discussion will likely include remedies such as abated rent, damages, and the Tenant’s ability to terminate the lease.

When putting in the effort to craft exclusive use provisions, tenants and landlords should consider certain practical applications. A tenant should be aware that, no matter how fiercely it negotiates an exclusive right, a competitor could spring up in a shopping center across the street that will not be bound by the exclusive right, making all the time and effort put into negotiating the perfect exclusive use right seem pointless. Landlords and tenants should also be aware that, in some cases, competing business can develop a synergy that may benefit both businesses. For example, customers may only want to shop for clothing and shoes in shopping centers that have multiple options so they can browse from store to store without having to drive down the street to get to the next store.

The factors that go into determining what exclusive use rights are appropriate for a tenant are diverse. Exclusive use provisions are not one-size-fits-all, and should be carefully thought out and negotiated with the assistance of capable legal counsel.

Friday, May 1, 2015

The NLRB’s Latest Do’s and Don’ts of Employer Handbooks

In recent years, the National Labor Relations Board (NLRB) has launched a new approach with respect to employer/employee relations by studying employer handbooks to determine whether they violate the rules protecting concerted activity. On March 18, 2015, NLRB General Counsel Richard F. Griffin, Jr. issued a report and Memorandum[1] offering “guidance” on various provisions of employer handbooks in his hope that employers review their handbooks and rules to ensure they are lawful.

By providing a number of examples of rules that are prohibited and rules that are lawful, the Memorandum separately focuses on provisions of the handbook of Wendy’s International LLC, which recently made a settlement with the NLRB. As Griffin noted, his inquiry, which is not a model of clarity in establishing a bright line between the rules that are correct and those that are incorrect, focuses on whether individual rules have a “chilling effect on employees’ Section 7 activity.”

The Memorandum breaks into various categories, and quotes examples of, rules found to be “lawful” or “unlawful”. The categories include confidentiality, conduct toward employer and fellow employees, third party communications, and employer logos, copyrights and trademarks.

While the Memorandum is replete with examples of different employee conduct addressed in the handbook rules, it is instructive to look at some conduct rules that were found to be unlawfully broad because “employees would reasonably construe them to restrict protected discussions with their coworkers.”
  • “[D]on’t pick fights” online.
  • Do not make “insulting, embarrassing, hurtful or abusive comments about other company employees online,” and “avoid the use of offensive, derogatory, or prejudicial comments.”
  • Do not send “unwanted, offensive, or inappropriate emails.”
Contrast these “unlawful” rules with those deemed to simply require “employees to be respectful to customers or competitors:”
  • “Making inappropriate gestures, including visual staring.”
  • Any logos or graphics worn by employees “must not reflect any form of violent, discriminatory, abusive, offensive, demeaning, or otherwise unprofessional message.”
  • “[T]hreatening, intimidating, coercing, or otherwise interfering with the job performance of fellow employees or visitors.”
  • No “harassment of employees, patients or facility visitors.”
With the foregoing examples in mind, it is compelling to review the Memorandum and look carefully at existing handbooks, policies and procedures to attempt to modify any that appear to be clearly prohibited. This will not be an easy task since the rules found to be unlawful are written very similarly to those found to be lawful. The Memorandum does not provide sufficient clarity to enable a review of existing handbooks in order to quickly correct rules or policies that would appear to violate the law. For example, Griffin found the following rules “unlawfully overbroad since employees would reasonably construe them to ban protected criticism or protests regarding their supervisor’s management or the employer in general.”
  • “[B]e respectful to the company, other employees, customers, partners, and competitors.”
  • Do “not make fun of, denigrate, or defame your co-workers, customers, franchisees, suppliers, the Company, or our competitors.”
Concerning employees’ right to criticize an employer’s labor policies, the NLRB determined the following rules unlawfully overbroad because they would reasonably be read to require employees to refrain from criticizing the employer in public:
  • “Refrain from any action that would harm persons or property or cause damage to the Company’s business or reputation.”
  • “[I]t is important that employees practice caution and discretion when posting content [on social media] that could affect [the Employer’s] business operation or reputation.”
  • Do not make “[s]tatements “that damage the company or the company’s reputation or that disrupt or damage the company’s business relationships.”
The following rules, which look quite similar, were found to be lawful:
  • No “rudeness or unprofessional behavior toward a customer, or anyone in contact with” the company.
  • “Employees will not be discourteous or disrespectful to a customer or any member of the public while in the course and scope of [company] business.”
Since the various examples provided in the Memorandum can be so difficult to distinguish, a suggested approach would be to review the handbook and change any rules that the NLRB would find clearly unlawful.

This article does not constitute, and should not be considered, legal advice. Individuals are urged to consult with an attorney on their own specific legal matters.

[1] The Memorandum (GC 15-04) can be accessed on the website of the National Labor Relations Board at under “General Counsel Memos.”