New DOJ Policies Tie Employee Compensation to Compliance

Alerts / March 29, 2023
Key Takeaways
  • When making charging decisions, the DOJ will now consider whether a company has developed compliance-promoting criteria within its compensation system and will require all companies seeking resolutions with the Department to develop such criteria under a new pilot program. 
  • The DOJ’s new pilot program also offers reduced criminal fines for companies that fully cooperate, timely and appropriately remediate, and seek to claw back compensation from corporate wrongdoers. In addition, companies may retain any compensation recovered from the employee-bad actor.
  • Companies seeking to develop programs under these new initiatives will need to pay serious attention to state wage and hour laws that may have limitations on their ability to effectively implement certain clawback mechanisms.

On March 15, 2023, the U.S. Department of Justice (DOJ or the Department) launched a three-year Compensation Incentives and Clawbacks Pilot Program (Clawback Program) intended to incentivize companies to create more robust compliance programs by connecting compliance with compensation structures for executives and employees. This new policy follows mandates announced in Deputy Attorney General Lisa Monaco’s September 15, 2022, Department-wide Memorandum, followed by revisions to the DOJ’s Evaluation of Corporate Compliance Programs (ECCP) on March 3, when, for the first time, the Department sought to incentivize companies to create compensation systems that clearly and effectively impose financial penalties for misconduct and instill a corporate culture in which employees follow the law and avoid legal "gray areas."

The new DOJ initiatives work alongside the Securities and Exchange Commission’s (SEC) Compensation Recovery Policy, announced last fall, and new proposed public company listing standards that were released by Nasdaq and the New York Stock Exchange in February imposing clawback requirements on public issuers, but the initiatives more broadly apply to both public and private companies. These new enforcement policies impose additional expectations on companies with respect to employee compensation that may implicate varying state labor and employment laws as well as international regulations, depending on where the affected employees are located.

DOJ Clawback Program

The Clawback Program, which applies to all corporate matters handled by the DOJ Criminal Division, has two components. First, every corporate resolution entered into by the Criminal Division will now include a requirement that the resolving company develop compliance-promoting criteria in its compensation system. These criteria may include (1) a prohibition on bonuses for employees who do not satisfy compliance performance requirements; (2) disciplinary measures for employees who violate applicable law and others who both (a) had supervisory authority over the employee(s) or business area engaged in the misconduct and (b) knew of, or were willfully blind to, the misconduct; and (3) incentives for employees who demonstrate full commitment to compliance processes.

Second, the Clawback Program offers fine reductions to companies that fully cooperate, timely and appropriately remediate, and seek to claw back compensation from corporate wrongdoers in appropriate cases. At the time of the resolution, companies will be required to pay the full amount of the otherwise-applicable fine, less 100 percent of the amount of compensation the company is attempting to claw back. At the conclusion of the resolution term, if the company has not recouped the full amount of the compensation it attempted to claw back, the company will be required to pay the difference, less up to 25 percent of the unrecouped amount if prosecutors determine that the company sought the clawback in good faith.

Recent Revisions to the DOJ’s Evaluation of Corporate Compliance Programs

In addition to the Clawback Program, the DOJ has recently issued significant revisions to the ECCP to address how a company’s compensation and consequence management systems contribute to the presence of an effective compliance program. Under the recent revisions, prosecutors will now consider, among other factors, whether a company has incentivized compliance by designing compensation systems that defer or escrow certain compensation tied to conduct consistent with company values and policies; provide for recoupment of previously awarded compensation if the recipient is found to have engaged in or be otherwise responsible for corporate wrongdoing; and provide positive incentives such as promotions, rewards, and bonuses for improving and developing a compliance program or demonstrating ethical leadership that can drive compliance. Prosecutors also will assess whether the company has clear consequence management procedures in place, enforces them consistently across the organization, and conveys to its employees that unethical conduct will not be tolerated regardless of the position or title of the employee who engages in the conduct.

Interplay with Wage Payment Laws

Compliance with the DOJ initiatives will require consideration of potential state wage and hour laws that have limitations on companies seeking to implement clawback mechanisms. For example, many state wage and hour laws prohibit employers from taking from wages deductions that are not deemed to be for the employee’s benefit. States often enforce different restrictions on employers’ rights to make withholdings from employees’ wages, and several states use different definitions of “wages,” which will require companies to navigate nuanced and state-specific limitations. Employment laws in numerous jurisdictions outside the United States also provide different protections for employees in this area.  

These limitations are contemplated by the DOJ initiatives, as Department guidance provides an exception from the clawback requirements that mitigate some of these concerns – namely that employers are not expected to claw back incentive compensation if recovery would violate applicable law. In other words, the DOJ program is not intended to preempt state law. It is of utmost importance, therefore, that employers know the wage laws applicable to such clawbacks, which depend on the location in which each affected employee works. It is also important that employers consider potentially seeking an opinion of counsel that could be later presented to prosecutors to support the position that the required clawback would violate state law where that is the case. 

New SEC Clawback Standards for Public Companies

As noted above, issuers already have been addressing clawback rules. The Dodd-Frank Act of 2010 added Section 10D to the Exchange Act, which requires the SEC to direct national securities exchanges to prohibit the listing of issuers that do not develop and implement a policy for the recoupment of compensation. Such a policy must apply when listed issuers are required to make a financial accounting restatement under the securities laws.

The scope of potential recovery extends to all incentive-based compensation received by any current or former executive officer who served at any time during the three fiscal years prior to when a restatement becomes required. Affected executive officers are strictly liable for the recovery, which means that an executive officer need not be culpable with respect to the facts that led to the restatement, and a company may not provide its executive officers with indemnity or insurance to insulate them from recovery.

If a restatement prompts a recovery under these new standards, the results and progress toward paying such recovery must also be publicly disclosed and incorporated into the existing summary compensation table and other existing disclosures.

These new standards are both broader and narrower than the DOJ’s new policies. On the one hand, they require recovering incentive-based compensation from executive officers regardless of whether the executives participated in or knew about the misconduct that led to the restatement. The DOJ’s policies require clawing back compensation only from employees who engaged in or are otherwise responsible for the misconduct. On the other hand, the SEC standards are limited to certain executives of issuers that have to restate their financial results. The DOJ’s new policies apply to any employee at both public and private companies and regardless of whether the misconduct led to a financial restatement.   

What Should Companies/Employers Do Now?

Companies seeking to develop criteria under these new initiatives will need to better understand compensation policies and employment laws at the state and federal levels to be in a position to best determine how to approach these issues in the event a company discovers potential wrongdoing. Companies should consider:

  • Determining whether any of the states in which they have employees have prohibitions and/or limitations regarding such clawback requirements.
  • Understanding the interplay among the various state, local and international laws and requirements relating to these clawback requirements.
  • Reviewing, evaluating and potentially revising employment policies, agreements, and/or compensation or bonus plans to properly address the DOJ’s clawback policies, as well as making good-faith attempts to enforce these policies, agreements and/or plans in the event of noncompliance or unethical behavior. Issuers that have already adjusted their policies in connection with the SEC rules and forthcoming public company listing standards should ensure their policies address the broader elements of the DOJ policies as well.
  • Tracking incentive-based compensation separately from other compensation to minimize the scope of clawback risk.

BakerHostetler’s attorneys have extensive experience helping clients with these issues through their work on our practice teams for White Collar, Investigations, and Securities Enforcement and Litigation; Labor and Employment; Capital Markets & Securities/Corporate Governance; and Executive Compensation.

Please contact any of our experienced professionals if you have questions related to this alert, and also consider reviewing our other recent client alert related to this issue: “Nasdaq and NYSE Propose Rules Regarding Recovery of Incentive-Based Executive Compensation Awarded in Error.

By Brian F. Allen, Patrick T. Campbell, Fanny A. Ferdman, Lauren J. Resnick, Stefan P. Smith, Janet A. Spreen, C. Shawn Cleveland, John J. Carney, Carole S. Rendon and George A. Stamboulidis

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