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Since the 1996 decision In re Caremark International, the duty of oversight has been applied only to the directors of a corporation. The duty of oversight requires directors to make a good faith effort to ensure that an adequate internal corporate information and reporting system exists. This system is required so directors can “reach informed judgments concerning both the corporation’s compliance with law and its business performance.”[1]

Recently, the Delaware Court of Chancery (the “Court”) held for the first time that the concept of the “duty of oversight” applies not only to corporate directors, but to corporate officers as well. Additionally, the Court broadened a corporate officer’s “duty of loyalty” when it ruled that a corporate officer’s engagement in sexual harassment of employees itself violates the duty of loyalty. The holding raises issues that should prompt Delaware corporations to reconsider their reporting systems in place and protections available to their corporate officers.

In the case of In re McDonald’s Corp., the Court denied the motion of David Fairhurst, former McDonald’s executive vice president and global chief people officer, to dismiss a derivative[2] lawsuit against him brought by McDonald’s shareholders. The shareholders alleged that the former vice president violated his fiduciary duties by allowing a corporate culture to develop that condoned sexual harassment and misconduct. In his executive role, Fairhurst was accused of failing to put a stop to workplace harassment. The plaintiffs filed a long list of “red flags” that Fairhurst allegedly ignored or was responsible for, including an atmosphere that condoned male employees engaging in inappropriate behavior toward their female co-workers.  He was also directly accused of sexually harassing female employees.

When analyzing a corporate officer’s duties to the corporation in this context, the Court held that the duty of oversight owed by officers is scrutinized under the same two-prong test used in Caremark that applies to directors. Specifically, officers “must make a good faith effort to ensure that information systems are in place so that officers receive relevant and timely information that they can provide to the directors.”[3] Further, officers “have a duty to address [red flags they identify] or report upward.”[4]

Applying the Caremark test, the Court held that the plaintiffs had a valid claim against Fairhurst because he breached his duty of oversight “by consciously ignoring red flags” of a culture congested with sexual harassment and misconduct.[5] The Court reasoned that officers are best situated to identify and address red flags or report them to the board of directors since their role as officers requires them to be involved with the day-to-day operations of the corporation. For “red flags” claims to be successfully pleaded against officers, the Court noted that a plaintiff must plead sufficient facts to support an inference that the officer not only knew of evidence of corporate misconduct, but also that the officer consciously failed to take action in response to such misconduct.[6]

Moreover, the Court held that an officer also violates the separate duty of loyalty when they engage in sexual harassment of employees. The Court explained that sexual harassment by a corporate officer is in furtherance of a private interest rather than “advancing the best interests of the company.[7] Sexual harassment is bad faith conduct, and thus disloyal conduct, with respect to their responsibilities as an officer of the corporation.Because harassment is per se not in the corporation’s best interests and disloyal conduct subjects the corporation to liability, it is a violation of the duty of loyalty and is actionable under the law.[8]

This decision demonstrates that Delaware courts continue to align the duties that are owed by corporate officers with those of directors. However, it also raises some questions about the scope of the additional duties imposed on officers of Delaware corporations. For instance, what if the corporation has a sufficient reporting and information system in place, but it failed to detect an officer embezzling money. Would the other officers be found to have violated their duty of oversight? 

Although the trajectory of the case’s impact is unclear, Delaware corporations should consider how they assess risk monitoring, reporting, and compliance systems currently in place, as well as protections available to corporate officers, such as directors’ and officers’ liability insurance.

Please contact us with any questions.

Thank you to Keith O’Brien for his research and writing assistance.

[1] In re Caremark International Inc., 698 A.2d 959, 970 (Del. Ch. 1996).

[2] A derivative lawsuit refers to one or more shareholders bringing an action on behalf of the corporation against a third party, generally the officers or directors of the corporation, to remedy harm done to the corporation.

[3] In re McDonald’s Corp., No. 2021-0324 at 11* (Del. Ch. Jan. 26, 2023).

[4] Id. at *12.

[5] Id. at *27.

[6] Id. at *32.

[7] Id. at *28.

[8] Id. at *30.

As CMM’s legal blog has explored, New York State enacted the New York Pay Transparency Law (the “Law”), which requires most New York employers to provide salary ranges for all advertised jobs and promotions in New York State, effective as of September 17, 2023. However, Governor Kathy Hochul recently signed an amendment to the Law (the “Amendment”)[1] that changes it in three major ways:

1. What constitutes a job “performed” in New York

Previously, the Law simply stated that the advertisement requirements would apply to any position that “can or will be performed in the state of New York.” Now, the Amendment explains that the Law does not apply to jobs solely because they “can” hypothetically be performed in New York. Instead, covered advertisements for jobs, promotions, or transfer opportunities will be those that:

• “will physically be performed, at least in part, in the state of New York”; and
• “will physically be performed outside of New York but reports to a supervisor, office, or other work site in New York.”

Essentially, the Law will apply to jobs where the employee will be physically located in New York in some capacity (whether full-time or as part of hybrid work), as well as to those who would be out-of-state employees, but report to a supervising contact of the covered employer who is physically located within the jurisdiction of New York State, similar to the New York City Pay Transparency Law.

2. Elimination of Recordkeeping Obligations

Furthermore, the Amendment wholly eliminates the Law’s recordkeeping requirement regarding the “history of compensation ranges for each job, promotion, or transfer opportunity and the job descriptions for such positions,” if they exist. While the Amendment has abolished this obligation, covered employers should consider maintaining such compensation records to ensure best practices.

3. Defining the Term “Advertise”

Lastly, the Amendment clarifies the previous ambiguity in the Law to provide a more concrete statutory definition of the term “advertise,” which is now defined as “mak[ing] available to a pool of potential applicants for internal or public viewing, including electronically, a written description of an employment opportunity.” Therefore, the Amendment confirms that the Law’s salary disclosure requirement applies to both internal and external written job postings and is thus silent on word-of-mouth/verbal communications.

Please contact us for guidance or with any questions.

[1] Senate Bill S1326; https://www.nysenate.gov/legislation/bills/2023/s1326.

Update: For the most recent information on the Pay Transparency Law, follow this link:
New York State Amends Pay Transparency Law

By now, you may have heard that starting later this year, job postings in New York State must include a salary range. What does this mean for your business? Read on for what employers need to know concerning this new law.

What is the new Pay Transparency Law?

On December 22, 2022, New York Governor Kathy Hochul signed into law the New York Pay Transparency Law[1] (the “Law”), which takes effect September 18, 2023. The Law amends New York Labor Law[2] to require most private sector New York employers to provide salary ranges for all advertised jobs and promotions in New York State. Similar requirements enacted in 2022 already apply to employers who operate in New York City. Nevertheless, the Law includes some significant differences from the New York City law and others that employers should be aware of.

Essentially, the Law requires employers of four or more employees[3] advertising a job, promotion, or transfer opportunity to disclose the “compensation or a range of compensation for such job, promotion, or transfer opportunity” in the job posting. The “range of compensation” is defined as “the minimum and maximum annual salary or hourly range of compensation for a job, promotion, or transfer opportunity that the employer in good faith believes to be accurate at the time of the posting.”

The Law applies to jobs that can or will be performed, at least in part, in the state of New York. Therefore, depending on forthcoming guidance from the New York Department of Labor, the Law could be construed broadly enough to apply to out-of-state employers that have employees performing work in New York State.  (Note that the Law does not apply to temporary help firms that assign employees to other employers for short-term projects or seasonal work, since such firms are already required to provide wage range information in compliance with the New York State Wage Theft Prevention Act.)

How is the Pay Transparency Law different from similar laws already enacted throughout New York State?

The first notable difference from the New York City law is that the Law requires employers to keep and maintain records of the posted salary ranges for at least six years, beginning on the effective date (September 18, 2023). Such records must demonstrate “the history of compensation range for each job, promotion, or transfer opportunity and the job descriptions for such positions, if such descriptions exist.”

The other prominent feature of the Law is that in addition to the salary range, it requires employers to include a “job description for [a] job, promotion, or transfer opportunity, if such description exists” in any advertisement for a job, promotion, or transfer opportunity in New York State. There are currently no parameters that define “job description,” but employers should ensure that covered postings include and disclose any pre-existing job descriptions relating to the job being posted if they do indeed exist.

Unlike the limited private right of action under the New York City law, there is no right to file a private cause of action for alleged violations of the state law. Instead, aggrieved individuals may file a complaint with the New York State Commissioner of Labor. Failure to comply with the Law can result in civil penalties of up to $1,000 for a first violation, $2,000 for a second violation, and $3,000.00 for a third or subsequent violation. We will continue to monitor any additional rules and regulations promulgated by the New York Department of Labor.

Please contact us for guidance or with any questions.

For additional information, please visit:

https://www.nysenate.gov/legislation/bills/2021/S9427

[1] S.9427/A.10477

[2] §194-b

[3] The Law also applies to employment agencies and the employees and agents of employers and employment agencies.

Beginning January 1, 2023, the amount of weekly benefits and eligible family members under the New York State Paid Family Leave Act (PFLA) will change.  The PFLA, which took effect in 2018, provides eligible employees with up to 12 weeks of job-protected, paid time off to bond with a child, care for a sick family member, or assist family when a service member is deployed abroad. The time can be taken all at once or in increments of full days.

Currently, the list of family members for whom eligible workers can take Paid Family Leave to care for includes spouses, domestic partners, children, step-children, parents, step-parents, parent-in-laws, grandparents, and grandchildren. These family members can live outside of New York State, and even outside of the country. Under the new changes, this list will be expanded to include biological siblings, adopted siblings, stepsiblings, and half-siblings.

Employees taking Paid Family Leave receive 67% of their average weekly wage, up to a cap of 67% of the current New York State Average Weekly Wage (NYSAWW). For 2023, the NYSAWW is $1,688.19, which means the maximum weekly benefit is $1,131.08. This is $62.72 more than the maximum weekly benefit for 2022.

New York State Paid Family Leave is essentially a type of insurance that may be funded by employees through payroll deductions. Although benefits are expanding to cover more family members this upcoming year, the contribution rate has gone down. For 2023, employees will contribute 0.455% of their gross wages per pay period. The maximum annual contribution for 2023 is $399.43, being $24.28 less than 2022. Employees earning less than the current NYSAWW of $1,688.19 will contribute less than the annual cap of $399.43, consistent with their actual wages.

Employers should confirm their 2023 Paid Family Leave premiums with their insurance carriers and coordinate with their payroll providers to make sure that the 2023 payroll will include the correct contribution rates.  Written employment policy documents will also need to be updated if they include the specific PFLA benefit or deduction levels.

If you have questions about the PFLA, please contact us.

As the end of the year approaches, it is important to remind New York State employers and employees of the increased minimum wages that affect both hourly and salaried employees.

For hourly, non-exempt workers, please see the chart below for basic hourly minimum wage increases that go into effect as of December 31, 2022:

Minimum Wage Increase

To the extent your business pays basic minimum wage, it is important to make sure that the increased wages are reflected as of December 31, 2022.

Tip Credit

New York State also allows employers in certain industries to satisfy the minimum wage by combining a cash wage paid by the employer plus a credit for tips the employee receives from customers. The minimum hourly rates New York employers must pay most tipped employees go into effect as of December 31, 2022:

Service Employees

Food Service Employees

The “tip credit” rules can be difficult to follow, so it is important to track this information to ensure that tipped employees are receiving at least basic minimum wage, inclusive of tips, when calculating wages.

Increased Salary Threshold for Overtime Exemption

Finally, there are increases in the minimum salary threshold that must be met for exempt employees. As of December 31, 2022, the following minimum salaries must be paid for exempt administrative and executive employees:

With the upcoming changes, it is important to update policies and pay practices to stay in compliance.  If you have a question about minimum wage, overtime, or wage and hour exemptions, please contact us or call (631) 738-9100.