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New York Labor Law Amended to Prohibit Use of State Funds to "Encourage or Discourage" Union Organizing

December 31, 2002

On September 30, 2002, New York Governor George Pataki signed legislation prohibiting the use of state funds to encourage or discourage union organizing activity. Commonly referred to as the "Labor Neutrality Law," the new law amends Section 211-a of New York's Labor Law, and takes effect on December 29, 2002.

Summary Of The New Law

Prohibition On Use Of State Funds

The Labor Neutrality Law prohibits employers who receive funds from New York State from using state funds to "train managers, supervisors or other administrative personnel regarding methods to encourage or discourage union organization, or to encourage or discourage an employee from participating in a union organizing drive." Significantly, this prohibition extends to the use of state money to "hire or pay attorneys, consultants or other contractors," and the use of state money to "hire employees or pay the salary and other compensation of employees whose principal job duties are to encourage or discourage union organization . . .".

The new law also requires employers that receive state funds to keep audited financial records for three years which show that state funds were not used for prohibited purposes. The Commissioner of Labor is expected to promulgate regulations governing the form and content of these required financial records, but the regulations are not likely to be in place until well after the law's effective date.

While the law is of greatest concern to employers that receive a substantial portion of their funding from the State government, such as not-for-profit and health care organizations, the broad language of the law covering "monies appropriated by the state for any purpose" makes the law applicable to any employer that does business with New York State. In fact, the stated intent of the law is to "ensure that funds appropriated by the Legislature for the purchase of goods and provision of needed services are ultimately expended solely for the purpose for which they were appropriated." In reality, the law may force employers (particularly those that cannot afford to maintain elaborate accounting systems to track the use of state funds) to give up their right to discuss their views on union organizing in order to receive state money.

Business groups opposing the legislation did succeed in having two clauses of the original bill removed. One such provision would have conditioned the award of a state contract on an employer's execution of a "neutrality agreement" in which the employer promises to take no position on unionization. A second provision not included in the final version of the law would have required state contractors to sign a written "majority authorization agreement" under which the contractor would agree to recognize a labor organization as the exclusive bargaining agent for workers based upon the presentation of a majority of authorization cards, affidavits or signed petitions, rather than requiring a secret ballot election conducted by the National Labor Relations Board ("NLRB").

Enforcement And Penalties

The law is to be enforced by the New York Attorney General. The Attorney General or the state entity providing the funds may request an employer's financial records, which must be produced within ten days of the request. If an employer is found to have violated the law, a court may order the return of the state funds and may impose a civil penalty not to exceed $1,000. If an employer is found to have knowingly used state funds for a prohibited purpose, or is found to have previously violated the law within the preceding two years, a court may impose a civil penalty of $1,000 or three times the amount of money unlawfully expended, whichever is greater.

Preemption By Federal Labor Law - Preempted Regulatory Action Or Permissible Proprietary Action?

We anticipate that the new law will be challenged in court and ultimately may be deemed to be preempted by the National Labor Relations Act ("NLRA"), in which case the New York Statute will be unenforceable. In fact, in an October 30, 2002 letter sent to New York's Labor Commissioner, the NLRB's Assistant General Counsel for Special Litigation expressed "serious concerns" about the new law, stating that it may be preempted by the NLRA because it "appears that the labor neutrality law will effectively regulate conduct that is intended by Congress to be free from governmental interference." In the letter, the NLRB states that the new law "interfere[s] with rights under the NLRA to freely discuss labor relations issues during union organizing" and requests that New York State provide the NLRB with its rationale for enacting the new legislation.

Federal courts generally recognize two types of preemption under the NLRA. So-called "Garmon" preemption, derived from San Diego Building Trades Council v. Garmon, 359 U.S. 236 (1959), forbids state regulation of conduct that is actually or arguably protected by Section 7 of the NLRA (such as the right to engage in union activity), as well as conduct that constitutes an unfair labor practice under Section 8 of the NLRA (such as discrimination against employees because of union activity or other interference with the rights protected by Section 7). See also, Building & Trades Council v. Associated Builders ("Boston Harbor"), 507 U.S. 218 (1993). "Machinists" preemption, named after Machinists v. Wisconsin Employment Relations Comm'n, 427 U.S. 132 (1976), prohibits state regulation of activities not protected or regulated by the NLRA if Congress intended those activities to remain unregulated.

Not all state action prescribing or prohibiting specified conduct is considered to be "regulation," however. Where a state is merely placing conditions on the expenditure of its funds, acting as a "player in the marketplace," such action is not state regulation preempted by the NLRA. For example, in the Boston Harbor case, the Supreme Court ruled that the NLRA did not preempt a government agency, the Massachusetts Water Resources Authority, acting as the owner of a construction project, from enforcing an otherwise lawful pre-hire collective bargaining agreement. The Supreme Court stated that "[w]hen a state owns and manages property . . . it must interact with private participants in the marketplace. In so doing, the State is not subject to pre-emption by the NLRA because pre-emption doctrines apply only to state regulation." 507 U.S. at 227.

Is a state law, like New York's new Section 211-a, which prohibits the use of state funds to encourage or discourage union organizing, "proprietary" or "regulatory" action? A recent case in federal district court in California finds such action to be regulatory, and therefore preempted by the NLRA.

The California Law -- Regulatory Action Preempted By The NLRA

In a suit filed by the U.S. Chamber of Commerce, a federal district court recently struck down portions of a California statute very similar to New York's Labor Neutrality Law on the grounds that the California statute was preempted by the NLRA. Chamber of Commerce of U.S. v. Lockyer, 2002 WL 31207130, 170 L.R.R.M. (BNA) 3185 (C.D. Cal. Sep. 16, 2002).

The portions of the California law which were found to be preempted in Lockyer prohibited recipients of state grants and employers receiving state funds in excess of $10,000 per year from using that state-provided money to "assist, promote or deter union organizing." Cal. Gov. Code §§ 16645.2 and 16645.7. The California statute also contained recordkeeping requirements similar to those included in the New York law. The California law also required employers to certify that no state funds would be used to assist, promote or deter union organizing and required employers that violated the statute to return the state funds and pay civil penalties of $1,000 per violation and/or an amount equal to twice the amount of the state funds.

In finding that portions of the California statute were preempted, the court in Lockyer relied upon section 8(c) of the NLRA, the so-called "free speech" provision of the NLRA. section 8(c) provides that the "expressing of any views, argument, or opinion, or the dissemination thereof" does not violate the NLRA (provided that the communication includes no "threat of reprisal or force or promise of benefit"). A state-imposed requirement of labor neutrality, the Lockyer court reasoned, is therefore inconsistent with federal law.

Proponents of the New York Labor Neutrality Law will likely argue that the law is a legitimate proprietary action and should not be preempted, an argument specifically rejected by the court in Lockyer. The defendants in Lockyer argued that California was merely "controlling the use of state funds" and acting in a proprietary manner as a "market participant," citing the Supreme Court's decision in Boston Harbor. The Lockyer court rejected this argument and ruled that, because the California statute was not specifically tailored to one particular project, the state was exercising its regulatory power, not merely its spending power.

It remains to be seen whether New York's Labor Neutrality Law, which addresses the state legislature's ability to direct how funds appropriated by the state are used, but which is clearly not limited to one particular project, will be found to be permissible proprietary action or regulatory action preempted by the NLRA.

Labor Neutrality Laws In Other Jurisdictions

In addition to New York and California, New Jersey, Florida and Rhode Island also have so-called "labor neutrality" provisions. New Jersey's version applies only in the apparel industry. Florida's statute, FL ST § 400.334, applies only to nursing homes and related health care facilities. Moreover, the Florida statute specifically states that it does not apply to "[k]eeping employees informed of issues and keeping lines of communication open between employees and employers as part of normal personnel management, provided such activities or expenses are not directly related to influencing employees with respect to unionization." Rhode Island's statute, Title 40, Chapter 8.2-23, prohibits Medicaid reimbursement for costs incurred which are "directly related to influencing employees regarding their rights to organize, to form a union, or to join a union . . .". The prohibition includes fees paid to consultants or attorneys.

Other states, including Arizona, Colorado, Illinois, Iowa, Missouri and Massachusetts, have pending "labor neutrality" legislation. The proposed laws include provisions requiring covered employers to certify that they are not using state funds for costs incurred to assist, promote or deter union organizing, and requiring employers to maintain records showing that state funds have not been used for prohibited purposes.