NAWER

Guidelines for Fiduciary Responsibilities Comment

COMMENT FOR:

Office of Labor-Management Standards
Employment Standards Administration
United States Department of Labor

FROM: National Alliance for Worker and Employer Rights

SUBJECT: Union Officials: Guidelines for Fiduciary Responsibilities

Under Section 501 of the Labor-Management
Reporting and Disclosure Act, 29 U.S.C. 501
RIN 1215-AB52

E-MAIL: OLMS-REG-1215-AB52@dol.gov

DATE: December 7, 2005

Introduction

The National Alliance for Worker and Employer Rights (NAWER) is an advocacy organization made up of employees and employers opposed to labor union abuses that infringe on the rights of wage earners and businesses and that hinder economic growth. Among other things, NAWER opposes union corruption, violence, misuse of the organizing process, and special privileges written into law.

This comment replies to the Department’s request for information concerning “whether to issue guidelines concerning the fiduciary obligations of union officers, agents, shop stewards and other representatives under section 501(a) of the Labor-Management Reporting and Disclosure Act (“LMRDA”), 29 U.S.C. 501.” 70 Fed. Reg. 51227 (Aug. 29, 2005). Section 501 states that such individuals hold “positions of trust” in labor organizations and must act in the union’s best interests, but does not set out in detail the nature and scope of the fiduciary obligation assumed by incumbents.

The Department seeks comments upon

As a rule, we will refrain from repeating the detailed supplementary information set out by the Department in the Federal Register notice, except where necessary, and focus directly upon NAWER’s substantive comments.

General Observations

NAWER believes that the Department is correct in considering whether to issue more detailed guidance regarding breaches of fiduciary duty. That said, a primary difficulty inherent in such an effort is the multifarious factual contexts in which such a breach may occur and the attendant problem of devising guidance and standards comprehensive enough to take account of a wide variety of situations, yet specific enough to be meaningful. Nevertheless, we believe that useful guidelines can be drawn from two sources: principles enunciated in court cases under the LMRDA and principles applicable to corporate fiduciaries.

At the same time, however, we believe a share of the problem derives from lack of knowledge on the part of union officials concerning their fiduciary responsibilities. We urge, therefore, that any additional guidance be formally incorporated in regulations promulgated under the Administrative Procedure Act (rather than merely set forth in the OLMS Interpretive Manual), and, moreover, that the new rule require labor organizations to make known its contents to their officers, agents, shop stewards, and other representatives by annual written, individual notification. Proof of actual, rather than constructive, knowledge should carry some weight in determining liability in a civil action under LMRDA § 501(b), as well as aiding the Department in making investigative judgments under LMRDA § 601, and in enforcement actions under other LMRDA sections.

Comments

At a minimum, we believe that Department rules (or interpretive guidance) should incorporate the principles, which the Department has distilled from judicial interpretation of § 501 as reflected in the request for information at Fed. Reg. 51230-31. These include

Because the civil action that can be brought under LMRDA § 501(b) for enforcement is analogous to a corporate shareholder suit, Phillips v. Osborne, 403 F.2d 826, 831 (10th Cir. 1968), corporation law can provide useful guidance for imbuing with meaning the fiduciary duty created by LMRDA § 501(a). The following suggestions are taken from HARRY G. HENN AND JOHN R. ALEXANDER, LAWS OF CORPORATIONS (3d. ed. 1983).

As a general statement of fiduciary obligation, the Department may wish to consider importing from corporation law, the “prudent man” rule. As stated in Henn and Alexander, the rule is that

Officers and directors shall be deemed to stand in a fiduciary relationship to the corporation, and shall discharge the duties of their respective positions in good faith and with that diligence, care and skill which ordinarily prudent men would exercise under similar circumstances.

§ 232 at 613.

Another principle relating to corporate fiduciary law has to do with competing with the corporation. This analogy may also be useful as regards union officials. Thus, in § 236, at 628, Henn and Alexander state

Directors and officers, as fiduciaries of their corporation, are subject to the rule of undivided loyalty which, inter alia, restricts their competing with their corporation. Directors and officers are not necessarily precluded from engaging in other businesses, but may not use their corporate positions to prevent the corporation from competing with them, use corporate personnel, facilities, or funds for their other businesses, disclose corporate trade secrets to others, lure away corporate business or personnel, receive secret commissions on corporate transactions, improperly profit by acquiring claims against their corporation, or breach reasonable covenant not to compete. ...

As applied to union officials, this rule of undivided loyalty would reach conduct vis a vis both competing labor organizations seeking to organize or represent the same employee complements, and employers whom the officials’ labor organization represents or seeks to represent. Recast in a manner suited to union officials and labor organization, such a rule could provide useful guidance about the propriety of conduct and transactions reported under LMRDA Title II, such as the LM-2 and LM-30 forms.

§ 238, at 637, of the Henn and Alexander treatise on conflicting interests may also have implications by analogy:

When a corporate fiduciary has in a corporate transaction an interest which conflicts with that of the corporation--another aspect of the undivided loyalty rule—the transaction might be voidable by or in behalf of the corporation on the basis . . . of the conflicting interest alone or plus the additional element of fraud or bad faith or unfairness to the corporation, possibly with the burden of proof on the proponents of the transaction or with the transaction subject to an adverse inference. . . .

Although LMRDA § 501(a) specifically forbids union officials from dealing with a labor organization as an adverse party, or on behalf of such a party, it would appear that the prohibition in the corporate context against conflicting interests alone, even absent, fraud, bad faith, or unfairness, is a more comprehensive ban consistent with the breadth of the fiduciary duty established in that section. We would recommend its explicit application under the LMRDA.

The reach of the fiduciary principle to competing union factions is suggested by treatise § 240, at 651, concerning oppression of minority shareholders.

Since directors, with respect to their exercise of their management functions, owe fiduciary duties to the corporation to exercise unbiased judgment in the best interests of the corporation as a whole, any attempt by directors to favor one intracorporate group to the detriment of another breaches such duties to the corporation and, in a sense, violates the implied term in the share contract between the corporation and any oppressed shareholder to the effect that corporate affairs will be managed in the best interests of the corporation.

Once more, drawing an analogy, union officials have a duty not to use their positions or the assets of the labor organization to favor one intraunion group over another. This has obvious implications in the not infrequent contests between dissidents and incumbents in union election contests subject to LMRDA Title IV regulation.

Speaking to compensation of corporate officers, the Henn and Alexander treatise succinctly states, § 245 at 666, that

Executive compensation must be reasonable in amount and based on services performed for the corporation, and should usually be determined before the services are rendered, with a minimum of self-dealing on the part of those involved and, when appropriate, ratified by shareholders.

Although any rule respecting compensation must necessarily be stated in general terms, NAWER believes applying this principle to compensation of union officials would be salutary, and find especially important, and most specific, the requirement that compensation be set before services are rendered.

In reply to the Department’s specific query about whether new definitional guidelines are needed for “the types of positions that are indicated by the phrase ‘officers, agents, shop stewards, and other representatives of a labor organization’ that is found in 501(a) of the Act” (70 Fed. Reg. 51232), we believe the answer is negative. LMRDA § 3(n) and (q) gives adequate content to these terms.

To answer two other particular queries contained in the request for information on the same page, we believe (1) an official with fiduciary responsibilities under the LMRDA breaches that responsibility by failing to report another fiduciary’s breach, and that any rules or guidelines should so state, and (2) any rules or guidelines should define a 60-day period as a “reasonable amount of time” to give a labor union opportunity to take remedial action before a civil enforcement suit is filed under LMRDA § 501(b).

NAWER appreciates the opportunity to comment upon this important request for information, and hopes the Department will find this submission useful as it considers the fiduciary issue.