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Best Practices For Employers Using AI to Make Employment Decisions

30 Apr 2024

Many employers use automated employment decision tools (AEDTs) to make decisions such as filtering job applications, hiring, performance evaluations, retention, promotion, and termination. However, employers should be cautious about using AEDTs for such traditional human resources tasks in a vacuum without attention to current and emerging laws and regulations that could create liability if their use of AI is mishandled. Without proper development, use and monitoring, AEDTs can be biased based on the data imputed, how the algorithm processes data or both. And that may have unintended consequences including those with legal implications which state and federal laws and regulations are struggling to keep up with.
Employers who use AEDTs are not shielded from liability despite the absence of laws and regulations that expressly address such uses. Courts and governmental agencies will likely apply the laws and regulations in existence to scenarios involving AI, including AEDTs. In the employment area, those existing laws include:
a. Title VII of the Civil Rights Act of 1964 (Title VII),
b. The Americans with Disabilities Act (ADA),
c. The Age Discrimination in Employment Act (ADEA),
d. The Fair Chance Act (FCA) and
e. The Fair Credit Reporting Act (FCRA).
Title VII prohibits employment discrimination based on age, race, color, religion, sex and national origin. AI may make inferences based on these protected characteristics and those protected by state and local laws based on information learned from the internet or social media. AEDTs can result in discrimination in employment if employers do not take the time to understand how the AI works and how AEDTs use data to correct any results that may adversely impact persons with characteristics protected by Title VII. For example, if AEDTs use an algorithm that is based on data supplied by white males, then the resulting AI could be trained to favor white men. Another example arises in the context of a job applicant’s criminal history. Title VII requires employers to make an “individualized assessment” of an applicant’s criminal history when determining if the information is job related and consistent with business necessity. Such an assessment should not be left to AEDTs. Employers may need to assess factors that are not part of the algorithm or have an algorithm created that specifically addresses those factors.
Use of third-party AEDTs will not shield employers from liability if use of those tools results in an adverse impact on members of a protected class. An adverse impact refers to a facially neutral practice that may disproportionately affect members of a protected class. Employers should employ safeguards to eliminate employees being adversely impacted by unintended, but illegal discriminatory reasons. Those safeguards include auditing AEDTs to understand what data is screened in and out, the diversity of the source data, and the data’s accuracy. At present, employers have few legal resources that squarely address AI. A solid first step to avoiding a misstep with legal implications is to look to existing regulatory and professional guidelines such as the Equal Employment Opportunity Commission (EEOC) and the Uniform Guidelines on Employee Selection Procedures (UGESP) which can be applied to AEDTs.
Another potential safeguard that employers may want to utilize is application of the four-fifths (80%) rule of thumb, which is generally recognized by Federal enforcement agencies as a benchmark to evaluate whether a selection process has an adverse impact against a group having a shared protected characteristic, e.g. race. For example, employers should query whether the use of AEDTs in hiring produced a selection ratio of a minority group of at least four-fifths (80%) the selection ratio of the majority group. Some courts, however, have found that the use of the four-fifths rule is not appropriate where it is not a reasonable substitute for a test of “statistical significance.” Employers should ask their AI vendor whether it relied on the four-fifths rule or statistical significance when determining whether the use of AEDTs might have an adverse impact on a particular group of workers.
The ADA is also prone to violation due to AEDT’s limitations on providing a “reasonable accommodation” for a person with a disability. Examples of uses of AEDTs that may have an adverse impact on a qualified applicant with a disability include:
1. an applicant who has limited dexterity with their hands may not be able to complete an automated assessment despite having been able to perform the essential functions of the job. Had that same applicant been afforded the reasonable accommodation of taking the assessment orally, the applicant would have been proficient and not screened out for a discriminatory reason;
2. an applicant with a speech impediment may not have speech pattern that is decipherable by AEDTs, which may make it unlikely that the AI would accurately assess the applicant’s problem solving ability;
3. soliciting prohibited information from applicants about their medical history;
4. AI that rejects applicants with gaps in their employment history would screen out persons who took time away from work for pregnancy or to treat for a disability; and,
5. gamified video memory assessments could screen out blind persons who cannot adequately see the computer screen to play the games.
To avoid running afoul of the ADA, employers should ensure that their use of AEDTs does the following:
1. allows reasonable accommodations such as:
a. opting out of AEDTs,
b. providing notice before use of AEDTs and
c. offering alternative formats such as offering an oral memory assessment as opposed to a video assessment.
2. provides clear instructions for requesting a reasonable accommodation.
Age Discrimination is another area that is ripe for AI bias. Employers should ensure that the algorithms used to review applicants is not trained to identify applicants who graduated after a particular date or who had .edu email addresses or other data that could skew in favor or against a particular age group.
In May 2022, the EEOC issued technical guidance addressing the use of AEDTs to assess job applicants and employees under Title VII, the ADEA and ADA. The EEOC puts the burden of compliance squarely on employers. In this regard, the guidance advises, “if an employer administers a selection procedure, it may be reasonable under Title VII if the procedure discriminates on a basis prohibited by Title VII, even if the test was developed by an outside vendor.” The employer may also be held responsible for agents’ actions if the employer has given the agent authority to act on the employe’s behalf. “This may include situations where an employer relies on the results of a selection procedure that an agent administers on its behalf.”
The EEOC guidance recommends that employers provide advance notice to applicants and employees of the use of AI and afford applicants and employees the opportunity to request a reasonable accommodation. The guidance also recommends that employers tell applicants: (1) which traits or characteristics the tool is designed to measure, (2) the methods by which those traits or characteristics are to be measured and (3) the disabilities, if any, that might potentially lower that applicant’s results or cause the applicant to be screened out. The guidance also advises that employers using AI tools must be prepared to demonstrate: (1) using AEDTs is “job related and consistent with business necessity” and (2) there are no less discriminatory alternatives that are equally effective.
The FCRA and FCA (which prohibit federal agencies and federal contractors from requesting that an applicant for federal employment disclose criminal history information before the agency makes a conditional offer of employment) can be implicated by use of AI to perform background checks. Frequently, such checks require gathering information about applicants’ credit and criminal histories and sorting applicants according to the same. Here again, employers using vendors to perform these tasks have an obligation to understand the algorithms that AEDTs are using, what data is sought, and what stage in the hiring process that data is being considered by the AI.
Although most states and major cities have seen a flurry of bills introduced that address AEDTs, few have been passed into law. The most prominent exception is New York City Local Law 144, which was passed in July 2023. Local Law 144 requires employers using AEDTs to screen candidates for hire or promotion to disclose the use of such tools to provide at least 10 days’ notice to the candidates. The notice must include instructions to request an alternative selection process or a reasonable accommodation. Local Law 144 prohibits use of AEDTs unless the tool has been the subject of an independent “bias audit” within the past year and the employer publishes the results of the audit, including its date, on the company’s website. Local Law 144 includes hefty monetary civil penalties for even first-time violators.
In May 2023, President Biden signed an Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. The Order establishes standards for AI safety and security to, inter alia, protect worker privacy and civil rights. Those standards include a blueprint for an AI Bill of Rights. These standards identify the following five principles that should guide the design, use and deployment of automated systems to protect the public:
1. protect against unsafe or ineffective systems,
2. algorithms and systems should be used and designed in an equitable way,
3. protect against abusive data practices via built-in protections and individuals should have agency over how their data is used,
4. disclose when an automated system is being used and how it is being used and why it contributes to outcomes that may impact the individual and
5. individuals should be able to opt out and have access to a person who can quickly consider and remedy problems the individual may encounter.
Although these standards do not have the legal impact of a regulation, they do provide guidance for employers using AEDTs in their workplaces to help them avoid liability as legislators and government agencies draft laws and regulations.
The Consumer Financial Protection Bureau (CFPB), the Department of Justice (DOJ), the EEOC, and the Federal Trade Commission (FTC) issued a Joint Statement addressing discrimination and bias that is inherent in the use of algorithms. The Joint Statement focuses on:
1. applying existing legal authorities,
2. addressing harmful outcomes and
3. protecting individual rights
The Joint Statement affirms that existing legal frameworks for automated systems apply equally to AI. The statement recognizes that AI can “perpetuate unlawful bias, automate unlawful discrimination, and produce other harmful outcomes” and emphasizes the need for “vigilance” in AI employment practices.
In the event that use of AI results in employee layoffs, employers should pay close attention to the requirements of the federal Worker Adjustment Retraining Notification and equivalent state and local laws, which govern notice obligations in connection with plant closing and mass layoffs. Also, to the extent employers use AI in machinery, compliance with the Occupational Safety and Health Act and equivalent state laws should be followed to provide a workplace free from recognized hazards.
Best Practices for using AEDTs to avoid legal liability include:
(1) focusing tasks solely on essential job qualifications,
(2) reviewing vendor compliance,
(3) ensuring that use of AI data used to make assessments are in fact job related,
(4) auditing the technology to ensure selection rates do not violate anti-discrimination laws,
(5) provide notice to applicants and employees that you are using AI software,
(6) allow applicants and employees the opportunity to seek reasonable accommodations to address inherent bias in the software,
(7) training staff charged with implementing and evaluating AI software results to verify the accuracy of the data and to recognize discriminatory issues,
(8) ensuring that the data used to train AI is representative and diverse,
(9) explain to applicants the characteristics the AI may use to conduct evaluations,
(10) obtain consent to be evaluated by AI,
(11) prohibit the sharing of an applicants’ AI results,
(12) obtain waivers for use of facial recognition software,
(13) create a mechanism for individuals to challenge and dispute adverse information
produced by AI,
(14) require vendors to share how their AI models were built, how they are trained and
provide the demographics of those training the algorithms and
(15) conduct pre-deployment and ongoing disparity testing and monitoring to account
for system changes when new data is fed into the system.
The use of AEDTs is rapidly emerging and changing due to its benefits and efficiencies. Although legislation and regulations are not yet fully developed, meaningful guidance is available. Our team of employment attorneys at Hill Wallack stand ready to guide employers through these changing times.

FTC Bans Most New Post Employment Noncompete Agreements

25 Apr 2024

On April 23, 2024, the U.S. Federal Trade Commission (FTC) today issued a final rule banning most new noncompete clauses in employment contracts and rendering all existing noncompete agreements unenforceable. The new rule also requires employers to notify their current and former employees that their non-compete clauses are void. Excepted from the new rule are non-competes covering “senior executives,” the sale of a business and franchisee/franchisor contracts. The new rule does not apply to non-profit corporations, banks, credit unions, air carriers and other entities that are outside of the FTC’s jurisdiction. The ban extends to all contract provisions that create “functional non-compete clauses” meaning those provisions that have the effect of prohibiting workers from accepting other employment. Given this broad definition, a non-disclosure agreement that limits a worker's mobility may also be banned.

The FTC defines “senior executives” to mean workers in policy making positions earning more than $151,164 annually. The new rule defines “non-compete clause” to mean those terms that preclude a worker from working for a competitor or starting a competing business within a certain geographic area for a set period of time. The new rule will pre-empt all current state laws limiting noncompete agreements unless the state law provides greater worker protection. The new rule becomes effective 120 days after its publication in the Federal Register, which has yet to occur. Employers who violate the rule will be subject to civil penalties, fines and injunctive relief.

The FTC’s rationale for the ban is premised on the belief that non-compete clauses suppress wages and harm competition by blocking workers from pursuing better opportunities and depriving businesses of a talent pool to help them expand. Garden leave clauses (which place a worker on paid leave) are likely to be permitted under the new rule, but the rule is silent as to the same, so employers should consult with counsel to review their garden leave clauses in this new environment.

Within 24 hours of the FTC issuing this ban on noncompete agreements, business groups led by the U.S. Chamber of Commerce sued the FTC. The lawsuit seeks a nationwide injunction stopping the final rule from taking effect while the litigation is pending.

Employers should not wait until the courts adjudicate the future of the FTC’s rule to assess their non- compete agreements and confidential information and trade secret covenants. Throughout the country, the legal trend has been to place greater limitations on restrictive covenants. Regardless of the outcome of this particular rule, the legal landscape for non-competes is changing and employers need to be prepared for those changes. Our team of employment attorneys at Hill Wallack stand ready to guide employers through these changing times. For questions, please contact: Susan L. Swatski, Esq. sswatski@hillwallack.com; David J. Truelove, Esq. dtruelove@hillwallack.com; and Suzanne M. Marasco, Esq. smarasco@hillwallack.com.

DOL Raises the Minimum Salary for Over Time Eligibility

25 Apr 2024

Earlier this week, the Department of Labor (“DOL”) increased the minimum threshold salary for employees to be classified as “exempt” from overtime under the Fair Labor Standards Act (“FLSA”). Exempt employees are those whose job responsibilities fulfill white collar executive, administrative and professional positions who are not eligible for overtime.

For employers looking to keep their salaried employees classified as “exempt,” the DOL will require such employees earn a minimum salary of $43,888 ($844 per week) effective July 1, 2024 and a minimum salary of $58,656 ($1,128 per week) effective January 1, 2025. Although this two- part approach affords employers some time to evaluate their employees’ status under the FLSA and to increase wages where appropriate, this 65 percent increase is a big jump and is higher than business groups anticipated. Also concerning is that this new minimum salary requirement is not geographically tailored to account for local wage rates.

Confronted with this increased overhead cost, some employers may decide to change workers’ classifications from exempt to non-exempt. Overtime compensation is based on the employee’s regular rate of pay, not the employee’s hourly rate of pay. The regular rate of pay includes compensation such as bonuses, commissions and incentive pay. In such circumstances, employers should be sure to provide employees with training on timekeeping requirements and rules against working off the clock.

The new rule also increased the salary threshold for highly compensated employees (HCE) to be exempt from overtime from $107,432 to $132,964 on July 1, 2024 and to $151,164 on January 1, 2025.

With the intention of avoiding such dramatic increases in the future, the new rule includes a three- year automatic adjustment mechanism for increasing the minimum salary for exempt employees and the HCE. The next adjustment date is July 1, 2027.

Prior attempts by the DOL to increase the minimum salary threshold were successfully challenged in courts throughout the country. We anticipate that this final rule likewise will face challenges in court, however, employers should not count on implementation of this rule being stayed while it makes its way through the judicial process. Now is a good time for employers to review exemption determinations and job descriptions to ensure compliance with this dynamic landscape. Hill Wallack’s employment law attorneys are well versed in this area of law and are here to help you through this process. For questions, please contact: Susan L. Swatski, Esq. sswatski@hillwallack.com; David J. Truelove, Esq. dtruelove@hillwallack.com; and Suzanne M. Marasco, Esq. smarasco@hillwallack.com.

N.J. Supreme Court Clarifies Procedure To Consider Request By Disabled Person For Emotional Support Animal

02 Apr 2024

It is generally recognized that pets provide emotional support for their owners, whether disabled or not. But when must a community association that restricts pets allow a resident to keep an emotional support animal (ESA) that otherwise would not be permitted? The N.J. Supreme Court recently weighed in on that issue. In the case of Players Place II Condominium Association, Inc. v. K.P. and B.F., the Court provided clarification for both associations and residents on how to determine whether an accommodation allowing an ESA must be provided to a resident pursuant to the N.J. Law Against Discrimination (LAD).

In Players Place II, a unit owner advised the condominium association that he and his girlfriend, B.F., were considering adopting an ESA that exceeded the association’s weight limit of 30 pounds and asked what medical documentation the association required. The association responded that it would not allow the overweight dog. Nevertheless, B.F. moved in with the animal, the association sued to remove the dog, and the residents counterclaimed, alleging violation of state and federal antidiscrimination laws. B.F. maintained that she had an emotional disability and that the dog was an ESA that helped decrease her symptoms. She explained that she needed a large dog because she had grown up with a large dog that she found comforting and that smaller dogs generally are “loud and yappy” and increased her anxiety.

In a strange twist, the trial judge concluded that B.F. was not handicapped or disabled within the meaning of the LAD or the federal Fair Housing Act but that she should be allowed to keep the oversize dog on equitable grounds because it helped reduce her mental health symptoms. Both sides appealed, and the Appellate Division found that B.F. was disabled but that there was no medical evidence that she needed a dog larger than 30 pounds. Nevertheless, the majority upheld the trial court’s decision on the equitable grounds. Based on a dissent by the third judge on the panel, the association appealed as of right to the Supreme Court.

SUPREME COURT DESCRIBED PROCESS FOR CONSIDERATION

The Court confirmed that New Jersey looks to federal law against discrimination as a helpful source to interpret the LAD, although the LAD’s definition of disability is broader than the federal definition. The Court then discussed the procedure for an association to evaluate a request for an accommodation to a pet policy. The relevant issues in such a case involve fact sensitive inquiries. A “housing provider,” which includes a community association, is not required to do everything possible to accommodate a disabled person. The cost to the provider, both financial and administrative, and the burden to the resident must be considered. If the alleged disability and the need for the ESA are not obvious or already known, the housing provider may request reliable documentation from the treating heath care professional.

The Court noted that the federal Department of Housing and Urban Development (HUD) Guidance publication states that assistance animals are not pets. The N.J. Supreme Court did not go that far but did state that ESAs “are different from pets and are not subject to general pet policies.” In any event, under federal law, a resident may request a reasonable accommodation to keep an assistance animal before or after acquiring the animal, and a housing provider may not summarily reject a request.

In summary, the Court established the following guidelines:

A resident is entitled under state and federal law to request an accommodation to a pet policy in order to keep an emotional support animal contrary to association restrictions.
The resident must first demonstrate that he or she has a disability under the LAD.
The person also must show that the requested accommodation may be necessary to afford an equal opportunity to use and enjoy the dwelling.
The association may ask for information that confirms that the person has a disability and needs a support animal, e.g., a determination from a government agency or a letter from a health care professional.
If the association claims that the requested accommodation is unreasonable, it has the burden of proving unreasonableness.
As part of the process, the parties should engage “in good-faith, interactive dialog to exchange information, consider alternative options, and attempt to resolve or narrow any issues.”

OTHER FACTORS

The Court held that there is no requirement that a mental health professional recommend or prescribe an ESA. Whether the animal has been trained also is not relevant because ESAs are not trained to perform specific tasks. HUD has stated that housing providers may not limit the breed or size of a dog used as a support animal, so B.F. was not required to show that she had a specific need for a dog that exceeded the weight limit. Rather, she had to show that the accommodation she requested, that is, the support animal, would help ameliorate one or more effects of her disability so as to enhance her quality of life.

In addition, the Court commented that although a resident may acquire an ESA before requesting permission from the association, the resident bears the risk of not being able to show entitlement to the animal. Therefore, it is preferable if possible to engage in a collaborative conversation in advance. The Court also noted that “service animals,” defined by statute, are distinct from ESAs and are not subject to the balancing test discussed in this case.

Before the Supreme Court, the association conceded that B.F. was disabled. Nevertheless, the Court stated that the record showed she had a disability under the LAD. The Court concluded that B.F. was entitled to a jury determination whether she needed the dog as an accommodation for her disability, and the association was entitled to a jury determination whether the accommodation sought was unreasonable. Accordingly, it reversed the Appellate Division and remanded the case for a trial.

Because an improper denial of an accommodation for a disabled person may result in significant damages, penalties and attorneys’ fees being awarded against an association, it is important that the association consult with legal counsel if it questions whether a requested accommodation should be provided.

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Governor Murphy Signs New Affordable Housing Legislation

22 Mar 2024

Hill Wallack Bulletin

By: Thomas F. Carroll, III, Esq.
609-924-0808
tcarroll@hillwallack.com

On March 20, 2024, Governor Murphy signed new legislation, known as A4/S50 (“A4”), designed to implement the “fourth round” of the affordable housing obligations imposed by the Mount Laurel doctrine. The fourth round of Mount Laurel compliance begins on July 1, 2025, but the legislation is designed to accomplish many tasks between now and then, so no time is wasted.

The new legislation: (1) sets up a process for calculating fair share obligations and seeking approval of fair share plans meeting those obligations; (2) provides formulas for deriving the regional need for low and moderate income housing, and the manner in which the regional obligations will be allocated to specific municipalities; (3) addresses a number of compliance issues, including the circumstances under which municipalities may seek “bonuses” for certain types of lower income units; and (4) establishes mechanisms for resolving disputes concerning fair share obligations and fair share plans.

Overall, A4 proposes a process that will be quite analogous to the familiar process we have all lived with since 2015, when the New Jersey Supreme Court declared the Council on Affordable Housing (“COAH”) “moribund” and allowed for Mount Laurel compliance to be achieved through “third round” declaratory judgment cases brought in the Superior Court and/or builder’s remedy cases. The A4 legislation takes that a step further and completely abolishes COAH and substitutes new procedures, as further described below.

Fair Share Calculations

Perhaps the most challenging aspect of the third round Mount Laurel cases was ascertaining the fair share obligations that the participating towns had to meet. In the first and second rounds (between 1987 and 1999) COAH calculated the fair share obligations and allocated them to the individual municipalities. However, COAH failed to do its duties for 16 years, and these tasks were therefore left to the courts. In this regard, a 42-day trial was held by Judge Mary Jacobson in Mercer County, during which fair share experts testified on behalf of builders, the Fair Share Housing Center (“FSHC”) and municipalities. As a result of that trial, regional fair share obligations were established by Judge Jacobson, and those fair share obligations were then allocated to the State’s municipalities.

Since it is now envisioned that the courts will not be establishing fair share obligations for the fourth round, A4 provides for a formula, based upon known Census data, and guidance from the Department of Community Affairs (“DCA”) to be provided by December 1, 2024, that results in the calculation of regional fair share obligations for the six regions identified by A4. Further, the new legislation will allocate prospective fair share obligations to the various towns (other than urban aid municipalities) pursuant to the three allocation factors identified in A4, guided by the factors that were described in Judge Jacobson’s opinion. A4 also sets forth a precise definition for ascertaining present need obligations. Thus, the most challenging part of implementing the Mount Laurel doctrine – deriving fair share obligations – should now be a rather straightforward exercise, although municipalities will be able to assert that their numbers should be different than the numbers to be set forth in a fair share numbers report to be released by the DCA.

As in the past, municipalities will be able to assert that they do not have sufficient vacant, developable land to meet their “gross” fair share obligations and can therefore seek vacant land adjustments decreasing their “net” obligations. However, one positive change provided by A4 is its language requiring towns obtaining a vacant land adjustment to identify parcels for redevelopment to address at least 25% of the prospective need that is to be adjusted downward. This provision should be quite useful to those seeking to redevelop lands, especially lands occupied by vacant office buildings and other nonproductive uses.

Up to 30% of a town’s obligation may be satisfied through age restricted housing, and at least 50% of each town’s obligation must be housing available to families with children. As to “bonus” credits for specified housing types, the new law first provides that no more than 25% of a town’s obligation may be met through bonus credits. A wide variety of potential bonus credits are described in the bill, with more notable examples including specified types of “transit” housing, units constructed on certain land previously used for retail, office, or commercial space, certain 100% affordable housing projects where there are municipal contributions of property or funding, and more. As to the length of affordability controls, the legislation provides that most lower income rental units must have affordability controls lasting at least 40 years, subject to exceptions, with the affordability controls period for most for-sale lower income units being 30 years. The law also includes provisions for the extension of existing affordability controls.

The New Process – “The Program”

As noted above, third round compliance took place within the courts. While there will still be a role for the courts, A4 envisions that most compliance activities will take place within an entity to be known as the Affordable Housing Dispute Resolution Program (“the Program”). The Program will consist of an odd number of members (between 3 and 7), overseen by the Administrative Director of the Courts, with Program members to be active judges or judges who are retired but on recall (or other qualified experts).

Applying the fair share calculation parameters set forth in the new legislation, municipalities are to propose their fair share obligations by no later than January 31, 2025, with any deviations from the upcoming DCA numbers report to be justified, if possible. Challenges to towns’ fair share calculations can then be lodged with the Program by February 28, 2025. The Program is to resolve challenges to the numbers by April 1, 2025. Municipalities will then be obligated to file fair share plans with the Program satisfying their obligations by no later than June 30, 2025. Again, objections to the fair share plans can be lodged, with the deadline for same being August 31, 2025. Such challenges are to be resolved by the Program, one way or the other, by December 31, 2025. Disputes that cannot be resolved are to be forwarded to the “County level housing judges” described in the legislation. The ultimate goal for municipalities will be acquisition of a “compliance certification,” the new legislative way to describe an approved housing element and fair share plan.

The Roles of the Builders

As was the case during the third round, when the courts had the principal responsibility for enforcing the Mount Laurel mandate, builders and public interest groups such as the FSHC are to play a critical role in advancing properties for rezonings and ensuring that municipalities are “playing by the rules.” Moreover, the new legislation provides that, when towns do not meet their obligations and deadlines under the law, such towns may be exposed to builder’s remedy suits brought to compel rezonings providing lower income housing, such as inclusionary developments providing for both market rate housing and lower income housing. In short, A4 should provide interested builders with many rezoning opportunities throughout the State, including redevelopment and asset conversion opportunities. A4 also has language offering considerable protections to sites that have been previously rezoned for affordable housing, as well as general language governing densities.

Conclusion

The new legislation consists of 75 pages of detailed provisions, and this article can only scratch the surface. The process will play out between now and July 1, 2025, and beyond, as fourth round Mount Laurel compliance unfolds. Among other things to watch, the DCA and the New Jersey Housing and Mortgage Finance Agency will be adopting regulations to implement A4. Another positive aspect of A4 is its requirement that most information of interest must be posted on the Program and DCA websites.

No legislation is perfect, and only time will tell whether A4 is fairly and expeditiously implemented in the many months to come. Nevertheless, A4 promises to get fourth round compliance moving promptly, avoiding delays like the unconscionable “16 year gap” that delayed the onset of third round compliance. It should be interesting. Stay tuned.

Empress House Condominium Association v. Turn Bright at Paterson, LLC

13 Mar 2024

It is well known in the community association industry that all members of community associations must pay assessments to their respective associations. In the New Jersey Appellate Division case of Empress House Condominium Association v. Turn Bright at Paterson, LLC, the court held that an association member had no right to cease paying assessments even where the association allegedly breached its duty to maintain and repair the premises. As explained below, the court reinforced long-standing precedent that an association member’s duty to pay assessments is unconditional.

The Parties

The Empress House Condominium Association (the “Association”) consists of 150 residential units and two commercial units. Turn Bright at Paterson, LLC purchased the two commercial units within the Association and rented out the units to a daycare center. The units Turn Bright purchased historically experienced water issues, including pipe condensation and broken or leaky pipes. Despite renovations in March of 2013, the water damage persisted in the form of leaks and floods. Because Turn Bright’s owner felt that the Association was not fulfilling its responsibility to maintain and repair the premises, Turn Bright stopped paying its monthly Association assessments. In 2014, Turn Bright sued the Association, alleging that the Association breached its duty to maintain and repair the premises.

The Settlement Agreement

The litigation was eventually settled via a settlement agreement (the “Agreement”). The Agreement required Turn Bright to pay the Association five years’ worth of assessment, which resulted in $97,000 in unpaid dues being forgiven by the Association. The Agreement also required Turn Bright to pay all ongoing monthly assessments starting April 1, 2016. Lastly, the Agreement mandated the Association to earmark $1,000 per month from the paid assessments to make repairs to Turn Bright’s unit.

Despite the Agreement, the leaks in the unit continued and Turn Bright ceased making payments. In January 2017, the Association made a few interim repairs but notified Turn Bright it was awaiting payment of its 2017 dues to make further repairs. However, Turn Bright did not pay the Association these dues, and contended the proposed work was not subject of the agreement.

The Lawsuit

On November 2, 2018, the Association sued Turn Bright, seeking payments of the unpaid Association dues. At trial, an Association representative testified that because of the water damage, it had no other choice but to stop payment. After the trial, the court issued a decision that mentioned that water infiltration was an ongoing problem in Turn Bright’s units and the Association’s efforts to respond to and repair the water issues were “woefully deficient.” Although the court criticized the Association in how it responded to the water issues that plagued the units, it stated Turn Bright took advantage of the Association in attempting to avoid its mandate to pay assessments.

The court rested its decision on the Appellate Division decision of Glen v. June, in which the court announced that, “[a] unit owner’s obligations to pay common expenses is unconditional.” The court ruled that there was no legal basis for Turn Bright to not pay assessments to the Association and entered judgment in the amount of $159,151.27 in favor of the Association.

The Appeal

On appeal, Turn Bright argued that the trial court erred by awarding the Association damages despite finding the Association breached its duty to maintain and repair the unit and by failing to apply the Agreement in its award of damages. The Appellate Division explained in its decision that under contract law, if a party commits a material breach, the non-breaching party is relieved of its duties under the contract. However, the court clarified that even if the Association materially breached the Agreement by not maintaining Turn Bright’s units, Turn Bright had no right under the Agreement to cease paying the Association. This is because the Agreement did not specifically provide that remedy to Turn Bright.

Like the trial court, the Appellate Division quoted Glen v. June’s pronouncement that a unit owner’s duty to pay assessments is unconditional. Turn Bright asserted that Glen v. June was inapplicable because that case involved the New Jersey Condominium Act, which obligates unit owners to pay assessments, while Turn Bright’s duty to pay assessments arose from the Agreement. The court disagreed and stated that the Agreement did not address the payment of future assessments except to recognize that Turn Bright would recommence its payment of assessments upon the execution of the Agreement. Turn Bright’s duty to pay assessments arose from the Association’s master deed and bylaws, not the Agreement. Thus, the court held the Association’s breach of its duty to maintain and repair the premises did not give Turn Bright the right to cease making payments to the Association.

It should be noted that Turn Bright also argued on appeal that the court should have offset a substantial amount of the damages award as a result of lost rental income because of the Association’s breach of its duty to repair the unit. However, the Appellate Division agreed with the trial court’s conclusion that Turn Bright was not entitled to this offset because it never made an effort to fix the leaks itself or attempt to collect rent from or evict its non-paying tenants.

Takeaways

Though this decision is an unpublished decision, which means that the decision does not constitute precedent and is only binding on the parties in the case, it reinforces how stringent the duty to pay assessments is. This decision also shows how much deference a court may give an association’s governing documents. Though the court held that the unit owner was not absolved of its responsibility to pay assessments despite the association’s breach of its duty to maintain the unit, an association should never abandon this duty as it may lead to litigation from and unrest among unit owners.

The Hill Wallack Community Association team is here to help our clients navigate through the process of collecting assessments from unit owners. For further information, please contact one of our team members: Ronald L. Perl, Kenneth R. Sauter, Caroline Record, Michael S. Karpoff, George Greatrex, Gregg Shivers, Terry A. Kessler, Jennifer Webb, Catherine M. Brennan, Daria B. Janka, Lucas B. Klirsfeld, Mel Edgar.

Us Department Of Labor Publishes Final Rule For Determining Worker Classification Under The Fair Labor Standards Act

19 Jan 2024

On January 9, 2024, the United States Department of Labor published its Final Rule revising its previous guidance on how to determine who is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The new rule rescinds the January 2021 rule on the subject and becomes effective March 11, 2024.

The new rule is designed to be “more consistent with the FLSA as interpreted by longstanding judicial precedent,” according to the Department of Labor’s announcement. The new rule does not impact other laws (federal, state and/or local) that use different standards for employee classification, such as the “ABC” test used in New Jersey or the “control” test used by the IRS. The new rule uses the “economic reality” test for classifying workers. Under the economic reality test, a worker is an “employee,” and not an “independent contractor,” if they are “economically dependent on an employer for work.” To make this determination, the new rule applies six factors to identify worker status. These factors are:

    1) opportunity for profit or loss depending on managerial skill;

    2) investments by the worker and the potential employer;

    3) degree of permanence of the work relationship;

    4) nature of degree and control;

    5) extent to which the work performed is an integral part of the potential         employer’s business; and,

    6) skill and initiative.

The factors will be applied using a “totality of the circumstances” standard. No single factor or group of factors is assigned any predetermined weight. Depending on a particular case, some factors may be more important in the determination than others. Thus, each situation will arguably be viewed independently, weighing those factors most relevant in the particular circumstances.

If a worker is identified as an “employee” under the FLSA, the employee and employer cannot agree to waive FLSA-protected rights, including minimum wage and overtime pay. Moreover, if an employee is incorrectly classified as an “independent contractor,” the employer could be subject to the following: unpaid wages owed to the employee, liquidated damages in an amount equal to back wages, civil money penalties and, if a claim is made by a represented individual (or group of individuals), attorneys’ fees associated with the litigation.

Employers who include “independent contractors” among their staff should have an audit performed by legal employment counsel to determine compliance with the new rule. Informed counsel can review an employer’s particular situation to assist in insuring compliance with the rule and avoid the potentially drastic consequences presented by non-compliance with wage and hour laws.

Hill Wallack employment law attorneys can provide the required review, analysis and counseling. For questions, please contact:

David J. Truelove, Esquire
dtruelove@hillwallack.com
(267) 759-2079

Suzanne M. Marasco, Esquire
smarasco@hillwallack.com
(609) 734-6351

Susan L. Swatski, Esquire
sswatski@hillwallack.com
(609) 734-6318

New Jersey's Fair Foreclosure Act Bill

17 Jan 2024

On January 12, 2024, New Jersey enacted Bill A5664 (the “Bill”), amending sections of the Fair Foreclosure Act and the statute governing foreclosure sale processes. The immediate impact of the Bill includes changes to the foreclosure sale process for residential properties and pre-sale notice requirements for lenders. Notably, there is uncertainty about the implementation of the Bill, leading to potential disparities among counties.

The Bill introduces requirements for sale notices on residential property which may conflict with the Fair Debt Collection Practices Act. Lenders must also now disclose the "upset price" (minimum sale amount) four weeks before the scheduled Sheriff’s sale, with limitations on price increases. Unforeseen expenses can be added to the upset price, except that taxes and insurance may not be included beyond the 3% cap for an increase in the original upset price given to the Sheriff.

Plaintiffs are prohibited from contacting borrowers, next of kin, or non-profit organizations regarding whether they intend to participate in the foreclosure sale before providing the upset price. The property's occupancy status must be disclosed, if known. The plaintiff is allowed to determine whether the foreclosed upon party qualifies for the 3.5% reduced deposit sale and evidence of financing the successful bid.

Protected Buyers, including borrowers, tenants and the community non-profits referenced in the Bill have rights to purchase for the upset price with a reduced deposit, subject to certain requirements. They also have first or second refusal rights, as applicable and an extended 90-business day closing period, with remedies including interest and a potential deposit forfeiture.

Community development companies with agreements to purchase the property for a borrower, next of kin, or tenant can exercise a second right of refusal. If a community development company is the successful bidder, any resale of the property is subject to income limitations, resulting in the property becoming affordable housing unit for a least 30 years.

The Bill also limits Sheriff Commission to $150.00 for properties reverting to the plaintiff on a credit bid.

Commercial properties or business loans are not subject to the Bill.

For questions please contact: Michael Kahme, Esquire or Eric Kelner, Esquire for additional information.

Structural Integrity and Reserves

15 Jan 2024

On January 8th, New Jersey Governor Phil Murphy signed into law S2760/A4384, commonly known as the Structural Integrity Bill. This law was enacted in response to the 2021 Champlain Tower South Condominium collapse in Florida in order to prevent a similar tragedy in New Jersey. This new legislation puts in place procedures for inspecting, evaluating and maintaining the structural integrity of certain residential condominiums and cooperatives, as more specifically defined in the legislation. The new legislation is composed of several components and not all of the legislation applies to all types of associations. The following are a few highlights of the new legislation which are divided into 2 categories—structural integrity and reserves.

Structural Integrity

Covered Buildings. This portion of the law addresses the structural integrity of “Covered Buildings” which are more specifically defined in the legislation. “Covered Buildings” are limited to condominium associations and cooperatives having a primary load bearing system that is comprised of a concrete, masonry, steel, or hybrid structure including heavy timber and buildings with a podium deck (a structural slab or deck). This description is generally associated with mid-or high-rise buildings, but other structures may be included as well. There are exceptions. Most notably apartments and single family homes are excluded.

When Inspections Must Occur. In those “Covered Buildings” an initial inspection of the “Primary Load Bearing System” (also defined in the statute) must be obtained within the earlier of (a) 15 years from the date on which the building received a certificate of occupancy or (b) 60 days after observable damage to the Load Bearing System. If the Certificate of Occupancy (CO) was issued more than 15 years before January 8, 2024, then an inspection must occur within 2 years from January 8, 2024. If the CO was issued less than 15 years prior to January 8, 2024, then the inspection must occur within one year of the 15th anniversary of the issuance of the CO. These inspections must be performed by a New Jersey licensed engineer with specific qualifications. Furthermore, the inspector is required to issue a report with details as to any work that is required and determine a reasonable period of time for the next inspection to occur (but no longer than 10 years from the first inspection or more than 60 days after there is observable damage to the load bearing system.

Required Maintenance. If the inspection identifies maintenance that is required, the association is obligated to perform such maintenance based on plans to be filed with the municipality. The maintenance must be performed notwithstanding any limitation on board-authorized expenditures in the association’s governing documents. A governing board may, without the approval of the owners or the developer, authorize an assessment or obtain a loan to fund the cost of corrective maintenance as long as the Board obtains a written report from a New Jersey licensed engineer or architect that failure to perform the maintenance will result in imminent or foreseeable hazard to health or safety, will violate other provisions of this statute or will result in a material increase in the cost of the maintenance if delayed.

Replacement Reserves

Reserve Studies Required by Law. While it has long been common practice in New Jersey for community associations to perform reserve studies and maintain replacement reserve accounts, it is now the law. This legislative change will impact all associations and not just those subject to the structural integrity requirements. The bill amended the Planned Real Estate Development Full Disclosure Act to require that all associations (with an exception for those with less than $25,000 in common area capital assets) obtain a capital reserve study and a 30-year funding plan “to ensure that the association has adequate reserve funds available to repair or replace the capital assets located on the common elements and facilities that the association is obligated to maintain without need to create a special assessment or loan obligation, except that in those cases in which a capital asset reaches the end of its established useful life earlier than predicted by the reserve study.” The Legislature made it clear, however that nothing in the law is intended to prevent the imposition of a special assessment or obtaining a loan.

Who May Perform and How Often. The standards and the components that must be included in the reserve studies are set forth in the new law which requires completion by a licensed engineer, architect or a reserve specialist, whose qualifications are also defined. An existing association that has not undertaken a reserve study within the 5 years prior to January 8, 2023, will have 1 year to complete the study. A new association formed after January 8, 2024, will be required to complete the study not more than 2 years following the election of a majority of the board by the members other than the developer.

Reserves Must Be Funded. Completion of the study is step one. The statute also requires that associations fund the reserves as provided for in the study. While the association may be able to borrow the money from the reserves because the current funding is inadequate, such borrowing may now only be undertaken in accordance with specific guidelines.

In the event that an association does not have adequate funding as of January 8, 2024, and the increase in the budget will result in an increase of 10% or more of the previous year’s assessment, the deficiency must be made adequate within the earlier of 10 years or that date by which the association’s reserves are predicted to fall below zero. If the deficiency in funding of the Association’s reserves is less than 10% of the previous year’s assessment, it must be made up within 2 years.

The new statutory requirements will present a challenge for some associations. The Hill Wallack Community Association team is here to help our clients navigate through the process. For further information, contact one of our team members: Ronald L. Perl, Kenneth R. Sauter, Caroline Record, Michael S. Karpoff, George Greatrex, Gregg Shivers, Terry A. Kessler, Jennifer Webb, Catherine M. Brennan, Daria B. Janka, Lucas B. Klirsfeld, Mel Edgar.

Emergency Rescue Mortgage Assistance Program (ERMA)

11 Jan 2024

Did you know there is a program in New Jersey that provides owners with financial assistance on various household expenses, including association fees? A number of delinquent owners have relied upon the Emergency Rescue Mortgage Assistance (ERMA) program to have their delinquent association accounts paid in full.

Associations may wish to provide its residents with the below information as well as the link for the online application:

https://njerma.com/

Housing counselors are available to assist with applications.

Emergency Rescue Mortgage Assistance (ERMA)

PROGRAM OVERVIEW:

Up to $75,000 per household for expenses which may include:

            • Mortgage reinstatement
            • Escrow shortages
          • Delinquent property taxes and HOA dues/fees
          • Municipal or property tax liens
          • Mortgage payments, including principal, interest, taxes, and homeowner’s insurance

ELIGIBILITY:

To qualify for assistance, a homeowner must:

• Own and occupy an eligible one- to four- unit primary residence

Have experienced a COVID-19 related financial hardship, and have been unable

• to remain current on mortgage payments
• Meet household income limits

CONTACT
Jennifer Webb, Esq
Office: (856)-616-8080
jwebb@hillwallack.com