Pennsylvania Gaming. Pennsylvania Gaming and Diversity: It s the Law

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1 NOVEMBER 2005 Pennsylvania Gaming Pennsylvania Gaming and Diversity: It s the Law The Pennsylvania Race Horse Development and Gaming Act, 4 Pa.C.S. 1101, et seq. (the Act ) has been controversial from its inception to litigation concerning its constitutionality to disputes about ownership to the identity of the licensees. Lost in these more controversial aspects is a very fundamental precept of the Act: it requires licensees under the Act and all those who do business with licensees directly or indirectly to adopt, implement, and enforce plans to assure diversity in their employment and in those with whom they deal. Diversity requirements and affirmative action are certainly not a new concept. Any employer who has done any substantial amount of business with the federal government is aware of affirmative action obligations toward minorities and women, the disabled, and veterans under various federal statutes and regulations. The Commonwealth of Pennsylvania under its general procurement statutes and regulations has broadly required consideration of diversity activities by contractors and suppliers. Finally, other states with gaming activities have to one extent or another required that licensees and providers participate in diversity programs. Thus, the diversity mandate in the Act is not unusual. News accounts during legislative debate on the Act reported that African American legislators insisted on strong diversity initiatives in return for their support of the legislation. STATUTORY DIRECTIVES Gaming operations are regulated and controlled by the Pennsylvania Gaming Control Board (the Board ). The statutory mandate for diversity begins with 4 Pa.C.S. 1202(b)(12) which gives the Board the power and duty [w]ithin six months after the effective date of this part,... to develop and implement an affirmative action plan to assure that all persons are accorded equality of opportunity in employment and contracting by the board, its contractors, subcontractors, assignees, lessees, agents, vendors and suppliers. 4 Pa.C.S. 1212(a) titled Diversity Goals of Board, provides: It is the intent and goal of the General Assembly that the board promote and ensure diversity in all aspects of the gaming activities authorized under this part. The board shall work to enhance the representation of diverse groups in the ownership, participation and operation of licensed entities 1 and licensed facilities in this Commonwealth and through the ownership, participation and operation of business enterprises associated with or utilized by licensed entities 1 and licensed facilities and through the provision of goods and services utilized by slot machine licensees under this part. The diversity mandate is enforced through the licensure requirements set forth in 4 Pa.C.S Section 1325(b) provides that a license or permit shall not be granted or renewed unless the Board finds that the applicant satisfies certain criteria, including the following: 1 Licensed entity is defined in 1103 as any slot machine, manufacturer, or supplier licensee, or other person licensed by the board.

2 (1) The applicant has developed and implemented or agreed 2 to develop and implement a diversity plan to assure that all persons are accorded equality of opportunity in employment and contracting by the applicant, its contractors, subcontractors, assignees, lessees, agents, vendors and suppliers. Section 1325(c) then lists additional eligibility requirements which the Board may take into account when considering an application: (4) The applicant s good faith plan for enhancing the representation of diverse groups in the operation of its facility through the ownership and operation of business enterprises associated with or utilized by its facility or through the provision of goods or services utilized by its facility and through the participation in the ownership of the applicant. (5) The applicant s good faith effort to assure that all persons are accorded equality of opportunity in employment and contracting by it and any contractors, subcontractors, assignees, lessees, agents, vendors and suppliers it may employ directly or indirectly. (10) The record of the applicant and its developer regarding compliance with: (i) Federal, State and local discrimination, wage and hour, disability and occupational and environmental health and safety laws; and (ii) State and local labor relations and employment laws. (11) The applicant s record in dealing with its employees and their representatives at other locations. 3 IMPLEMENTING REGULATIONS In order to implement the Act, the Board has issued temporary regulations on a whole variety of licensing issues pursuant to 4 Pa.C.S. 1202(B)(14) & The regulations are found at 58 Pa. Code Chs Subpart G, Chapter 481, et seq., titled Minority and Women s Business Enterprises, is the portion of the regulations implementing the diversity requirements. The title is misleading, for this subpart of the regulations goes beyond minority and women s business enterprise issues. As will be seen in the subsequent discussion, the regulations attempt to implement the diversity requirements of the Act. The regulations are in many respects vague and simply pronounce goals rather than list specific requirements. This lack of specificity may be both good and bad for license applicants. It may be good in that it leaves an applicant reasonably free to design its own plan. It may be bad because this lack of specificity results in comparatively little guidance on what the plan must contain, and thus subjects an applicant to the Board s concluding that it does not like the content of the plan without having any specific requirements as a frame of reference. This largely unfettered scope of review certainly exists under other provisions of the licensing requirements, and are of equal concern. In many instances, the grant of a license will be to one of several competing applicants. When the Board has wide discretion to pick, the less guidance in the regulations the greater the chance of an arbitrary decision. As this article is being written, the Harness Racing Commission allegedly denied a license to an applicant in part because the now-deceased grandfather of one of the applicant s owners lent money to reputed mobsters 20 years ago. 4 Although the Commission operates under a differrent statute and regulations, and whether or not the Commission s decision can be defended, 2 The statute raises an interesting question in its phraseology that the applicant has developed and implemented or agreed to develop and implement a diversity plan. This suggests that the Board would have the authority to issue a license even though the applicant had not yet developed a diversity plan but simply has promised to develop a plan. This same or agreed to language is reflected in the implementing regulations subsequently discussed at 58 PA.Code 423.3(a)(1). By contrast, 481.4(a) requires a plan be submitted with the application. It would seem, however, that an applicant would be taking an unnecessary risk if it did not submit with its application a developed diversity plan. 3 The very broad authority given to the Board by (10) and (11) to consider the applicant s compliance with a wide variety of labor and employment laws at other times and other locations is a potential Pandora s box. It is easy to imagine an applicant attempting to harm a competing applicant by alleging real or imagined violations of law or unpleasant dealings with its employees, or a labor organization at another location using this provision as leverage in its own dealings with the applicant. 4 See Tracie Mauriello, State Harness Racing Board Explains License Rejections, The Pittsburgh Post-Gazette, Nov. 11, 2005, at 2 NOVEMBER 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

3 it raises concern about the Board s degree of discretion. One over arching concept in the statute and regulations must be understood. An applicant is not required only to have its own diversity plan applicable to its hiring and to the entities with which it directly deals. An applicant is also obligated as part of its diversity plan to require that any entity which provides goods or services which eventually affects the goods or services received by the licensed entity must also have a diversity plan. The licensee is at the top of the pyramid, but those many layers down in the pyramid are also affected by the requirements. Thus, although the Board does not have direct control over entities other than those entities which must be licensed, it has imposed these far-reaching diversity obligations on entities which may be far removed from the gaming industry. How far down the pyramid the Board will expect a licensee to police remains an unanswered question. 5 The breadth of the diversity requirements can be seen in the language used in 481.1(b) and (c) which provides as follows: (b) It is the policy of the Board to promote and ensure that licensed entities and applicants for licensure conduct all aspects of their operations in a manner that assures diversity of opportunity as follows: (1) In the ownership, participation, and operation of licensed entities in this Commonwealth. (2) Through the ownership, participation and operation of business enterprises associated with or utilized by licensed entities. (3) Through the provision of goods and services utilized by licensed entities. (c) It is further the policy of the Board to promote and ensure diversity in employment and contracting by each licensed entity or applicant for a license and its contractors, subcontractors, assignees, lessees, agents, vendors, and suppliers. Although the requirements of subsection (b) are amplified in later sections of the regulations, subsection (b) raises several questions which are not subsequently clarified by the regulations. First, it is anticipated that the actual operators of the gaming establishments as well as the manufacturer licensees will be well financed, privately held entities, or subsidiaries or affiliates of publicly owned entities. They may have little or no minority or female ownership, or may be broadly owned public entities. To what extent will minority or female ownership of such entities be considered in awarding licenses? Second, what is the difference between the requirements of (2) and (3)? This attention to ownership of both licensed entities and first and second tier entities, and the focus on issues other than direct employment by licensed entities and first and second tier entities, make the gaming diversity regulations significantly different from those that exist under the federal affirmative action obligations which focus on employment by the government contractor and subcontractor at each tier but not on their contracting arrangements. Section defines the terms diversity plan, minority, and participation plan. A diversity plan is simply the plan developed by the entity to pursue the diversity goals. Minority is defined as the ethnic/racial categories used by the United States Equal Employment Opportunity Commission and Office of Federal Contract Compliance Programs of the United States Department of Labor. The critical definition is that of participation plan, which is defined as follows: An obligation imposed by a licensed entity or applicant as part of its contract with a contractor that requires the contractor to perform the contract through the utilization of minority or women owned business enterprises. Thus, the licensed entity is required in its contract with a first tier contractor to require that the contractor perform the contract through the utilization of minority or women owned business enterprises ( MWBE ). Section of the regulations provides that the Board will compile a list of MWBEs as certified by the Bureau of 5 For ease of discussion, the entity directly contracting with the licensee will be referred to as the first tier, and all other entities will be referred to as second tier. 3 NOVEMBER 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

4 Minority and Women s Business Enterprises in the Department of General Services, and make that list available to all licensed entities and applicants. The effect of the requirement of a participation plan is to require the applicant to require its first-tier contractors to have the contract performed through the use of MWBEs. What is unclear from this portion of the regulations is whether that obligation to have a participation plan extends to second tier entities. Literally read, the requirement to have a participation plan appears to apply only to the license applicant, but the general theme of the Act and the diversity regulations is to require diversity effort at each tier in the pyramid. This obligation could present serious obstacles to a first or lower tier supplier who prefers to do the work solely or largely with its own employees, and does not intend to contract any portion of the work to another entity. The further removed from the licensed entity, the harder it becomes to require or enforce participation by MWBEs. The regulations are in many ways poorly drafted. They use the term diversity or diversity plan in two significantly different ways but often fail to distinguish between the two uses. In some places, diversity plan refers only to the required participation of MWBEs. In other places, the term refers to diversity in direct employment by the licensee or tier entities. Using the same term for two very different obligations causes confusion in understanding and applying the regulations. Section 481.4(a) requires each applicant to have a diversity plan in its application for licensure that establishes a separate goal of diversity in the (1) ownership, (2) participation in, (3) operation of, and (4) employment at, the applicant. The Board then gives itself great discretion by stating, with absolutely no criteria, that it will determine whether the stated goals are reasonable to establish equality of opportunity in contracting and employment both by the licensed entity and by its contractors, subcontractors, vendors and suppliers, i.e., the first and second tier entities. Is the licensed entity to develop goals for each tier and, if so, how? The confusion in failure to separate the concept of diversity in employment and diversity in contracting is reflected in 481.4(b) which provides that the applicant can achieve its diversity goals through either contracting or transacting directly with MWBEs or contracting with a non-mwbe in a contract that contains a participation plan. That section totally fails to address the issue of direct employment by either the licensed entity or any of the tier entities. It is inconceivable and in conflict with the Act and other sections of the regulations that the Board would not require that diversity in direct employment also be a part of the diversity goals. The regulations conclude in by requiring that each licensed entity seeking to renew a license file a report concerning the performance of its diversity plan. This section of the regulations, by defining what must be in the report, also provides the best guidance as to the expected content of the diversity plan. The report is required to contain all of the following information: 1. Employment data, including information on minority and women representation in the workforce, including at the executive and managerial level, and recruitment, training, retention and outreach efforts toward minorities and women. In addition, salary information is required, presumably to monitor potential discrimination in compensation between males and females and minorities and non-minorities. Compensation discrimination is becoming a part of increased focus by the office of Federal Contract Compliance Programs under the federal affirmative action regulations, and that trend may have impacted Pennsylvania s regulations. 2. Total number and value of all contracts awarded for goods and services. 3. Total number and value of all contracts awarded to MWBEs. 4. Total number and value of contracts that contain a participation plan. 5. Total number and value of all subcontracts to be awarded to minorities and business enterprises under contracts containing a participation plan. This provision will require the licensee to obtain information from at a minimum its first tier contractors with participation plans as to the contracts that they have entered with MWBEs. 6. An identification of each subcontract actually awarded to a MWBE under contracts with a participation plan during each calendar quarter and the actual value of such subcontract. 4 NOVEMBER 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

5 7. An identification of each contract awarded to a minority or women s business enterprise. This requirement apparently applies to direct contracts between the licensee and MWBEs. 8. A description of efforts made by the licensed entity to monitor and enforce the participation plan. 9. Information on minority and women investment, equity ownership, and other ownership or management opportunities initiated or promoted by the licensed entity. 10. Other information deemed necessary by the Board. Even with this greater detail in the requirements, the Board still retains extensive discretion on deciding whether the licensee has compiled with it s diversity obligations. CONCLUSION Diversity is a key component of the Act. An application for a license under the Act must contain a diversity plan, or at least a promise to create one. The diversity plan must address ownership, participation, operation, and employment at the applicant, and must address use of MWBEs at several tier levels. Goals must be set, and reports on the degree of success in achieving these goals submitted. Beyond these broad requirements, the content of a diversity plan is not specified. An applicant must first be creative in comprehending the requirements, and then in creating a diversity plan which will satisfy the Board. Hayes C. Stover hstover@klng.com If you have questions or would like more information about K&LNG s Betting and Gaming Practice, please contact one of our lawyers listed below: Harrisburg David R. Overstreet doverstreet@klng.com London Warren L. Phelops wphelops@klng.com BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PALO ALTO PITTSBURGH SAN FRANCISCO WASHINGTON Kirkpatrick & Lockhart Nicholson Graham LLP (K&LNG) has approximately 950 lawyers and represents entrepreneurs, growth and middle market companies, capital markets participants, and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally. K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware, U.S.A. and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and Washington and one incorporated in England practicing from the London office. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Data Protection Act We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please cgregory@klng.com if you would prefer not to receive this information KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.