Department of Labor Signals Move to Limit Definition of “Employment”

On June 7, 2017, U.S. Secretary of Labor Alexander Acosta announced the immediate withdrawal of the U.S. Department of Labor’s (DOL’s) 2015 and 2016 Administrative Interpretations regarding joint employment and independent contractors. While this withdrawal signals the current administration’s attempt to limit the expansive definition of “employment,” the DOL made clear that it does not relieve companies of their legal obligations under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act.

Many businesses had argued these obligations were unduly burdensome on employers. For the past several years, the Wage and Hour Division (WHD) has worked with the IRS and numerous states to combat employee misclassification and to ensure that workers receive all the wages, benefits and protections to which they are entitled. In Fiscal Year 2015, for example, WHD investigations resulted in some $74 million in back wages for more than 102,000 workers, many of which were concentrated in traditionally low-wage industries such as janitorial, temporary help, food service, day care and hospitality. Withdrawal of the Administrative Interpretations may be the first step to rein in these enforcement efforts.

Specifically, the DOL has withdrawn guidance regarding:

  • The Presumption That Most Workers Are Employees: The withdrawn guidance on independent contractors stated that “most workers are employees” under the FLSA. United States Supreme Court precedent makes clear that there is no single rule or test for determining whether an individual is an employee or an independent contractor for purposes of the FLSA. Thus, even now, the inquiry into independent contractor status remains complex and fact-intensive.

  • The Expansion of the “Joint Employer” Definition: The withdrawn guidance on joint employment distinguished between “horizontal” joint employment and “vertical” joint employment scenarios. Under this guidance, the joint employment inquiry focused on the “economic realities” of the relationship between the employee and the potential joint employer. Its withdrawal signals a shift back to applying joint employer status only when a business has direct control over another business’s workplace.

More is expected from the Trump Administration and the courts on the ever-changing law surrounding independent contractors and joint employment.

This post was written by Angela M. Duerden and Elisabeth (Lisa) Shu of Wilson Elser Moskowitz Edelman & Dicker LLP.

Defendants’ Timing Defense to DTSA Claims Faces Mixed Results

With the law’s first anniversary in the rear view mirror, defendants have established a viable defense to claims arising under the Defend Trade Secrets Act (“DTSA”) – a plaintiff may be precluded from bringing a claim under DTSA if it only alleges facts that show acts of misappropriation occurring prior to May 11, 2016 (the date of DTSA’s enactment).   In the last few months, four different courts have tackled this “timing defense,” and defendants raising it in motions to dismiss DTSA claims have encountered mixed results.

In Brand Energy & Infrastructure Servs. v. Irex Contr. Grp., No. 16-cv-2499, 2017 U.S. Dist. LEXIS 43497 (E.D. Pa. Mar. 23, 2017), a Pennsylvania federal court rejected the defendants’ attempt to invoke the timing defense because the plaintiff’s amended complaint alleged various times after the enactment of the DTSA that the defendants “used” the plaintiff’s alleged trade secrets.  The court also noted the plaintiff’s inclusion of allegations in the amended complaint showing that “to this day, the defendants continue to ‘obtain access to [its] confidential and proprietary business information ….”  Based on this pleading, the court held that the plaintiff could pursue its DTSA claim.  Similarly, in AllCells, LLC v. Zhai, Case No. 16-cv-07323, 2017 U.S. Dist. LEXIS 44808 (N.D. Cal. Mar. 27, 2017), a California federal court denied the defendants’ motion to dismiss a DTSA claim because “even if [defendants] copied and thus acquired the alleged trade secrets before May 11, 2016, [the plaintiff] has sufficiently alleged that there was at least use of the trade secrets after that date.  Hence, the Act applies.”

In Molon Motor & Coil Corp. v. Nidec Motor Corp., No. 16-cv-03545, 2017 U.S. Dist. LEXIS 71700 (N.D. Ill. May 11, 2017), a plaintiff’s DTSA claim survived dismissal, overcoming the defendant’s argument that “no acts occurred after the effective date of the Act.”  The court held that the plaintiff’s allegations regarding the inevitable post-enactment disclosure of its trade secrets to the defendant by its former employee were sufficient to state a plausible DTSA claim:  “[i]f it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that [defendant] would be continuing to use them.”  The court noted, however, that further discovery would be needed to determine whether post-enactment disclosure of the trade secrets was in fact inevitable.

By contrast, a California federal court granted a defendant’s motion to dismiss where a complaint lacked sufficient allegations regarding the timing of the alleged appropriation in Cave Consulting Grp., Inc. v. Truven Health Analytics Inc., No. 15-cv-02177, 2017 U.S. Dist. LEXIS 62109 (N.D. Cal. Apr. 24, 2017).  In Cave, the plaintiff alleged that the defendant acquired trade secrets and used them in a 2014 client meeting, but that conduct predated the enactment of the DTSA.  The court held that plaintiff had failed to make any “specific allegations that defendant used the alleged trade secrets after the DTSA’s May 11, 2016 enactment.”  Because the plaintiff failed to allege that any “postenactment use occurred,” the plaintiff had not stated a plausible DTSA claim.

These decisions illustrate that the likelihood of success of the timing defense largely is a matter of drafting, and provide an important takeaway for both sides of a trade secrets dispute. A plaintiff should be mindful in drafting its pleading to include factual allegations showing that the defendant’s misappropriation occurred (or inevitably will occur) after DTSA’s enactment.  The defendant, on the other hand, should carefully scrutinize the complaint to determine whether a timing defense applies.

This post was written by Jonathan L. Shapiro by Epstein Becker & Green, P.C..

President’s FY18 Budget Proposes Historic Cuts to EPA Funding and Staffing

On May 23, 2017, the White House unveiled the full version of President Trump’s proposed budget for fiscal year (FY) 2018 entitled “A New Foundation for American Greatness.”  As signaled in the President’s “skinny budget” released earlier this year, the proposed budget would fund the U.S. Environmental Protection Agency (EPA) at $5.7 billion — a more than 30 percent decrease from the current funding of nearly eight billion.  EPA’s congressionally enacted budget has remained relatively flat since 2000, other than a significant boost in 2010 to $10.3 billion.  The proposed FY18 budget also calls for an EPA staffing level of 11,611 — a thirty year low.  The proposed decreased staffing level equates to a 20 percent reduction in the overall EPA workforce, which would eliminate approximately 3,000 employees.  A portion of the staff cuts would come from programs proposed for elimination, including the Center for Corporate Climate leadership, the Coalbed Methane Outreach group, and greenhouse gas reporting programs.  Some of the staff cuts may be accomplished by early retirement and lump sum voluntary separation payment incentives.  On June 1, 2017, EPA Acting Deputy Administrator Mike Flynn sent an e-mail to EPA employees providing preliminary details and next steps on early retirement and separation incentive offers.  Employees who accept offers will leave EPA by early September 2017.

Funding for state and tribal assistance grants (STAG) and other funds for state and regional initiatives is markedly decreased or zeroed out in the proposed budget, with cuts totaling $482 million, or 45 percent below the current enacted levels.  According to the Environmental Council of the States, which represents state departments of environment, STAG monies support approximately 27 percent of state departments of environment annual budgets.

In the area of federal enforcement, the Office of Enforcement and Compliance Assurance’s (OECA) budget would decrease by nearly 25 percent below current funding.  This decrease would reduce civil and criminal enforcement by 18 and 16.5 percent, respectively.  Funding for laboratory and forensics costs that support enforcement cases, including monitoring, would decrease by over 40 percent.  The corresponding reduction in enforcement efforts is likely to result in increased litigation from environmental advocates, particularly for matters governed by the Clean Air Act and the Clean Water Act which authorize citizen suits.

The budget requests $65 million for chemical risk review and reduction efforts under the Toxic Substances Control Act (TSCA), an increase of nearly $3.8 million from the current level.  EPA’s budget document notes that TSCA fee collections, set to begin in the second quarter of FY18, will fund approximately 53 full-time employees to support the chemical review process that were previously funded by federal appropriations. This small boost in funding may not be sufficient enough to support the implementation of “new TSCA,” however, and the implementation could still result in delays.

skinny budget donald trumpThe President’s budget provides $99.4 million in appropriated funding to support EPA’s pesticide registration review and registration program, including implementation.  This amount would decrease funding by $20.4 million from current enacted levels.  In addition to budget appropriations, EPA’s pesticide program is supported by Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) maintenance fees and Pesticide Registration Improvement Act (PRIA) registration application fees.  These fees combined typically generate approximately $40-45 million in additional funding per year. Congress is currently considering the reauthorization of PRIA, which would increase application fees.  Together, however, the total amount of funds available to operate the pesticide program (appropriations and industry fees) have declined over the past years and present a threat to the pesticide program’s ability to meet application review deadlines.

EPA Administrator Pruitt’s Back-to-Basics agenda includes addressing hazardous waste clean-up of the sites that have remained on the Superfund National Priorities List for decades.  In spite of this priority action item, the proposed budget would fund the Hazardous Substance Superfund Account at $762 million, $330 million below the 2017 level.  Instead of relying on the Superfund account to finance remediation, EPA instead would use existing settlement funds to clean up hazardous waste sites.

EPA’s Office of Water’s overall funding would decrease by nearly 20 percent. The Clean Water and Drinking Water State Revolving Funds (SRF) funding levels would remain funded at current levels. The SRFs support states’ administration of their drinking water and surface water programs and related infrastructure projects.  Steep cuts to STAG grants, and zeroing out of the Section 319 Nonpoint Source program and regional initiatives like the Great Lakes and Chesapeake Bay programs will be felt at the state level. The Section 319 program targets nonpoint source pollution, including runoff from agricultural working lands. States use 319 program funds to support watershed improvement projects and incentivize voluntary installation of best management practices on farms (e.g., grass waterways and buffers).

EPA’s FY18 Budget in Brief provides more details on proposed budget allocations and priorities.  The President’s budget is likely to face steep opposition in Congress, which has until September 30, 2017, to pass a budget for FY18, although this timeline will likely be extended through the use of continuing resolutions.  The House is slated to finish its work on appropriation bills before the July 4, 2017, holiday break, which should provide more insights on how much influence the President’s budget will have with appropriations leadership.

This post was contributed by the Government Regulations practice group at Bergeson & Campbell, P.C.
marijana

Growing Questions About Employee Medical Marijuana Use Leave Employers in a Haze

The intersection of employment and marijuana laws has just gotten cloudier, thanks to a recent decision by the Rhode Island Superior Court interpreting that state’s medical marijuana and discrimination laws. In Callaghan v. Darlington Fabrics Corporation, the court broke with the majority of courts in other states in holding that an employer’s enforcement of its neutral drug testing policy to deny employment to an applicant because she held a medical marijuana card violated the anti-discrimination provisions of the state medical marijuana law.

Background

Plaintiff applied for an internship at Darlington, and during an initial meeting, she signed a statement acknowledging she would be required to take a drug test prior to being hired.  At that meeting, Plaintiff disclosed that she had a medical marijuana card.  Several days later, Plaintiff indicated to Darlington’s human resources representative that she was currently using medical marijuana and that as a result she would test positive on the pre-employment drug test.  Darlington informed Plaintiff that it was unable to hire her because she would fail the drug test and thus could not comply with the company’s drug-free workplace policy.

Plaintiff filed a lawsuit alleging Darlington violated the Hawkins-Slater Act (“the Act”), the state’s medical marijuana law, and the Rhode Island Civil Rights Act (“RICRA”). The Hawkins-Slater Act provides that “[n]o school, employer, or landlord may refuse to enroll, employ, or lease to, or otherwise penalize, a person solely for his or her status as a cardholder.”  After concluding that Act provides for a private right of action, the court held that Darlington’s refusal to hire Plaintiff violated the Act’s prohibition against refusing to employ a cardholder.  Citing another provision that the Act should not be construed to require an employer to accommodate “the medical use of marijuana in any workplace,” Darlington contended that Act does not require employers to accommodate medical marijuana use, and that doing so here would create workplace safety concerns.  The court rejected this argument, concluding:

  • The use of the phrase “in any workplace” suggests that statute does require employers to accommodate medical marijuana use outside the workplace.
  • Darlington’s workplace safety argument ignored the language of the Act, which prohibits “any person to undertake any task under the influence of marijuana, when doing so would constitute negligence or professional malpractice.” In other words, employers can regulate medical marijuana use by prohibiting workers from being under the influence while on duty, rather than refusing to hire medical marijuana users at all.
  • By hiring Plaintiff, Darlington would not be required to make accommodations “as they are defined in the employment discrimination context,” such as restructuring jobs, modifying work schedules, or even modifying the existing drug and alcohol policy (which prohibited the illegal use or possession of drugs on company property, but did not state that a positive drug test would result in the rescission of a job offer or termination of employment).

The court thus granted Plaintiff’s motion for summary judgment on her Hawkins-Slater Act claims.

With respect to Plaintiff’s RICRA claim, the court found that Plaintiff’s status as a medical marijuana cardholder was a signal to Darlington that she could not have obtained the card without a debilitating medical condition that would have caused her to be disabled. Therefore, the Court found that Plaintiff is disabled and that she had stated a claim for disability discrimination under RICRA because Darlington refused to hire her due to her status as a cardholder.  Importantly, the court held that the allegations supported a disparate treatment theory.

Finally, while noting that “Plaintiff’s drug use is legal under Rhode Island law, but illegal under federal law [i.e. the Controlled Substances Act (the CSA”)],” the Court found that the CSA did not preempt the Hawkins-Slater Act or RICRA. According to the court, the CSA’s purpose of “illegal importation, manufacture, distribution and possession and improper use of controlled substances” was quite distant from the “realm of employment and anti-discrimination law.”

Key Takeaways

While this decision likely will be appealed, it certainly adds additional confusion for employers in this unsettled area of the law – particularly those who have and enforce zero-tolerance drug policies. The decision departs from cases in other jurisdictions – such as CaliforniaColoradoMontanaOregon, and Washington – that have held that employers may take adverse action against medical marijuana users.  The laws in those states, however, merely decriminalize marijuana and, unlike the Rhode Island law, do not provide statutory protections in favor of marijuana users.  In those states in which marijuana use may not form the basis for an adverse employment decision, or in which marijuana use must be accommodated, the Callaghan decision may signal a movement to uphold employment protections for medical marijuana users.

While this issue continues to wend its way through the courts in Rhode Island and elsewhere, employers clearly may continue to prohibit the on-duty use of or impairment by marijuana. Employers operating in states that provide employment protections to marijuana users may consider allowing legal, off-duty use, while taking adverse action against those users that come to work under the influence.

Of course, it remains unclear how employers can determine whether an employee is under the influence of marijuana at work. Unlike with alcohol, current drug tests do not indicate whether and to what extent an employee is impaired by marijuana.  Reliance on observations from employees may be problematic, as witnesses may have differing views as to the level of impairment and, in any event, observation alone does not indicate the source of impairment.  Employers choosing to follow this “impairment standard” are advised to obtain as many data points as possible before making an adverse employment decision.

All employers – and particularly federal contractors required to comply with the Drug-Free Workplace Act and those who employ a zero-tolerance policy – should review their drug-testing policy to ensure that it (a) sets clear expectations of employees; (b) provides justifications for the need for drug-testing; (b) expressly allows for adverse action (including termination or refusal to hire) as a consequence of a positive drug test. Additionally, employers enforcing zero-tolerance policies should be prepared for future challenges in those states prohibiting discrimination against and/or requiring accommodation of medical marijuana users.  Those states may require the adjustment or relaxation of a hiring policy to accommodate a medical marijuana user.

The Callaghan decision also serves as a reminder of the intersection of medical marijuana use and disability.  Here, the court allowed a disability discrimination claim to proceed even though Plaintiff never revealed the nature of her underlying disability because cardholder status and disability were so inextricably linked.

Finally, employers should be mindful of their drug policies’ applicability not only to current employees, but to applicants as well. In Callaghan, the court found the employer in violation of state law before the employee was even offered the internship or had taken the drug test.

This post was written byNathaniel M. Glasser and Carol J. Faherty of Epstein Becker & Green, P.C.

The U.S. Department of Labor Rolls Back Obama-Era Guidance on Joint Employers and Independent Contractors

The U.S. Department of Labor (“DOL”) announced today that it was rolling back an Obama-era policy that attempted to increase regulatory oversight of joint employer and contractor businesses.

Courts and agencies use the joint employer doctrine to determine whether a business effectively controls the workplace policies of another company, such as a subsidiary or sub-contractor. That control could be over things like wages, the hiring process, or scheduling.

Legal IT ConsultantIn a short statement, the DOL signaled that it was returning to a “direct control” standard. “U.S. Secretary of Labor Alexander Acosta today announced the withdrawal of the U.S. Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors. Removal of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the department’s long-standing regulations and case law.”

Until 2015, the DOL interpreted the joint employer doctrine to apply only to cases in which a business had “direct control” over another business’s workplace. In 2015 and then again in 2016, under then-Labor Secretary Tom Perez (currently the Democratic National Committee Chair), the DOL changed its interpretation to state that a business may be a joint employer even if it exerted “indirect control” over another’s workplace. The 2015 and 2016 guidance effectively expanded the conditions for when one business can be held liable for employment and civil rights law violations at another company. Critics of this “indirect control” language argued that it was ambiguous and threatened to throw franchise, parent-subsidiary, and independent contractor relationships between businesses into disarray. Companies, particularly franchises, were particularly concerned that they could face liability at workplaces they did not directly oversee or control.

However, the DOL’s announcement today rescinded its guidance on “indirect control” and also rescinded guidance on independent contractors, which essentially stated that the DOL considered most workers to be employees under the Fair Labor Standards Act and that it was likely to apply a broad definition of “employee” and “employer” when investigating a company’s practices. This decision is a big win for businesses and business groups.

Despite the DOL’s reversal, the Obama-era standard can still be applied to businesses through the National Labor Relations Board (“NLRB”), an independent agency that serves as the government’s main labor law enforcer. The NLRB considers a company jointly liable for its contractors’ compliance with the National Labor Relations Act if they have “indirect” control over the terms and conditions of employment or have “reserved authority to do so.” The NLRB has not rescinded its interpretation. President Trump has yet to pick nominees for the five-member board’s two open seats, which will likely affect the NLRB’s interpretation of the joint employer doctrine and many other NLRB rules, interpretations, and guidance.

The DOL’s guidance does not affect actions taken by other federal agencies.

This post was written by James R. Hays and Jason P. Brown  Sheppard Mullin Richter & Hampton LLP.

Can Congress Get to “Yes” on Replacing the Affordable Care Act?

Senate Majority Leader Mitch McConnell recently gave a candid assessment of the chances of getting an Affordable Care Act (ACA) replacement bill through the Senate, saying “I don’t know how we get to 50 (votes) at the moment.” That succinctly captures the political dilemma. There has long been broad bipartisan agreement that the nation’s health care system was in need of repair. Something had to be done to contain rapidly rising health care costs, increase the quality of medical outcomes, and to expand coverage. But there was little or no bipartisan agreement on how to do it. Indeed, no major health care initiative since Medicare was enacted in 1965 has enjoyed true bipartisan support.

The most recent effort to overhaul the health care system was no exception. The ACA passed in March 2010 with no Republican votes. That wholly partisan effort, in turn, set off a determined, seven-year-long effort by Republicans to repeal the law. The most recent step on this tortuous journey occurred on May 4, 2017 when the House passed the American Health Care Act (AHCA) by a vote of 217-213. In this case, no Democrats voted for the bill. Twenty Republicans also voted no and the bill passed with just one GOP vote more than the 216 needed to pass.

As we explain below, the ACA and AHCA are “apples and oranges” in their approaches to reforming the healthcare system. Because each proceeds from different philosophical premises, this post briefly examines their key components and primary goals without opining on the merits. Our primary focus is on the political and policy challenges faced by Senate Republicans in getting a bill passed (which remains highly uncertain) and whether such a bill will differ greatly from the House product. In our view, to achieve the GOP’s publicly stated policy objectives, and faced with the constraints imposed by the budget reconciliation rules (explained below), Senate Republicans will be forced to address essentially the same questions as their colleagues in the House—and their solutions likely will differ from those of the House mostly in degree.

What the AHCA Does

In the AHCA, House Republicans singled out a few ACA provisions they had publicly campaigned against—most of which are contained in Title I of the law. These include the mandate that individuals purchase coverage; the narrow, 3:1 modified community-rating corridor that Republicans asserted made coverage prohibitively expensive for younger individuals; and the requirement that plans sold in the individual and small-group market include a comprehensive set of covered medical and related services known as “essential health benefits” (EHBs) The AHCA also would make major changes to Medicaid that go well beyond rolling back the program expansion authorized by the ACA.

The AHCA’s primary purpose is to reduce premium costs and reduce the federal government’s role in health care by giving more authority and flexibility to the states. The ACA’s primary goal, in contrast, was to expand insurance coverage in the individual markets—and it did that, although not as much as had been predicted. Another ACA goal was to make coverage more affordable, at least for low- and moderate-income individuals—and it did that too. But the ACA did little to lower medical costs, and from the available evidence had only a marginal effect on healthcare outcomes. Neither does the AHCA address those issues. It instead focuses mainly on reducing federal expenditures, shifting costs to the states, and constraining the growth of Medicaid. The recently issued report by the Congressional Budget Office and the staff of the Joint Committee on Taxation indicates that the AHCA would achieve significant success in this regard, estimating that the bill would reduce the cumulative federal deficit over the 2017-2026 period by $119 billion.

The GOP Challenge

With their slim 52-48 majority, Republican lawmakers don’t have the votes to repeal the ACA outright. That would require 60 votes to overcome a filibuster. Instead, they must rely on a special budget strategy called “reconciliation.” Created by the Congressional Budget Act of 1974, reconciliation allows certain bills that directly impact federal spending to be passed by a simple majority. For example, reconciliation rules would allow repeal of the ACA’s individual and employer mandates by a simple 51-vote majority because those mandates directly affect revenue; but reconciliation could not be used to repeal the employer reporting rules because those provisions do not directly affect spending. These restrictions severely limit which provisions of the ACA Republicans in the Senate (and by extension the House) can replace without Democratic support. We discuss those provisions below.

The individual mandate

The ACA included an “individual mandate” that requires most U.S. citizens to buy health insurance. The purpose was to ensure broad participation in the individual markets so that there would be enough healthy individuals in the risk pool to subsidize the cost of covering those who are less healthy. Most agree that the ACA penalty for not maintaining coverage was insufficient to induce enough healthy people into the pool. The result has been steep underwriting losses which have prompted major carriers to exit the public exchanges. The AHCA would eliminate the penalty retroactively, to the beginning of 2016. In its place, the bill would impose a “continuous coverage” requirement to induce people to buy coverage and stay covered rather than buying it only when they need it, which drives up costs in the exchanges. Health carriers could assess a 30 percent penalty on individuals who have a gap in coverage of more than 63 days in the prior 12 months. The Health Insurance Portability and Accountability Act (HIPAA) has provided a similar rule for employer-provided group coverage since 1996.

Community rating

Under community rating, premiums can vary by age, among other things. In the case of age rating, actuarial principles dictate that the premiums paid by the oldest subscribers should be about five times what younger subscribers pay. To mitigate the impact on older citizens, the ACA limited the rating range to 3:1. The AHCA allows a ratio of up to 5:1 which actuaries say more closely aligns premiums with the costs associated with age. AHCA proponents assert that the maximum 3:1 ratio dictated by the ACA unfairly penalizes younger, healthier individuals, discouraging them from participating in the individual markets and contributing to the underwriting losses in the ACA exchanges. They also assert that individuals 65 and older are eligible for Medicare and that the workers affected by the 5:1 ratio would be primarily those 54 to 65 years old—generally the highest earning years.

Premium tax credits

The AHCA scraps the ACA’s cost-sharing subsidies, and replaces its premium tax credits. Beginning in 2020, the AHCA would offer credits for U.S. citizens and qualified aliens enrolled in qualified health plans who are not eligible for other sources of coverage. The credit amounts are based on age and adjusted by a formula that takes income into account. Credits would be capped according to a maximum dollar amount and family size. In general, the AHCA subsidies are less generous than those provided by the ACA. According to the CBO report, repeal of the ACA’s tax credits saves some $665 billion while the cost of the AHCA’s tax credits is $375 billion—a net savings of $290 billion.

Medicaid

Medicaid is a health insurance program with shared federal/state authority and financing. Historically, coverage generally was limited to low-income families with children, the elderly, and people with disabilities. The ACA offers states generous federal funding designed to encourage expansion of their programs to cover all Americans under age 65 whose family income is effectively at or below 138 percent percent of federal poverty guidelines ($16,394 for an individual in 2016). Currently, 31 states plus the District of Columbia have expanded their programs.

The AHCA would change the current system of federal funding of Medicaid by placing per capita caps on federal payments to states. Under that approach, each state’s Medicaid spending, beginning in 2020, would be limited based on enrollee categories (i.e., children, disabled, etc.). States that exceed the limits would get less money the following year. Alternatively, states could opt to receive federal block grants (i.e., predetermined fixed amounts) to cover their Medicaid-eligible populations.

The Medicaid changes account for the single largest item of budgetary savings under the AHCA—some $843 billion over 10 years according to the CBO. The savings are important to achieving other GOP objectives such as tax reform, but many of the 16 GOP governors who expanded Medicaid have expressed concerns about the scope and timing of the changes and the impact on their citizens.

States’ ability to opt out

In an effort to persuade House conservatives to support the AHCA, Rep. Tom MacArthur (R-NJ) offered an amendment that would allow states to seek waivers of certain AHCA provisions. The idea was to devolve to those states flexibility to modify their coverage rules to best meet the needs of their constituencies. Under the amendment, states that are granted waivers may:

  • Adopt age-rated premium ratios higher than 5:1 for older individuals buying coverage in the individual and small group markets;

  • Define their own, less generous, “essential health benefits” (EHBs) for plans purchased in the individual and small-group markets instead of the 10 EHBs mandated by the ACA (and which the AHCA otherwise would leave in place); and/or

  • Bypass the 30 percent penalty for individuals who do not maintain continuous health coverage, and instead apply medical underwriting to the pricing of plans in such cases; but states seeking such waivers must have a high-risk pool or participate in the Federal “Invisible Risk Sharing Program” (explained below).

High-risk pools

High-risk pools are state programs that provide funding to cover the health care costs of individuals with catastrophic or pre-existing medical conditions and who are unable to purchase affordable coverage in the individual market. The AHCA embraces state high-risk pools as a way to contain the cost of medical premiums for healthy individuals. It does this by creating two risk pools: one for healthy individuals or those with continuous coverage, and the other for those with high-cost or pre-existing conditions. The idea is to lower premiums for healthy people while at the same time providing coverage for those with serious health conditions using a separate funding mechanism.

To fund coverage for high-risk individuals, the AHCA provides a total of $138 billion over 10 years through various mechanisms as follows:

  • A State Stability Fund in the amounts of $15 billion in 2018 and 2019, and $10 billion each year thereafter through 2026;

  • An additional $15 billion in 2020 that states could use for maternity coverage and newborn and prevention, treatment, or recovery support services for mental or substance use disorders;

  • An additional $8 billion for the period 2018-2023 to states with a “MacArthur waiver” (previously discussed); and

  • A Federal Invisible Risk Sharing Program to help with high-cost medical claims of certain individuals who buy coverage in the individual market.

The MacArthur waivers are not without controversy. The two biggest issues are the potentially large cost increases to older citizens and whether individuals with pre-existing health conditions will be adequately protected. Another question is how many states actually will seek waivers and assume the financial (and political) responsibility for protecting older and sicker workers if the federal dollars under the AHCA prove insufficient. The CBO makes an educated guess as to how many people might be affected by states getting waivers, but they are guesses nonetheless.

Ways to get to Yes

The CBO report estimates that from 2017 to 2026, the AHCA would reduce direct spending by $1.111 trillion and revenues by $0.992 trillion (resulting in a net deficit reduction of $119 billion—and that 23 million fewer people would have health coverage (CBO does not count as health coverage limited benefit plans, including so-called “mini-med” plans and fixed-dollar indemnity plans). These numbers are a direct consequence of the AHCA’s stated goals—to reduce the role of the federal government in regulating and financing health care, specifically in the individual market, Medicaid, and the uninsured.

Senate Republicans broadly share those goals, but they differ on how to achieve them, as did many of their House colleagues. To further mitigate the impact on individuals, the Senate could adjust the AHCA’s spending and revenue levels, as well as the timing of certain provisions—for example, they could push back the phase-out of the ACA’s Medicaid expansion provisions from 2020 to a later date. Similarly, the AHCA’s per-capita caps and block grant provisions could be adjusted to provide more money to the states. The trade-off would be higher spending levels than the House bill, but this could be offset by modifying the AHCA’s tax repeal provisions. For example, the ACA’s so-called “Cadillac” tax on high-cost employer plans, which the House bill delayed until 2026, could be allowed to go into effect earlier, thus generating more revenue. To the same effect, the Senate could push back repeal of the ACA’s Medicare payroll tax on high income individuals. Another step might be to provide additional subsidies for those aged 50 to 64 to mitigate any adverse effect of the increase in the premium age-rating ratio proposed by the House.

We are under no illusions that the policy differences among Senate Republicans can be reconciled—and if they can, that the House and Senate can reach agreement when they go to conference. All we know now is that the GOP is stuck with its seven-year public commitment to creating a better system with still no clear path forward. Democrats may be enjoying the Republicans’ predicament, but neither party is likely to be viewed favorably if the current system continues to falter and ultimately fails. If that happens, the price of our polarized political environment could be steep for both sides.

The sheer magnitude of the dollars at stake should compel policymakers to find a breakthrough. The Centers for Medicare and Medicaid Services reports that national spending on health care grew 5.8 percent to $3.2 trillion in 2015, accounting for 17.8 percent of GDP. Medicare spending alone was $646.2 billion, 20 percent of the total. Medicaid another $545.1 billion, or 17 percent. Thus, the most urgent practical question may not be whose theory of government is more correct, but whether the current rate of health care spending is sustainable. We can’t think of a better answer than economist Herbert Stein’s wry observation that, “if something cannot go on forever, it will stop.”

This post was written by Alden J. Bianchi andEdward A. Lenz of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

The Healthcare Executive’s Simple Guide to FMV For Attorneys, C-Suite, Compliance, and Physicians

Health ABA adsThe ABA has developed a guide for healthcare executives: The Healthcare Executive’s Simple Guide to FMV For Attorneys, C-Suite, Compliance, and Physicians.  This guide has been developed to provide basic information on nearly every type of transaction or compensation arrangement that must adhere to the FMV standard.

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This guide will help healthcare executives navigate nearly every type of FMV opinion for transactions and compensation agreements. Readers will be able to quickly access pertinent material to help better understand and ensure a sound FMV analysis.

The Guide covers:
• Current regulatory environment and guidance behind FMV
• What to ask when engaging an appraiser to help ensure you will get a defensible opinion
• Value drivers behind over 20 of the most common facility transactions and agreement types
• Checklist when reviewing a FMV opinion and the Commercially Reasonable standard

 

U.S. Supreme Court Rules That An SEC Enforcement Claim For Disgorgement Is Subject To A Five-Year Statute Of Limitations

Today, the U.S. Supreme Court unanimously held that any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. The decision in Kokesh v. SEC, No. 16-529, resolved a split among Courts of Appeals whether the statute of limitations that applies to SEC enforcement actions seeking a penalty or forfeiture (28 U.S.C. § 2462) applies when disgorgement is sought. The Court had earlier applied that statute of limitations to claims by the SEC seeking a civil monetary penalty, and held that the limitations period begins to run when the violation occurs, not when it is discovered by the government. Gabelli v. SEC, 568 U.S. 442 (2013).

Supreme Court SCOTUS Class-Action WaiverThe five-year statute of limitations applies to “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” The Court held that the imposition of disgorgement in an SEC enforcement action is a “penalty,” thus subject to the five-year limitations period. In reaching that conclusion, the Court noted that disgorgement is imposed as a consequence of violation of a public law, not because some individual was aggrieved. Another element of the Court’s reasoning was that when disgorgement is ordered in an enforcement action the remedy is not compensatory. Instead, disgorged profits are paid to the court, and it is within the discretion of the court to determine how and to whom the money will be distributed.

Perhaps most important among the Court’s rationales, the primary purpose of disgorgement ordered in an enforcement action is deterrence, and sanctions imposed to deter infractions of public laws are “inherently punitive.” The Court noted that the amount paid is often greater than the defendant’s gain so that the defendant is not, in all cases, merely restored to the status it would have occupied had it not broken the law.

The oral argument in the case included considerable colloquy on the source of a court’s power to order disgorgement in an SEC enforcement action. In its decision the Court stated, “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings . . . .” (Slip Op., p. 5, n. 3)

The obvious effect of the decision will be to require the SEC to be expeditious in filing cases seeking not only civil monetary penalties but also, now, disgorgement. The Court did not address whether the remedy of an injunction, which often has collateral consequences for the defendant, or of declaratory relief is subject to this statute of limitations. The Court also did not discuss the effect a tolling agreement would have on the running of the statute.

This post was written by Allan Horwich of Schiff Hardin LLP.
Immigration Ban, Temporary Restraining Order

Unanimous Supreme Court Decision in Favor of “Church Plan” Defendants

Today, the Supreme Court handed a long-awaited victory to religiously affiliated organizations operating pension plans under ERISA’s “church plan” exemption. In a surprising 8-0 ruling, the Court agreed with the Defendants that the exemption applies to pension plans maintained by church affiliated organizations such as healthcare facilities, even if the plans were not established by a church. Justice Kagan authored the opinion, with a concurrence by Justice Sotomayor.  Justice Gorsuch, who was appointed after oral argument, did not participate in the decision.  The opinion reverses decisions in favor of Plaintiffs from three Appellate Circuits – the Third, Seventh, and Ninth.

For those of you not familiar with the issue, ERISA originally defined a “church plan” as “a plan established and maintained . . . for its employees . . . by a church.”   Then, in 1980, Congress amended the exemption by adding the provision at the heart of the three consolidated cases.  The new section provides: “[a] plan established and maintained . . . by a church . . . includes a plan maintained by [a principal-purpose] organization.”  The parties agreed that under those provisions, a “church plan” need not be maintained by a church, but they differed as to whether a plan must still have been established by a church to qualify for the church-plan exemption.

The Defendants, Advocate Health Care Network, St. Peter’s Healthcare System, and Dignity Health, asserted that their pension plans are “church plans” exempt from ERISA’s strict reporting, disclosure, and funding obligations.  Although each of the plans at issue was established by the hospitals and not a church, each one of the hospitals had received confirmation from the IRS over the years that their plans were, in fact, exempt from ERISA, under the church plan exemption because of the entities’ religious affiliation.

The Plaintiffs, participants in the pension plans, argued that the church plan exemption was not intended to exempt pension plans of large healthcare systems where the plans were not established by a church.

Justice Kagan’s analysis began by acknowledging that the term “church plan” initially meant only “a plan established and maintained . . . by a church.” But the 1980 amendment, she found, expanded the original definition to “include” another type of plan—“a plan maintained by [a principal-purpose] organization.’”  She concluded that the use of the word “include” was not literal, “but tells readers that a different type of plan should receive the same treatment (i.e., an exemption) as the type described in the old definition.”

Thus, according to Justice Kagan, because Congress included within the category of plans “established and maintained by a church” plans “maintained by” principal-purpose organizations, those plans—and all those plans—are exempt from ERISA’s requirements. Although the DOL, PBGC, and IRS had all filed a brief supporting the Defendants’ position, Justice Kagan mentioned only briefly the agencies long-standing interpretation of the exemption, and did not engage in any “Chevron-Deference” analysis.  Some observers may find this surprising, because comments during oral argument suggested that some of the Justices harbored concerns regarding the hundreds of similar plans that had relied on administrative interpretations for thirty years.

In analyzing the legislative history, Justice Kagan aptly observed, that “[t]he legislative materials in these cases consist almost wholly of excerpts from committee hearings and scattered floor statements by individual lawmakers—the sort of stuff we have called `among the least illuminating forms of legislative history.’” Nonetheless, after reviewing the history, and as she forecasted by her questioning at oral argument (see our March 29, 2017 Blog, Supreme Court Hears “Church Plan” Erisa Class Action Cases), Justice Kagan rejected Plaintiffs’ argument that the legislative history demonstrated an intent to keep the “establishment” requirement.  To do so “would have prevented some plans run by pension boards—the very entities the employees say Congress most wanted to benefit—from qualifying as `church plans’…. No argument the employees have offered here supports that goal-defying (much less that text-defying) statutory construction.”

In sum, Justice Kagan held that “[u]nder the best reading of the statute, a plan maintained by a principal-purpose organization therefore qualifies as a `church plan,’ regardless of who established it.”

Justice Sotomayor filed a concurrence joining the Court’s opinion because she was “persuaded that it correctly interprets the relevant statutory text.” Although she agreed with the Court’s reading of the exemption, she was “troubled by the outcome of these cases.”  Her concern was based on the notion that “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.”  This concern appears to be based on the view that some church-affiliated organizations effectively operate as secular, for-profit businesses.

Takeaways:

  • Although this decision is positive news for church plans, it may not be the end of the church plan litigation.  Numerous, large settlements have occurred before and since the Supreme Court took up the consolidated cases, and we expect some will still settle, albeit likely for lower numbers.
  • In addition, Plaintiffs could still push forward with the cases on the grounds that the entities maintaining the church plans are not “principal-purpose organizations” controlled by “a church.”

René E. Thorne and Charles F. Seemann III of Jackson Lewis P.C..

Employer No-Recording Policies May Violate NLRA Says the Second Circuit

On June 1, 2017, the U.S. Court of Appeals for the Second Circuit, which covers Connecticut, New York and Vermont, upheld a National Labor Relations Board (“NLRB”) finding that Whole Foods Market Group, Inc.’s no-recording policy was overbroad and violated the National Labor Relations Act (“NLRA”).

In Whole Foods Market Group, Inc. v. NLRB, Whole Foods’ employee handbook contained a provision that prohibited employees from recording conversations, phone calls, and meetings, without first obtaining managerial approval.  The court concluded that this no-recording policy violated the NLRA.  The NLRA deems it an unfair labor practice “to interfere with, restrain or coerce employees in the exercise of their rights [to, among other things, engage in concerted activities for the purposes of collective bargaining or other mutual aid or protection.]  Whole Foods insisted that its policy was not intended to interfere with employees’ rights to engage in concerted activity or to prevent them from discussing their jobs, and that it was merely a general prohibition against recording in the workplace.  Whole Foods argued that its policy was “to promote employee communication in the workplace” by assuring employees that their remarks would not be recorded.

Whole FoodsThe Second Circuit found, however, that the seemingly neutral policy was overbroad and could “chill” an employee’s exercise of rights under the NLRA.  In other words, the policy prohibited recording regardless of whether the recording involved an exercise of those rights.  As a result, “’employees would reasonably construe the language to prohibit’ recording protected by [the NLRA].”  Despite finding that Whole Foods’ policy violated the NLRA, the Second Circuit said that “[i]t should be possible to craft a policy that places some limits on recording audio and video in the work place that does not violate the [NLRA].”  Such a policy might be acceptable if it was narrow in scope, and furthered a legitimate safety concern.

Previously, in 1989, the Second Circuit held that recording a conversation at work in violation of a no-recording policy might not be sufficient “cause” for the termination of an employment agreement under Connecticut law.  In  Heller v. Champion Int’l Corp, (2d Cir. 1989), the Second Circuit rejected the employer’s assertion that such a recording constituted an act of disloyalty on the employee’s part.  According to the Second Circuit in Heller, the employee’s surreptitious tape-recording to be sure, represents a kind of ‘disloyalty’ to the company, but not necessarily the kind of disloyalty that under these circumstances would warrant dismissal as a matter of law. . . . Considering the range of factors that might have justified [the employee’s] conduct, especially his belief that he was gathering evidence in support of a possible claim of age discrimination, we cannot say that [the employer] had sufficient cause, as a matter of law, to dismiss him.

The Second Circuit’s latest decision in Whole Foods makes clear that an overbroad no-recording policy in the workplace will be stricken in violation of the NLRA.  At the very least, courts may disregard an overbroad policy depending upon the circumstances surrounding the recording.  In order for a no-recording policy to withstand scrutiny, care must be taken to limit the scope of the prohibition, and consider whether the employee’s purpose for recording jeopardizes an employer’s legitimate interest.

This post was written by Salvatore G. Gangemi of Murtha Cullina.