Tag: Labor Law

Out of Work? Out of Luck

Great posted added today at the National Law Review about the EEOC’s hearing about the impact of employers considering only those currently employed for job vacancies.  

EEOC Examines Employers’ Treatment of Unemployed Job Applicants at Hearing

WASHINGTON—In a public meeting held today, the U.S. Equal Employment Opportunity Commission (EEOC) examined the impact of employers considering only those currently employed for job vacancies.

“Throughout its 45 year history, the EEOC has identified and remedied discrimination in hiring and remains committed to ensuring job applicants are treated fairly,” said EEOC Chair Jacqueline A. Berrien. “Today’s meeting gave the Commission an important opportunity to learn about the emerging practice of excluding unemployed persons from applicant pools.”

According to Helen Norton, Associate Professor at the University of Colorado School of Law, employers and staffing agencies have publicly advertised jobs in fields ranging from electronic engineers to restaurant and grocery managers to mortgage underwriters with the explicit restriction that only currently employed candidates will be considered. “Some employers may use current employment as a signal of quality job performance,” Norton testified. “But such a correlation is decidedly weak. A blanket reliance on current employment serves as a poor proxy for successful job performance.”

“The use of an individual’s current or recent unemployment status as a hiring selection device is a troubling development in the labor market,” said Fatima Goss Graves, Vice President for Education and Employment of the National Women’s Law Center. She noted that this practice “may well act as a negative counterweight” to government efforts to get people back to work. Women, particularly older women and those in non-traditional occupations, are disproportionately affected by this restriction, testified Goss Graves.

Denying jobs to the already-unemployed can also have a disproportionate effect on certain racial and ethnic minority community members, Algernon Austin, Director of the Program on Race, Ethnicity, and the Economy of the Economic Policy Institute, explained. Unemployment rates for African-Americans, Hispanics and Native Americans are higher than those of whites. When comparing college-educated workers, the unemployment rate for Asians is also higher. Thus, restricting applications to the currently employed could place a heavier burden on people of color, he concluded.

The use of employment status to screen job applicants could also seriously impact people with disabilities, according to Joyce Bender, an expert in the employment of people with disabilities. “Given my experience, I can say without a doubt that the practice of excluding persons who are currently unemployed from applicant pools is real and can have a negative impact on persons with disabilities,” Bender told the Commission.

Dr. William Spriggs, Assistant Secretary of Labor for Policy, offered data supporting this testimony. Spriggs presented current national employment statistics showing that African-Americans and Hispanics are overrepresented among the unemployed. He also stated that excluding the unemployed would be more likely to limit opportunities for older applicants as well as persons with disabilities.

“At a moment when we all should be doing whatever we can to open up job opportunities to the unemployed, it is profoundly disturbing that the trend of deliberately excluding the jobless from work opportunities is on the rise,” said Christine Owens, Executive Director of the National Employment Law Project. In addition to presenting statistical evidence, she recounted stories unemployed workers have shared with her organization where they were told directly that they would not be considered for employment due to being unemployed.

James Urban, a partner at the Jones Day law firm, who counsels employers, expressed doubt as to the extent of the problem. Fernan Cepero, representing the Society of Human Resource Professionals, told the Commission that his organization is not aware of this practice being in regular use. But both Mr. Urban and Mr. Cepero noted that the automatic exclusion of unemployed persons from consideration does not constitute “due diligence” in the screening of job applicants.

© Copyright 2011 – U.S. Equal Employment Opportunity Commission

Ice Inspection Hits Close to Home – Guilty of I-9 Form Violations

Recently posted by Jennifer G. Parser of Poyner Spruill LLP at the National Law Review – details about a recent employer immigration fine – where the employer had a legal workforce…..

Fast Food Franchisee In Fayetteville, NC Fined Over $27,000 — Despite Legal Workforce

In a decision dated December 22, 2010, the US Department of Justice Executive Office for Immigration Review’s Office of the Chief Administrative Hearing Officer (OCAHO) found a fast food franchisee in Fayetteville, North Carolina, guilty of I-9 violations and fined the company $27,150. Count I alleged that the franchisee hired 11 individuals from 2006 through early 2009, yet failed to ensure that they properly completed Section 1 of the I-9 Form and/or failed itself to properly complete Section 2 or Section 3. Count II alleged that the franchisee hired 97 individuals during the same time period for whom it failed to prepare any I-9s. Penalties were sought in the amount of $1,028.50 for each violation, for a total of $111,078. OCAHO found that, based upon a visual inspection, the I-9 Forms for the 11 individuals named in Count I contained substantive violations, and no I-9 Forms could be produced for any of the 97 employees named in Count II. For reasons discussed below, OCAHO ultimately fined the franchisee $27,150, approximately 25% of the penalties sought by ICE.

Never Backdate I-9 Forms

Employers should be aware that the substantive violations found in Count I were caused in part by the ICE auditor subtly marking a Form I-9 to determine if it was later tampered with, something that the franchisee tried to do, demonstrating bad faith. In this case, the ICE auditor made “three subtle marks” to determine later whether the forms produced were backdated or completed after service of the Notice of Inspection on the franchisee in the context of the auditor simultaneously providing a sample I-9 Form and a copy of the Handbook for Employers (M-274). At that time, the ICE auditor expressly warned the franchisee’s employee not to backdate the I-9 Form if new ones were prepared. When the I-9s were subsequently reviewed by ICE, however, it was determined that they had all been completed after the Notice, and that 7 of the 11 forms were backdated with the employer attestation at Section 2 still left blank.

Factors Used by OCAHO in Setting Penalties

Turning to assessing the amount of fines to be levied, OCAHO considered the following five factors which were not given equal weight:

  • Size of the business,
  • Good faith of the employer,
  • Seriousness of the violation(s),
  • Whether or not the individuals involved were unauthorized aliens, and
  • Any history of previous violations of the employer.

 Each factor will be reviewed in light of the fines levied against the franchisee.

Size of Employer

OCAHO found the franchisee’s relatively small size to be a mitigating factor in assessing the fines. Analyzing its number of employees, OCAHO determined that despite being part of a national fast food franchise, the franchisee was in fact a small employer with a large turnover common in the fast food industry, hence the 97 former employees.

Good Faith

Any analysis of an employer’s good faith focuses first on whether or not the employer reasonably attempted to comply with its obligations prior to issuance of the Notice of Inspection. Here, OCAHO determined that:

“…there is not a scintilla of evidence that suggests [the franchisee] made any effort whatsoever to ascertain the requirements of the law…[The franchisee] made no effort at all to ascertain what the law required and lacked the reasonable diligence required: there was simply no attempt at compliance prior to the Notice of Inspection. [The franchisee’s] subsequent attempts at compliance have minimal bearing on an analysis of its good faith because conduct occurring after the investigation is over is ordinarily outside the permissible scope of consideration.”

It is important for employers to note that mistakes found in Section 1 completed by the employee can be attributable to the employer as the employer is obligated to ensure that the employee properly completes Section 1: “[The franchisee] not only made no effort at all to ascertain what the law requires or to conform its conduct to it, it also attempted deception by permitting employees to backdate I-9 forms, and this is sufficient to support an assessment of bad faith.”

Further, the franchisee’s belated and disingenuous attempt to complete the I-9s by failing to attest to its own compliance in Section 2 implies an avoidance of liability for perjury.

Seriousness of the Violation(s)

OCAHO noted that a failure to prepare an I-9 at all is among the most serious of paperwork violations. As described above as a demonstration of a lack of good faith, OCAHO found the franchisee’s failure to complete Section 2 to imply an avoidance of liability for perjury.

Employees were not Unauthorized and Employer had no History of Previous Violations
None of the employees whose I-9s were involved was an unauthorized to work, nor had the franchisee a history of violations, probably mitigating the fines levied.

Mitigating or Exacerbating Factors in Assessing Penalties

Here, OCAHO took into account the depressed state of the economy and the difficulty any displaced employee would have in finding other work and reduced the penalties accordingly. As a result, the franchisee was directed to pay $27,150 in civil money penalties and not the $111,078 sought by ICE.

Conclusion

Employers should be aware that they will be blamed by ICE and penalized accordingly for failing to ensure their employees are properly completing Section 1, for permitting backdating or tampering with incomplete or missing I-9s for failing to complete its Section 2. Merely employing a legal workforce will not absolve an employer from imposition of penalties if Section 1 of its I-9 Forms are not meticulously completed by the employee on day one of hire for pay and Section 2 by the employer by day three.  

© 2011 Poyner Spruill LLP. All rights reserved.

Federal Scrutiny of Social Media Policies – Facebook posting subject of NLRB settlement with employer

The much publicized case in front of the National Labor Relations Board (NLRB)  concerning the employer  charged by the NLRB with terminating an employee for posting disparaging comments about her supervisor on Facebook has been settled.   Bracewell & Giuliani posted the following on the National Law Review yesterday: 

 

On Monday, February 7, 2011, the National Labor Relations Board (NLRB) reached a settlement with American Medical Response of Connecticut, Inc., the employer recently charged by the NLRB with terminating an employee in violation of federal labor law for posting disparaging comments about her supervisor on Facebook. The NLRB complaint alleged that the employer’s policy regarding “Blogging and Internet Posting” was overly-broad and unlawfully interfered with employees’ rights under Section 7 of the National Labor Relations Act (NLRA) to engage in “concerted, protected activity.” As written, the challenged policy stated that “Employees are prohibited from making disparaging, discriminatory or defamatory comments when discussing the Company or the employee’s superiors, co-workers and/or competitors.”

Under the terms of the settlement agreement, the employer agreed to revise this policy to allow employees to discuss wages, hours, and working conditions with co-workers outside of the workplace, and agreed to refrain from disciplining or firing employees for engaging in such discussions. The matter of the employee’s discharge was resolved through a separate, private agreement between the employee and the employer.

Why is this important?

The NLRB’s involvement in this case indicates an increased focus on the enforcement of employee rights under Section 7 of the NLRA and on employers’ social media policies. Section 7 protects employees regardless of whether their workplace is unionized; therefore all employers must be cognizant of policies and practices that might be interpreted to limit employees’ right to engage in concerted action.

Actions needed?

The NLRB’s stated position on this issue is that employees are allowed to discuss the conditions of their employment with co-workers on Facebook, or other social media websites, to the same extent they are permitted to do so at the water cooler or a restaurant. To this end, policies or practices which could be interpreted as limiting such right should be modified to include a statement that the policy will not be construed or applied in any manner that interferes with employees’ rights under the NLRA.

© 2011 Bracewell & Giuliani LLP

Can a 401(k) Plan Member Recover Damages to His Individual Account Caused By a Plan Administrator’s Breach of Fiduciary Duty?

Recently posted at the National Law Review by guest blogger David B. Cosgrove – a question many unhappy 401(k) plans members may have pondered: 

An ERISA Plaintiff cannot seek individual monetary damages for a Plan Administrator’s breach of fiduciary duty to the plan. Importantly, however, seeking damages on behalf of the 401(k) Plan as a result of a Plaintiff’s losses in his individual account is explicitly permitted under LaRue v. DeWolff, Boberg & Associates, Inc., 552 U.S. 248 (2008), which held that ERISA Section 502(a)(2) authorizes recovery by a plan participant for fiduciary breaches “that impair the value of plan assets in a participant’s individual account.” 522 U.S. at 256. The Supreme Court in LaRue made clear its reasoning for this holding:

Whether a fiduciary breach diminishes plan assets payable to all participants and beneficiaries, or only to persons tied to particular individual accounts, it creates the kind of harms that concerned the draftsmen of § 409.  Id. at 256.

For instance, a Plaintiff may rely upon ERISA Section 502(a)(1)(B) for a Defendant’s failure to provide the Plaintiff with the full 401(k) benefits owed to him under the 401(k) Plan at issue. And the Plaintiff may also rely upon ERISA Section 502(a)(2) for a Defendant’s breaches of fiduciary duties. A plain reading of Sections 502(a)(1)(B) and 502(a)(2) establishes that the two sections provide for different relief. Indeed, as the 9th Circuit explicitly noted in Harris v. Amgen, Inc.:

Section 502(a)(1)(B) allows a plan participant “to recover benefits due to him under the terms of his plan.” By contrast, Section 502(a)(2) encompasses claims based on breach of fiduciary duty and allows for the more expansive recovery of “appropriate relief,” including disgorgement of profits and equitable remedies.  573 F.3d 728, 734, n. 4 (9th Cir. 2009) (citations omitted).

Regardless, some defendants incorrectly assert that “the Eighth Circuit and other courts alike have repeatedly held that participants cannot state claims for breach of fiduciary duty under ERISA Section 502(a) when they are also seeking to recover the same benefits under ERISA Section 502(a)(1)(B).” The falsity of this assertion is clear upon a review of the federal caselaw. Indeed, the cases usually cited are inapplicable in that each is either irrelevant or is limited in scope to claims brought under ERISA Sections 502(a)(1)(B) and 502(a)(3), not Sections 502(a)(1)(B) and 502(a)(2). See Geissal ex rel. Estate of Geissal v. Moore Medical Corp., 338 F.3d 926, 933 (8th Cir. 2003) (narrowly holding that a beneficiary cannot bring a claim for benefits under Section 502(a)(1)(B) and Section 502(a)(3)(B));Conley v. Pitney Bowes, 176 F.3d 1044, 1047 (8th Cir. 1999) (citing Wald v. Southwestern Bell Corporation Customcare Medical Plan, 83 F.3d 1002, 1006 (8th Cir. 1996) in holding that “where a plaintiff is ‘provided adequate relief by [the] right to bring a claim for benefits under [Section 502(a)(1)(B)],’ the plaintiff does not have a cause of action to seek the same remedy under [Section 502(a)(3)(B)]”). Some defendants also cite Coyne & Delaney Co. v. BCBS of Va., Inc., 102 F.3d 712 (4th Cir. 1996). However, Coyne is not relevant in that it analyses whether aplan fiduciary can bring a claim for benefits under ERISA Section 502(a)(3). 102 F.3d at 713.

Some plan defendants also rely upon the U.S. Supreme Court’s holding in LaRue v. DeWolff, Boberg & Assoc., Inc., 552 U.S. 248 (2008) for the proposition that duplicative claims under ERISA Section 502(a)(1)(B) and 502(a)(2) are inappropriate. Specifically, defendants may rely upon commentary by Chief Justice Roberts in that case, without revealing that Justice Roberts wrote the concurring opinion rather than the opinion of the Court. Accordingly, his analysis is not binding. Id. at 249. In fact, at the conclusion of his concurring opinion, Justice Roberts acknowledged that his analysis is not binding on the issue: “In any event, other courts in other cases remain free to consider what we have not—what effect the availability of relief under § 502(a)(1)(B) may have on a plan participant’s ability to proceed under § 502(a)(2).” Id. at 260.

Indeed, in Crider v. Life Ins. Co. of N. Am., 2008 WL 2782871 (W.D. Ky. 2008), the Western District of Kentucky acknowledged that Justice Roberts’ analysis inLaRue is not binding, and therefore noted that in deciding whether to allow a claim under both ERISA Section 502(a)(1)(B) and Section 502(a)(2), the question for the court is whether the facts the plaintiff alleges “state a claim for breach of fiduciary duty under Section 502(a)(2) which is separate from her claim for benefits under Section 502(a)(1)(B).” Id. at *2. The court further noted that in deciding this question, the Sixth Circuit has on at least three occasions “allowed plaintiffs to pursue both a claim for benefits under Section 502(a)(1) and also to attempt to hold a plan responsible for breaches of fiduciary duty under a separate Section 502(a) action.” Id. Finally, In Hill v. Blue Cross & Blue Shield of Mich., the Sixth Circuit observed that plan-wide claims are distinct from claims seeking to correct the denial of individual benefits. 409 F.3d 710, 718 (6th Cir. 2005).

Finally, it is well-established that “[i]n ruling on a motion to dismiss, a court must view the allegations of the complaint in the light most favorable to the plaintiff.”Guarantee Co. of North America, USA v. Middleton Bros., Inc., 2010 WL 2553693, at *2 (E.D. Mo. June 23, 2010). To survive a motion to dismiss, a claim need only be facially plausible, “meaning that the factual content…allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Id. (quoting Cole v. Homier Dist. Co., Inc., 599 F.3d 856, 861 (8th Cir. 2010)).

Copyright © 2011 Cosgrove Law, LLC.

Conduct Outside Business Hours: Guidelines for Minimizing Risk

Posted yesterday at the National Law Review by Wendy C. Hyland of Dinsmore & Shohl LLP – one of my personal favorite topics – after hour business social activities – who knew that one Harvey Wallbanger could make a person so wacky: 

Disciplining employees for conduct outside of work can be tricky territory and highly dependent on the specific nature of the incident. Consider both of the following scenarios. At an after hours dinner following a company annual meeting, several off color jokes are told about the shape of food on employees’ entrees after a few rounds of margaritas. Everyone is laughing at the jokes and no one reports being uncomfortable with the conversation. Since attendance is required, almost all employees are there, including human resources employees.

What should they do?

In the second scenario, employees playing on the company softball team go for happy hour after the game. An employee starts coming on to a co-worker and, after she rebuffs his advances, the co-worker follows her home and repeatedly knocks on her door asking to come in. At work the following Monday, she tells another co-worker about the incident but says it didn’t happen on work time and she doesn’t want to report it. The co-worker reports it to human resources, but doesn’t want anything to be done because she promised her co-worker she wouldn’t tell anyone. One event is a company-sponsored dinner following a company event, and the other is not. Is there a difference? What are the best practices to limit liability and, if necessary, discipline employees as the result of conduct outside of work hours?

Employers are in a tough position since, on one hand, parties and sports teams can be a great way to encourage employee morale and relationship building. On the other hand, they are fraught with potential legal issues, risks, and concerns. The first issue to consider is whether the event if company sponsored, because there is a difference between company-sponsored events and voluntary social opportunities. If an employee gets hurt while traveling to, or during the course of an event, the injury is likely to be considered work-related for workers’ compensation purposes. A company could be held responsible for any accidents or injuries resulting from employer-sponsored events. Ways to minimize this risk include:

 

  1. eliminating alcohol at company-sponsored events and informing employees that attendance is completely voluntary;
  2. require employees to pay for drinks, or provide drink tickets for a limited number of drinks;
  3. stop serving alcohol one hour before the event ends; and
  4. provide a taxi or other designated driver service or encourage employees to car pool and choose a designated driver.

What about employee behavior, whether at a company sponsored event or otherwise, and its impact on the workplace? In both of the above scenarios, there are potential issues implicating harassment/hostile work environment policies. What else can companies do to minimize risk in these situations? In the first scenario, potential measures prior to the event could include sending a company-wide e-mail explaining the parameters on alcohol, along with specific language about dress code and a reminder of the harassment/hostile work environment policy as a guide for appropriate behavior. After the event, the human resources employees could recirculate the company policy on harassment and have everyone sign an acknowledgement of receipt. In the second scenario, similar precautions regarding the parameters and rules of voluntary participation, alcohol use, and appropriate behavior could be circulated among employees before the softball season begins—handed out along with the team t-shirts. The company should immediately investigate the report on the potential harassment issue with the co-worker, even though neither party was at work when the event took place and there were requests not to do anything. Company response to issues is critical to defenses in the event of a harassment lawsuit. The co-worker’s report places the company on notice that potential issues exist, whether an employee wants its addressed or not. If warranted under company policy, disciplinary action could be appropriate, even for off duty conduct.

While legal issues and concerns are a reality, there are creative ways to minimize risk while pursuing the goal of workplace cohesion and relationship building.

© 2011 Dinsmore & Shohl LLP. All rights reserved.

Leasing Employees – Not a Risk Free Arrangement

Posted today at the National Law Review by  Melvin J. Muskovitz of Dykema Gossett PLLC – some of the key points to consider when considering entering into an employee leasing situation:  

While leasing employees from a staffing agency, either on a temporary or long term basis, is not a new phenomenon, the number of such workers is again increasing after reaching a low in July 2009, according to the Bureau of Labor Statistics. While there are a number of benefits to leasing employees, the arrangement is not risk free. This article discusses issues associated with the use of a contingent workforce.

Businesses may use temporary employment agencies to provide more flexibility with their workforce, maintaining a core workforce and utilizing temporary employees as the need exists. However, even though a staffing contract may state that the business is not the employer of thetemporary workers, it may be liable under various employment laws as a “joint employer” with the agency, despite the fact that the worker is paid by the agency and is not on the contracting business’ payroll.

Who is the legal employer?

Since the agency normally hires and pays the employee, provides workers’ compensation coverage, and if necessary, terminates the employee, it has an employer/employee relationship with the worker.However, during the job assignment, the entity to whom the worker is assigned may also be considered a joint employer depending upon the amount of control it exercises over the worker. A determination of joint employment is made by looking at the entire relationship

Factors to consider in determining if there is a joint employment relationship include:

  • the nature and degree of control over the worker;
  • the degree of supervision, direct or indirect, exercised over the work, including the scheduling of hours worked;
  • the furnishing of work space and/or equipment for the job;
  • the power each has to determine the pay rates or the methods of payment of the employee; and
  • the right each has to hire, fire or modify the worker’s employment conditions.

What is the liability for the joint employer?

If the agency and the client are held to be joint employers, both may be liable under federal or state employment laws.

Anti-Discrimination

If the entity to whom a worker is assigned treats that worker in a discriminatory manner, or subjects the employee to a hostile environment, it may be liable. Further, generally, the entity to which a worker is assigned is required to provide an accommodation if it has notice of the need for it and can do so without an undue hardship.

Family and Medical Leave Act (FMLA)

The FMLA generally covers private employers with 50 or more employees and all schools and public agencies. Employees jointly employed by two employers must be counted by both for FMLA purposes. If a temporary employee fills in for an absent one who is expected to return, both employees count toward the employer’s 50-employee minimum for FMLA coverage purposes. Part-time employees who work for a full workweek, including those hired through a temporary agency, count toward the 50 minimum for FMLA coverage.

When organizations are considered joint employers under the FMLA, only the primary employer is responsible for giving notices concerning FMLA leave, providing the leave, and maintaining health benefits.In a joint employment situation, the primary employer is the one that has the authority to hire or fire, assign or place the employee, and provide pay and benefits. The secondary employer is responsible for accepting an employee returning from leave if the secondary employer continues its relationship with the agency and the agency elects to return the employee to that job.

Fair Labor Standards Act (FLSA)

The FLSA makes both employers liable for minimum wage and overtime requirements.

National Labor Relations Act (NLRA)

Joint employers may both be liable under the NLRA if they share matters governing essential terms and conditions of employment such as hiring, supervision, disciplining and discharging. Therefore both employers may be found liable in an unfair labor practice. In addition,the National Labor Relations Board has taken the position that temporary employees from an agency may be included in a bargaining unit or voting unit if the temporary employees share a “community of interests” with the regular employees.

Occupational Safety and Health Act (OSHA)

Generally with joint employers under OSHA, the employer at whose business location the temporary employee is assigned will be the liable employer for work-related injuries. The staffing agency will normally be cited only if it knew or should have known of the unsafe conditions or if the citation is necessary to correct a violation.

Benefits Statutes

Depending on the terms of a business entity’s benefit plans, in addition to other factors, leased employees may be entitled to benefits provided to an entity’s regular employees.

Best Practices

1. Employers should seek indemnity agreements in the contracts they sign with temporary staffing agencies so that the agency retains liability for employment related claims and agrees to indemnify the client for any losses they may incur attributable to the actions of the staffing agency.

2. Contracts with staffing agencies should include a provision that makes the staffing agency responsible for payment of all federal, state and local employment taxes, including income taxes, FICA and unemployment taxes.

3. Employers should verify that the employees are covered under the staffing agency’s workers’ compensation policy.

4. Employers should accommodate the needs of a worker with a disability, or be able to justify why it would be an undue hardship to do so.

5. Employers should ensure that temporary or leased employees are not subjected to discriminatory treatment or harassment.

6. Employers should review all policies and benefit plans, to ensure that leased employees are not eligible to receive company benefits.

© 2011 Dykema Gossett PLLC.

 

The Wrongful Distribution of Retirement Benefits to a Plan Fiduciary is Prohibited by ERISA Section 406(b)

This week’s featured bloggers at the National Law Review are from Cosgrove Law L.L.C.   In the ‘who knew’ category from Kurt J. Schafers:  the wrongful distribution of plan benefits to a Plan Fiduciary.  

Although the distribution of benefits to a plan participant is not a “transaction” as that term is used in Section 406(a), the wrongful distribution of benefits to a plan fiduciary is clearly prohibited conduct under Section 406(b). For example, inLockheed Corp. v. Spink, 517 U.S. 882 (1996), the plaintiff brought suit against his employer (administrator of his 401(k) plan) under Section 406(a)(1)(D) because the employer wrongfully allowed some of its employees to receive early retirement benefits that the plaintiff was unable to receive. Id. at 892-93. The respondent argued that the payment of benefits is not a “transaction” under Section 406(a). Id.at 892. In its holding, the Court agreed with the respondent, but made clear that its holding was strictly limited to the language of Section 406(a). Indeed, the Court clarified that “the payment of benefits is in fact not a ‘transaction’ in the sense that Congress used that term in § 406(a).” Id. at 892 (emphasis added).

The narrow scope of Lockheed becomes clear upon a review of subsequent federal caselaw. See Armstrong, 2004 WL 1745774, at *10 (holding “payments to participants in accordance with plan terms not to be transactions within the meaning of [Section 406(a)]”); Owen v. SoundView Financial Group, Inc., 54 F.Supp.2d 305, 323 (S.D. N.Y. 1999) (holding that “ERISA’s “Prohibited Transaction” rules, see 29 U.S.C. §§ 1106(a) [ERISA Section 406(a)]…are not applicable to the payment of Plan benefits to a Plan beneficiary, because the beneficiary is not a “party in interest”). The limited scope of Lockheed is confirmed by the equally limited scope of Section 406(a). For instance, Section 406(a), entitled, “Transactions between plan and party in interest,” is plainly intended to govern only those transactions in which fiduciaries cause a plan to engage. Indeed, Section 406(a)(1) begins with the following language: “A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect. . . .” (emphasis added). Section 406(a)(1) then lists five narrow types of transactions in which a fiduciary should not cause a plan to engage. Courts have determined that the purpose of Section 406(a) is limited to “prevent[ing] plan fiduciaries from engaging in certain transactions that benefit third parties at the expense of plan participants and beneficiaries.” Armstrong v. Amsted Industries, Inc., 2004 WL 1745774, at *10 (N.D. Ill. 2004); Marks v. Independence Blue Cross, 71 F.Supp.2d 432, 437 (E.D. Pa. 1999).

The limited holding of Lockheed (and the subsequent federal court decisions) does not, however, apply in many cases. Indeed, a plaintiff’s prohibited transactions claim against a defendant may be brought under a completely separate ERISA provision: Section 406(b). This Section, entitled “Transactions between plan and fiduciary,” may more clearly apply to a defendant’s conduct. Importantly, unlike Section 406(a), Section 406(b) does not specifically limit which types of transactions apply to the Section. As such, the “transactions” contemplated under Section 406(b) are much broader in scope than those specifically set forth in Section 406(a). Moreover, rather than aiming to prevent plan fiduciaries from engaging in transactions that benefit third parties at the expense of plan participants and beneficiaries, Section 406(b) aims to prevent—among other things—plan fiduciaries from engaging in prohibited transactions for their own account. A plan fiduciary wrongfully using his or her power to obtain a higher distribution than is warranted, for example, obviously falls under the broad conduct contemplated under Section 406(b).

Finally, Section 408(c)(1) reads as follows:

Nothing in [ERISA Section 406] shall be construed to prohibit any fiduciary from—

(1) receiving any benefit to which he may be entitled as a participant or beneficiary in the plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of the plan as applied to all other participants and beneficiaries.

A plain reading of this Section establishes that Section 406 should be construed to prohibit a fiduciary from receiving a benefit that is computed and paid on a basis which is inconsistent with the terms of the plan as applied to all other participants and beneficiaries.

Copyright © 2011 Cosgrove Law, LLC.

Ninth Circuit Holds that Repayment for Training is Not an Illegal 'Kick-Back'

Judd H. Lees of William Kaster recently posted at the National Law Review information about a  recent 9th Circuit case involving the repayment of training costs for employees: 

Many employers provide expensive training to new employees only to see the newly trained employees disappear after a short tenure.  In order to recoup the costs associated with upfront training, some employers require repayment of training costs on a graduated scale based on the tenure of employment.  In Gordon v. City of Oakland, the Ninth Circuit Court of Appeals determined that such a written agreement did not violate the Fair Labor Standards Act as an unlawful kick-back.

In Gordon the City of Oakland’s police department required officers to repay a portion of their training costs if they voluntarily left the City’s employment before completing five years of service.  If they left prior to one year of employment, the departing officer owed 100 percent of the training costs and the percentage dropped by 20 percent every year until no repayment was required for a separation after five years of employment.  The written training reimbursement agreement was signed by employee Gordon.  Gordon resigned after completing her second year of service and received her full paycheck.  However, the City withheld her accrued unused vacation and compensatory time off as partial payment for the training costs and also served her with a demand for the remaining training costs which were not covered by the withheld amounts.

Gordon filed a lawsuit alleging that the City’s action violated the federal Fair Labor Standards Act.  Specifically, Gordon alleged that there was no legal difference between deducting the entire sum from her paycheck and directly demanding payment of the sum after receiving her paycheck.  Both resulted in a negative sum for her last week of work and therefore violated the minimum wage requirement of the FLSA.

The district court disagreed and held that the issuance of a paycheck exceeding the minimum wage amount complied with the FLSA and that the subsequent demand was, indeed, a distinction with a difference.  On appeal to the Ninth Circuit, the Court agreed and held that the City was free to both deduct a portion of the training costs and seek repayment of the remaining training costs as “an ordinary creditor” and that the agreement to repay the training costs did not constitute a kick-back under the FLSA.

Employers who choose to rely on such a repayment plan should note the following.  First, the employee signed a written agreement which provided the basis for recoupment of the training costs.  Second, and most importantly, the employer made sure that the employee’s last paycheck met the minimum wage requirements and did not subtract the entire amount due.  The Court suggested that its holding may have been different had the paycheck fallen below the minimum wage requirements.  Employers are cautioned to ensure that any and all deduction from wages are expressly agreed to ahead of time by the employee since both state and federal law require this.  In addition, if an employer contemplates satisfying such “loans” from final paychecks, this also needs to be specifically set forth in the agreement.  The wiser alternative is to make sure that the final paycheck at least results in payment of minimum wages for the final week accompanied by a demand for payment of the remaining amounts.

© 2002-2011 by Williams Kastner ALL RIGHTS RESERVED

Section 409A Again? Employers Need to Re-examine Executive Employment Contracts and Other Agreements Conditioning Severence Payments Upon a Release of Claims

Recently posted at the National Law Review by Nancy C. Brower and David L. Woodard of Poyner Spruill LLP – information for employers about the tax Consequences of employment agreements, retention agreements, severance agreements and change in control agreements: 

Agreements that provide for payments upon termination of employment, such as employment agreements, retention agreements, severance agreements and change in control agreements, often condition payment upon the return of an executed release of claims. Since Section 409A allows agreements to provide for a payment window of up to 90 days from separation from service, it was widely believed that an agreement could provide for payments to begin upon the return of a release, provided the release was required to be returned within the 90-day window period and the company determined the time of payment. In Notice 2010-6, the IRS stated that this type of provision is not Section 409A compliant. Fortunately, at the end of last year, the IRS came out with relief that will allow companies to correct this problem without employees incurring Section 409A taxation.

Action Step

Companies should immediately identify all employment agreements, retention agreements, severance agreements and change in control agreements that condition severance payments upon the return of a release. All of these agreements should be reviewed for Section 409A compliance based on the new guidance from the IRS. Companies should not rely on the fact that the agreements were previously reviewed for Section 409A compliance, since the 2010 guidance from the IRS was not anticipated by most practitioners. Companies should pay careful attention to the timing of payments made under impacted agreements during 2011, as payments made after March 31, 2011 must comply with the corrective guidance contained in Notice 2010-80. Further, any impacted agreements that are outstanding or have any payments still due after December 31, 2012, must be amended to correct the agreement provisions in accordance with Notice 2010-80 no later than December 31, 2012.

 © 2011 Poyner Spruill LLP. All rights reserved.

Reprieve For Fully Insured, Non-Grandfathered Group Health Plans From Complying With PPACA Nondiscrimination Rules

From featured guest bloggers Amy M. Christen and Gabriel S. Marinaro of Dykema Gossett PLLC – updates on the implementation of the Public Health Service Act: 

Notice 2011-1 states that the Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively referred to as the “Departments”), have determined that compliance with new nondiscrimination rules under Section 2716 of the Public Health Service Act (“PHS Act”) will not be required until plan years beginning after regulations or other administrative guidance has been issued. The Departments issued Notice 2011-1 in response to concerns raised regarding a plan sponsor’s ability to implement the new nondiscrimination rules without such guidance, and specifically held that a plan sponsor of a non-grandfathered fully insured group health plan would not be subject to the excise taxes for failure to comply with such new nondiscrimination rules, nor be required to file IRS Form 8928 until plan years beginning after the guidance has been issued.

The Patient Protection and Affordable Care Act (the “Affordable Care Act”) added Section 2716 of the PHS Act, which prohibits a fully insured, non-grandfathered group health plan from discriminating in favor of highly compensated individuals as to eligibility to participate in such plan, as well as to benefits offered to participants under the plan in accordance with the rules similar to the ones set forth under Code Section 105(h). Under Code Section 105(h), highly compensated individuals generally include the five highest-paid officers, employees at any time during the plan year with more than a 10 percent ownership, and all other employees who are among the highest-paid 25 percent of all employees. If a fully insured, non-grandfathered group health plan discriminates in favor of highly compensated employees as to eligibility to participate or as to providing benefits to participants, the employer will be the party to suffer the consequences. Specifically, the Affordable Care Act imposes an excise tax on employers that do not satisfy the market reform and consumer protection provisions of the Affordable Care Act equal to $100 per day for each affected participant, up to a maximum fine for unintentional failures of $500,000 per taxable year. The IRS (or HHS) has discretion to waive the tax in whole or in part to the extent the failure was due to reasonable cause and not to willful neglect, and small employers with no more than 50 employees may be exempt from such tax with certain exceptions. An employer also may be subject to a civil lawsuit filed by non-highly compensated employees. Until guidance is issued stating otherwise, it does not appear that highly compensated individuals will be subject to any adverse income tax consequences on the value of health benefits provided under a discriminatory fully insured, non-grandfathered group health plan. 

If a fully insured group health plan maintains its grandfathered status (within the meaning of Section 1251 of the Affordable Care Act and the Departments’ grandfathered regulations), then it is exempt from these new nondiscrimination requirements. A group health plan has grandfathered status only if it existed as of March 23, 2010, and it does not make plan design changes above certain threshold amounts set forth in the grandfathered plan regulations. Additionally, certain HIPAA-excepted benefits are not subject to the new nondiscrimination requirements, including a limited-scope dental or vision plan that is offered through a different insurance carrier than the medical plan or is offered separately to employees for an additional premium cost. Unless future guidance provides otherwise, HIPAA-excepted benefits that are not subject to the new nondiscrimination rules also may include a stand-alone retiree-medical plan that covers only former employees of an employer (and does not cover active employees).

Before the enactment of the Affordable Care Act, the nondiscrimination requirements under Code Section 105(h) only applied to self-insured group health plans. A self-insured plan is one in which the employer pays for the benefits out of its general assets as opposed to paying through a fully insured policy. IRC Section 105(h) prohibits a self-insured plan from discriminating in favor of highly compensated employees as to eligibility to participate or in favor of highly compensated participants as to benefits provided under such self-insured plan. A discriminatory self-insured plan produces adverse tax consequences to the highly compensated employees / participants (e.g., all benefit reimbursements made under a discriminatory plan will be taxable to such highly compensated individuals rather than any excise taxes on the employer).

The Departments have requested additional comments on PHS Act Section 2716 by March 11, 2011, and Notice 2011-1provides specific issues on which the Departments would like additional comments as a follow-up to the public comments received in response to IRS Notice 2010-63.

© 2011 Dykema Gossett PLLC.