Agencies Issue Additional FAQs on Health Care Reform and the Mental Health Parity Act

Recent featured guest blogger at the National Law Review Penny C. Wolford of Ford & Harrison LLP – brings to our attend the recent actions by Departments of Health and Human Services, Labor and Treasury regarding the implementation of the the Patient Protection and Affordable Care Act (“health care reform”) and the Mental Health Parity and Addiction Equity Act. Of most note to employers is:

Right before the holidays, the Departments of Health and Human Services, Labor and Treasury issued additional Frequently Asked Questions (FAQs) regarding implementation of the Patient Protection and Affordable Care Act (“health care reform”) and the Mental Health Parity and Addiction Equity Act. The guidance of most note to employers is as follows:

1. Automatic Enrollment in Health Plans: The agencies clarified that the automatic enrollment requirement of health care reform does not become effective until the agencies issue regulations on the requirement. The Department of Labor indicated that it intends to issue regulations on the automatic enrollment requirement sometime before 2014.

2. 60-Day Prior Notice Requirement for Material Modifications: Health care reform requires group health plans to provide notice of modifications to participants no later than 60 daysprior to the date on which the modification becomes effective. The agencies clarified that group health plans are not required to comply with the 60-day advance notice requirement until standards for the requirement are issued by the agencies.

3. Dependent Coverage of Children to Age 26: Health care reform prohibits group health plans from making distinctions based upon age in dependent coverage. (For example, charging a higher premium for adult children than for minor children would be a prohibited distinction.) The agencies clarified that health care reform does not prohibit distinctions based upon age that apply to all coverage under the plan. Therefore, in answer to the specific question posed in the FAQs, the agencies determined that it is permissible for a group health plan that normally charges a co-payment for physician visits that do not constitute preventive services, to charge a co-payment to individuals age 19 and over, including employees, spouses, and dependent children but waive the requirements for those under age 19.

4. Grandfathered Health Plans: The agencies clarified that a fixed amount cost-sharing, other than a co-payment, that is based on a percentage-of-compensation formula, will not cause a plan to lose grandfathered plan status as long as the formula remains the same as that which was in effect on March 23, 2010, even though the actual cost-sharing may change as a result of a change in the employee’s compensation.

5. Mental Health Parity Act: The agencies issued several answers to questions on the Mental Health Parity Act, including: (a) confirming that a small employer exempt from the Act is an employer with 50 or fewer employees; (b) stating that a contracting health care provider can request and is entitled to receive the plan’s criteria for medical necessity determinations; and (c) explaining that plans can apply for the increased cost exemption under the Act if costs under the plan have increased at least 2 percent in the first year that the Act applies to the plan (the first plan year beginning after October 3, 2009), or at least 1 percent in any subsequent plan year (generally, plan years beginning after October 3, 2010.) The exemption lasts for one year and allows the plan to be exempt from the requirements of the Act for the following year. Plans can apply for the cost exemption by following the exemption procedures described in the 1997 Mental Health Parity Act regulations.

6. Wellness Programs: Along with health care reform and the Mental Health Parity Act, the agencies also addressed a few FAQs on HIPAA and wellness programs. Most notably, the Department of Labor explained that under health care reform, the maximum reward that can be provided under a HIPAA wellness program will increase from 20% to 30%. The increase will not occur under health care reform until 2014. However, the agencies intend to propose regulations using regulatory authority under HIPAA to raise the percentage for the maximum reward that can be provided under a HIPAA wellness program to 30% before the year 2014.

Employers’ Bottom Line

The agencies continue to define the landscape of health care reform even for the first round of requirements that have already gone into effect or will be going into effect for employer‑sponsored plans beginning on or after the first plan year following September 23, 2010. Employers should keep an eye out for additional guidance and make a good-faith effort to comply with existing guidance with an understanding that additional adjustments may be necessary as further guidance and clarifications are issued.

FDA Commissioner Margaret Hamburg Key Note Speaker NYSBA Annual Meeting Food, Drug & Cosmetic Law Section Lunch Jan 27th

The National Law Review would like to you know that the New York State Bar Association Food, Drug & Cosmetic Law Section is featuring FDA Commissioner Margaret Hamburg MD as their luncheon keynote speaker on Thursday January 27th as part of the NYSBA’s Annual Meeting being held at the Hilton New York in New York City from Jan 24th-29th. The lunch will be held on Thursday January 27th in the Trianon Ballroom on the 2nd floor. For Tickets and More Information, Please Click Here

Congress Finally Resolves Estate Tax Uncertainty: But Only for Two Years!

Very Comprehensively written article by Michael D. Whitty and Igor Potym of Vedder Price P.C. – so much good Year End Tax Information we thought we’d include it here too:

As part of a compromise to extend the income tax rates in effect from 2003 to 2010 (sometimes described as the “Bush tax cuts”) and unemployment benefits, Congress has finally resolved uncertainties in the estate, gift, and generation-skipping transfer (“GST”) taxes. The new law makes the most significant changes to these taxes since 2001, including a generous increase in exemptions and a significant reduction in tax rates for 2011–2012. In order to take advantage of some one-time wealth transfer opportunities, action is required before the end of 2010. For nearly all high-net-worth persons, the next two years will bring extraordinary estate planning opportunities. Unfortunately, and contrary to many media claims, 2011 and 2012 will also bring added complexity and uncertainty. Surprisingly, estate planning for married persons with estates of less than $10,000,000 may actually be more complicated than planning for married persons with larger estates. Accordingly, all estate plans should be reviewed early in 2011 to determine whether the plan will work as intended under the new tax laws. Persons who would like to discuss how the new estate, gift, and GST tax laws affect their specific situations and existing estate plans should call a member of the Estate Planning Group of Vedder Price P.C.

Executive Summary

The following is an executive summary of the most notable effects of the new law; a more detailed discussion of each can be found inside this Bulletin:

Income Tax Rates Continued for 2011–2012. The 2010 income tax rates are continued for two more years, including the preferential 15% tax rate for long-term capital gains and qualified dividends.
Estate Tax Made Optional for 2010. The estate tax, which had been repealed for 2010, was reinstated effective January 1, 2010, but the executor for a person dying in 2010 may elect to opt out of the estate tax and apply carryover basis instead.
Transfer Tax Exemptions Increased, Tax Rate Reduced. The lifetime exemption amount for transfer taxes—the estate tax, gift tax, and GST tax—is set at $5,000,000. These increases are effective in 2010 except for the gift tax exemption, which remains $1,000,000 until 2011. The tax rate on estates, gifts, and generation-skipping transfers above these amounts is 35%.
Generation-Skipping Transfer Tax Rate Is Zero for 2010. For all of 2010 (including the balance of the year), the GST tax rate is zero.
Unused Estate Tax Exemption Transferable to Surviving Spouse. Beginning in 2011, the unused estate and gift tax exemptions of the first spouse to die may be transferred to the surviving spouse for both gift and estate tax purposes.
Bullets Dodged. The new legislation did not include recent proposals to reduce or eliminate the effectiveness of several of the most advantageous estate planning techniques.
Direct Gifts from IRAs to Charities Reinstated for 2010–2011. In 2008–2009, IRA owners over age 70½ could make direct distributions from their IRAs to charities and exclude the amount from income while treating it as part of their required minimum distribution. The new law extends that option through 2011. Because so little time remains in 2010, a special rule permits taxpayers to make such a transfer in January 2011 and treat it as if it had been made on December 31, 2010.

The “Tax Relief, Etc.” Act of 2010

The bill passed by Congress and signed by President Obama on December 17, 2010, H.R. 4853, was titled the “Tax Relief, Unemployment Insurance Authorization, and Job Creation Act of 2010” in its final form. (It had previously carried other names, including the “Middle Class Tax Relief Act of 2010.”) For simplification, this Bulletin will refer to it as the “2010 Tax Act” or “the Act.”

The bill went through many changes in the last month prior to enactment, and includes some unexpected provisions while excluding other provisions that had been expected. As a result, some of our recommendations from prior bulletins have changed. Please contact a member of our Estate Planning Group for confirmation before acting on our prior recommendations.

The benefits of the Act may be temporary, however. All of the tax changes included in the Act will expire on or before January 1, 2013. Without further action by Congress, the estate, gift, and GST tax rates and exemptions applicable on January 1, 2001 will return on January 1, 2013. Additional legislation in late 2012 or early 2013 seems likely, but it is impossible to predict the details of that legislation.

Income Tax Rates Continued for 2011–2012

The Act continues the 2009 income tax rates through 2012, including the preferential 15% tax rate for long-term capital gains and qualified dividends. Apart from other changes discussed later in this Bulletin, these changes include:

Withholding of Social Security tax from wages and self-employment income for 2011 decreased by two percentage points (with the gap made up from general federal revenues)
AMT “relief” for most taxpayers through 2011
Ability to deduct state sales tax as an itemized deduction through 2011
Enhanced business capital investment deductions and research and development credits

Summary of Changes to Transfer Tax Rates and Exemptions

		2009		2010				2011–2012		2013 (if no action)
Tax:		Exemption	Rate	Exemption			Rate	Exemption	Rate	Exemption	Top Rate
Gift		$1,000,000	45%	$1,000,000		35%		$5,000,000	35%	$1,000,000		55%
Estate		$3,500,000	45%	$5,000,000	[1]	35%		$5,000,000	35%	$1,000,000		55%
GST		$3,500,000	45%	$5,000,000		0%		$5,000,000	35%	$1,400,000	[2]	55%
Notes:	[1] Executors for decedents dying in 2010 may opt out of estate tax, into carryover basis.
	[2] The GST exemption shown for 2013 is a projection, as it would be $1,000,000 indexed for inflation.

Estate Tax Made Optional for 2010

Under the 2001 tax act, the estate tax had been gradually eased, and was then repealed for one year only, 2010. The new Act reinstates the estate tax and stepped-up basis (used for measuring capital gains) effective January 1, 2010. This default rule benefits most estates that are too small for estate taxes but benefit from having stepped-up basis automatically apply to all assets. However, the executor of a 2010 estate may elect to opt out of the estate tax and instead apply carryover basis (where the heirs take the decedent’s basis). (See the item below regarding due dates.)

Transfer Tax Exemptions Increased, Tax Rates Reduced

The Act resets the estate tax exemption to $5,000,000 per decedent, effective January 1, 2010 (up from $3,500,000 in 2009). The exemption for the GST tax is also $5,000,000 effective January 1, 2010. The Act also increases the gift tax exemption to $5,000,000 to re-unify it with the estate tax exemption, but that change is delayed until 2011. These exemption amounts are also adjusted for inflation, beginning in 2012. However, all of these exemptions will revert to $1,000,000 in 2013 unless Congress takes additional action. The Act sets a 35% tax rate on estates, gifts, and generation-skipping transfers above the exemption amounts. This compares favorably with the 45% top rate that applied in 2009, and the 55% rate that would have applied in 2011 if Congress had not acted (and will apply in 2013 if Congress fails to take additional action).

The Act also changes how prior taxable gifts are taken into account in gift and estate tax calculations, by applying the tax rates for the year in question rather than the year of the prior gifts. In our October 2010 Bulletin, we described how the transition in the gift tax rates and exemption from 2010 to 2011 would allow some donors who had already used all of their gift tax exemption to make a modest additional tax-free gift of $36,585 in 2011. The Act’s changes in the gift tax rate, exemptions, and calculations of taxes on prior taxable gifts will eliminate that effect for 2011, but will allow much more extensive tax-free gifts.

Due Dates for 2010 Returns, Disclaimers

To prevent unfairness, the Act extends the due date for all estate and GST tax returns affected by the Act until September 17, 2011, nine months after the date of enactment (as that date falls on a Saturday, the effective date will be September 19, 2011). The due date for related tax payments is also extended to the same date. The deadline for qualified disclaimers (an affirmative election to decline a gift or bequest, treated under federal law as if the disclaimant had predeceased the transfer) is also extended to September 17, 2011. However, the due date for 2010 gift tax returns was not extended.

Generation-Skipping Transfer Tax Rate Fixed at Zero for 2010

The Act sets the GST tax rate at zero for all of 2010 (including the balance of the year after enactment). This means that gifts, bequests, trust terminations, and trust distributions to grandchildren made this year will face no GST tax. If the transfer was made to a trust for a grandchild, the GST tax consequences are more tricky. Neither the transfer to the trust nor a future distribution to the grandchild will be subject to GST tax. However, future distributions from the trust to great-grandchildren or younger descendants will be subject to GST tax unless the trust is made exempt by allocation of the transferor’s GST exemption. In addition, a transfer in 2010 to a typical generation-skipping trust that benefits children, grandchildren, and younger descendants will not be exempt from GST tax in the future unless the trust is made exempt by allocation of the transferor’s GST exemption. If you have already made or plan to make gifts to grandchildren in 2010, contact a member of our Estate Planning Group to discuss the effects of the new Act, including reporting requirements and tax elections.

Unused Estate Tax Exemption Transferable to Surviving Spouse

Beginning in 2011, the unused estate tax exemption of the first spouse to die may be transferred to the surviving spouse by an election filed with the first spouse’s estate tax return. This may require the filing of an estate tax return in cases where a return would not otherwise be required. The surviving spouse may use this transferred exemption for lifetime gifts as well as for bequests at death. Only the unused exemption from the last deceased spouse will apply, and the death of a subsequent spouse will reset the identity of the last deceased spouse. However, lifetime gifts could use a predeceased spouse’s exemption before the death of a subsequent spouse changes the amount of exemption available.

For planning purposes, transferability of the unused estate tax exemption of the first spouse does not eliminate the value of so-called credit shelter trusts and QTIP trusts as part of the estate plan. As one example, the new law does not allow the unused GST tax exemption of the first spouse to be transferred to the surviving spouse. The credit shelter trust and QTIP trust are two tools to avoid wasting the first spouse’s GST tax exemption.

Bullets Dodged

The Tax Reform Act of 2010, in its final form, did not include recent legislative proposals (some of which had already passed in the House or Senate, but not both) to reduce or eliminate the effectiveness of several of the most attractive estate planning techniques. The final legislation did not include recent proposed legislation to reduce or eliminate valuation discounts on intra-family transfers of non-operating partnerships and LLCs, to impose a 10-year minimum term on grantor retained annuity trusts (commonly known as GRATs), or to require taxpayers to use a consistent basis for estate and income tax purposes.

Direct Gifts from IRAs to Charities Reinstated for 2010–2011

In 2008–2009, IRA owners over age 70½ could make direct distributions from their IRAs to charities of up to $100,000 per year and exclude the amount from income, while treating it as part of their required minimum distribution. The new law extends that option through 2011. Because so little time remains in 2010, a special rule permits taxpayers to make such a transfer in January 2011 and treat it as if it had been made on December 31, 2010.

Roth Conversions

The new Act did not change the rules regarding Roth IRA conversions, discussed in prior Bulletins. The only thing that expired in 2010 was the election to report the tax over the following two taxable years (2011 and 2012). Conversions in 2011 will still work as in 2010, except that the taxable income has to be recognized entirely in 2011.

The New Law’s Effect on Estate Planning

The fundamental principles and priorities of estate planning will remain the same. However, the effect and relative value of certain specific techniques have changed. Some opportunities have been improved, others have disappeared, and still others remain but have decreased in relative importance.

As noted at the opening of this Bulletin, the new tax laws create extraordinary estate planning opportunities for high-net-worth individuals. Additionally, the new tax laws will impact the basic estate plan of nearly all persons with significant assets. Estate planning for married persons with combined estates of less than $10,000,000 will be particularly complex, given the possibility that the estate, gift, and GST tax exemptions will revert to only $1,000,000 per person in 2013.

Time for Action

A few of the opportunities described in this Bulletin have an absolute expiration date: December 31, 2010. Others may expire as soon as December 31, 2012.

Other Super Year-end Tax and Estate Planning Articles:

FEDERAL TAX NOTICE: Treasury Regulations require us to inform you that any federal tax advice contained herein (including in any attachments and enclosures) is not intended or written to be used, and cannot be used by any person or entity, for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.

Food Safety Bill Leaves Senate with Unanimous Consent, House Vote Tuesday

Update yesterday from National Law Review guest blogger William Marler of the Marler Blog:

Perhaps the President will bring the Bill with him to Hawaii for Christmas – It’s a short flight from Seattle. Thanks to Republican and Democratic Staff for this great Summary of the House and Senate version of the Bill:

Noteworthy

· S. 510 is intended to respond to several food safety outbreaks in recent years by strengthening the authority of the Food and Drug Administration (FDA) and redoubling its efforts to prevent and respond to food safety concerns.

· The legislation expands current registration and inspection authority for FDA, and re-focuses FDA’s inspection regime based on risk assessments, such that high-risk facilities will be inspected more frequently. The bill also requires food processors to conduct a hazard analysis of their facilities and implement a plan to minimize those hazards.

· The bill requires FDA to recognize bodies that accredit food safety laboratories domestically and third-party auditors overseas. The bill enhances partnerships with state and local officials regarding food safety outbreaks, and establishes a framework to allow FDA to inspect foreign facilities.

· The bill does NOT change the existing jurisdictional boundaries between FDA and the Department of Agriculture, and includes protections for farms and small businesses.

· The bill gives the FDA the power to order mandatory food recalls, in the event that a food company cannot or does not comply with a request to recall its products voluntarily.

Title I – Prevention

Records Inspection: Expands and clarifies FDA’s records inspection authority, such that FDA can inspect records regarding an article of food “and any other article of food that [FDA] reasonably believes is likely to be affected in a similar manner, will cause serious adverse health consequences or death to humans or animals.”

Registration: Requires facilities to renew registration with the FDA every two years, and to agree to potential FDA inspections as a condition of such registration. Gives the FDA Commissioner the power to suspend facilities’ registration in the event FDA determines the facility “has a reasonable probability of causing serious adverse health consequences or death.” A suspended facility shall not be able to “introduce food into interstate or intrastate commerce in the United States. A hearing would occur within two business days on any suspension. If the suspension is found warranted, the facility must submit a corrective action plan before its suspension could be lifted. The bill also states that the commissioner cannot delegate to other officials within FDA the authority to impose or revoke a suspension.

Small Entity Compliance Guides: Requires FDA to develop plain language small entity compliance guides within 180 days of the issuance of regulations with respect to registration, hazard analysis, safe production, and recordkeeping requirements.

Hazard Analysis: Requires facilities to analyze at least every three years their potential hazards and implement preventive controls at critical points. Further requires facilities to monitor the effectiveness of their preventive controls, take appropriate corrective action, and maintain records for at least two years regarding verification of compliance. The bill gives FDA the authority to waive compliance requirements in certain instances, and allows FDA to exempt facilities “engaged only in specific types of on-farm manufacturing, processing, or holding activities that the Secretary determines to be low risk.” The language also delays implementation for smaller establishments for up to three years.

Performance Standards: Requires FDA to review evidence on food-borne contaminants and issue guidance documents or regulations as warranted every two years.

Produce Safety: Establishes a process to set standards for the safe production and harvesting of raw agricultural commodities (i.e. fruits and vegetables). Requires FDA to promulgate regulations regarding the intentional adulteration of food—applying to food “for which there is a high risk of intentional contamination”—within two years, and issue compliance guidance as appropriate. Includes delayed implementation of up to two years for smaller establishments.

Fees for Non-Compliance: Imposes fees on facilities only in cases where a facility undergoes re-inspection to correct material non-compliance, or does not comply with a recall order and thereby forces FDA to use its own resources to perform recall activities. Importers would be subject to fees for annual re-inspections or for participation in the voluntary qualified importer program established under title III of the bill. Requires FDA appropriations funding to keep pace with inflation in order for fees to be collected. The bill gives FDA the authority to lower fee levels on small businesses through a notice-and-comment process.

Safety Strategies: Requires FDA, the Department of Agriculture, and the Department of Homeland Security to coordinate to create an agriculture and food defense strategy, focused on preparedness, detection, emergency response, and recovery. Requires reports from FDA on building domestic preventive capacity—including analysis, surveillance, communication, and outreach—and requires FDA to issue regulations on the sanitary transportation of food within 18 months of enactment.

Food Allergies in Children: Requires FDA to work with the Department of Education to develop voluntary guidelines to manage the risk of food allergy and anaphylaxis in schools and early childhood education programs. Authorizes new grants of up to $50,000 over two years for local education agencies to implement the voluntary guidelines.

Dietary Ingredients and Supplements: Requires FDA to notify the Drug Enforcement Administration if FDA believes a dietary supplement may not be safe due to the presence of anabolic steroids.

Refused Entry: Requires FDA to notify the Department of Homeland Security, and by extension the Customs and Border Protection Agency, in all cases where FDA refuses to admit foods into the United States on the grounds that the food is unsafe.

Title II – Detection and Response

Targeted Inspections: Requires FDA to prioritize inspection of high-risk facilities, based on a risk profile that includes the type of food being manufactured and processed, facilities’ compliance history, and other criteria. Requires FDA to inspect high-risk facilities once in the five years after enactment, and every three years thereafter; low-risk facilities would be inspected once in the seven years after enactment, and every five years thereafter. Foreign facility inspections would be required to double every year for five years.

Laboratory Testing: Requires FDA to establish within two years a process to recognize organizations that accredit laboratories testing food products, and to develop and maintain model standards for accrediting bodies to use during the accreditation process. Requires food testing for certain regulatory purposes to be conducted in federal laboratories or those accredited by an approved accrediting body, with results sent directly to FDA. Includes reporting and other provisions designed to support early detection among laboratory facilities.

Traceback and Recordkeeping: Establishes a series of pilot projects within nine months of enactment on “methods to rapidly and effectively identify recipients of food to prevent or mitigate a foodborne illness outbreak.” Requires FDA to issue within two years a notice of proposed rulemaking regarding recordkeeping requirements for high-risk foods. Permits FDA to request that farm owners “identify immediate potential recipients, other than consumers,” in the event of a foodborne illness outbreak. Delays implementation of regulations for up to two years for smaller establishments.

Surveillance: Directs FDA to enhance foodborne illness surveillance systems to improve collection, analysis, reporting, and usefulness of data on foodborne illnesses, and establishes a multi-stakeholder working group to provide recommendations. Reauthorizes an existing program of food safety grants through fiscal year 2015.

Mandatory Recall Authority: Provides FDA the authority to order recall of products if the products are adulterated or misbranded “and the use of or exposure to such article will cause serious adverse health consequences or death.” Requires FDA to provide an opportunity for voluntary recall by the manufacturer or distributor prior to ordering a recall and provides the responsible party the opportunity to obtain a hearing within two days regarding any FDA order for a mandatory recall. Requires federal agencies to establish and maintain a single point of contact regarding recalls, and requires FDA to take appropriate actions to publicize mandatory recalls through press releases, an internet Web site, and other similar means. Also gives FDA authority to order the administrative detention of food products when the agency has “reason to believe” they are adulterated or misbranded. Directs that only the commissioner has the authority to order a mandatory recall, a power that may not be delegated to other FDA employees.

State and Local Governments: Directs FDA, working with other federal departments, to provide support to state and local governments in response to food safety outbreaks. Requires the Department of Health and Human Services to set standards and administer training programs for state and local food safety officials. Creates a new program of food safety centers of excellence, and amends an existing program of food safety grants to fund food safety inspections and training, with an extended authorization through fiscal year 2015.

Food Registry: Permits FDA to require the submission of reportable food subject to recall procedures (excepting fruits and vegetables that are raw agricultural commodities). Requires grocery stores with more than 15 locations to post information about reportable foods prominently for 14 days.

Title III – Food Imports

Foreign Supplier Verification Program: Requires importers to undertake a risk-based foreign supplier verification program to ensure that imported food meets appropriate federal requirements and is not adulterated or misbranded. Requires FDA to establish regulations for the foreign supplier verification program within one year of enactment. Importers’ records relating to foreign supplier verification would be maintained for at least two years.

Voluntary Qualified Importer Program: Directs FDA to establish within 18 months a voluntary program of “expedited review and importation” for importers. Eligibility would be determined by FDA using a risk assessment based on such factors as the type of food being imported, the compliance history of the foreign supplier, and the compliance capacity of the country of export.

Import Certification: Permits FDA to require as a condition of importation a certification “that the article of food complies with some or all applicable requirements” under the Food, Drug, and Cosmetic Act. Requires FDA’s determination of certification requirements to be made based on risk assessments. Requires notices for imported food to list any country that previously refused entry for that food. Permits FDA to review foreign countries’ controls and standards to verify their implementation.

Foreign Government Capacity: Requires FDA to “develop a comprehensive plan to expand the technical, scientific, and regulatory capacity” of foreign entities exporting food to the United States. Permits FDA to inspect foreign food facilities, and requires the refusal of imported food if a registered exporter refuses entry of FDA inspectors into an overseas facility. Directs FDA to establish a system to recognize bodies that accredit third-party auditors to certify eligible foreign food facilities meet federal compliance requirements. Requires FDA to establish overseas offices in countries selected by FDA to “provide assistance to the appropriate governmental entities of such countries with respect to measures to provide for the safety of articles of food.”

Smuggled Food: Requires FDA to work with the Department of Homeland Security and Customs officials to develop a strategy to identify smuggled food and prevent its entry.

Title IV – Other Provisions

Funding and Staffing: Authorizes such sums in funding for fiscal years 2011 through 2015. The bill also sets staffing goals of 4,000 new field staff in fiscal year 2011, and a total of 17,800 through fiscal year 2014.

Employee Protections: Creates a new process intended to prevent employment discrimination against individuals reporting food safety violations. The Department of Labor is directed to review and investigate complaints of such discrimination through an administrative process, subject to appeal in federal court.

Jurisdiction: The bill notes that nothing within its contents shall be construed to alter the division of jurisdiction between the Department of Health and Human Services and the Department of Agriculture. Likewise, the bill notes that it shall not be construed in a manner inconsistent with American obligations under the World Trade Organization and other relevant international treaties.

Summary of Tester Amendment as Modified (Included in Harkin Substitute Amendment as passed the Senate):

· Clarifies that a “retail food establishment” shall not include the sale of food products at a roadside stand or farmer’s market, the sale of food “through a community supported agriculture program,” or the sale of food through any other “direct sales platform” designated by the Secretary.

· Exempts from recordkeeping and hazard analysis requirements a “very small business” as defined by the Secretary, as well as those facilities whose direct sales (to consumers and local restaurants) exceed their sales to distributors AND whose annual sales total fewer than $500,000 (adjusted for inflation). Requires such facilities receiving exemptions to submit documentation to FDA that the owners have identified potential food hazards OR are in compliance with state and other applicable food safety laws. Permits FDA to revoke exemptions in the event of a food outbreak directly linked to the facility or to protect the public health.

· Requires a study by FDA and the Department of Agriculture to help define the terms “small business” and “very small business” for purposes of the statute’s regulatory requirements.

· Requires facilities receiving exemptions under the amendment to “include prominently and conspicuously…the name and business address of the facility where the food was manufactured or processed,” either on food labels or at the point of purchase.

· Amends the timeline for the new hazard analysis requirements to specify that small businesses will have an additional six months to comply with the hazard control regulatory requirements (down from two years in the base bill) and very small businesses will have an additional 18 months to comply (down from three years in the base bill).

· Exempts from new produce safety guidelines those farms whose direct sales (to consumers and local restaurants) exceed their sales to distributors AND whose annual sales total fewer than $500,000 (adjusted for inflation). Requires farms receiving exemptions under the amendment to “include prominently and conspicuously…the name and business address of the facility where the food was manufactured or processed,” either on food labels or at the point of purchase. Permits FDA to revoke exemptions in the event of a food outbreak directly linked to the facility or to protect the public health.

Time to Retire the ESOP from the 401k: Assessing the Liabilities of KSOP Structures in Light of ERISA Fiduciary Duties and Modern Alternatives

The National Law Review would like to congratulate Adam Dominic Kielich of Texas Wesleyan University School of Law as one of our 2010 Fall Student Legal Writing Contest Winners !!!

I. Introduction

401k plans represent the most common employer-sponsored retirement plans for employees of private employers. They have replaced defined benefit pension plans, as well as less flexible vehicles (such as ESOPs) as the primary retirement plan.¹ However; some of these plan models have continued their legacy through 401ks through structures that tie the two together or place one inside the other. A very common and notable example is the Employee Stock Ownership Plan (ESOP). ESOPs are frequently offered by companies as an investment vehicle within 401ks that allow participants to invest in the employer’s stock as an alternative to the standard fund offerings that are pooled investments (e.g. mutual funds or institutional funds). Participants may be unaware that the company stock option in their 401k is a plan within a plan. These combination plans are sometimes referred to as KSOPs.²

Although this investment vehicle seems innocuous, KSOPs generate considerable risk to both participants and sponsors that warrants serious consideration in favor of abandoning the ESOP option. Participants face additional exposure in their retirement savings when they invest in a single company, rather than diversified investment vehicles that spread risk across many underlying investments. They may lack the necessary resources to determine the quality of this investment and invest beyond an appropriate risk level. Moreover, sponsors face substantial financial (and legal) risk by converting their plan participants into stockholders within the strict protections of ERISA.³ The risk is magnified by participant litigation driven by the two market downturns of the last decade. Given the growing risk, sponsors may best find themselves avoiding the risks of KSOPs by adopting a brokerage window feature (sometimes labeled self-directed brokerage accounts) following the decision in Hecker.⁴

II. Overview and History of ESOPs

A. ESOP Overview

ESOPs are employer-sponsored retirement plans that allow the employee to invest in company stock, often unitized, on a tax-deferred basis. They are qualified defined contribution plans under ERISA. As a standalone plan, ESOPs take tax deferred payroll contributions from employees to purchase shares in the ESOP, which in turn owns shares of the employer’s stock. That indirect ownership through the ESOP coverts participants into shareholders, which gives them shareholder rights and creates liabilities to the participants both as shareholders and as participants in an ERISA-protected plan. They may receive dividends, may have the option to reinvest dividends into the plan, and may be able to receive distributions of vested assets in cash or in-kind, dependent upon plan rules.⁵

ESOPs offer employers financial benefits: they create a way to add to employee benefit packages in a manner that is tax-advantaged while providing a vehicle to keep company stock in friendly hands – employees – and away from the hands of parties that may seek to take over the company or influence it through voting. Additionally, ESOPs create a consistent flow of stock periodically drawn out of the market, reducing supply and cushioning prices. Moreover, with those shares in the hands of employees, who tend to support their employer, there are fewer shares likely to vote against the company’s decision-makers or engage in shareholder activism.⁶

B. Brief Relevant History of ESOPs

ESOPs are generally less flexible and less advantageous to employees than 401ks. ESOPs lack loan options, offer a single investment option, typically lack a hardship or in-service distribution scheme and most importantly, lack diversification opportunities. Individual plans may adopt more restrictive rules to maintain funds within the plan as long as possible, as long as it is ERISA-compliant. Perhaps the most important consequence of that lack of diversity is that it necessarily ties retirement savings to the value of the company. If the company becomes insolvent or the share price declines without recovery, employees lose their retirement savings in the plan, and likely at least some of the pension benefits funded by the employer. The uneven distribution of benefits to employees helped pave the way for ERISA in 1974.⁷

C. Current State of Law on ESOPs

1. ESOPs Within 401k Plans

After the ERISA regulatory regime paved the way for 401k plans, employers began folding their ESOPs and other company stock offerings into the 401ks. For decades employers could mandate at least some plan assets had to be held in company stock. When corporate scandals and the dot com bubble burst in 2001, it evaporated significant retirement savings of participants heavily invested in their employer’s stock, often without their choice. Congress responded by including in the Pension Protection Act of 2006 (PPA) by eliminating or severely restricting several permissible plan rules that require 401k assets in any company stock investment within 401k plans.⁸

2. ERISA Litigation of the 2000s

Participants who saw their 401k assets in company stock vehicles disappear with the stock price had difficulty recovering under ERISA until recent litigation changed how ERISA is construed for 401k plans. ERISA was largely written with defined benefit plans in mind. Defined benefit plans hold assets collectively in trust for the entire plan. Participants may have hypothetical individual accounts in some plan models, but they do not have actual individual accounts. ERISA required that suits brought by participants against the plan (or the sponsor, trust, or other agent of the plan) for negligence or malfeasance would represent claims for losses to the plan collectively for all participants, so any monetary damages would be awarded to the plan to benefit the participants collectively, similar to the shareholder derivative suit model. Damages were not paid to participants or used to increase the benefits payable under the plan.

Defined contribution plans with individual participant accounts, such as 401k plans and ESOPs, were grafted onto those rules. Therefore, any suit arising from an issue with the company stock in one of these plans meant participants could not be credited in their individual accounts relative to injuries sustained. It rendered participant suits meaningless in most cases because the likelihood of recovery was suspect at best.⁹

The Supreme Court affirmed this view in 1985 in Russell, and courts have consistently held that individual participants could not individually benefit from participant suits. Participants owning company stock through the plan could take part separately in suits as shareholders against the company, but these are distinguished from suits under ERISA. In 2008, the Supreme Court revisedRussell in LaRue and held that Russell only applied to defined benefit plans. Defined contribution plan participants could now bring claims individually or as a class and receive individual awards as participants. This shift represented new risks to sponsors that immediately arose with the market crash in 2007.¹⁰

III. Risks to Employees

The primary risk to employees is financial; a significant component of employee financial risk is the investment risk. 401k sponsors are required to select investments that are prudent for participant retirement accounts. This is why 401k plans typically include pooled investments; diversified investment options spread risk. ESOPs are accepted investments within 401k plans, although they are not diversified.¹¹ This increases the risk, and profit potential, participants can expose themselves to within their accounts. While added risk can be exponentially profitable to participants when the employer has rising stock prices or a bull market is present, the downside can also be significantly disastrous when the company fails to meet analyst expectations or the bears take over the markets.

Moreover, employees may be more inclined to invest in the employer’s stock than an independent investor would. Employees tend to be bullish about their employer for two reasons.¹² First, employees are inundated with positive comments from management while typically negative information is not disclosed or is given a positive spin. This commentary arises in an area not covered by ERISA, SEC, or FINRA regulations. This commentary is not treated as statements to shareholders; they arise strictly from the employment relationship. This removes much of the accountability and standards that otherwise are related to comments from the company to participants and shareholders. Management can, and should, seek to motivate its employees to perform as well as possible. While the merit of misleading employees about the quality of operations may be debatable, the ability to be positive to such an end is not.

Second, employees tend to believe in the quality of their employer, even if they espouse otherwise. They tend to believe the company is run by experienced professionals who are leading the company to long term success. Going to work each day, seeing the company operating and producing for its customers encourages belief that the company must be doing well. It can even develop into a belief that the employee has the inside edge on knowing how great the company is, although this belief is likely formed with little or no knowledge of the financial health of the company. The product of the internal and external pressures is a strong likelihood employees will invest in an ESOP over other investment options for ephemeral, rather than financial, reasons.¹³

Additionally, participants may have greater exposure to the volatility of company stock over other shareholders due to 401k plan restrictions. While some plans are liberally constructed to give participants more freedom and choice, some plans conversely allow participants few options. This is particularly relevant to the investment activity within participant accounts. Participants may be limited to a certain number of investment transfers per period (e.g. quarterly or annually), may be subject to excessive trade restrictions, or may even find themselves exposed to company stock through repayment of a loan that originated in whole or in part from assets in the ESOP. Additionally, the ESOP may have periodic windows that restrict when purchases or redemptions can occur. While a regular shareholder can trade in and out of a stock in seconds in an after-tax brokerage account, ESOP shareholders may find themselves hung out to dry by either the ESOP or 401k plan rules. These restrictions are not penal; they represent administrative decisions on behalf of the sponsor to avoid the added expense generally associated with more liberal rules.

Although employees take notable risk to their retirement savings portfolio by investing in ESOPs within their 401k plans, it can add up to a tremendous financial risk when viewed in the bigger picture of an employee’s overall financial picture. Employees absorb the biggest source of financial risk by nature of employment through the company because it is the major, if not sole, income stream during an employee’s working years. This risk increases if the employer is also the primary source of retirement assets or provides health insurance. The employee’s present and future financial well being is inherently tied directly to the employer’s financial well being. This risk is compounded if the employee also has stock grants, stock options, or other stock plans that keep assets solely tied to the value of the company stock. If the employee is fortunate enough to have a defined benefit plan (not withstanding PBGC coverage) or retirement health benefits through the company, then that will further tie the long term success of the company to the financial well being of the employee. Adding diversification in the retirement portfolio may be a worthwhile venture when those other factors are considered in a holistic fashion.

IV. Risks to the Sponsor

ERISA litigation is a serious risk and concern to sponsors. Although there is exposure in other areas related to participants as stockholders, ERISA establishes higher standards towards participants than companies otherwise have towards shareholders. Sponsors once were able to protect themselves under ERISA but since LaRue participants have an open door to reach the sponsor to recover losses related to the administration of the plan.¹⁴ ERISA requires sponsors to make available investment options that are prudent for 401k plans. The dormant side of that rule requires sponsors to remove investment options that have fallen below the prudent standard. Company stock is not excluded from this requirement.¹⁵

Any time the market value of the stock declines, the sponsor is at risk for participant losses for failure to remove the ESOP (or other company stock investment option) as an imprudent investment within the plan. Participants are enticed to indemnify losses through the sponsor. Such a suit is unlikely to succeed when the loss is short term and negligible, or the value declined in a market-wide downturn. However, as prior market downturns indicate, investors look to all possible avenues to indemnify their losses by bringing suits against brokers, advisors, fund companies, and issuers of their devalued assets. There is no reason to believe that participants would not be enticed to try this route; LaRuewas born out of the downturn in the early 2000s.¹⁶

The exposure for sponsors runs from additional costs to mount a defense to massive monetary awards to indemnify participants for losses. In cases where participants are unlikely to recover, sponsors still must finance the defense against what often turns into expensive, class action litigation or a long serious of suits. However, there is a serious risk of sponsors having to pay damages, or settle, cases where events have led to a unique loss in share value. Participants have filed suit under the theory that the sponsor failed to remove imprudent investment options in a timely fashion. BP 401k participants filed suit following the gulf oil leak under a similar theory that the sponsor failed to remove the company stock investment option from the plan, knowing that it would have to pay clean up costs and settlements. While it remains to be seen if these participants will be successful, they surely will not the last to try.¹⁷

Sponsors should take a good, long look at the ESOP to determine whether the sponsor receives more reward than risk – particularly future risk – from its inclusion. The risk to a company does not have as severe as the situation BP faced this year. Even bankruptcy or mismanagement that results in serious stock decline can merit suit when the sponsor fails to immediately withdraw the ESOP, since it has prior knowledge of the bankruptcy or mismanagement prior to any public release.

To hedge these risks, sponsors can adopt several options. First, sponsors may limit the percentage of any account that may be held in company stock. This is easily justified as the sponsor taking a position in favor of diversification and responsible execution of fiduciary duties. While this may not completely absolve the sponsor of the duty to remove imprudent investment options, it does act as a limit on liability. Although it does provide some protection against risk, it is an imperfect solution.

Second, ESOP plans can adopt pricing structures to discourage holding large positions of company stock for the purpose of day trading. Some 401k plans allow participants to trade between company stock and cash equivalents without restraint. When the ESOP determines share pricing based on the closing price of the underlying stock, it creates a window where participants can play the company stock very differently than the constraints of most 401k investment options.

It is a very alluring reason to take advantage of the plan structure by taking an oversized position in company stock. Add the possibility to indemnify losses in court and it becomes even more desirable. The process is simple: participants can check the trading price minutes before the market closes. If the stock price is higher than the basis, they sell and net profit. If it is below, they hold the stock and try against each day until the sale is profitable. They will then buy back into the ESOP on a dip and repeat the process. This is distinguishable from the standard diversified fund options in 401k plans, where ignorance of the underlying investments preempts the ability to game closing prices. Funds generally discourage day trading – and may even carry redemption fees to penalize it – and encourage long term investing strategies more consistent with the objective of retirement accounts.

Available solutions are directly tied to the cause of the problem; changing the ESOP pricing scheme can eliminate gaming closing prices. ESOPs can adopt other pricing schemes such as average weighted pricing and next day order fulfillment. Average weighted pricing gives participants the average weighted prices of all transactions in the stock, executed that day, by a given entity. For example, if the ESOP is held with Broker X as the trustee, it may rely upon Broker X to provide the prices and volumes of all of its executed orders that day in the stock, which is used to determine the average weighted price participants will receive that day. Alternately, participants could be required to place orders on one day and have the order fulfilled on the following day’s closing with that day’s closing price. Both of these pricing schemes introduce some mystery into the price that diminishes gaming the closing price. This is also an imperfect solution, even if combined with the first option, because it maintains the risks of the ESOP.

Sponsors may also take advantage of brokerage windows to expand employee investment options, including company stock, without the risks afforded to ESOPs. Brokerage windows create brokerage accounts within 401k plans. The brokerage window is not an investment in itself; it is a shell that allows employees to reach through the window to access other investments. Sponsors found good reason to be suspicious of brokerage windows, seeing it as liability for all the available investments that could be deemed imprudent for retirement accounts. A minute minority of participants saw it as a way to have their cake and eat it too during the last rise and fall of the markets; they could invest more aggressively within their 401ks and then demand sponsors indemnify their losses when the markets gave up years of gains on the basis of sponsor failure to review the available contents of the window under the prudence standard.

However, in Deere the court handed down a critcal decision: sponsors could not be responsible for the choices made by participants within brokerage windows. InDeere, several Deere & Co. (John Deere) employees sued the company for making available investments that were imprudent for 401k accounts that caused substantial losses in the 2007 market downturn. John Deere had not reviewed the thousands of available options under the ERISA prudence standard. Although the plaintiffs’ theory was a compelling interpretation of ERISA duties, the court rejected the theory on two grounds. First, it would be impossible for any sponsor to review every investment available through the window. Second, participants had taken ownership of the responsibility to review their investment decisions by choosing to invest through the window.¹⁸

Following the court’s decision in Deere, brokerage windows gained new life as a means for sponsors to expand investment availability at less risk. Rather than having to review a menu of funds and company stock for prudence under ERISA, sponsors can justifiably limit the fund selection directly offered through the plan and leave the rest of the options to the brokerage window. Importantly, this includes offering company stock in the window. By utilizing the brokerage window, sponsors allow access to the company stock without the liabilities of offering an ESOP through the plan. The sponsor will likely lose out on any benefits received from the ESOP, although for most established employers ESOPs are likely more of a convenience factor and a legacy offering rooted in the history of employer-sponsored plans.

Although Deere foreclosed participant abuse of brokerage windows, this option is not without its own negative aspects. Future litigation may reestablish some liability upon the sponsor for the brokerage link. Sponsors may face alternate liability under ERISA for selecting a brokerage window with excessive commissions or fees, similar to requirements for funds under ERISA.¹⁹ Given the flurry of awareness brought to 401k management fees and revenue sharing agreements between sponsors and fund providers following the market crash in 2007, it is likely that brokerage windows will be the hot ticket for participants in the next market crash. Therefore, sponsors should preemptively guard against future litigation by reviewing available brokerage window options to make sure any fees or commissions are reasonable and the categories of investment options are reasonable (even if specific investments in those categories are not).

Perhaps a lesser concern, sponsors need to consider overall plan operation and any negative impacts that may arise from shifting to a brokerage window-based investment offering. These concerns may be less of a legal risk issue than a risk of participant discontent and dealing with those effects. There are primarily two areas that brokerage windows can create discontent. First, when participants want to move from a fund to the brokerage window, they must wait for the sale to settle from the fund and transfer to the window, which generally makes the money available in the window the day after the fund processes the order. Conversely, selling investments in the window may delay transferring money into plan funds because of settlement periods and the added delay of settlement with the fund once the funds are available to move out of the window. Additionally, the settlement periods within the window may frustrate participants, although the plan has no control over those timeframes. Those natural delays in processing the movement of money may create discontent, especially for those participants trying to invest based upon short term market conditions.

Second, those same processes and delays can negatively affect plan distributions. Many plans offer loans and withdrawal schemes, and while sponsors may have their own reasons for making those options available, participants often use those offerings to finance emergency financial needs. Brokerage windows can complicate and delay releasing money to participants. Settlement periods will create delays; if money has to be transferred out of the window to another investment to make those funds available for a distribution that will add at least one more day before money can be released. If participants find themselves in illiquid investments, the money may not be able to move for a distribution at all. Although these issues may not be of legal significance but they will be significant to the people responsible for absorbing participant complaints and there may be additional expenses created in handling those issues.

An additional concern is that the Department of Labor (DOL) is still fleshing out several requirements surrounding brokerage windows and how they relate to ERISA requirements. For example, the DOL October 2010 modification of 401k disclosure rules affects plans as a whole, but it leaves open several areas of ambiguity around the specific effects on brokerage windows. Sponsors may face continuing financial costs complying and determining how to comply with DOL requirements. Future changes in the regulations may negatively affect plans that rely heavily on brokerage windows to provide access to a greater range of investment options.²⁰

These considerations are not exhaustive to the benefits or risks of either ESOPs or brokerage windows, they merely highlight some of the more salient points as they relate generally to the legal and significant financial benefits and risks to sponsors. There may be additional concerns equally salient to sponsors given their particular situation, such as participant suspicion of the removal of the ESOP or unwillingness at the executive level to retire the ESOP.

V. Conclusion

Although brokerage windows may open the door to some new liabilities, it closes the door to the risks of ESOPs, for both participants and sponsors. Sponsor diligence in administering retirement plans will always be the most successful method of checking liability; however, as discussed ESOPs risk putting sponsors in an unwinnable position. Removing the company stock option may not be the most beneficial option in all cases but it may be time for sponsors to consider retiring the ESOP from the 401k in light of the current regulatory regime. A brokerage window option is well suited to take advantage of participant ownership of the employer’s stock, as well as other investment opportunities, while limiting the risk that normally accompanies that ownership. Ultimately, sponsors must consider what is best for the plan and its participants over both the short term and the long term.

Endnotes.

1. Chris Farrell, The 401(k) Turns Thirty Years Old, Bloomberg Businessweek Special Report, Mar. 15, 2010,http://www.businessweek.com/investor/content/mar2010/pi20100312_874138.htm.

2. National Center for Employee Ownership401(k) Plans as Employee Ownership Vehicles, Alone and in Combination with ESOPs, (no date provided),http://www.nceo.org/main/article.php/id/15/.

3. Id.; 29 U.S.C. § 1104 (2010); the term “sponsor” can be used interchangeably with “employer” for purposes of this discussion, however there are some situations where the employer is not the sponsor, such as union plans, or the employer is not the sole sponsor in the case of multi-employer plans. This discussion relates to KSOPs where the sponsor is the employer. Different rules and different liability may apply to other plan structures.

4. Hecker v. Deere & Co., 556 F.3d 575, 590 (7^th Cir. 2009), cert. denied, 130 S. Ct. 1141 (2010).

5. Todd S. Snyder, Employee Stock Ownership Plans (ESOPs): Legislative History, Congressional Research Service, May 20, 2003.

6. William N. Pugh et al. The Effect of ESOP Adoptions on Corporate Performance: Are There Really Performance Changes?, 21Managerial & Decision Econ., 167, 167-180 (2000).

7. Supra note 5.

8. Pension Protection Act of 2006 § 901, 29 U.S.C. 401 (2010).

9. LaRue v. DeWitt, Boberg & Assocs., Inc., 552 U.S. 248, 254-55 (2008).

10. Id. at 255-56.

11. Shlomo Benartzi et al., The Law and Economic of Company Stock in 401(k) Plans, 50 J.L. & Econ. 45, 45-79 (2007).

12. Id.

13. Id.

14. LaRue, 552 U.S. at 254-55.

15. § 1104.

16. LaRue, 552 U.S. at 250-51.

17. E.g., In Re: BP P.L.C. Securities Litigation, MDL No. 2185, 2010 WL 3238321 (J.P.M.L. Aug. 10, 2010).

18. Hecker, 556 F.3dat 590.

19. §1104.

20. 29 C.F.R. § 2550 (2010).

Alternatives to International Criminal Justice – Restorative Justice and Peace Through Peaceful Means

The National Law Review would like to congratulate Heejung Park of Washington University in St. Louis as one of our Fall 2010 Law Student Legal Writing Contest Winners!

“Out of timber so crooked as that from which man is made nothing entirely straight can be carved.” -Immanuel Kant-

Individuals live their own lives, and have their own goals. An entity may be an individual, a group, or a nation. The purposes of two parties may be in harmony with each other and without conflict, or may not. Such purposes may be good, or evil. Essentially, problems occur when the purposes of two or more parties do not coincide. The basic position of the traditional criminal justice system is to address problems simply by punishing the perpetrators. However, over the last several decades, there have been new studies in the area of peace and human rights, and in this environment, new institutions may be welcome. This is inspiring changes from the perspective of human integrity and the right to peace, which pursues harmonious coexistence.

If the criminal justice system, which aims to punish perpetrators, takes an interest in the perpetrators as well as the victims by enabling the perpetrators to truly repent for their offenses and voluntarily make restitution to their victims, while allowing the victims to accept the restitution based on a principle of forgiveness and tolerance, a foundation for peace and respect of others in the community will be formed. As such, it is very significant to prepare for a system wherein the pepetrator and the victim can remediatetheir hurt,and recover. If we are working from a principle that values life above all, and values human rights to the extent that they carry more weight than the earth itself, such an approach must be inspiring. It is not that easy to buildasociety that is better and more peaceful, in which everyone can live together harmoniously. When criminals are punished, this does not mean that everything has been resolved. Often,the root causesof a crime can be foundin the community, or even in the victim himself or herself. On this basis, victims and communities also have a responsibility to take an interest in the perpetrators of crimes. The intent must be to identify the fundamental causes of crimes, and by addressing these causes, to create a better society and a better country, byseeking an alternative to the international criminal justice system based on peaceful means.

To achieve this, one or more of the following three approaches may be effective. The first is to constitute a truth commission to pursue truth and reconciliation. This approach has been successful in South Africa, as well as in some Latin American and Asian countries. Truth will be identified, and reconciliation will be made based on investigations into violations of human rights and provisions concerning ethical and legal responsibilities and duties. The Report of the Truth and Reconciliation Commission that was prepared by the government of South Africa in 2003 also addressed this issue. Through the Truth and Reconciliation Commission, violations of human rights relating to apartheid have been addressed.[i] The second is to hold public inquiries. This is closely related to post-conflict management. “Bloody Sunday[ii]” in the UK is a representative sample. In this event, 13 people were shot to death and several were injured on January 30, 1972, a Sunday. A high-profile public inquiry, it was led by English Supreme Court Justice Mark Saville together with a judge from New Zealand and a judge from Canada, and was established on April 3, 1998. The last is “Community-based Restorative Justice”, which is the most important and is addressed intensively herein. This is a mechanism that focuses on the post-conflict environment, and is deeply related to the peaceful coexistence of a community. In this area, new justice systems have emerged, called “gacaca” and restorative justice.[iii] Gacaca is a new court system that was launched by the Rwandese government on June 18, 2002. This new court system follows the customary system for community hearings, which have been used whenever a conflict occurs in the community. Begun at a Canadian church in the 1970s, restorative justice is a crime-fighting approach for victim-sensitive victim-offender mediation.

Criminal prosecution is not always the right solution. It is a good method only when it can benefit society and nation. If we acknowledge that unexpected pitfalls exist for everyone, then people should be given one more chance, even if they have committed a crime. The proposition of the “restoration of offenders” is not suitable for all conflicts. Nonetheless, it is a new approach to consensus, and aims at facilitating mutual understanding. The Bible features an approach similar to this restorative justice.[iv] It also refers to accountability for healing that goes through discipline to move toward a peaceful environment, which is different from the existing criminal justice system.[v] The Bible considers every individual a sinner. It says that an individual can receive forgiveness when he/she sincerely repents, surrenders to God, and produces the fruit of repentance.[vi] It further says that reconciliation will take place when one makes restitution and reparation for the harm, and this action bears fruit.[vii] When this is done, the offender is able to commit himself/herself to the community and the nation by producing the fruit of the Spirit[viii], through his/her indebtedness and freedom from being forgiven. Curing offenders, allowing them to repent for their wrongdoings and to voluntarily make restitution and reparation, a win-win situation for perpetrator and victim, is possible in the love of God through the remediation of hurt, restoration, forgiveness, and tolerance. Through this, the community can seek peace through social justice and tolerance. Both perpetrators and victims have fundamental rights as human beings. In this area, the roles of national reconciliation/mediation agencies, protection agencies, and NGOs are important.

These approaches may equally be applied to international criminal justice. As demonstrated above, post-conflict management should be approached peacefully. Disputes occur when the purposes of parties do not coincide with each other. This discord emerges in the form of conflict. A conflict is a polarization of opinions or powers. Ultimately, such polarization may reach the level of violence, which leaves residual trauma. This process repeats itself, continuously. The ring of this vicious circle should be peacefully severed. Such an approach to peaceful means advocates solving problems through mediation (this is directed toward the future, and it is better than “victory”) at the stage of conflict; through the positive involvement of peace-building at the stage of polarization; and through nonviolence rather than violence, and reconciliation and conciliation (which is against the past, and requires healing) instead of trauma.

[i]Mark Freeman, Truth Commissions and Procedural Fairness, Part 1:‘Introduction’ 3 (Cambridge University Press, 2007).

[ii]Angela Hegarty, “Truth, Law and Official Denial: The Case of Bloody Sunday”15Criminal Law Forum 199 (2004).

[iii]Phil Clark, “Hybridity, Holism and ‘Traditional’ Justice: The Case of the Gacaca Community Courts in Post- Genocide Rwanda”, 39 Geroge Washinton International Law Review 4 20 (2007).

[iv]Tony F. Marshall, Restorative Justice An Overview 6 (Research Development and Statistics, 1998).

[v]Edward Bouverie Pusey, The Confessions Of Saint Augustine 5-6 (Kessinger Publishing, 2004).

[vi]Matthew, New International Version Bible,The New Testament: Matthew 2 (Word Of Life Press, 2009).

[vii]Jeremiah, New International Version Bible, The Old Testament: Jeremiah 706 (Word Of Life Press, 2009).

[viii]Paul, New International Version Bible, The New Testament: Galatians 185 (Word Of Life Press, 2009).

Congressional Approach to Misclassification of Employees as Independent Contractors Would Confuse Rather than Clarify the Law

From featured guest blogger at the National Law Review Richard J. Reibstein of Pepper Hamilton LLP – good commentary on why what Congress is proposing concerning Independent Contractors won’t work and what should be done instead:

Congress has introduced two bills intended to discourage businesses from misclassifying employees as independent contractors and end the issuance of Form 1099s to workers who are not legitimate independent contractors. Both bills – one a labor bill and the other a tax bill – have the laudable objective of curtailing misclassification of employees as independent contractors. But the two bills, although related, contain different tests for determining who is an independent contractor or employee.

The Obama Administration has firmly endorsed both bills. While some Administration-supported legislative initiatives have little chance of passage in the lame-duck session of Congress or in 2011, these bills have a far better chance of passage because they are both revenue raisers. Between the two bills, the labor bill may be passed earlier, inasmuch as hearings on the bill have already been held.

It can hardly be disputed that businesses that intentionally issue Form 1099s to workers contribute to the tax gap, deprive workers of federal, state, and local workplace protections, and places businesses that properly classify workers at a competitive disadvantage. But, what about unintentional misclassification by businesses confused by varying definitions and legal standards used to determine who is an independent contractor and who an “employee” under an array of labor, tax, and benefits laws?

A 2006 report to Congress by the Government Accountability Office addressing misclassification observed that “the tests used to determine whether a worker is an independent contractor or an employee . . . differ from law to law,” even among various federal labor, employment, and employee benefits laws. The GAO report notes, “For example, the NLRA, the Civil Rights Act, FLSA, and ERISA each use a different definition of an employee and various tests, or criteria, to distinguish independent contractors from employees.” A 2009 report by theGAO concluded that while “the independent contractor relationship can offer advantages to both businesses and workers” and “[m]any independent contractors are classified properly,” Congress should take steps to help businesses that “may be confused about how to properly classify workers.”

The tax bill expressly seeks to clarify confusion over who is an employee or independent contractor under the federal employment tax laws; however, the labor bill not only contains a test at odds with the tax bill but is also inconsistent with the test used in most other federal laws dealing with labor and employment.

The passage of the labor bill as drafted, with or without passage of the tax bill, will contribute to an even more confusing legal landscape for the hundreds of thousands of businesses that treat certain workers as independent contractors.

The Tax Bill: The Fair Playing Field Act of 2010

In mid-September 2010, both the Senate (S. 3786) and House (H.R. 6128) introduced the more recent of the two bills addressing misclassification – the Fair Playing Field Act of 2010. The bill would close what the sponsors of the legislation, Senator John Kerry (D-MA) and Representative Jim McDermott (D-WA), refer to as a “tax loophole allowing businesses to misclassify workers as independent contractors.” As set forth in the preamble of the bill, “Such misclassification for tax purposes contributes to inequities in the competitive positions of businesses and to the Federal and State tax gap, and may also result in misclassification for other purposes, such as denial of unemployment benefits, workplace health and safety protections, and retirement or other benefits or protections available to employees.”

The “loophole” that the Fair Playing Field Act seeks to close is Section 530 of the Revenue Act of 1978. For the past 30 years, that law has afforded businesses a “safe harbor” to treat workers as independent contractors for employment tax purposes as long as the company has had a reasonable basis for such treatment and has consistently treated such employees as independent contractors by reporting their compensation on a Form 1099.

The tax bill’s “findings” recognize that while “many workers are properly classified as independent contractors, in other instances workers who are employees are being treated as independent contractors.” The bill continues: “Workers, businesses, and other taxpayers will benefit from clear guidance regarding employment tax status.” The bill therefore directs the Secretary of the Treasury to issue guidance in the form of regulations “allowing workers and businesses to clearly understand the proper federal tax classification of workers.”

The Fair Playing Field Act bill provides that, in issuing such guidance, the term “employment status” for any individual shall be determined “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).”

The IRS and the courts have historically used the “common law” test for determining independent contractor status under the Tax Code. But, as noted below, the other federal bill seeking to curtail misclassification not only refers to a different test for determining who is an employee and who is an independent contractor, but also is out of sync with prevailing judicial precedent.

The Labor Bill: The Employee Misclassification Prevention Act (EMPA)

EMPA was introduced in late April 2010 by the Senate (S. 3254) and House (H.R. 5107). EMPA would amend an existing law, the Fair Labor Standards Act (FLSA), by creating a new labor law offense: misclassification of an employee as an independent contractor.

If passed, EMPA would also impose strict record-keeping and notice requirements upon businesses with respect to workers treated as independent contractors, expose such businesses to fines of $1,100 to $5,000 per employee for each misclassification, and award triple damages for violations of the minimum wage or overtime provisions of the FLSA.

EMPA also makes specific reference to the definition of “employee” found in the FLSA, a 1938 law that regulates child labor and mandates the payment of minimum wage and overtime for employees who work more than 40 hours in a workweek. For decades, courts have interpreted the word “employee” in FLSA cases under an expansive legal standard that is commonly referred to as the “economic realities” test. As the Supreme Court has noted, this expansive interpretation under the FLSA derives from laws that were intended to prevent child labor violations, and “stretches the meaning of ‘employee’ to cover some parties who might not qualify as [an employee] under a strict application of traditional [common] law principles.”

As drafted, however, the EMPA bill would arguably incorporate the FLSA’s broad “economic realities” test into its definition of “employee.” That test gives undue weight to the economic dependence by workers on the business that has retained them. Such a test is inconsistent with the Supreme Court’s most recent judicial precedents applying the “common law” test and is at odds with what the that Court referred to as the “common understanding…of the difference between an employee and an independent contractor.”

At least one house of Congress is presumably well aware of this disconnect. As the Assistant Secretary of Labor testified in writing before the Senate at a hearing held on EMPA on June 17, 2010, “Whether a worker is an employee [or independent contractor] depends on which law is applicable.” He continued, “We recognize that it is conceivable for a worker to be correctly classified differently under the different standards that apply for different statutory purposes.” Thus, absent a legislative “fix,” a business that properly classified a particular worker under the “common law” test used to determine independent contractor status under the Tax Code, ERISA, and the nation’s discrimination laws, may be found to have misclassified the same worker under the new EMPA law if the “economic realities” test of the 1938 FLSA law is used.

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

The “common law” test for determining if an individual is an independent contractor or employee focuses on whether the business controls the manner and means that the work is accomplished. The Supreme Court has set forth twelve factors relevant to the issue of “control,” but noted that there are many additional factors that can be useful in determining employee status, including the additional factors set forth in the IRS’s so-called “20 factor” test.

According to the Supreme Court, the “common law“ test “comports…with our recent precedents and with the common understanding, reflected in those precedents, of the difference between an employee and an independent contractor.” Those recent precedents include the Court’s determination of whether a worker was an employee or independent contractor under the nation’s pension law and under one of the most important post-Civil Rights discrimination laws – the Americans with Disabilities Act (ADA).

The sponsors of EMPA as well as witnesses who testified in favor of the bill’s passage at a Senate committee hearing in June have noted that EMPA is intended to serve a number of important objectives: closing the tax gap that has deprived the federal and state governments of tax revenues; affording protections to misclassified workers under an array of federal laws that govern employers and employees (including ERISA, FLSA, OSHA, and the federal discrimination laws); and promoting fair business competition by outlawing the practice of misclassification, which creates an unfair advantage for businesses that improperly avoid the payment of payroll taxes. Notably, these are the very same purposes set forth in the preamble of the Fair Playing Field Act. Thus, both misclassification bills are intended to serve the same broad tax, labor, and business purposes. There is no reason, therefore, for Congress to have two different and potentially conflicting tests for determining if a worker is an employee or independent contractor.

The FLSA is one of over a dozen major federal labor and employment laws; it is not a misclassification statute. Congress appears to have attached EMPA to the FLSA merely as a matter of legislative convenience. The value of piggy-backing new legislative initiatives on existing laws can have many benefits, such as eliminating the need for Congress to draft definitional, administrative, procedural, and other similar provisions for a new piece of legislation.

This valuable use of legislative piggy-backing, however, should not automatically incorporate special definitional sections within the existing law where the definitions were enacted to serve purposes wholly unrelated to the purpose of the new legislation. Indeed, the Congressional Declaration of Policy underlying the FLSA, which was enacted as part of the New Deal legislation, was to address “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” The broad purposes of EMPA have little if nothing to do with the narrow remedial purposes of the FLSA or the child labor law statutes that were used to craft the expansive definition of “employee” in the FLSA.

The Congressional goal expressed in the Fair Playing Field Act of “allowing workers and businesses to clearly understand the proper federal tax classification of workers” is beneficial, but if Congress allows EMPA to be passed with a different definition of “employee” than what prevails under the Tax Code and most other federal laws, all Congress will have done is created more confusion among workers and businesses. In addition, in order to comply with all federal laws covering “employees,” a prudent business would have to disregard the “common law” test applicable under most federal statutes including the Fair Playing Field Act and only treat workers as independent contractors if they satisfied the narrower test under the New Deal child labor and wage and hour law. This would have the effect of limiting the use of legitimate independent contractors, a result that Congress has never articulated as a purpose of either of the two bills. Indeed, as stated in the preamble to the Fair Playing Field Act, Congress has found that “many workers are properly classified as independent contractors….”

What Congress Should Do

Congress should use the legislative process to take one of the following two steps to remedy this important discrepancy between the two bills or, if only the labor bill is passed, to ensure that it does not create even greater confusion about who is and who is not an independent contractor:

Modify the definition of “employee” within EMPA so that it uses the same wording found in the Fair Playing Field Act for determining employee or independent contractor status. Such determinations under that law should be made, as stated in the Fair Playing Field Act, “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).”
Make it crystal clear in the legislative history of the bill, including the Senate and House committee reports, that the definition of “employee” for purposes of EMPA should be construed in a manner consistent with both the “common law” test – which is the prevailing judicial standard under most federal laws including ERISA, the ADA, and the Tax Code – and the “common understanding” of contemporary independent contractor relationships.

Another approach would be to amend the definition of “employee” or “employ” under the FLSA to language that updates the New Deal definitional terms and, like the Fair Playing Field Act bill, incorporates the “common law” test that prevails under virtually every other federal law.

The urgent need for thoughtful federal legislation in the area of misclassification is hard to argue against. The one witness that testified in a critical manner about EMPA at the Senate hearing this past June did not suggest that federal legislation is not needed. Rather, he criticized the size of the proposed penalties for misclassification, the nature of the record-keeping requirements, the language of the proposed notice to be given to all workers, and the potential that the anti-retaliation provision could reward unethical conduct.

The determination of whether an individual worker is an independent contractor or employee is, more often than not, in the “gray area” and it oftentimes presents a close question of law. Regardless of whether Congress conducts further hearings on EMPA, it is imperative that legislators avoid placing businesses and workers in the untenable position where they may be found by the very same court to have properly classified an individual under one of the two new proposed laws but improperly classified him or her under the other.

The Tax Bill: The Fair Playing Field Act of 2010

The Labor Bill: The Employee Misclassification Prevention Act (EMPA)

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

What Congress Should Do

Modify the definition of “employee” within EMPA so that it uses the same wording found in the Fair Playing Field Act for determining employee or independent contractor status. Such determinations under that law should be made, as stated in the Fair Playing Field Act, “under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).”
Make it crystal clear in the legislative history of the bill, including the Senate and House committee reports, that the definition of “employee” for purposes of EMPA should be construed in a manner consistent with both the “common law” test – which is the prevailing judicial standard under most federal laws including ERISA, the ADA, and the Tax Code – and the “common understanding” of contemporary independent contractor relationships.

Marketing and PR Social Networking Best Practices

The Business of Law Blog Spot at the National Law Review recently featured Amy Juers of Edge Legal Marketing who shared a great top ten list of Social Networking Best Practices and a great video on businesses implementing social media strategies:

When should your team get involved in social networking marketing tactics, and which sites offer the most appropriate venue to shorten the sales cycle? Many marketing departments are still holding back on this initiative for good reason, it is practically impossible to manage what you do not understand.

Determining the right time to jump in is not as important as investigating the sites to determine if your involvement would complement your legal technology marketing or legal services marketing, sales, client communication, or any host of business initiatives. Simply jumping in for the sake of getting your feet wet is not a strategic social networking tactic. You should do research to gain an understanding of your options, match options with organizational goals, and then consider launching initiatives through multiple outlets. If you do not have time to research this or determine if or how to weave social networking into your organization, call experts in legal marketing and PR services and ask them for social networking strategy advice.

Whether or not sites that are popular today will evolve and remain popular next year cannot be predicted, however, given every teenager knows of this technology and actively uses it, your customers and prospects of the future are developing social networking finesse and will expect to connect with you in a few years in these ways. If the popular “must have” social networking sites of today fade into the abyss, rest assured, new “must have” networking outlets will emerge to satisfy social networking needs in business. Think of today’s big buzz social networking websites like a wave that has water in it that you can choose to ride or let pass. If you miss this one, certainly there will be another. Because no one knows how long this wave will be upon us, rather than simply waiting for this to pass, there are plenty of good reasons to investigate and consider getting involved today.

Why use Social Networking for Legal Marketing and PR

Connections through social networking sites allow groups to quickly catch up on each other’s business, while also allowing for the free-flow of information. People are increasingly becoming more excited about checking their social networking page rather than checking email for good reason, spam has a difficult time finding its way into your “friend” list and the platform for interaction is growing increasingly dynamic.

How extensively you get involved with social networking initiatives depends upon how these initiatives align with your firm’s goals. Your firm may want to leverage a site like Facebook to create a client group, post news, share client success stories or post YouTube videos of client testimonials and demos. LinkedIn has recently added greater flexibility into their site as well. For any firm sending out electronic newsletters, or client communications, creating a chat group or client networking group on these sites provides another outlet for sharing important content that may otherwise get buried if it were delivered as an email message.

Top 10 Social Networking Best Practices

Conduct your own investigation. Before you determine whether or not to invest resources or any energy into creating a business profile and joining a site, investigate the leading sites and kick the tires! Social networking sites require zero “real cash” outlay, costing only the investment of research time.
Select social networking opportunities that support business goals. Test the waters before you dive in, ask your prospects, clients and employees which social networking site they prefer. Not every site is going to be a fit and align with your firm goals.
Get the word out – and if needed – educate your clients! Connect to your prospects, clients and who’s who in your channel. Introducing a “chat” group on Facebook for clients makes little sense if your clients have no understanding of how to create a profile or get connected.
Structure or limit the time invested in managing a social networking site.Whether responding to posts, making connections with people, or adding content to your profile, make regular updates once or twice weekly. Calendar for 15-minutes one time per week to maintain each site.
Avoid getting personal. Publish content relevant to your expertise to establish thought-leadership status. No one really wants to know if you just finished a cup of coffee or if your dog has fleas.
Don’t over-stimulate with too much content. Keep postings brief and informational.
Resist begging. Create a consistently informational space and followers will line up to “friend” you.
Avoid posting on what may be sensitive topics. Events will unfold in the industry or within a competitors business that may be highly tempting to post about. The safest approach is to stay neutral, be informative and remain professional.
Measure your activity. You cannot analyze what you cannot measure. Track your tweets, followers, time spent, and conversions.
Keep current on social networking trends.Subscribe to a social networking blog or legal industry RSS feed to receive legal industry social networking, marketing and PR updates daily or weekly.

Recommended Social Media Resource Webcast

Watch this YouTube webcast video, The Business Value Behind Social Media featuring social media experts Charlene Li, David Meerman Scott and Chris Brogan as they weigh in on social media and discuss the latest strategies and opportunities that executives face when considering the implementation of social media initiatives. This webcast was recorded at the Premier Business Leadership Series in Las Vegas in November 2010. Please note, although informative this video is approximately an hour long.

USPTO Extends and Expands Patent Application Peer Review Program

Under the category of “Who Knew” — National Law Review guest blogger James M. Singer of Pepper Hamilton LLP lets us know about a US Patent Office Pilot Program which invites public participation in the patent application process.

The U.S. Patent and Trademark Office has announced an additional one-year pilot of its “Peer To Patent” pilot program, which invites public participation in the patent application process. The new program launches on October 25, 2010 and will be available through September 30, 2011.

The Peer-to-Patent program is a collaboration between the USPTO, the New York Law School, and others in which participating patent applications receive public scrutiny through comments and prior art submissions on the Peer-to-Patent website. The peer review period begins approximately one month after the patent application is published, and it lasts for three months. After the peer review period, the project sends the prior art and comments to the USPTO, and the USPTO advances the application earlier in its queue for examination. Both the USPTO and the applicant can consider the public comments and submitted prior art during the examination.

Applications that participate in the program can receive the benefit of quicker examination than they would have received if they had merely waited their ordinary turn at the USPTO. This is especially useful for technologies such as software and telecommunication inventions where the typical wait time to first Office Action often is several years. In addition, many commenters have suggested that the fact that a patent was peer reviewed patent could be useful in situations such as challenges to validity in litigation — in order words, the fact that a patent went through the program may make a jury less likely to find the patent invalid.

According to the USPTO, the Peer to Patent Program “opens the patent examination process to public participation in the belief that such participation accelerates the examination process and improves the quality of patents. Under the pilot program, inventors can opt to have their patent applications posted on the www.peertopatent.org website. . .. After the review period, the prior art is sent to the USPTO patent examiners for their consideration during examination.”

Changes in the new pilot include:

eligible technology classes have expanded to include software, telecommunications, and others;
peer review time is reduced to three months (from the previous four months);
up to 1,000 applications will be accepted into the program; and
peer reviewers may submit up to six items of prior art per application (down from the previous limit of 10).

The original Peer To Patent pilot ran from June 2007 until June 2009. The original pilot included 189 patent applications, and it received over 600 items of prior art from peer reviewers. To participate in the program, a pending application must not have published more than 30 days before filing a consent form, and it must fall into an eligible technology class. Eligible classes include, among others:

260 (certain subclasses) – chemistry of carbon compounds,
380 – cryptography,
424 (certain subclasses) – drug, bio-affecting and body-treating compositions,
702, 703, 705-715, 717 and 718, which relate to certain types data processing and computers, and
726 – information security.

The full list of technology classes eligible for the 2010 pilot is listed at www.uspto.gov/patents/init_events/class_subclasses_for_2010pilot.jsp. For more details about the Peer to Patent program, visit the Peer to Patent website at www.peertopatent.org.

An Analysis of South Africa’s Mental Health Legislation

The National Law Review is pleased to congratulate Natalie LaToya McCrea of American University- Washington College of Law winner of the Fall 2010 Law Student Writing contest.

If one were to measure a society’s health by its historical environment, then something can indeed be said of South Africa. This nation is known for its long abhorrent history with apartheid entrenched with a political and human rights struggle. In 1995, the world witnessed the evisceration of apartheid and the birth of a new democratic South Africa. In light of the struggle endured by a visible portion of the South African population, a question asked is, what about the forgotten and somewhat invisible individuals, those who suffer with mental illness. The purpose of this work is to discuss South Africa’s mental health legislation, namely Mental Health Care Act, No. 17 [MHCA 2002], and conduct a comparative study with the African Banjul Charter, the UN Principles for the Protection of Persons with Mental Illness [MI Principles], and the World Health Organization Principles.

Historical Mental Health Legislation

While South Africa has had numerous mental health statutes, our discussion will commence with the 1973 Act.

Mental Health Act 18 of 1973 [MHA 1973] grew out of a “public panic” that ensued after the assassination of then Prime Minister, Dr. Hendrik French Verwoerd by someone deemed to be mentally ill.[i] A Commission that inquired into his death concluded that many assassinations “are committed by mentally disordered persons.”[ii] The Commission’s conclusion spawned a proposed amendment, which eventually culminated into MHA 1973.[iii]

Scholars and psychiatrists have noted that MHA 1973 did not have an individual rights concern. Rather, its primary focus was on patient control and treatment, along with the “welfare and safety” of the society.[iv] The fact that this Act was propelled during the apartheid era cements the view that the human rights of the patients were not necessarily the priority. Specifically, MHA 1973 has been criticized because (i) it only required a reasonable degree of suspicion to be certified to a mental institution;[v] (ii) individuals could be denied their freedom and placed in a mental facility based on prejudices and vendettas.[vi] In fact, finding someone mentally incapable was sometimes utilized solely for political means in the apartheid era. Freedom fighters were often silenced by being placed in a mental facility; (iii) once deemed mentally ill and certified, patients went without the assistance of the law, and could spend a considerable amount of time in the mental institutions against their will[vii]; and (iv) patients did not have a significant right of appeal or representation.[viii]

According to the South Africa Federation for Mental Health, while MHA 1973 was in existence, it facilitated disproportionate mental health care based on race, with blacks receiving the least care. In effect, the MHA 1973 provisions did not promote personal autonomy, dignity or justice for individuals with mental illness. Instead, it highlighted a paternalistic principle which allowed mentally ill patients to be alienated, stigmatized and disempowered. It became apparent that MHA 1973 needed to be reconsidered and changed.

South Africa’s Present Mental Health Legislation

South Africa entered into a state of transition after the presidential election of Nelson Mandela in 1994. The nation was moving from a repressive regime into a new democratic era. According to the World Health Organization [WHO], Mandela’s administration was particularly focused on ridding the nation of all apartheid polices, and instituting new ones that met the needs of groups previously disadvantaged.

The new South Africa adopted its Constitution with an accompanying Bill of Rights on May 8, 1996, which came into force on February 7, 1997. It became even more evident that MHA 1973 needed to be brought in step with the newly adopted principles of the South African Bill of Rights.[ix] Specifically, it needed to reflect the rights expounded in Chapter 2, §§§ 9, 10, and 12; recognizing respectively, issues of equality; the right to the respect and protection of human dignity; and the freedom and security of person.

South Africa’s new Mental Health Care Act (MHCA 2002) was passed in 2002 and promulgated on December 15, 2004.[x] It came in force in line with other positive international initiatives in mental health legislation, such as the London Mental Health Act 2007, The Scotland Mental Health (Care and Treatment) 2003, and the Jamaica Mental Health Act 1998. In effect, MCHA 2002 seeks to: (1) shift the system from a past custodial approach to one encouraging community care; (2) make certain that appropriate care, treatment and rehabilitation are provided at all levels of the health service; and (3) highlight that individuals with mental disabilities should not be discriminated against, stigmatized or abused.[xi]

MCHA 2002’s Key Provisions

Mental illness is defined under the Act as a “positive diagnosis of a mental health related illness in terms of accepted diagnostic criteria” made by a mental health care practitioner authorized to make such diagnosis.[xii] The Act outlines the rights and duties to mental health patients, and highlights that their human dignity and privacy must be respected; that they should not be unfairly discriminated against because of their mental status; and that they should be protected from “exploitation, abuse and any degrading treatment” [xiii]

Involuntary Treatment:

Regulation No. 27117 of 2004 governs MCHA 2002.[xiv] This Regulation and § 33 of the Act, states that in order to commence a proceeding to have someone involuntarily committed, “an application must be made to the Head of a Health Establishment (HHE) by a spouse, next of kin, partner, associate, parent or guardian”, who must have seen the person within the past seven days.[xv] Once the application is received, the HHE must have the person examined by two mental health care practitioners who perform independent assessments of the patient, and must report their findings and recommendations.[xvi] If the assessments of the two practitioners are different, then the HHE must have the patient assessed by another practitioner.[xvii] The HHE can approve an application only if the two mental health care practitioners agree together that involuntary care is needed.[xviii]

MHCA 2002 is clear that only individuals suffering from mental illness are eligible for involuntary care.[xix] According to the Act, an involuntary mental health user “must be provided with care, treatment and rehabilitation at a health establishment if at the time of application, there is a reasonable belief that the mental health care user has a mental illness,” and is likely to cause serious harm to their person or others.[xx]

If the HHE recommends involuntary care, treatment and rehabilitation, the patient must be admitted to a health establishment within 48 hours.[xxi] The HHE must then arrange for the assessment of the patient’s physical and mental health status for 72 hours.[xxii] After the 72-hour assessment, based on the medical health care practitioner’s reports, the HHE must decide if the patient requires further involuntary care, treatment and rehabilitation services as an inpatient. If the HHE determines that the patient does not require further treatment, care or rehabilitation, the patient must be discharged immediately, unless the patient gives consent to further care. Invariably, depending upon the HHE’s determination, the patient can be discharged or have their status changed to a voluntary inpatient or outpatient. [xxiii]

Voluntary Treatment:

MHCA 2002 directs that an individual who voluntarily submits to a mental health facility for care and treatment, and who consents to such care, is “entitled” to care and treatment, or referral.[xxiv]

Procedural Protections and Precautions:

MHCA 2002 incorporates several procedures, and precautions to ensure that patient’s rights are fully protected. One notable precaution is that persons directed by the HHE to examine the prospective patient must be qualified mental health practitioners.[xxv]

Another important precaution and procedural protection is the establishment of the Mental Health Review Boards, which are to be constituted in every province.[xxvi]The primary aim of the Boards is to ensure that the rights of the prospective patients are not violated. The Boards must be comprised of one magistrate, one attorney, and a mental health practitioner.[xxvii] Where the HHE subjects an involuntary patient to the 72 hour assessment, and concludes that the patient should receive further involuntary care, treatment and rehabilitation, the HHE must submit a report within 7 days of the expiration of the 72-hour assessment requesting the Board to approve further involuntary care.[xxviii]

One striking element of the Act is that while the Board considers the HHE’s decision to continue involuntary treatment, all (the applicant, the mental health providers), except for the reluctant patient is afforded the opportunity to present their representations to the Board.[xxix] Additionally, it is interesting that after the Board makes its deliberations, there is no mention of them sending a notification of the results to the potential patient. The Act, however, notes that decision letters are sent to the HHEs and the applicant who requested that the patient be treated.[xxx] Once the Board decides to adhere to the HHE’s assessment that the involuntary patient should continue to be so treated, the Board must submit their decision for judicial review and send all documentations to the High Court for consideration of the matter. The Court has a month to consider.[xxxi]

The aforementioned concerns are somewhat ameliorated by the Act’s provision that mental health care users have a right to legal representation, and to appeal to the Board about the decisions of the HHE to continue involuntary treatment.[xxxii]One problem, however, is that the HHE’s decision in favor of involuntary care is not submitted to the patient, but to the applicant. Since the reluctant patient was not notified of the HHE’s decision in the first place, it is rather difficult for the patient to submit an appeal. If the Board finds for the reluctant patient, s/he must be released immediately. If the Board finds in favor of the HHE’s decision, the Board must submit their decision to the High Court for judicial review.[xxxiii]

Another important procedural protection applicable to both voluntary and involuntary mental patients is that their conditions must be periodically reviewed, and annual reports must be submitted to the Board for review.[xxxiv]

MHCA 2002 Compliance with Other Human Rights Principles

The African Banjul Charter on Human and People’s Rights was ratified by South Africa on June 9, 1996, and accordingly, its principles are binding on South Africa. The Charter calls for the protection of the dignity of mental health patients; their equality before the law; their right not to be deprived of their liberty and security; and the right to obtain good mental health. [Articles 5, 3, 6, 16, respectively]. Some of these proscriptions were called to the forefront before the African Commission on Human and Peoples’ Rights in the landmark case, Purohit and Moore v. Gambia No. 241/2001 (2003). The Commission held that all states party to the Banjul Charter should guard and protect the rights of the mentally disabled to dignity and the enjoyment of life.[xxxv]

South Africa’s MHCA 2002 recognizes and subscribes to the importance of protecting individuals with mental illness.[xxxvi] The Act further recognizes that this protection is called for in the state Constitution. There is a clear indication that South Africa wants to protect the rights and interests of the mentally ill.[xxxvii] The human dignity and respect principles evoked in Purohit are enforced and protected in §§8, 10 and 11 of the Act.

The Principles for the Protection of Persons with Mental Illness and the Improvement of Mental Health Care (MI Principles)[xxxviii]

As illustrated below, MHCA 2002 comports with many of the tenets of the United Nations’ MI Principles:

Chapter III of the Act is a reflection of MI Principle 1 enumerating some basic rights for the mentally ill, such as respect for human dignity and privacy;[xxxix] the consent to care factor;[xl] and rules against discrimination, exploitation and abuse.[xli] MI Principle 4 is reflected in Section 12 of the Act. Specifically, similar to the MI Principles, MHCA 2002 § 12 directs that a determination of an individual’s mental health status should not be based on their socio-political, cultural or economic background. The MI Principle of Notice of Rights (Principle 12) can be found in § 17 of the Act providing that mental health patients must be informed of their rights before any administration of care or treatment. The Act follows MI Principle 16 on involuntary admission in that it considers the dangerousness factor before committing an individual involuntarily. The Act, like Principle 16, recognizes the importance of the concurrence of two mental health practitioners, and that involuntary preliminary treatment should be brief pending a review.[xlii] Additionally, both the Act and the MI Principles contain provisions for the creation of Review Boards [Principle 17; MHCA § 18]. They both also have provisions for periodical reviews of involuntary patients [Principle 17, MHCA § 30]; and the right of the patient to appeal [Principle 17, MHCA §29]. The MI Principle of monitoring is reflected in the Act in the form of judicial reviews in §§ 34, 35, 36 and 37.

The World Health Organization Principles

According to the WHO, South Africa’s MHCA 2002 “is consistent with international human rights standards…and appears to be a highly appropriate and important milestone in the development of the mental health system in South Africa.[xliii]

Many of the principles reflected in MHCA 2002 are in line with the WHO’s concept that the aim of a mental health legislation is to “protect, promote, and improve” the lives of the mentally ill.[xliv] Significantly, WHO’s concepts are reflected in a number of the Act’s principles, namely that mental health services should offer care, treatment and rehabilitation; and that recipients should be treated with the least possible restriction on their freedom.

Concerns with the New Mental Health Care Legislation

Despite the fact that MHCA 2002 represents a major milestone in South Africa’s history, the WHO has noted that it does not appear to be enough to bring forward major reforms greatly needed in South Africa’s mental health system.[xlv] In fact scholars have commented that the system is plagued with human resource constraints and infrastructure restraints, and thus implementation of the Act’s requirement in community and district hospitals is problematic.[xlvi] According to Moosa, South Africa has a limited amount of specialized psychiatric hospitals, and those that are available are ill equipped to properly abide by the 72-hour provision. Additionally, many South African psychiatric hospitals do not separate the patients by age groups; and there is a significant lack of beds.[xlvii] Other problematic areas that undermine the Acts successful implementation are lack of proper training, inadequate skills; and a lack of proper understanding of the Act.[xlviii]

Conclusion

South Africa’s new mental health care act is an important instrument implemented to advocate for the best interest of mental health care users. Although there are problems, one must remember that the nation had a horrid past, and remnants of the past system are still ingrained therein. The redeeming factor is that South Africa has made the step to correct the deficiency and has moved towards enabling its citizens to have access to obtaining optimal mental health care.

[i] Nicholas Haysom, Martin Strous, and Lloyd Vogleman, The Mad Mrs. Rochester Revisited: The involuntary confinement of the mentally ill in South Africa, 6 SAJHR 341, 343 (1990).

[ii] Id.

[iii] Id.

[iv] Burns, JK Implementation of the Mental Health Care Act (2002) at district hospitals in South Africa: Translating principles into practice, S Afr Med J 2008; 98 46-49.

[v] Id.

[vi] Id.

[vii] Id.

[viii] Id.

[ix] Bonthuys, Elsje, Involuntary Civil Commitment and the New Mental Health Bill,118 SALJ 667 (2001).

[x] Mental Health Care Act 17 of 2002 (S.Afr.),http://www.info.gov.za/view/DownloadFileAction?id=68051

[xi] MYH Moosa and FY Jeenah, Involuntary treatment of psychiatric patients in South Africa, 11(2)Afr Journal of Psychiatry, 109, 110 (2008).

[xii] Mental Health Care Act 17 of 2002 Chapter 1, § xxi (S. Afr.).

[xiii] Id. atChapter 3, §§§ 8, 10 and 11.

[xiv] http://www.info.gov.za/gazette/notices/2004/27117.pdf

[xv] Mental Health Care Act 17 of 2002 §33 (1,2) (S. Afr).

[xvi] Id. at § 33(4,5).

[xvii] Id. at § 33(6).

[xviii] Id. at §33(7).

[xix] Id. at § 32.

[xx] Id.

[xxi] Id. at §33(9).

[xxii] Id. at § 34.

[xxiii] Id. at §34(3).

[xxiv] Id. at §§ 25, 26.

[xxv] Id. at §27(4), §33(4).

[xxvi] Id. at § 18.

[xxvii] Id. at § 20.

[xxviii] Id. at §34(3)(c).

[xxix] Id. at §34(7)(a).

[xxx] Id. at §34(7)(b).

[xxxi] Id. at §34(7)(c).

[xxxii] Id. at §§ 15, 35.

[xxxiii] Id. at §35(3)(4).

[xxxiv] Id. at §§30, 37.

[xxxv] Michael L. Perlin, Arlene S. Kanter, Mary P. Treuthart, Eva Szeli & Kris Gledhill, INTERNATIONAL HUMAN RIGHTS and COMPARATIVE MENTAL DISABILITY LAW840-841 (Michael L. Perlin eds., 2006).

[xxxvi] Mental Health Care Act 17 of 2002 Preamble (S. Afr).

[xxxvii] Id. at §4(c)(d).

[xxxviii] The Protection of Persons with Mental Illness and the Improvement of Mental Health Care, G.A. Res. 46/119, U.N. Doc. A/Res/46/119 (Dec 17, 1991).

[xxxix] Mental Health Care Act 17 of 2002 §§8, 13 (S. Afr).

[xl] Id. at §9.

[xli] Id. at §§10, 11.

[xlii] Id. at §§26, 33.

[xliii] WHO, Mental Health Policy Development and Implementation in South Africa: A Situation Analysis, 10 [January 31, 2008].

[xliv] Id.

[xlv] Id.

[xlvi] MYH Moosa and FY Jeenah, Involuntary treatment of psychiatric patients in South Africa, 11(2)Afr Journal of Psychiatry, 109, 110 (2008).

[xlvii] Id.

[xlviii] Burns, JK Implementation of the Mental Health Care Act (2002) at district hospitals in South Africa: Translating principles into practice, S Afr Med J 2008; 98 46-49.

About the Author:

Natalie Latoya McCrea received her J.D. from Syracuse University College of Law in 2009. She also holds a Master’s Degree in International Affairs from Maxwell School of Citizenship and Public Affairs at Syracuse University. She is currently pursuing a LLM with a specialty in international business from American University Washington College of Law. www.wcl.american.edu / 347-886-6900

Employers’ Bottom Line

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Executive Summary

The “Tax Relief, Etc.” Act of 2010

Income Tax Rates Continued for 2011–2012

Summary of Changes to Transfer Tax Rates and Exemptions

Estate Tax Made Optional for 2010

Transfer Tax Exemptions Increased, Tax Rates Reduced

Due Dates for 2010 Returns, Disclaimers

Generation-Skipping Transfer Tax Rate Fixed at Zero for 2010

Unused Estate Tax Exemption Transferable to Surviving Spouse

Bullets Dodged

Direct Gifts from IRAs to Charities Reinstated for 2010–2011

Roth Conversions

The New Law’s Effect on Estate Planning

Time for Action

Other Super Year-end Tax and Estate Planning Articles:

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Noteworthy

Title I – Prevention

Title II – Detection and Response

Title III – Food Imports

Title IV – Other Provisions

Summary of Tester Amendment as Modified (Included in Harkin Substitute Amendment as passed the Senate):

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I. Introduction

II. Overview and History of ESOPs

A. ESOP Overview

B. Brief Relevant History of ESOPs

C. Current State of Law on ESOPs

1. ESOPs Within 401k Plans

2. ERISA Litigation of the 2000s

III. Risks to Employees

IV. Risks to the Sponsor

V. Conclusion

Endnotes.

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The Tax Bill: The Fair Playing Field Act of 2010

The Labor Bill: The Employee Misclassification Prevention Act (EMPA)

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

What Congress Should Do

The Tax Bill: The Fair Playing Field Act of 2010

The Labor Bill: The Employee Misclassification Prevention Act (EMPA)

Congress Should Provide a Common Federal Definition of “Employee” for Misclassification Purposes

What Congress Should Do

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Why use Social Networking for Legal Marketing and PR

Top 10 Social Networking Best Practices

Recommended Social Media Resource Webcast

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Historical Mental Health Legislation

South Africa’s Present Mental Health Legislation

MCHA 2002’s Key Provisions

Involuntary Treatment:

Voluntary Treatment:

Procedural Protections and Precautions:

MHCA 2002 Compliance with Other Human Rights Principles

The Principles for the Protection of Persons with Mental Illness and the Improvement of Mental Health Care (MI Principles)[xxxviii]

The World Health Organization Principles

Concerns with the New Mental Health Care Legislation

Conclusion

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