Posted in International Employment Law

Global RIFs: A Checklist Approach

Global RIFs require careful planning and implementation.

What can be achieved in a day (or a couple of months if WARN applies) in the US can take months (and yes, sometimes years), once taken global. What in the US can  be implemented at no cost or with separation payments that can be enshrined in releases is often far more expensive due to statutory obligation internationally.

But, global RIFs are manageable if carefully planned.  Here is a checklist to guide that planning.

4-a

 

 

 

 

 

 

Posted in Employment Policies International Employment Law

A Movie Review And A Legal Critique: Two Days, One Night

Today’s authors are summer college interns from DLA’s Chicago office. 

Two Days, One Night is an award winning film set in Belgium that revolves around an employment dilemma. Here’s the premise:

Sandra is scheduled to return from sick leave on Monday but discovers on the preceding Friday that she is being terminated from her position with a solar panel manufacturer in Belgium. The reason? The boss decided that 16 workers could do the work of 17 so he gave the rest of the employees the option of either taking 1,000 Euro bonuses, or keeping Sandra on the payroll.

With the aid of her friend who chairs the works council at this company, the boss agrees to rerun the vote on Monday. Sandra has only the weekend – 60 hours = two days and one night — to track down her 16 coworkers and persuade them to forfeit a bonus so she can keep her position: a job that Sandra needs not only for the family economy but also for personal stability.

Can employers actually do such a thing?

We interviewed DLA employment attorneys around the world to find out.

Johnathan Exten-Wright, who practices in the United Kingdom, believes legality here depends on the answer to the following question: “is the job redundant or is Sandra targeted for ill health?” If Sandra’s position is redundant, the employer may prove how and why she should be terminated. If Sandra is targeted for her mental health, however, she will likely prevail in a discrimination suit.

Repeatedly, attorneys cautioned that redundancy statutes in their countries place the burden on employers to show that the termination is the best economic option. For example, Hélène Bogaard, who practices in the Netherlands, noted that her country has stringent redundancy statutes in place to protect the employees, like Sandra.

When approaching termination, redundancy laws from Germany to Hong Kong require that the decision meet a standard of “reasonableness.” According to Julia Gorham of DLA’s Hong Kong office, leaving a redundancy decision to a vote, as Sandra’s employer does, would foreclose meeting the standard of reasonableness and render the termination illegal.

While most countries use redundancy statutes to ensure fair treatment of employees, Japan believes that redundancy statutes are… well… redundant. Lawrence Carter, who practices there, referred to Japan as an “employee’s paradise”; Sandra would have been 100% safe in keeping her job if only her film was set in Japan.

Countries without redundancy laws evaluate motives.  Washington, D.C. attorney Joseph Turzi noted that there is nothing unlawful in the U.S. about 16 employees deciding whom to fire but that this delegation makes it difficult to prove that the motive wasn’t to punish Sandra for taking leave (which would violate the Family Medical Leave Act).  “Without a rational explanation,” Turzi cautioned, “a jury will find an illegal one.”

In the United Kingdom, employers are better safe than sorry.  According to Kate Hodgkiss in Edinburgh, “the safest way here is procedural.”  A fair process involves either eliminating a unique job position or using objective criteria (i.e., documented performance).  Kate adds that often employers there utilize settlement payments to sidestep that process — a common practice in the U.S. as well.

Although Two Days, One Night’s employment problem faced legal setbacks elsewhere around the world, what about in Belgium, since the film takes place there?  Even there, it is compelling drama but totally unreal. Soetkin Lateur, counsel with DLA Piper’s Brussels Office, presented no fewer than three different ways in which the film’s scenario was contrary to Belgian law:

  1. firing someone straight off of sick leave suggests illegal discrimination;
  2. incentivizing her co-workers to dump Sandra could constitute an abuse of employer’s prerogatives; and
  3. failing to give Sandra twelve weeks of notice before termination is a separate problem.

Sandra’s employer should have called Soetkin.  Two Days, One Night’s producers should have too but that would have killed the drama in their project.  There is little drama in watching veteran lawyers guide their clients around complicated employment laws.  Yet, for employers with businesses that span the globe who want to run those businesses smoothly – without drama – the stars each should cast is clear:

Soetkin Lateur in Brussels

Kate Hodgkiss in Edinburgh

Joe Turzi in D.C.

Julia Gorham in Hong Kong

Lawrence Carter in Tokyo

Hélène Bogaard in Amsterdam

Jonathan Exten-Wright in London

Each gets:

Posted in Employment Litigation Employment Policies

Kvetching Toward Living With EEO-1 Compensation Data Demands

Nobody remembers I.F. “Izzy” Stone (1907-1989) but everybody should; he was a reporter who did deep-dive readings of the handouts, the press releases, and the public documents.  Izzy would love the EEOC as a target.  While the EEOC did not include its proposed EEO-1 form in its updated Final Comment Request, you can find it (just as Izzy would have found it and devoured it).

Reading the EEOC’s conclusion that the cost of including pay data is only $416.58 per employer suggests that it is necessary to read the form itself (and very carefully).  The requested additional data is merely 1,512 cells to be filled in twice: once with numbers of employees and once with hours.  That is for one establishment; if an employer has 10 establishments, that is 30,000+ cells to calculate, populate, double-check, and then certify that “These reports are accurate and were prepared in accordance with the instructions.”  All for $416.58?

Swamped by the numbers?  Let’s go back slowly.  There are 12 salary bands on which the EEOC wants data; it demands that data separately for each of the 9 EEO-1 job categories (professionals, technicians, craft workers, etc.) and for each of the 14 traditional race/sex categories.  So, 12 x 9 x 14 = 1,512 for the number of employees and the same for the aggregate hours.  Izzy (were he still alive) would note the irony of the EEOC complaining about “the complexity” of its “burden” in explaining how this is consistent with the Paperwork Reduction Act.

But, wait, it gets better.  The EEOC states that its current EEO-4 report (for state and local government employers) requires compensation data – albeit with not quite so many cells.  It then  points out that for those EEO-4 forms “on average approximately 7% of the cells on the reporting form are actually used by an employer to report data” and, thus, it anticipates that “[t]he overwhelming majority of the cells [will be] left blank.”  Izzy would ask “why bother at all then?”

If you are curious why the EEOC is bothering, its updated explanation of how it will use this data is set out at pp. 41-46 of this Final Comment Request.  That, however, is a long-term focus.  Inquiring readers today prefer the short-term focus: i.e., what has changed from the EEOC’s initial proposal to its revised proposal?

Let’s turn to what is changed.  Precious little:

  • compensation reporting is now W-2 only: no employer options;
  • EEO-1s with compensation data will not be due until March 31, 2018;
  • the employer choice of when to take the “snapshot” of its workforce has now narrowed to the 4th quarter only; and
  • hours worked are FLSA hours for nonexempts and for FLSA exempts either a default of 40 (which will be used almost always) or actual hours if available.

Beyond promising no burden, the EEOC’s “Final Comment Request” also does a deep dive into confidentiality and data security to reassure the world that what is reported will not be spilled. From those same wonderful folks who promised that all of this reporting can be done at a cost of only $416.58, this is truly reassuring.  Regrettably, Izzy would not be so reassured: “Every government is run by liars and nothing they say should be believed.”

Izzy, however, did not promise a world free from such governments.  Prudent employers can merely begin planning early (which is far more practical than cursing).  Let’s stake out what employers need to look at to be ready for the initial EEO-1 with compensation data.

First, HR information systems (with the demographics) will need to sync with payroll systems.  Otherwise, the matching of demographic information with hours and with W-2 wages will be overwhelming.  Let’s prove Izzy wrong here in writing that “[t]he only thing God didn’t do to Job was give him a computer.”

Second, if the computers are synced, then do a test run with 2016 year-end data.  Izzy too believed that practice improves performance: “You have to take the long view…. it’s like pissing on a boulder.  For the first few thousand years, you don’t see any effect.  But after that, you start to see a definite impact.”

Finally, study (but only in a framework that is subject to attorney client privilege) how the EEOC will use the data to decide what measures may be taken (but be careful of reverse discrimination) and what explanations will bear up under scrutiny.  Izzy offers the following guidance on  explanations: “I sought … the overlooked fact, the buried observation which illuminated the realities of the situation.”

PS: The fate of regulatory reforms that do not take effect before a change in Presidential administrations — so-called “midnight regulations” — is another subject altogether.  While “midnight regulations” know no party boundaries, loyalists of the party not in the White House always aspire to relief from such regulations.  There is even a pending bill in Congress entitled the Midnight Regulation Relief Act.  Fantasy fictions of “what if …” , however, are beyond the scope of this blog.

Posted in Employment Litigation Employment Policies

Space, Time, and Taxes: How The Theory Of Special Relativity Applies To Settling An Employment Claim

taxSpecial thanks to Taylor Carico for contributing to this post.

Tax implications of employment settlements bedevil everyone. Even Albert Einstein famously stated that “the hardest thing in the world to understand is the income tax.”

There are lots of reasons for confusion but the complication between what is taxable income and what is taxable wages may be the right place to start. If you win the lottery, it is taxable income but it is reported on a 1099 rather than a W-2 because it is not wages.  Simple in theory but complicated in practice.

Charting it out may help.

Knowing these basics is significant.

First, it permits cheaper settlements.  If settlement proceeds are gross income but non-wages, a plaintiff receives the time-value of money and an employer profits by reducing its unemployment and other payroll tax payments.  Put concretely, every dollar shifted from a W-2 report to a 1099 report will save an employer more than 10% of that dollar in payroll taxes (as well as increase the satisfaction of the payee for more cash in hand).

Second, it avoids tax penalties. Mishandling reporting triggers penalties.  If an employer fails to file the required 1099 or W-2 and/or reports incorrect amounts, it is subject to penalties of $250 for each return.  If an employer willfully and intentionally disregards such requirements, it may be liable for a penalty equal to 10% of the settlement amount (but that high standard is satisfied where the employer acts “voluntarily in withholding required information, rather than accidentally or unconsciously.” Purser Truck Sales, Inc. v. United States, 710 F. Supp. 2d 1334, 1339 (M.D. Ga. 2008)).

Finally, it facilitates bullet-proof settlements.  Knowing the tax consequences allows allocating the settlement and spelling out that allocation in the agreement itself.  Because both the employer and employee have joint liability on the taxes due,  allocating the nature of the claims and their corresponding dollar figure within the settlement agreement serves both.   Further, the IRS will usually defer to an arms-length, good faith allocation among the various categories of potential damages; conversely, a failure to allocate will cause the IRS to treat the entire settlement as taxable wages. See, e.g., Bagley v. Comm’r, 105 T.C. 396, 406 (1995), aff’d 121 F.3d 393 (8th Cir. 1997); Morabito, Fedinand A., TC Memo 1997-315 (July 9, 1997).

Let’s look at an example.

Al Einstein is a theoretical physics and mathematics professor at the California Institute of Technology (Caltech). His annual salary is $200,000.  Everyone agrees that Al is one of the most promising academics in the field.  This past year, Al made three business trips to New York, London, and Munich presenting on novel issues in the field.  Al submitted his expenses for reimbursement promptly after each trip.  Caltech still owes Al $10,000 for those business expenses.  Recently, Al published the groundbreaking theory of relativity overturning Sir Ike Newton’s law of universal gravitation.  However, as Provost of Caltech, Ike was quite embarrassed that someone on his own faculty undermined his life’s work.  As an assertion of authority, Ike demoted Al to associate professor and decreased his salary by $50,000.  Further escalating the issue, Ike made some off-hand remarks about Al being a communist at the Caltech Board Meeting.

Al was furious. Due to related stress and anxiety, Al suffered a mild heart attack.  The hospital bill was $100,000.  Embracing the American way, Al threatened to file a lawsuit against Ike and Caltech for slander, breach of contract, emotional distress, and unlawful discrimination.  Rather than risk trial, Caltech decided to pay Al $1 million to settle the claim a year later.

During negotiations, Al, Ike, and Caltech set out to properly allocate the settlement proceeds. Let’s look at the break down:

  • Back pay – Here, Al’s base annual salary before the demotion was $200,000. The decreased salary was $150,000. Thus, the amount allocated to back pay is $50,000. This payment is classified as taxable wages subject to deductions and reported on Al’s W-2.
  • Front pay – Al had plenty of universities offering him higher paying positions after leaving Caltech. Accordingly, there is no allocation for front pay. If there had been such an allocation, it is handled just like back pay.
  • Medical expenses and emotional distress – The hospital bill (beyond insurance) for the heart attack was $100,000. This amount is not taxable income. In addition, the parties allocated another $200,000 for emotional distress related to case of Al’s heart attack. Again, there is no withholding requirement for this payment because it is not taxable income: this is the exceptional case; but for the physical illness/injury, ordinary emotional distress is taxable income subject to a 1099 form.
  • Expense reimbursement – The $10,000 owed to Al for his business trip expenses is not considered taxable income because it was incurred according to an accountable plan: i.e., a plan, policy, or practice covering expense reimbursements (1) paid or incurred while the employee is performing services as an employee and (2) adequately accounted to the employer within a reasonable time.
  • Interest – The parties designated part of the settlement proceeds as interest accrued over the year. Accordingly, this portion is paid without payroll deductions and reported as income only on a 1099 form.
  • Attorney fees – $400,000 has been allocated to attorneys’ fees and will be paid directly to Al’s counsel. Nonetheless, this is reported on 1099 forms to both Al and his attorney; Al may then claim this expense on his tax return to lower his tax burden on the rest of his taxable settlement.
  • Punitive damages – The parties designated the remaining $240,000 (minus interest) as punitive damages, which (like interest) is paid without payroll deductions and reported as income only on a 1099 form.

As you can see, tax aspects of an employment settlement can be tricky, even for Einstein. Before finalizing an employment settlement, make sure you consider the tax implications of the payments.  Both the employer and employee will be happy that you did.  And who knows, you might even find that the formula holds true: in Employee settlements = Money Counts.

Posted in Employment Policies

An Apple a Day Will Not Keep Paid Leave Away

Take two aspirin before reading further because apples won’t help. Keeping up with the ever-expanding paid leave laws is enough to give any employer a headache. Let’s start with those currently effective – 4 states, Puerto Rico, Washington D.C., and 22 other cities or counties:

Take two more aspirin and look ahead.

• The U.S. Department of Labor (“DOL”) is currently working on regulations mandating paid family and medical leave policies for all government contractors; those regulations are expected later this year.

• New York is set to phase-in the nation’s broadest paid leave policy starting in 2018. There, employees will be eligible for 8-12 weeks (as the plan is phased-in) of partially paid family leave (50%-67% of average weekly wages).

• Other states and localities have legislation in the pipeline.  For example, Plainfield, New Jersey and Los Angeles, California passed paid sick time laws which go into effect July 2016.  In Maryland, the Montgomery County Council passed a paid sick time law which will go into effect on October 1, 2016 while San Diego’s expanded paid sick time law was approved on June 7, 2016.  Effective January 1, 2017, employers with employees in Santa Monica, Spokane, and Vermont will need to comply with the corresponding paid sick leave ordinances. San Francisco is adding paid parental leave,which will also be phased-in (according to number of employees) starting January 1, 2017. Chicago, Illinois has also enacted paid sick time which will go into effect July 2017.

For employers fortunate enough to be outside the realm of government contracting and with business operations confined to a single city (or at least a single state), the aspirin alert passes quickly. For those employers with a national scope, there is a dilemma: a single policy based on the most generous current law or a headache inducing manual with upwards of 25 (for today with that number increasing month by month) separate policies for each local facility.

Let’s consider what such a single policy approach might look like:

1. Front-load the maximum number of hours of sick time accruable into employees’ accounts on January 1.

a. This eliminates accrual method and carryover calculation discrepancies across jurisdictions.
b. Leave should be available for immediate use by current employees.

2. Front-loading 72 hours (9 workdays) of paid sick time generally complies with the highest required amount of paid leave. [NB: 96 hour requirements for the hotel industry due to certain city laws imposing more on those employers].

3. This policy must apply to full-time, part-time, and temporary employees. New hires are eligible to use paid sick leave on the 90th day of employment or upon 680 hours worked, whichever occurs first. This, however, works only for businesses that are not in either Puerto Rico (which requires only a 2 month waiting period before sick leave may be used) or Long Beach and SeaTac (which each allow employees to use paid sick leave as accrued).

4. Leave should apply to caring for a child, a parent, a spouse, a domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship who has a serious injury/illness or is otherwise in need of care; victims of: domestic violence, sexual assault, or stalking, or to relieve family pressure while a family member is called to active military service.

5. Payout of unused sick leave at years’ end (before front-loading the required amount of leave on January 1 for the next year) is required.

6. Accrued sick time can be used in the smaller of hourly increments or the smallest increment the employer’s payroll system uses to account for other absences or use of time.

7. Accrued but unused sick time is lost upon termination but must be reinstated for immediate use by an employee who is rehired within 1 year after separation.

Are you saying “where is that industrial-strength aspirin?” A single policy is no panacea. Indeed, implementing such a uniform policy, based on the most generous amount of sick time required, may also be cost prohibitive — providing 72 hours of paid sick leave up-front for even part-time and temporary employees upon their first day is too expensive a price for administrative convenience.

With the illusion shattered and with balancing too many local laws inducing migraines, you can write to your Senators and members of Congress. This explosion of local laws concerning paid leave perhaps begs for a federal solution: a single law that pre-empts all state and local laws. Interestingly, the U.S. is the only developed country without national legislation mandating paid leave.

Posted in Employment Litigation Employment Policies

How to use the new trade secrets act: tips for employers

US businesses lose $300 billion annually in stolen trade secrets; employees can steal thousands of documents with the push of a button; and the FBI acknowledges it cannot stop this hemorrhage on its own. In response, Congress just enacted the Defend Trade Secrets Act (DTSA) to give private litigants powerful new tools to combat this problem.

What’s the import of these tools in practical terms?

Federal court options: the game changer

DTSA gives potential plaintiffs (but only plaintiffs) access to federal courts. Thus, businesses seeking to enforce trade secrets will now automatically have a choice of forums: state court or federal court. Apart from the enhanced remedies available under DTSA, there will often (but not always) be reasons to select federal court: the single-judge docket system in federal court; the law clerks available to federal court judges for cases that are brief-intensive; and uniform rules of procedure and evidence for a business policing trade secrets from coast to coast.

This entry to federal court will permit more than trade secret claims: employee non-competition and non-solicitation cases – generally the province of state court – may be eligible for supplemental federal jurisdiction. This is especially significant in jurisdictions where state and federal courts interpret state law at variance. For example, in California, federal courts more readily enforce restrictions against soliciting employees than state courts there. Similarly, in Illinois, federal courts have been reluctant to adopt the Illinois Appellate Court’s holding in Fifield v. Premier Dealer Services, Inc. 2013 IL App (1st) 120327 that requires consideration other than employment to support a non-competition or customer non-solicitation restriction. (See our coverage of this case here.)

This opportunistic use of supplemental jurisdiction also works in other ways. For example, DTSA does not permit injunctions based solely on “inevitable disclosure.” Yet, many states do. Inclusion of such state law trade secret claims permits achieving in federal court what DTSA alone will not permit for such “inevitable disclosure” cases.

Remedies: new and old

DTSA adds a remedial innovation; it allows private parties to seek a court order instructing law enforcement officials to seize stolen trade secrets and to obtain such orders ex parte: i.e., without notice to or allowing the purported thief an opportunity to appear in court.

This is a powerful remedy, likely aimed at the most egregious theft, like the trading code worth $500 million recently stolen by a financial institution’s employee, the design system specifications worth $50 million recently stolen by a manufacturing company’s employee, or the organic light-emitting diode chemical process worth $400 million recently stolen by a chemical company’s employee.

Seizure is not for everyday cases but for “extraordinary circumstances.” Indeed, the threshold for such ex parte orders is purposefully high: (1) the plaintiff must show the defendant would not comply with an ordinary injunction and (2) the plaintiff must show imminent irreparable harm, among other elements. Even if granted, where a seizure proves to be “wrongful or excessive,” the defendant can countersue for damages caused by the seizure.

Aside from ex parte seizure, DTSA’s remedies adopt the remedies available under the Uniform Trade Secrets Act (UTSA). Like UTSA, DTSA provides for injunctive relief (although not for cases of inevitable disclosure); damages caused by misappropriation as well as alternative options for royalties or unjust enrichment caused by the misappropriation; and both exemplary (double) damages and attorney’s fees for willful and malicious misappropriation.

Defining trade secrets: status quo

DTSA still defines a “trade secret” the same way as UTSA: it is information that (a) is the subject of reasonable efforts to maintain its secrecy and (b) derives independent economic value because it is kept secret from those that could profit from it.

As a refresher:

This continuity in definition may be especially significant with respect to patent-related information. While patent claims require a plaintiff to demonstrate it uses the invention in question, the US Court of Appeals for the Federal Circuit holds that is not so for trade secret claims, at least in the international trade context. TianRui, supra. Further, trade secret cases also have a broad jurisdictional reach and can enjoin importation of products made with misappropriated trade secrets, even if the misappropriation occurred outside the US. Id. at 1324. With DTSA’s automatic option for federal court and for ex parte seizure of their trade secrets, trade secret claims will supplement (and perhaps may supplant in some instances) patent claims for that category of cases.

Notice provisions: why care?

To be eligible for exemplary damages (a statutory doubling of damages awarded) or attorneys’ fees in connection with a suit for theft of trade secrets, employers must include language to the following effect in any contract with any employee or consultant regarding confidentiality or trade secrets:

An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that—

(A) is made—

(i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and

(ii) solely for the purpose of reporting or investigating a suspected violation of law; or

(B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

Such disclosures are automatically protected under DTSA regardless of whether this clause is included. Further, this language parallels enforcement policies concerning potential whistleblowers that the SEC, EEOC, NLRB and FINRA have already been emphasizing. As suggested in an alert last year, businesses should already be including language like the following in their non-disclosure, proprietary information, severance and other agreements with their employees and consultants: “nothing in this agreement will limit [employee’s/consultant’s] ability to provide truthful information to any government agency regarding potentially unlawful conduct.” That perhaps deserves to be expanded with this DTSA language but what if it isn’t?

With DTSA and UTSA both providing identical remedies and no pre-emption under DTSA, there are issues to be resolved in future litigation on the integration of both state and federal statutes. For example, envision an employer who failed to include this whistleblower notice: isn’t that employer nonetheless entitled (if the misappropriation was willful and malicious) to claim exemplary damages and attorney’s fees under state law even though barred from seeking such damages under DTSA?

Conclusion: the never-ending story…

DTSA is the beginning of more legislation on trade secrets, not the end. DTSA mandates that the US Attorney General deliver in one year a report to the judiciary committees of the House and Senate with further recommendations to improve trade secret protection. Meanwhile, concurrent with DTSA, the European Union has just adopted its own Trade Secrets Directive, with a definition of trade secrets that is virtually identical to the definitions in DTSA and UTSA.

Since both sides of the Atlantic now agree trade secrets are safe only where employers have made reasonable efforts to protect that information, perhaps you should put this alert down and check to see how well your business is protecting its trade secrets. Here are some benchmarks to understand what’s adequate for now, and what may be required in the not-too-distant future, given the pace of technology:

See our alert on ramifications of the DTSA for IPT companies here.

Posted in Employment Litigation Employment Policies

Dealing with the new FLSA salary tests in ruby slippers

This article first appeared as an Employment Alert on our firm’s website.

News releases echoing the famous mantra from The Wizard of Oz – “lions, and tigers, and bears … Oh my!” – suggested that the Department of Labor (DOL) has issued an army of flying monkeys. Not so. The DOL merely finalized new dollar thresholds for the salaried jobs exempt from overtime under the Fair Labor Standards Act. Thus, effective December 1, 2016, the new salary test will be $47,476 ($913 per week) for executive, administrative, and professional employees.

Growing up with Dorothy and her friends teaches many things, including “never panic.” There is always a solution, whether for witches, flying monkeys, or government regulations (as Dorothy illustrated nicely in getting into the Emerald City, which is worth re-watching now).

What questions would Dorothy ask in the face of the new DOL salary standards?

1. Do the jobs on my team that pay less than $47,476 per year have truly exempt duties?

To qualify as overtime exempt, executive, professional, and administrative jobs must clear a double hurdle: the duties test and the salary test. The DOL’s new rules increase the salary threshold but leave the duties test unchanged.

Often, jobs have been classified as exempt in the past without revisiting whether a given job – as it exists today – meets the duties test. There is no point increasing compensation to meet the new salary test unless the duties test can also be satisfied: that is simply throwing money away.

Templates for checking exempt status can easily be built from the regulations or found on the internet if you Google “FLSA exempt questionnaire.” That is the easy part. Sitting down to determine actual job content (not merely what is in the job description) requires more effort.

2. For those jobs with the requisite duties, can I meet the $47,476 test by counting bonus or commissions?

This is the good news in the new salary test. For the first time, employers may use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the salary level, so long as such incentive payments are paid on a quarterly basis or more frequently. In those cases, the actual minimum salary can be as low as $42,728.40 (i.e., $821.70 per week, almost $100 under the standard $913 per week).

Some states, however, may not allow bonuses, commissions, and other incentive compensation to count toward the minimum salary requirement under state law (e.g., California). As you will recall (with tears), the FLSA mandates complying with both state and federal law; so, where state law is more favorable to the employee, it must be followed.

3. For jobs that still fall short, should I increase compensation or convert those jobs to nonexempt?

This is a business calculus that will be unique to each employer. Let’s think out loud.

There are three key factors:

• Is the job performed on premises or off premises (line of sight rule)?
• Is the job one that likely has high volumes of overtime?
• Is the current salary close or far from the new threshold?

If a job is paid far less (e.g., below $40,000), conversion is probably more economical. If the job is within striking distance, the amount of anticipated overtime and the ease of accurately counting/controlling that overtime ought to be dispositive. For close calls, the line of sight rule is the tie-breaker; jobs performed outside the line of sight of management are often difficult to manage as hourly jobs.

4. Where I am choosing to increase compensation, have I planned to address the ripple effect (e.g., the potential need to increase compensation for higher ranking jobs to maintain internal equity)?

Compensation compression is a problem on multiple levels. First, it is a morale problem. Second, it is a recruiting problem, Third, it is a potential equal pay problem. It is a problem that demands consideration before bumping a job paid at $42,000 per year to $48,000 to maintain exempt status.

Here too, the answers will be unique to each business. Assume assistant managers will go to $48,000 on December 1, 2016. What will need to be done with compensation for the managers to whom those assistant managers report? And, then, what about the general managers? This is the hidden burden in upping salaries to meet the new salary test.

5. For jobs that are being converted, how do I announce/explain that without demotivating my Scarecrows and Tin Woodsmen?

This is art, not law. It is also the most difficult piece of this compliance adventure.

(A) There is a school of thought that employees derive prestige from being salaried. To that extent, there is a temptation to finger point (“twasn’t us; this is because of those damn pointy-headed bureaucrats”). Resist. Your organization had the last clear chance: you chose to convert to hourly rather than increase salary to $47,476 (which your Munchkins will soon enough figure out).

(B) If possible, you can sell this as an upside: more money because you are now eligible for overtime in those weeks where extra efforts are required. But, don’t say that if your goal is to set an hourly rate (see no. 7, infra) to make this whole conversion “cost neutral” to your budget.

(C) Where cost neutral is the goal, then that is the message: i.e., “this won’t reduce your annual compensation but it is required so that we can comply with both state and federal payroll laws by tracking hours worked.” In this context, be very careful that the message is not mistranslated into a guarantee of automatic pay for X hours of OT (which would create a separate nightmare by inflating the regular rate) or into a warning that time worked and reported cannot exceed Y hours (which walks you into serious issues of off-the-clock violations and lawsuits).

6. For jobs that are being converted, should I attempt to take advantage of half-time overtime under the fluctuating workweek (FWW) regulations?

This is far cheaper than the normal overtime (50 percent of the regular rate vs. 150 percent of the regular rate). FWW is permitted if (A) the employee is paid a fixed salary each week that does not vary based on the number of hours worked; (B) the company and the employee have a “clear mutual understanding” that the employer will pay this fixed salary regardless of the number of hours worked; (C) the fixed salary must be sufficiently large to provide compensation that at least equals the minimum wage for all hours worked; (C) the employee’s hours must fluctuate from week to week; and (D) the employee receives a 50 percent overtime premium in addition to the fixed weekly salary for all hours worked in excess of 40 during the week. 29 C.F.R. § 778.114.

Why doesn’t everybody use it? It is complicated for payroll administration (because the overtime rate changes with each week’s hours: salary/total hours in that week = regular rate). It also requires guaranteeing a salary. Finally, it doesn’t work in every state; some (e.g., California, New Mexico, and Pennsylvania) decline to recognize it for purposes of their state versions of the FLSA.

7. For jobs that are being converted, can I set a lower hourly rate?

Let’s put this in numbers. Assume a current salary of $40,000 in a job that is being converted to nonexempt. Dividing that salary by 40 hours per week and 52 weeks per year generates an hourly rate of $19.23 per hour. In short, converting at that rate will increase labor costs for every hour of overtime (which will be paid at $28.85 per hour).

Assume that this job averages 5 hours of overtime per week. Assigning an hourly rate of $16.50 makes the conversion almost cost neutral: total annual compensation of $40,755. But, is that legal and is that practical? Reducing an employee’s hourly rate pay is perfectly permissible; DOL openly advertises that employer right. The problem is morale. But see no. 5, supra on how to handle announcements.

* * * * *

For Dorothy Gayle, getting home to Kansas was a fraught journey, but she persevered. Your journey to adjusting to the new DOL salary standards may be too, but you can follow Dorothy as a role model: it is okay to be afraid, but not to quit (and it is easier to keep going if you have really, really good shoes).

Posted in Employment Policies International Employment Law

Global Trends: Mandated Reports Regarding Equal Pay

Pay equity is a hot-button issue in the US. The EEOC and OFCCP have announced plans to begin collecting detailed pay information from US employers. Seven states have also passed legislation in the last twelve months changing the paradigm from equal pay for equal work, to equal pay for similar or comparable work. These states have also stripped away the affirmative defense under the Equal Pay Act permitting pay disparities based on any factor other than sex, to requiring that employers show a disparity is warranted by business needs.

This increasing focus on equal pay for women is not exclusively a US phenomenon. For example, both the UK and Australia are now addressing public reporting on gender pay gap for private-sector employers. Simply stated, equal pay is a global issue now and requires some strategic thinking across borders. A quick look at those countries in comparison to the US on the requirements for data collection and disclosure on pay equity is instructive:

Multi-national corporations need a three-step approach to equal pay compliance:

1. Monitor the developments (and emerging deadlines) on gender pay gap issues around the world. More is coming; there is no denying it. The EU and Japan have taken actions with respect to gender compositions in managerial positions and company boards; regulatory requirement in those jurisdictions may be more “when” than “if” propositions.

2. Determine whether gender pay reporting in individual countries may have any cross-border impact, either practically or legally (especially given that gender pay information in the UK and Australia will be made public), and whether — given the uncertainties around cross-Atlantic data privacy issues — mandated reporting obligations are better handled locally or at headquarters for better control of this issue.

3. Ask whether it is appropriate to self-evaluate or audit internally to identify potential issues of a gender-driven wage gap. There are pros and cons to either approach but the threshold issue is whether this can be done subject to attorney-client privilege or otherwise be safe from compelled disclosure in all jurisdictions.

PS:  For more information on equal pay obligations in more countries, see DLA’s Gender Pay Survey encompassing 23 countries. 

3105467_Gender_pay_survey_Opt_02_V5

Posted in Employment Litigation Employment Policies

FAQs on the ADA’s Application to Addicts

23.5 million Americans aged 12 or older—approximately 10% of the U.S. population—consider themselves in recovery from drug or alcohol abuse problems. In light of these staggering numbers, as well as the ADA’s explicit protections for addicts, litigation related to employee addiction is increasingly common.

The following FAQs address legal responsibilities with respect to addicted employees.

Are Current Drug Users Protected by the ADA?

No. Employees “currently” using illegal drugs use are not protected by the ADA.

The definition of “currently” is far less clear. Courts tend to define the term with a thesaurus rather than a calendar: e.g., “sufficiently recent to justify an employer’s belief that the drug abuse is an ongoing problem” in light of (i) the level of responsibility entrusted to the employee; (ii) the employer’s job and performance requirements; (iii) the level of competence ordinarily required to perform the task in question adequately; and (iv) the employee’s past performance record. Mauerhan v. Wagner Corp., 649 F.3d 1180, 1188 (10th Cir. 2011) (“No formula can determine if an individual . . . is ‘currently’ using drugs, although certainly the longer an individual refrains from drug use, the more likely he or she will qualify for ADA protection. Instead, an individual’s eligibility for the safe harbor must be determined on a case-by-case basis, examining whether the circumstances of the plaintiff’s drug use and recovery justify a reasonable belief that drug use is no longer a problem.”)

Are Former Drug Users “Disabled” for Purposes of the ADA?

Yes.

Individuals who are no longer using illegal drugs, who are receiving treatment for drug addiction, or who have been rehabilitated successfully cannot be discriminated against because of their “history” of disability. There is, however, a curiosity: employees who only casually used illegal drugs in the past — but did not become addicted — are not “disabled” for ADA purposes. See EEOC Technical Assistance Manual on the ADA § 8.5 (“[i]n order for a person to be ‘substantially limited’ because of drug use, s/he must be addicted to the drug”); Almond v. Westchester Cnty. Dept. of Corrections, 425 F. Supp. 2d 394 (S.D.N.Y. 2006) (in a “regarded as” ADA case, where record suggested that defendant employer thought plaintiff was a casual drug user, rather than an addict, plaintiff failed to show entitlement to ADA protection).

What About Prescription Drug Abusers?

Addictions to street drugs and prescription drugs are legally indistinguishable.

Are Alcoholics Covered by the ADA?

Yes; the section of the ADA that excludes current users of illegal drugs from the law’s protection does not apply to alcoholics. While alcoholism is generally regarded as a disability under the ADA, some courts require employees claiming alcohol addiction to show that their addiction substantially limits one or more major life activities. See e.g., Roberts v. Rayonier, Inc., 135 Fed. Appx. 351 (11th Cir. 2005) (alcoholism not disabling).

Are Other Addictions Covered by the ADA?

The ADA explicitly excludes certain conditions from the definition of “disability,” including compulsive gambling, kleptomania, pyromania, sexual behavior disorders and psychoactive substance use disorders resulting from the current illegal use of drugs. Although not explicitly addressed by the ADA, most courts have ruled that ADA protections do not extend to tobacco or nicotine addicts. See e.g., Brashear v. Simms, 138 F. Supp. 2d 693 (D. Md. 2001).

Notably, the ADA’s list of addiction exclusions has been questioned lately. Recent case law is leading commentators to ask whether the exclusion of sexual disorders may be unconstitutional at least insofar as gender dysphoria for transgenders is concerned. See e.g., Blatt v. Cabela’s Retail Inc., No. 5:14-cv-04822-JFL (E.D. Pa., filed Aug. 15, 2014) (transgender employee challenging ADA’s exclusion of gender dysphoria).

What is a Reasonable Accommodation for an Addict?

Practical accommodations for qualified addicted employees might include leave time for inpatient treatment; a modified schedule to attend counseling or outpatient treatment; or temporary reassignment to a vacant non-safety-sensitive position while the employee completes treatment. Employers are not required to accommodate an employee’s intoxication or the adverse effects of excessive alcohol use.

In order to receive an accommodation, the employee usually has the initial obligation to alert the employer to the disability. See e.g., Rock v. McHugh, 2011 WL 2119035 (D. Md. May 26, 2011) (an employee with alcohol or drug addiction must demonstrate that the employer was aware of the disability in order to prevail in a reasonable accommodation claim).

What Can an Employer Do to Ensure a Drug and Alcohol-Free Workplace?

The ADA permits employers to:

• Prohibit the use of drugs or alcohol at the workplace;
• Require that employees not be under the influence of drugs or alcohol at the workplace;
• Refuse to employ someone who is a current user of drugs, regardless of performance; and
• Hold drug users and alcoholics to the same job performance standards as it holds other individuals, even if any unsatisfactory performance is related to the individual’s drug use or alcoholism.

Employers also need not excuse the violation of a consistently applied rule even if the misconduct is tied to an employee’s addiction. For example, employers do not need to grant alcoholics immunity from sanctions for tardiness due to being hungover; discipline is proper as long as the employer would impose the same discipline on a nondisabled employee. See EEOC Guidance: Applying Performance and Conduct Standards to Employees with Disabilities.

Posted in Employment Benefits Employment Policies

Landmines In Health Care Coverage In Executive Comp Packages

Employers promising to pay for health care in recruiting an executive or in negotiating an outplacment package need to pay close attention to overlooked tax provisions, some of which have been modified by the Affordable Care Act (ACA). In some cases, these rules are designed to prevent payments for health coverage that discriminate in favor of highly compensated individuals; but, in other cases, the rules effectively prohibit an employer from paying for or reimbursing any employees for purchases of individual health insurance.

Payment for health care coverage comes in many forms from a simple payment for coverage under a group plan sponsored by an employer to the more complex reimbursement for premiums for coverage obtained from other sources. Each is subject to different tax rules. Violations of some rules cause employers to incur liability for substantial federal tax penalties, while other types of violations may result in highly compensated individuals incurring additional taxable income.

A. Coverage Under Employer Group Plans

In the simplest situation, an employer will pay the cost of an employee’s coverage under a group health plan maintained by the employer for all or most of its employees. While such payments may generally be made on a tax-free basis, employers must be aware of nondiscrimination rules designed to prevent the employer from paying a disproportionate share of the premiums on behalf of highly compensated individuals. For self-insured plans, the nondiscrimination provisions have been in place for decades and, if violated, will cause highly compensated individuals to be taxed on the benefits provided under the plan.

The ACA added similar nondiscrimination provisions for insured plans. If the ACA’s new insured plan nondiscrimination rules are violated, the employer becomes subject to excise tax penalties of $100 per day for each covered life. However, the IRS delayed the application of these provisions for insured plans pending the issuance of additional guidance. Some commentators have speculated that this guidance may be issued later in 2016; but there hasn’t been any official word from the IRS.

B. Reimbursement For Coverage From Other Sources

A different analysis applies when an employer reimburses an employee for the cost of obtaining health coverage from sources other than a group plan maintained by the employer (including when the employer pays that other source directly). IRS guidance prohibits employers from paying directly or reimbursing employees for their premium payments for individual health insurance policies regardless of whether payments are made on a pre-tax or after-tax basis.

These arrangements are referred to as “employer payment plans.” Such plans are subject to the full range of ACA market reforms, which has rendered this option obsolete. For example, the ACA requires health plans to satisfy a number of requirements such as prohibitions on life time and annual limits, the provision of preventive services without copays, coverage of adult children to age 26, and many other patient protections designed to increase coverage. An employer payment plan can’t be aggregated with the underlying individual health insurance policy for purposes of satisfying each of these requirements. Therefore, the employer payment plan by itself will never be able to comply with the ACA – resulting in excise taxes imposed on the employer in the amount of $100 per day for each covered life, and for each market reform not satisfied.

This, in short, is a no-fly zone: drafters must avoid any obligations to pay or reimburse employees for individual health insurance coverage. Conversely, payments of additional taxable cash compensation are an acceptable substitute in negotiating an employee’s compensation package. Such payments, however, can’t be tied directly or indirectly to the employee obtaining individual health insurance coverage from other sources.

C. Handling COBRA Continuation Coverage

Severance agreements should continue to avoid commitments to pay COBRA continuation premiums for health coverage under self-insured plans on behalf of a disproportionate number of highly compensated individuals. Here again, the dichotomy between self-insured and insured plans remains important.

Pending IRS guidance on insured plans, there are two possible strategies. The first is to avoid any such commitments for the employer to pay a larger amount of health insurance premiums for highly compensated individuals than it pays for nonhighly compensated individuals on the assumption that the rules ultimately issued will make all such commitments discriminatory. The second is to include such provisions, but have the employer retain the unilateral discretion to alter the terms of such commitments if necessary to comply with the IRS guidance when it is issued.

Employers should also clearly communicate the terms and implications of such commitments to former employees for whom they pay COBRA premiums. Employer COBRA subsidies aren’t forever; the end of a subsidy may make COBRA continuation overly expensive in comparison to marketplace coverage. Yet, when that happens outside of an ACA open enrollment period, the former employee may be left with unaffordable coverage or no coverage. Simply stated, the ACA makes the historic practice of providing subsidized COBRA far less beneficial.

D. Reconsidering Opt-Out Credits

Some employers use opt-out credits (which offer employees an additional taxable cash incentive to enroll in health coverage other than the employer’s plan). These provisions only work when part of an employer’s cafeteria plan. Now, the limitations (even in that context) make this a burdensome and complicated option.

There is a double burden. First, cafeteria plans with such opt-out credits must condition the payments on documentation of coverage from sources other than individual health insurance coverage (so as not to violate the “employer payment plan” prohibition) or Medicare (so as not to run afoul of Medicare secondary payor rules). Second, even then, employers must also be mindful of the effect of such credits on the affordability of the employer’s other offers of health coverage under the ACA’s “pay or play” penalty structure.

* * * *

Pre-ACA experience with executive compensation or pre-ACA templates for executive compensation agreements will leave you in dangerous places without the requisite map. Noted travel writer Paul Theroux in his recent book – Last Train to Zona Verde – wrote that his favorite place is one “that doesn’t welcome tourists, that’s really difficult and off the map.” Apparently, Theroux only visits where I work every day; call if you need a tour.

LexBlog