Earlier this week, the Wall Street Journal reported that Senators are considering a tax on employer-sponsored health insurance plans to raise revenue. It is not my intention to discuss the politics of this proposal, and instead, I write to consider how such a proposal would alter the economics of recruiting and retaining employees.
Until now, it went without question that those who secured health insurance through their employers did so on a pre-tax basis. Employers, for their part, can deduct the cost. This incentivizes employers to offer health insurance coverage to employees as part of a compensation package. Health benefits are hugely important to employees when deciding whether to accept new positions. As such, these plans are powerful recruitment and retention tools.
In my practice, time and again, I hear that talented and experienced employees do not want to leave their current employment, not because of well-drafted restrictive covenants (as many employers believe), but because of their compensation package, that includes health insurance. Spouses and children may have medical conditions that require care, and employees resist the stress of leaving behind good coverage for new jobs or self-employment. Employees believe, in many cases correctly, that the cost of health insurance is cheaper through employer-subsidized plans than in the individual market, and that they can get better coverage for their dollar through their employer.
This is particularly true right now, as the healthcare debate rages on, and employees feel insecure about how their health insurance will work in the future. The Senate’s proposal would remove a tool from an employer’s recruitment arsenal, and dramatically change the economics of recruiting and retaining talented employees. Of course, employers have other tools, and should not rely totally on health insurance, but it is hard to overstate the importance of this coverage to employees. The implementation of such a tax would mean that employers would need to reconfigure compensation packages and rethink the manner in which they provide health insurance coverage to employees.
Lawmakers have referred to the tax-favored treatment of employer-sponsored health insurance plans as discriminatory to those who purchase their health insurance individually. Interestingly, removing these tax protections would also remove the incentive for employers to provide such healthcare. It would be interesting to know from these lawmakers if that is what they intend. A move away from employer-sponsored health insurance does not just change the economics of the employment relationship; it changes the economics of healthcare.
Of course, the healthcare debate impacts employer / employee relationships even as the status of the Affordable Care Act and employer-sponsored health insurance remains unclear. It is simply impossible for employers, or for their lawyers for that matter, to plan for changes in healthcare while proposals are floated and then rejected by lawmakers. However, the proposal to end the tax-favored treatment of employer-sponsored health insurance would mark a radical change. It will be interesting to see if it makes its way out of the pages of the Wall Street Journal.
Let’s check in with the January 2017 case filed in the United States District Court for the Eastern District of Texas challenging the Obama Administration’s proposed changes to overtime regulations. Those regulations would have required employers to reclassify many employees considered exempt from overtime rules to non-exempt status, requiring the employer to now pay overtime to those employees. The rule was widely considered a boon to employees, but a burden for small businesses and nonprofits.
Those rules would have required that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476 to qualify for “exempt” status. The current rule requires that the employee earn a minimum salary of $23,660. The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours in advance of a December 1, 2016 deadline.
As previously discussed on this blog, on November 22, 2016, the Eastern District of Texas entered an injunction prohibiting enforcement of the new rules. Many clients have asked me, dreading the answer, whether that injunction remains in place. On December 1, 2016, the United States Department of Labor appealed the injunction order, and sought a stay of the Court’s order prohibiting enforcement. The Court denied the stay, and the matter is now on appeal. During the appeal, the Department of Labor cannot enforce the new rules. The appeals court granted a request submitted by the Department of Justice to extend time to file appellate briefs while “incoming leadership personnel” considered the issues. That brief is now due on June 30.
The Trump Administration has three choices: defend the rule, withdraw the rule, or rewrite the rule. Labor Secretary Alexander Acosta has telegraphed that a review of the rule was necessary, but that the salary increase was too dramatic. However, the Department of Labor’s repeated requests for extensions to file a brief indicate that it is not necessarily an easy call. For example, because the Eastern District’s order granting the injunction called into question the rulemaking authority of the Department of Labor, there may be good reason for the administration to challenge the court’s injunction order, even though it does not necessarily agree with the rule.
The overtime rules will remain in limbo until at least June 30, 2017. We will continue to monitor the situation. In the meantime, employers are not required to change their overtime policies or the classifications of their employees.
By Patricia Collins, Esquire
On May 2, 2017, the House passed the Working Families Flexibility Act. The purpose of the Act is to give employees flexibility in how they choose to be paid for overtime: in wages or in compensatory time off. The Act crystallizes a tension I see often in my representation of employers.
Presently, the Fair Labor Standards Act (“FLSA”) requires employers to pay nonexempt employees overtime compensation for work hours in excess of 40 in a workweek. Employers cannot compensate employees for those overtime hours in compensatory time off (“comp time”). Such a policy violates the FLSA, exposing the employer to liability for the unpaid overtime hours as well as penalties and attorney’s fees.
The FLSA prohibition against payment in comp time is intended to protect employees from abusive overtime demands by employers. The statutory obligation to pay additional wages for hours over forty in a workweek, so the argument goes, forces the employer to base the decision to require overtime hours on business and financial considerations. The FLSA’s ban on comp time legislates a policy determination that offering comp time will not protect employees from abusive demands by employers.
Republicans this week argued otherwise. They argue that permitting employees to take comp time rather than payment for overtime work gives employees flexibility. Democrats who opposed the bill countered that the Act’s provision allowing employers the final say does not adequately protect employees.
Practically, the Act sits at the tipping point of many competing considerations: employers want to establish policies that comply with the law, protect the business, and benefit employees. Employees want flexibility, but they also need to be paid for their work. The reality is that banked comp time can be a liability for employers because there are jobs for which attendance is extremely important, and unscheduled or unpredictable time is off is sometimes expensive or interferes with the progress of work. Further, employees might not be free to use that comp time in the manner they would like if it interferes with the employer’s business. Most employers offer paid time off in a set amount, in order to create predictability as to an employee’s attendance. While this proposed rule might create flexibility and reduce overtime costs, I do wonder whether it is really a savings in the long run.
It will be interesting to see how the Senate balances these concerns, and whether employers will create policies that allow comp time. The bill now goes to the Senate – no word yet on whether they will vote on it. Stay tuned!
Employers have been working to comply with new overtime rules issued by the United States Department of Labor that raise the salary level in order to meet certain exemptions from overtime rules before a December 1, 2016 deadline. Those rules require that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476. The old rule required that the employee earn a minimum salary of $23,660. The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours.
On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, temporarily barring the Department of Labor from enforcing the new overtime rule. The order will remain in place pending a full hearing on the issue. While the order is temporary, as a prerequisite to entering the order, the Court was required to find that there was a substantial likelihood of success on the merits of the argument that the DOL exceeded its authority in promulgating the rule. So, there is some indication that the Court may bar enforcement of the new rules permanently.
For now, employers are temporarily relieved of the obligation to comply with the new rules by the December 1, 2016 deadline. Because the outcome is not guaranteed, employers should have their new policies ready to go, but do not need to implement them on December 1. It is simply too early to say whether employers should “shelve” those new policies. We will have to wait for the Court’s final ruling. Stay tuned to this space as the case unfolds.
Patricia Collins is an employment and litigation Partner at Antheil Maslow & MacMinn, LLP and chair of the labor and employment practice group.
Employers are now using a new strategy in an effort to keep their employees from leaving the company and working in a competitive enterprise. Traditionally, employers used restrictive covenant agreements, almost always built in to the employee’s written employment agreement. These covenants prohibit employees from engaging in competition with a former employer. Courts tend not to favor restrictive covenants because they impinge on the ability of a worker to earn a living – they are a restraint of trade.
To limit the scope of restrictive covenants, courts impose a reasonableness standard. Restrictions for a limited time, such as a year, and a small geographical area, such as a five mile radius, were favored. Long-term and broad covenants were not. The employee’s skill set and knowledge of the original employer’s enterprise are also key factors in assessing the business need for any restrictions. The more skill needed to do the work, the more knowledge an employee has of the employer’s business strategies, the more justifiable the non-compete clause becomes.
Why Employers Like the Employee Choice Doctrine
The strategy that employers are now using in some states, including Pennsylvania, is a little more artful. Employers are offering employees post-employment benefits such as stock options and deferred compensation with a condition – a catch. The catch is that the benefits are only available if the employee who leaves the company does not compete with the employer providing the benefits. The employee is given a choice to either accept the benefits and not compete, or compete, but forfeit the benefits and be subject to repayment, or "clawbacks” of benefits already paid. The choice has become known as the employee choice doctrine.
The employee choice option works better for the employer than the typical restrictive covenant because it enables the employer to shift the burden to the employee. In the classic non-compete case, the employer's remedy was to seek an injunction against the competing former employee ordering him or her to cease the competition. In employee choice cases, the employer can still seek an injunction. Better still, the employer can just terminate the benefits (the stock option or other post-employment benefit) thus shifting the burden to the employee to seek redress in the courts by demanding payment of the benefit.
In some states, like New York, there is no review of the employee choice option to assure that the choice offered to the former employee is reasonable. That is not the case in Pennsylvania. Pennsylvania law currently does allow employees to craft employment benefits that are tied to non-competition, but the tie has to be reasonable. The cases in Pennsylvania are evolving. As with restrictive covenants, the more reasonable, meaning less strict, the choice is - the more likely Pennsylvania courts will uphold it.
Key Drafting Issues in Employee Choice Benefit Contracts
When drafting employee choice benefit provisions, employers should keep in mind the following points:
• The Employee must have a real choice. The choice between competing in the new position and forfeiting the benefit or not competing and keeping the benefit should be clear. In short, the employee should understand that there is a trade-off.
• The Employee has to leave voluntarily. The choice option is likely only valid if the employee controls the decision about leaving the current employer. Some courts reason that the employee choice doctrine is not really a choice if the employer fires the employee without cause. In such a circumstance, the employer has little or no legitimate business interest in enforcing the non-compete obligation.
• Consideration. For the employee to be forced to make a choice between forfeiting assets and working with a competitor, the employer has to give the employee additional consideration over and above that which the employee would have been entitled to receive in the normal course of working for the employer, including severance or other payments normally paid upon termination.
Why Legal Counsel Can Help
Experienced business counsel understand the evolving nature of the employee choice doctrine. In particular, they keep current with the Pennsylvania and federal court decisions so they can craft documents which have the best chance of surviving attack by employees who seek to avoid them by claiming that the choice is invalid as a restraint of trade.
Before drafting, and certainly before presenting an employee benefit with a forfeiture provision – employers should seek to have their business counsel review the language of the benefit contract.
Federal law (Title VII of the Civil Rights Act of 1964) prohibits, among other matters, a covered employer, from discriminating against an employee because of such individual’s sex. Generally, a private employer with 15 or more employees, engaging in interstate commerce, is covered by Title VII. The Pregnancy Discrimination Act (PDA) passed in 1978, added discrimination based on “pregnancy, childbirth, or related medical conditions” to this prohibition.
The PDA also provides that employers are required to treat “women affected by pregnancy… the same for all employment-related purposes … as other persons not so affected but similar in their ability or inability to work” .
In the recent case of Young v. UPS, the Supreme Court, in interpreting the provision above, announced a new test for analyzing pregnancy discrimination claims. The relevant facts of the case are as follows:
Plaintiff Young worked as a part-time driver for defendant United Parcel Service (UPS). Her duties included pickup and delivery of packages. While employed by UPS she became pregnant and was told by her doctor that she should not lift more than 20 pounds during her first 20 weeks of pregnancy and no more than 10 pounds thereafter. Drivers in Young’s position were required to lift up to 70 pounds. UPS therefore advised Young that she could not work while under a lifting restriction. As a result Young remained home without pay during most of her pregnancy and ultimately lost her employee medical coverage.
By Patricia C. Collins, Esquire, Reprinted with permission from the March 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.
Recently, the United States District Court for the Eastern District of Pennsylvania, in Mathis v. Christian Heating and Air Conditioning, Inc., 13-3747 (March 12, 2015), examined the effect of factual findings in unemployment compensation proceedings in Pennsylvania on discrimination claims filed in federal court. The conclusion? The discrimination case is a “do over,” and nothing determined by the tribunal (including the Unemployment Compensation Board of Review and the Commonwealth Court) will collaterally estop either party, presumably, from taking a contrary position in the subsequent wrongful termination suit.
The facts are these: Mr. Mathis was employed at Christian Heating and Air Conditioning (“Christian Heating”) for nearly two years. During that time, Mr. Mathis had placed black tape over part of his identification badge. The objectionable part of the card professed the company’s mission statement to, inter alia, run the business in a way that was “pleasing to the lord [sic]….” Mr. Mathis’s supervisor and the owner of the business required him to remove the tape from the back of his badge. Mr. Mathis refused to do so, and contended that he was terminated as a result.
A recurring issue employers must address is the enforceability of restrictive covenants entered into with an employee. These restrictive covenants are typically non-disclosure (confidentiality), non-solicitation, and/or non-competition agreements. The timing, form, and substance of these agreements will determine whether a court will find them valid. From a former employee’s perspective, the issue is basically the same but reversed: can the employee disregard a previously signed restrictive covenant without being liable for monetary damages to his former employer (and if newly employed at another company, keeping the second company out of litigation)?
Two cases recently decided by the Pennsylvania Superior Court provide guidance for employers and employees:
Fleisher v. Bergman, concerned an employee who was hired as a full-time employee. At the time of his hire, employee signed a restrictive covenant which was a confidentiality and non-competition agreement. The restrictive covenant provided that employee would not divulge any “Confidential Information” (e.g., customer lists, pricing policies, names of vendors) to other parties without the consent of employer; the Agreement further mandated that for a period of five years after termination of his employment, employee would not “. . . solicit or do business with any . . . entity . . . that was, within the three year period preceding the Employee’s termination, a Client or Prospect of Employer... ”
Reprinted by permission of Catalyst Center for Nonprofit Management. Further duplication without permission is prohibited.
Childhood victimization and other abuses of our most vulnerable citizens unfortunately remain a much too prevalent and tragic issue of our times. Particularly offensive is the possibility of physical or emotional abuse of those susceptible because of age, disability or circumstance while receiving services of a nonprofit. Safety efforts to protect the very people being served by a nonprofit, regardless of size, must be constantly monitored.
Even the smallest nonprofit should adopt safety-related policies based on nationally recommended guidelines developed by experts. Such policies and guidelines help protect both the recipients of the nonprofit’s services and the integrity of the nonprofit’s programs. Every nonprofit that serves children and youth has the obligation to exercise “reasonable due diligence” with regards to screening as part of its hiring and vetting programs for members of the nonprofit’s Board, staff and volunteers. Without such screening or gate-keeping vigilance, the very people the nonprofit is trying to serve are more likely to be unprotected and the reputation of the nonprofit (not to mention its fiscal health) are at unnecessary risk.
The U.S. Supreme Court finally rendered its decision in U.S. v. Quality Stores, Inc., 572 U.S. ____ (2014), on March 25, 2014, in a closely watched tax case. The Supreme Court reversed the Sixth Circuit Court of Appeals, and found that severance pay is to be considered wages, and therefore subject to Federal Insurance Contribution Act (“FICA”) taxes.
This holding dashed the expectations created by the Sixth Circuit’s holding that severance pay was not subject to FICA taxes. Many businesses had already filed refund claims based on the Sixth Circuit decision, and many more were in the process. Those refund claims are now most likely going to be denied.
The taxpayer, Quality Stores, Inc., paid severance to hundreds of employees while undergoing Chapter 11 bankruptcy reorganization. In its originally filed payroll tax returns, the taxpayer paid roughly $1 million of FICA tax on those severance payments. It later sought a refund of those payments while in bankruptcy, which then placed jurisdiction with the U.S Bankruptcy Court, rather than the U.S. Tax Court. That jurisdictional position seemed to work in the taxpayer’s favor, as the Bankruptcy Court found in favor of the taxpayer, as did the Michigan District Court on review of the decision.