Every year, Pennsylvania’s appellate courts seem to issue a handful of decisions addressing the enforceability of non-compete agreements. However, there are relatively few court decisions addressing non-solicitation agreements. A non-solicitation agreement is the less restrictive cousin of the non-compete. Under a non-solicitation agreement, a former employee is permitted to work anywhere, including competitors of his or her former employer. A non-solicitation agreement merely prohibits a former employee from soliciting (or perhaps even contacting) the former employer’s customers, prospective customers and/or employees. In Metalico Pittsburgh, Inc. v. Newman, the Superior Court of Pennsylvania recently addressed some fundamental points regarding enforcement of these less restrictive agreements.

In Metalico, two executives of a scrap metal broker left their employer (“Metalico”) to join a competitor, Allegheny Raw Materials, Inc. (“ARM”). Upon joining Metalico, they had both signed employment agreements which included non-solicitation provisions that prevented them from soliciting any of Metalico’s suppliers for up to two years after their employment ended. Their employment agreements were each for three year terms and, once these terms expired, the agreements were not renewed. Both executives continued to work for Metalico for a period of time as “at will” employees; i.e. their salaries and bonuses were no longer contractually guaranteed.

After leaving Metalico, both executives began soliciting Metalico’s suppliers for their new employer. Metalico sued to enforce the non-solicitation provisions in the expired employment agreements. The trial court ruled for the executives and refused to enforce the non-solicitation restrictions, holding, once the employment agreements expired, they “were replaced with at-will relationships that did not include non-solicitation provisions.”

On appeal, the Superior Court of Pennsylvania reversed the trial court and enforced the non-solicitation restrictions. The Court began with the basic premise that both executives received adequate consideration for their non-solicitation covenant when they signed [their agreements] “as part of their initial employment relationship.” Citing several earlier decisions, the Court then observed that “it is possible for a non-solicitation covenant to survive the end of a term of an employment contract, when the employee stays on as an at-will employee” if the written agreement provides for this. Looking to the terms of each executive’s employment agreement, the Court then noted that the non-solicitation provision was clearly intended to be in effect during three relevant time periods: (a) during the three-year term of the employment agreement; (b) during any period of continued employment after the employment agreement expired; and (c) up to two years after the executives left Metalico’s employment.

Since the non-solicitation restrictions were supported by adequate consideration (i.e. initial employment) and were never mutually disavowed by the parties, the Superior Court held that the restrictions remained enforceable – notwithstanding the expiration of the agreements in which they appeared.

It is not uncommon for employees to continue working for a company after their written employment agreements expire. The Metalico case serves as a good lesson as to how to draft restrictive covenants that will survive the expiration of the agreement in which they appear. Another approach taken by many employers is to have employees sign two separate agreements – an employment agreement with a fixed term, and a separate restrictive covenant agreement that remains in effect for the duration of employment and for a fixed period afterward. Regardless of which approach is taken, the Metalico case demonstrates that careful drafting is the key to ensure enforceability.

As the cost of providing health coverage increased over the past fifteen years, many employers began to offer employees cash payments if they “opted out” of coverage.  Some expected that the Affordable Care Act (ACA) would put an end to opt-out incentive programs.  The ACA does not prohibit opt-out payments; however, the IRS recently issued proposed regulations that highlight how the ACA impacts these payments.  The IRS’s proposed regulations recognize two types of opt-out arrangements: a) unconditional opt-out payments; and b) eligible opt-out arrangements. 

Unconditional Opt-Outs.  An “unconditional” opt-out payment offered to an employee for having declined health coverage will be viewed by the IRS as increasing the employee’s required contribution for purposes of determining the affordability of the health plan to which the opt-out payment relates.  This is true regardless of whether the employee enrolls in the plan or elects to opt-out and takes the payment.  Put another way, the cost of coverage to employees for purposes of determining affordability under the ACA must include not only monthly employee contributions, but also the amount of any opt-out payment that is offered to them.  If an opt-out payment incentive increases the total employee cost of coverage above applicable affordability thresholds (9.66% for 2016), the employer may face a pay or play penalty.

Eligible Opt-Out Arrangements.  Employers may avoid the potential affordability problem outlined above by offering an “eligible opt-out arrangement.”  An eligible opt-out arrangement conditions the payment of the incentive on  the employee’s declining coverage and providing, at least annually, reasonable evidence that the employee and his or her “tax family” (those for whom the employee expects to claim a personal exemption) will have minimum essential coverage (other than individual market coverage) during the period covered by the opt-out arrangement.  If the opt-out payment covers a full plan year and the employee’s “tax family” includes a spouse and one child, payment must be conditioned upon reasonable evidence that all three individuals will have coverage for the full year.  Requiring such evidence allows employers to exclude opt-out incentives from the cost of coverage they offer for purposes of calculating affordability.

Effective Dates and Transition  Relief.  The IRS proposed regulations will apply for plan years beginning on or after January 1, 2017.  Although the regulations are in proposed form, employers and plan administrators may rely on them immediately.  Unconditional opt-out arrangements that were adopted before December 16, 2015 may be exempted from the affordability calculation if certain conditions are met.  Similarly, unconditional opt out arrangements that are included in a current collective bargaining agreement (CBA) are exempt from the affordability calculation until the later of (1) the start of the first full plan year after the CBA expires (excluding any CBA extensions on or after December 16, 2015), or (2) the start of the first plan year beginning on or after January 1, 2017.

What To Do Now?  Employers that wish to continue offering opt-out incentive payments may certainly do so under the proposed regulations.  However, it is now important that opt-out payments be structured as an “eligible opt-out arrangement” which clearly conditions payment on sufficient proof of other coverage (other than individual market coverage).  Employers should also be aware that opt-out payments could impact the calculation of non-exempt employee overtime earnings under the Fair Labor Standards Act (regardless of whether the employee opts out and receives payment), unless properly structured. 

In sum, opt-out incentive programs have survived the ACA.  However, employers must be careful in designing these programs or they may run afoul of affordability requirements.  If you have any questions regarding the IRS regulations or this article, please don’t hesitate to contact any member of our Labor & Employment Practice Group.

 

 

Have you by chance recently received an email from your company’s CEO requesting copies of employee W-2 forms?  If so, don’t respond without first verbally confirming that the request is legitimate.  Several of our clients in Pennsylvania have reported receiving such fraudulent emails.  These emails are part of a broad “spoof” scheme launched by computer fraudsters with the goal of gaining unauthorized access to individual tax records.  The emails are typically sent to HR professionals from a high-ranking company officer and “kindly request” a file containing employee W-2 forms.  The thieves then use the personal information on W-2 forms (i.e. names, addresses, social security numbers, and earnings information) to file false tax returns and commit other forms of identity theft.  This scam is not limited to central Pennsylvania.  On March 1, 2016, the IRS issued a notice alerting employers of the scheme.  The IRS notice contains additional information and can be viewed by clicking here.

If you suspect your company may have released W-2 forms or other personally identifiable information to unauthorized parties, be sure to promptly comply with federal and state laws governing data breach notifications.  Companies with employees in multiple states will need to comply with the varying requirements of each state.  If you have any questions regarding your obligations under data breach notification laws, please contact any member of the McNees Privacy & Data Security Group or the McNees Labor and Employment Practice Group.

Among the many requirements imposed by the Affordable Care Act, none are more controversial than the excise tax to be imposed on expensive health plans. This provision of the law, commonly known as the “Cadillac Tax,” would impose a 40% excise tax on group health plans to the extent their total annual premium costs exceed $10,200 for single coverage and $27,500 for family coverage (cost thresholds are indexed for inflation). In other words, a plan offering single coverage with a total annual premium of $11,200 (i.e. $1000 above the tax threshold) would owe an excise tax of $400 for each participant who elects that coverage option. The Cadillac Tax, originally scheduled to take effect in 2018, was expected to generate much of the funding necessary to finance the tax subsidies that are available to low-earning participants in the ACA health insurance exchanges. The Tax was also intended to motivate employers and carriers to find ways to reduce the cost of employee health coverage. However, carriers, employers, and unions alike have criticized the Cadillac Tax since the ACA was passed in 2010 – and that criticism intensified as the Tax’s 2018 effective date approached.

On December 18, 2015, President Obama approved a spending and tax package that includes a two-year delay of the Cadillac Tax effective date. The excise tax will now not take effect until 2020. The new law also makes the Cadillac Tax deductible for employers.

With a presidential election in 2016, the Cadillac Tax was sure to become a frequent speech topic for candidates pledging to “repeal or replace” the ACA. The two-year delay will likely reduce the degree to which candidates focus on the Cadillac Tax; however, the ACA is sure to draw attention from candidates in both parties. Interestingly, the new effective date also happens to fall in a presidential election year. Assuming the Cadillac Tax remains part of the ACA, it is possible that another delay may be proposed four years from now. In the meantime, it’s not entirely clear how the tax subsidies for participants in the ACA insurance exchange will be financed.

One year ago, the U.S. Supreme Court ruled in the case of Burwell v. Hobby Lobby Stores, Inc. et al, that for-profit closely held corporations must be permitted to opt out of the Affordable Care Act’s contraception mandate on religious grounds. As discussed in our July 7, 2014 blog post, the Hobby Lobby ruling left many key questions unanswered. In final regulations published on July 14, 2015, the regulating agencies addressed many of those questions.

Which “closely held corporations” may opt out of the ACA’s contraception mandate? A closely held corporation which properly adopts a resolution under applicable state corporation laws establishing that it objects to covering some or all forms of contraception on account of the owner’s sincerely held religious beliefs may opt out of the contraception mandate. The new final regulations define “closely held corporation” to mean an entity that:

  1. Is not a nonprofit entity;
  2. Has no publicly traded ownership interests; and
  3. Has more than 50% of the value of its ownership interest owned directly or indirectly by 5 or fewer individuals.

Such corporations must also either “self-certify” their status in a form developed by the Department of Labor or via a notice to the Department of Health and Human Services.

Do any ownership attribution rules apply? Yes. Ownership interests owned by a corporation, partnership, estate or trust are considered owned proportionately by the entity’s shareholders, partners or beneficiaries. An individual is considered to own the ownership interests owned, directly or indirectly, by or for his or her family. Family includes only brothers and sisters (including half-brothers and half-sisters), a spouse, ancestors and lineal descendants. If a person holds an option to purchase ownership interests, he or she is considered to be the owner of those interests.

What if a corporation is not certain whether it qualifies?  In these instances, a corporation may send a letter describing its corporate structure to the Department of Health and Human Services (“HHS”) seeking a determination of eligibility.  Interestingly, the regulations state that if the corporation does not receive a response from HHS within 60 calendar days, it will be considered to be eligible for the opt-out for as long as the corporate structure is maintained.

How do closely held corporations opt out of the mandate? A corporation offering self-insured health coverage may provide either a copy of its self-certification to its plan’s third party administrators or a notice to HHS advising that it is an eligible closely held corporation and of its religious objection to coverage of some or all of the mandated contraceptive services. Corporations offering insured health benefits may provide their self-certification to their insurers or to HHS.

Does opting out prevent covered employees from obtaining contraception benefits? No. The regulations place the burden on insurance companies and third-party administrators to ensure that all covered employees have access to free contraceptive coverage, albeit not through the objecting corporation’s health plan. Third-party administrators (“TPAs”) that administer self-insured health plans for closely held corporations that opt out are expected to provide contraception benefits to plan participants without imposing any charge to the objecting corporation. TPAs may do this by reimbursing participants for contraceptive services directly or through an arrangement with another party. Similarly, insurers that provide group health insurance to closely held corporations that opt out bear the sole responsibility of providing contraception benefits to plan participants independent of the objecting corporation’s health plan. The regulations indicate that costs associated with providing this coverage may be reimbursed through an adjustment to the federally-facilitated Exchange user fee.

If you have any questions regarding the new regulations or any aspect of the ACA, please contact any member of our Labor and Employment Law Practice Group.

On June 25, 2015, the U.S. Supreme Court issued its decision in King v. Burwell, ruling that Section 36B of the Patient Protection and Affordable Care Act (“ACA”) authorizes insurance exchanges run by the federal government to issue tax subsidies like their state-run counterparts. The 6-3 decision was authored by Chief Justice Roberts, an appointee of President George W. Bush.

The case involved whether Section 36B of the ACA permits only state-run exchanges to issue tax subsidies to qualifying purchasers of coverage.  That Section defines “premium assistance amount” in part by referring to insurance plans that are enrolled in “an Exchange established by the State.”  The absence of any reference to federal exchanges in these portions of Section 36B led opponents of the Act to argue that only state-run exchanges have the power to issue ACA tax subsidies.  Since only 16 states (plus the District of Columbia) elected to run their own exchanges, the opponents’ position, if adopted, could have made ACA tax subsidies unavailable to residents of 34 states (including Pennsylvania) – and may have rendered the “individual mandate” penalty unenforceable in those states.

The preliminary issue facing the Court was whether the Act, and specifically Section 36B, was ambiguous with respect to its use of the phrase “Exchange established by the State.” Acknowledging that the ACA is replete with “more than a few examples of inartful drafting,” Justice Roberts recited a number of passages in the ACA in which Congress blurred the distinction between state-run and federal exchanges. Given this ambiguity, the Court looked to the greater context of the Act and legislative intent. Finding ample provisions in the Act to support the notion of subsidies being issued by all exchanges, the Court ruled that Congress intended the Act to be interpreted to allow for such subsidies. Otherwise, the Court surmised, the individual insurance markets in states with federal exchanges may experience a “death spiral” – a result that the ACA was intended to prevent.

In sum, the Court found that the opponents of the law were arguing that “Congress made the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code.  We doubt that is what Congress meant to do.”

Employers with 50-99 employees are expected to comply with the “pay or play” provisions of the Act in 2016.  For those employers that have already begun to plan to comply, today’s decision is an endorsement to “carry on.”  For employers that have delayed planning in hopes that the Supreme Court would derail the ACA, it is now time to catch-up.

If you have any questions regarding this article or the ACA, please contact any member of our Labor and Employment Practice Group.

Background

The Americans with Disabilities Act (ADA) generally prohibits employers from requiring current employees to submit to medical examinations or medical inquiries unless the exam or inquiry is “job-related and consistent with business necessity.”  Guidance issued by the Equal Employment Opportunity Commission (EEOC) in 2000 makes an exception to this rule for wellness programs that request employee medical information (e.g. biometric testing, health risk assessments, etc.) as a condition of participating in the program.  However, this exception only applies if participation in the wellness program is “voluntary” – meaning that participation may not be required and non-participants may not be penalized.

Over the past fifteen years, employers and their benefits consultants have developed a myriad of strategies for encouraging employee participation in wellness programs, many of which involve “discounts” on employee contributions for health coverage for wellness participants.  More aggressive employers have gone so far as to condition enrollment in their group health plan on an employee’s participation in a wellness program.  Allegations of such requirements were the basis for EEOC lawsuits filed in late 2014 against Honeywell International Inc. and several other employers.  It is in this context that the EEOC published their proposed regulations on April 20, 2015 to further define the “do’s and don’ts” for wellness programs under the ADA.  The proposed regulations, if finalized in their current form, would change the wellness landscape in five significant ways.

Financial Incentives

The Affordable Care Act caps aggregate financial incentives that are offered under wellness programs at 30% of the applicable group health plan premium (and 50% for tobacco-related incentives).  The EEOC proposed regulations, on the other hand, would cap total financial incentives for participation in any wellness program(s) that involves employee medical inquiries (e.g. health risk assessments) or examinations (e.g. biometric testing) to 30% of the cost of employee-only coverage.

Employee Notice Requirements

If a wellness program is offered as part of a group health plan, employees must be provided with a notice that: (i) describes the type of medical information that will be obtained through the program and the purposes for which it is used; (ii) describes applicable restrictions on the disclosure of the employee’s medical information; and (iii) is written in a manner that the employee is likely to understand.

Reasonable Design Requirement

Wellness programs which include medical inquiries or examinations must be “reasonably designed to promote health or prevent disease.”  The EEOC explains that medical information that is gathered through a wellness program must be put to a use that benefits program participants.  For example, if a particular health risk is identified through such information, the risk should be communicated to the participant.  Gathering such information without providing employees with follow-up information or advice would not meet this standard.

Equal Benefit Rule

Some employers have offered additional health plan options to wellness participants while non-participants are limited to participating in a single less generous plan.  The proposed regulations would prohibit employers from denying coverage under any group health plan or otherwise limiting the extent of benefits available to employees who do not participate in wellness programs.

Non-Retaliation

The EEOC proposed regulations further prohibit employers from taking any “adverse employment action” due to an employee’s decision not to disclose medical information or submit to medical exams in connection with wellness programs.  For programs that offer financial incentives for participation, the “packaging” of these incentives will be important.  Premium discounts will remain lawful if they are within the applicable limits set forth in the ACA and the EEOC regulations.  However, premium “surcharges” for non-participation would likely be considered unlawful retaliation.

The EEOC will be accepting public comments on the proposed regulations through June 19, 2015.  Although the regulations are merely “proposed” at this stage, they provide a road map for how the Commission interprets the ADA in the context of wellness programs.  Non-compliant programs could conceivably be challenged even before the regulations are finalized.  For this reason, employers would be wise to reconsider their existing programs in light of the new proposed regulations now.