Pennsylvania Labor and Employment Blog : Pennsylvania Labor and Employment Lawyer & Attorney : McNees Wallace & Nurick Law Firm : Human Resources, Workplace and Business Law : Harrisburg, Lancaster, Allentown, Lehigh

Pennsylvania has long been considered an "employment at will" state – meaning that employers and employees may terminate their employment relationship at any time with or without cause or prior notice. However, the number of exceptions to the "at will doctrine" seems to grow every year. The year 2010 was no exception. In Hamovitz v. Santa Barbara Applied Research Inc., 2010 WL 4117270 (W.D. Pa. Oct. 19, 2010), the U.S. District Court for the Western District of Pennsylvania recognized a new exception to the at will doctrine involving an employer's refusal to hire an applicant based on prior service in the National Guard.

In Hamovitz, the plaintiff claimed that the employer refused to rehire him based on his service in the National Guard. In addition to filing statutory claims under the Uniform Services Employment and Reemployment Rights Act ("USERRA") and the Pennsylvania Military Affairs Act ("PMAA"), the plaintiff brought a common law wrongful discharge/failure to hire claim seeking the court to apply a "public policy" exception to the employment at will doctrine. In Pennsylvania, exceptions to the at will doctrine are rare. Under the "public policy" exception, a plaintiff may have a viable wrongful discharge claim if he can show that his termination violated a clear mandate of public policy.

In order to show that an employer's actions offended a clear mandate of public policy, the plaintiff must show that he or she was terminated for: (1) engaging in conduct required by law or (2) refusing to engage in conduct prohibited by law. In such cases, the public policy cited by the plaintiff must have legislative or constitutional endorsement, and it must be clear and specific.

In Hamovitz, the court created a new exception to the at will doctrine: "where an employer's actions impinge upon protected rights of employees." The court found that the employer in Hamovitz may have impinged upon the employee's rights under the PMAA, and therefore, the plaintiff was allowed to proceed with his wrongful discharge claim.

By allowing this claim to go forward, the court also enabled the plaintiff to avoid the statutory limitations on damages found in USERRA and the PMAA. Although not available under the PMAA or USERRA, the court found that the plaintiff in Hamovitz would be entitled to recover punitive damages if he were to prevail on his common law wrongful discharge claim.

Unless the Hamovitz decision is reversed on appeal, this new exception to the at will doctrine may trigger a wave of litigation as plaintiffs seek broad interpretations of "actions that impinge upon protected rights of employees." Courts have long held that employees sacrifice certain rights in the workplace; for example, an employer may restrict free speech by prohibiting offensive language or behavior at work. Now, however, plaintiffs may argue that a termination, or even a refusal to hire, "impinges upon protected rights" in any number of situations that previously fell under the employment at will doctrine.
 

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In recognition of the importance and sacrifices associated with military service, many employers provide a supplemental payment for their employees called to active military service which covers the difference between their military pay and their regular compensation. Pay differentials are provided for varying lengths of time.

Revenue Ruling 2009-11 provides that a differential wage payment made by employers to their employees that leave their job to go on active military duty is not subject to FICA or FUTA taxes. However, the pay differential is subject to income tax withholding under new Code section 3401(h). The IRS ruling provides that employers may use the aggregate procedure or optional flat rate withholding to calculate the amount of income taxes required to be withheld on these payments, and that these payments must be reported on Form W-2.

Section 3401(h) was added to the Code by section 105(a) of the Heroes Earnings Assistance and Relief Tax Act of 2008.  New subsection 3401(h) provides that, for purposes of income tax withholding, any differential wage payment is to be treated as a payment of wages by the employer to the employee. Section 3401(h) applies to differential wage payments paid after December 31, 2008. The enactment of section 3401(h) modifies the holding in Revenue Ruling 69-136 that differential wage payments are not subject to income tax withholding. The term “differential wage payment” means any payment which (A) is made by an employer to an individual with respect to any period during which the individual is performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) while on active duty for a period of more than 30 days, and (B) represents all or a portion of the wages the individual would have received from the employer if the individual were performing service for the employer.

We have previously summarized the provisions of HEART in our post Making Sure Your "HEART" Is In The Right Place When It Comes To Soldier-Employee's Benefits

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On June 17, 2008, President Bush signed into law the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "HEART Act"). The HEART Act extends or modifies several tax and retirement benefits for active-duty and former military service members, and employers and plan administrators should be familiar with its provisions.

Retirement Plans

            Currently, for purposes of retirement plan vesting or accruals, an individual's period of qualified military service is treated as a period of employment, which is credited when the soldier-employee returns to work. As such, if the individual dies during military service, his or her survivors do not receive accelerated vesting, ancillary life or other benefits they may have received if the employee died while actively performing his civilian employment. Under the HEART Act, retirement plans must pay the survivors of a soldier-employee who dies during qualified military service any benefits (other than those that accrued during military service) that the plan would have paid had the employee died during active employment. If a plan fails to follow this provision, it will be disqualified. Of note, this provision is effective for military service related deaths and disabilities occurring on or after January 1, 2007, so some plan sponsors may have to provide this benefit retroactively or risk disqualification.

            In addition to this mandatory provision, the HEART Act provides that retirement plans may elect to provide optional benefits to soldier-employees and their families. Notably, under one of the optional benefits, a plan may treat someone who dies or becomes disabled during qualified military service as if he or she resumed employment the day before the death or disability occurred and then terminated employment because of the death or disability. This optional benefit allows the plan to pay out benefits that would have accrued during the soldier-employee's military service presuming he or she was reemployed. Plan sponsors that elect to make this benefit available must do so for all employees performing qualified military service on a reasonably equivalent basis.

Differential Wage Payments

            The voluntary payments made by some employers to service members during a qualified military leave to account for the difference between what the soldier-employee makes in the military and what his or her average compensation was while actively employed are commonly referred to as "differential wage payments." Under prior law, the Income Revenue Service (IRS) took the position that these payments were not subject to tax withholding and were not required to be treated as compensation for retirement plan purposes. Under the HEART Act, however, as of January 1, 2009, differential wage payments will be deemed wages subject to income tax withholding and must be treated as compensation of the employee for retirement plan purposes. In the HEART Act, "differential wages" is a term of art that includes: "compensation paid by an employer to an individual who is on active duty in the uniformed services for a period of more than 30 days, that represent all or a portion of the wages the individual would have received from the employer if the individual had remained in active employment with the employer." Any plan amendments relating to differential wages must be made on or before the last day of the first plan year beginning on or after January 1, 2010. 

Flexible Spending Arrangements

            The HEART Act permits health flexible spending arrangements ("FSA") to provide "qualified reservist distributions." A soldier-employee may be eligible for a "qualified reservist distribution" if he or she is called to active military duty for at least 180 days (or for an indefinite period), and the distributions are made during the period beginning with the active-duty call and ending on the last day of the FSA's coverage period that includes the date of the active-duty call. Although this provision will help employees avoid the FSA use-it-or-lose-it rule, a number of important issues remain open for clarification. Specifically, the permissible amount of the distribution, timing of the distribution, and taxation of the distribution are not squarely addressed under the HEART Act. Accordingly, employers may amend their FSAs to include qualified reservist distributions as of June 17, 2008, it is advisable for employers to wait to offer these distributions until after the IRS clarifies some of the foregoing issues.

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