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

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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As if HR didn't have enough on its plate with E-Verify compliance, new FMLA regs, and EFCA planning, next year is one of those strange years with 27 bi-weekly paydays instead of 26. Bi-weekly pay programs pay employees in 14-day increments resulting in a 364 day annual pay cycle. Since there are either 365 or 366 days in a year, every 5 years or so, there is a calendar year with 27 pay periods instead of the typical 26.

The 27 pay periods for 2009 create a compensation issue for salaried employees. Bi-weekly pay is typically calculated by dividing annual salary by 26 and employees are accustomed to a payroll amount based on this division. Continuing this practice in 2009 will result in an "extra" paycheck in 2009, but the normal 26 pay periods will resume in 2010. Some commentators have characterized this as a "timing issue". It is not. There are never years with only 25 pay periods to offset the years with 27.

Employers approach this situation in two ways. Some employers adjust salaried employee bi-weekly compensation for the 27 pay period years by dividing the stated annual salary by 27 rather than 26 resulting in a lower pay for each pay period in the year. Salaried employees are paid the same gross salary in smaller increments. However, this approach can cause problems with automatic deductions. Other employers allow the extra pay check and inflated compensation, not wanting to mess with the largely automated payroll system. Both approaches will require employee communication and may be influenced by an employer's past practice.   Legal issues can arise from reducing the bi-weekly salary amount.

Paying salaried employees on a semi-monthly basis (twice a month) avoids this problem because there are always 24 paydays. However, semi-monthly pay doesn't always work well for hourly employees because it may require estimating hours and overtime based on misalignment of the 7-day workweek with the 15 or 16-day pay period. Many employers don't want the expense of running two payrolls so they live with the 27 payday problem.

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The specter of business failure and personal financial setbacks wreak havoc on employee morale challenging Human Resources with dual management problems. First, HR needs to formulate a communication strategy to address the concerns of employees surrounding job security and compensation. Employee jitters surround the viability of their employer and the security of their jobs. Retirement savings evaporate as the stock market plummets leading some to forego matching 401k contributions. Compensation packages and incentives tied to stock continue their downward spiral. Wordsmith the message that the CFO might send out: “They are lucky to have a job.”

Second, HR must manage the collateral effects of an employee’s personal financial problems, which can lead to bankruptcy, foreclosure and even divorce, any of which may influence his or her job and job performance. Businesses must be prepared to respond to employee performance issues created by financial problems. Employers should be aware of legal limitations placed on their actions with regard to an employee’s financial problems. In addition, human resource professionals should appreciate the relationship between their performance management program and other resources to address employee issues created by financial distress.

Pennsylvania and federal laws limit actions employers may take against employees that file for bankruptcy or are subject to wage attachments. Many employers, particularly those in the financial sector, face customer relation problems when one of their employees does not pay his or her bills or files for bankruptcy. Legal limitations on employer responses are as follows:

• Garnishment/Attachment of Wages. Pennsylvania prohibits garnishment/attachment of wages for the repayment of personal debts, except in limited circumstances for child support, alimony or student loans.   Employees may not be disciplined, discriminated against or discharged because of wage garnishments.
• Employee Bankruptcy. Section 575 of the Bankruptcy Act protects employees and applicants from discrimination if an individual:(1) is or has been a debtor under this title or a debtor or bankrupt under the Act; (2) has been insolvent before the commencement of a case under the Act or during the case but before the grant or denial of a discharge; or (3) has not paid a debt that is dischargeable in a case under this title or that was discharged under the Act. Courts have limited the reach of this provision by requiring that the discrimination be "solely because" of the individual's bankruptcy participation.
• Worries about Temptation for Theft. Businesses may become concerned that an employee in financial distress may be more likely to embezzle and react by trying to find out the scope of an employee’s credit problems. The Fair Credit Reporting Act limits an employer’s use of employee credit information. A business’ usual financial controls should be uniformly applied, but, if inadequate, should be revised for all employees.

Employees experience financial distress are subject to performance problems including declining productivity, absenteeism and depression.  The usual performance management tools can be used: however, special attention should be paid to other resources like the EAP and Debt/Credit counseling.

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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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“Small Employer” minimum wage increases to $7.15 per hour effective July 1, 2008 

All employers in Pennsylvania must pay the state’s minimum wage of $7.15 per hour based on the expiration of the Small Employer exemption. Previously, an employer who had an employee complement composed of the equivalent of 10 or less full-time employees had a lower minimum wage rate of $6.65 per hour until July 1, 2008.

Pennsylvania's Training Wage Increases to $6.55 per hour effective July 24, 2008

Pennsylvania’s training wages is scheduled to increase from $5.85 to $6.55 effective July 24, 2008. The training wage is no longer allowed after July 23, 2009. A 60-day training wage may be paid to employees under 20 years old effective January 1, 2007. This wage matches the current federal minimum wage. Eligible employees may be paid the training wage up to the day before the employee’s 20th birthday. On and after the employee's 20th birthday, pay must be raised to the regular Pennsylvania minimum wage even if the 60-day period has not expired.

The 60-day period starts on the first day of work. The 60-day period is counted as consecutive days on the calendar, not as days worked or business days. A break in employment (e.g. vacation, school year, etc.) does not affect the calculation of the 60-day period of eligibility and does not allow the employer to “restart” the 60-day period.

A youth under 20 may be paid the training wage for up to 60 consecutive calendar days after initial employment with any employer, not just the first employer. The fact that an eligible youth may be employed at the same time by more than one employer (unrelated to each other) does not affect either employer’s right to pay the training wage.   An employee may be “initially employed” only once by any one employer even if there are breaks in employment.

Employers must notify these employees at the time of hire of this wage and their right to receive the regular Pennsylvania minimum wage after 60 calendar days. Current employees may not be displaced, have their hours reduced or have their wages or employment benefits reduced to allow hiring of persons eligible for the training wage. Employers do not have to meet any training requirements to pay an eligible youth this training wage.

Pennsylvania’s Mandatory Minimum Wage Poster

FAQ on Pennsylvania Minimum Wage

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