Major developments in the area of wage and hour law are happening right now in Harrisburg and happening quickly.  These developments may have a significant impact on Pennsylvania employers in 2020 and beyond.

On November 20, the Pennsylvania Senate passed Senate Bill 79 by a vote of 42-7.  This bill would make substantial amendments to the Pennsylvania Minimum Wage Act (PMWA).

Currently, the minimum wage rate under both the federal Fair Labor Standards Act (FLSA) and the PMWA is $7.25 per hour.  Under the Senate bill, the hourly minimum wage rate under the PMWA would increase as follows:

  • $8.00 effective July 1, 2020
  • $8.50 effective January 1, 2021
  • $9.00 effective July 1, 2021
  • $9.50 effective January 1, 2022

In exchange for these increases to the minimum wage rate, Pennsylvania employers and their allies in the Senate were able to secure some welcome compliance simplification and relief.  Specifically, the Senate bill would:

  • Amend the PMWA to state that its minimum wage and overtime requirements must be applied in the same manner as the FLSA, except when a higher standard is specified under the PMWA or its regulations. This change would be significant for employers, as it would eliminate much ambiguity and the differences between the PMWA and FLSA on issues like overtime exemption requirements.  In other words, Pennsylvania employers would have one set of requirements to follow in this area, rather than two often vague and conflicting sets of rules.  This amendment would make all overtime exemptions currently available under the FLSA now also apply to the PMWA.  Additionally, it would provide clear guidance that, in areas where the PMWA and its regulations are silent, federal law would apply and provide the necessary guidance for compliance.  This change would be particularly timely, as the Pennsylvania Supreme Court issued a decision (coincidentally) on November 20 holding that the fluctuating work week method of paying salaried non-exempt employees, which is expressly permitted by the FLSA’s regulations, violates the PMWA, because the PMWA’s regulation do not mention or address the fluctuating work week method.  Conflicts and uncertainty like this due to silence in the PMWA and its regulations would go away if the Senate bill becomes law.
  • Preclude the Pennsylvania Department of Labor and Industry (DLI) from making any changes to the minimum salary requirements for the PMWA’s white-collar overtime exemptions until January 1, 2023. As noted previously in this blog, DLI submitted final regulations on October 17, 2019, that would have dramatically increased the minimum salary requirements for the PMWA’s white-collar exemptions well in excess of the minimum salary requirements for the same exemptions under the FLSA.

As for those new PMWA regulations, Pennsylvania’s Independent Regulatory Review Commission (IRRC) was set to consider and rule upon them at a public meeting on November 21.  On the morning of November 21, the Wolf Administration formally withdrew the new regulations as part of the negotiations that led to bipartisan support for and passage of the Senate bill.  With its withdrawal, the Wolf Administration made clear that, if the Senate bill is not passed by the Pennsylvania House of Representatives, it intended to resubmit the regulations for final approval.

That is a lot of legislative and regulatory action in a mere 24 hours!

The Senate bill is a compromise measure, with Governor Wolf able to secure a long-sought minimum wage increase and the Republican-controlled Senate able to block the PMWA minimum salary regulations from taking effect and obtain a long-desired alignment of the requirements of the FLSA and PMWA.

The bill now moves to the Pennsylvania House for consideration.  Like the Senate, the House is Republican-controlled.  Whether the bill will be passed by the House in the same or similar form remains to be seen.  However, remarkable progress has been made in a very short time.

Stay tuned.

For decades, federal wage and hour regulations have required that non-discretionary bonuses paid to employees be included in the recipients’ “regular rate” for purposes of calculating their overtime premiums.  In other words, if an employee earns a base rate of $10/hour and also earns a non-discretionary weekly productivity bonus in the amount of $50 during a week in which he works 50 hours, his regular rate for the week will jump to $11/hour.  For the ten overtime hours he worked during the week, his ½ time overtime premium must be calculated based on the inflated regular rate, not his lower base rate.  So, his total earnings in the example above would equate to [50 hours x $10/hour = $500] + [10 x ½ x $11.00] = $555.00.

Many employers overlook this basic requirement in the U.S. Department of Labor’s (“DOL”) regulations governing overtime compensation – and the law on this issue just got a little bit trickier.  In Secretary of Labor v. Bristol Excavating, Inc., Talisman Energy Inc. offered a variety of bonuses to all workers at its drilling sites, including employees of its contractors.  Employees of Bristol Excavating, a contractor on a Talisman job site, inquired with their employer whether they could qualify for the Talisman bonuses.  Bristol, in turn, posed this question to Talisman, and Talisman agreed to extend their bonus programs to Bristol’s employees – including bonuses for safety, efficiency and a “Pacesetter” bonus.  Bristol and Talisman did not enter a formal agreement regarding this arrangement, but Bristol did undertake the clerical work to administer the bonus programs as they applied to its employees (e.g. determining eligibility, invoicing Talisman and distributing Talisman’s bonus payments).

During a routine compliance audit, a DOL auditor determined that the Talisman bonuses paid to Bristol’s employees must be added to each recipient’s regular rate of pay for purposes of calculating his or her overtime premiums.  Bristol disagreed, and the matter proceeded to federal court.

The U.S. Court of Appeals for the Third Circuit rejected the DOL’s position that all payments to employees for their services, regardless of their source, must be included in the regular rate of pay unless specifically exempted.  Instead, the Third Circuit reasoned that whether a payment qualifies as remuneration for employment “depends on the employer’s and employee’s agreement.”  The Court identified a number of factors to be considered in determining whether third-party bonuses should be considered remuneration for employment, including: (a) whether the specific requirements for receiving the payments are known by the employees in advance of performing the work; (b) whether the payment itself is for a reasonably specific amount; and (c) whether the employer’s facilitation of the payment is significantly more than serving as a pass through vehicle.  If those factors exist, a court should then consider whether the employer and its employees “have adopted the third-party incentive bonuses as part of their employment agreement.”

In applying this analysis to the Talisman payments, the Third Circuit concluded that the $25 daily safety bonuses paid by Talisman to Bristol’s employees were, in fact, remuneration for employment since “Bristol’s facilitation of the program went significantly beyond merely acting as a pass-through.”  On the other hand, the Court found that the evidence of record was insufficient to conclude that Talisman’s Pacesetter and efficiency bonuses were remuneration subject to the DOL’s overtime rules.  For this reason, the Third Circuit remanded the case for further proceedings on this issue.

Although the Bristol Excavating decision was not a complete victory for the DOL, it does highlight a basic point that many employers are likely to overlook: bonuses and other payments made by third parties to your employees may affect how you must calculate their overtime premiums.  If your employees may receive payments from third parties for their services, it is important to determine whether those payments should be included in their regular rate for overtime purposes.

If you have any questions regarding the Bristol Excavating decision, or FLSA compliance in general, please contact any member of our Labor and Employment Practice Group.

Effective October 6, 2020, Pennsylvania’s Construction Industry Employee Verification Act will require the use of the E-Verify system for all construction industry employers.

The Act defines the construction industry as those who engage in the erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work or maintenance work done on real property or premises under a contract, including work for a public body or paid for from public funds.  The Act will apply to construction industry employers with as few as a single employee, and will apply to construction staffing agencies.

The Act will require these employers to use E-Verify to double check the legal work status of new employees.  E-Verify is, as its name suggests, a web-based program administered by the federal government that allows employers to electronically verify an employee’s work-authorization.

Currently, all U.S. employers are required to verify the employment-eligibility of new hires by completing a Form I-9. The Act takes that requirement one step further by requiring the construction industry employer to match the information from the employee’s Form I-9 with that on the E-Verify system.

Once verified, the employer is required to maintain a record of such verification for the duration of the employee’s employment, or three years, whichever is longer.

The Pennsylvania Department of Labor & Industry will be tasked with enforcement of the Act and will be empowered to enter and inspect a place of business to examine records. The Department will also be empowered to copy records as necessary, require a written statement of the employer’s verification process, and “interrogate persons” to determine the employer’s compliance with the Act.

If the Department determines that an employee is not authorized to work in the United States, which it will verify with the federal government, then it will first issue a warning letter detailing the violation and informing the employer of the provisions of the Act. The employer will then have 10 business days to demonstrate that it has terminated the unauthorized employee’s employment. Employers will be entitled to administratively appeal the issuance of a warning letter. Failing to terminate the unauthorized employee, or a second violation, will result in the matter being referred to the Attorney General’s office, which will then file an action against the employer in the county in which the employer is located.

Penalties under the Act also include placing the employer on a “probationary period” during which the employer must file quarterly reports with the Department for each new employee hired, as well as face suspension of business licenses.

Notably, the Act contains a robust anti-retaliation/anti-discrimination provision. It prohibits a construction industry employer from discharging, threatening, or otherwise retaliating or discriminating against an employee because the employee participated in an investigation, hearing, or other inquiry under the Act, or made reports or complaints regarding violations of the Act to the employer or a governmental authority.

Employers in the construction industry should also be aware that employees who wish to file an action under this section have a three- year window in which they may do so. Perhaps more importantly, the Act permits an employee seeking redress to go directly to the court of common pleas, meaning there is no administrative exhaustion requirement before a lawsuit is filed. Remedies available to the prevailing employee are also substantial, and include reinstatement, restitution equal to three times the amount of the employee’s wages and fringe benefits from the date of retaliation or discrimination, attorney fees and costs, and any other relief the court deems appropriate.

If you have any questions regarding the requirements of the Act or compliance, please contact any member of the McNees Labor and Employment Group.

More than a year ago, in June 2018, the Pennsylvania Department of Labor and Industry (DLI) proposed new regulations under the Pennsylvania Minimum Wage Act (PMWA) that would increase significantly the minimum salary requirement for the white-collar overtime exemptions under this law.

The PMWA is the state-law equivalent of the federal Fair Labor Standards Act (FLSA).  The PMWA and FLSA both place minimum wage and overtime pay obligations for Pennsylvania employers.  While the laws’ requirements are similar, they are not identical.  Employers in Pennsylvania must meet the requirements of both laws to ensure compliance.  In areas where one law is more favorable to employees than the other, Pennsylvania employers must comply with the more employee-friendly requirements to avoid liability for unpaid minimum wages or overtime pay.

The DLI’s June 2018 proposed regulations sought to increase the PMWA’s white-collar overtime exemptions’ minimum salary requirements dramatically, ultimately to $921 per week ($47,892 annually) within two years of the final regulations’ publication date.

Needless to say, the proposed regulations were controversial.  In September 2018, Pennsylvania’s Independent Regulatory Review Commission (IRRC) published comments on the proposed regulations that concluded that DLI needed to do more to justify the proposed regulations and included a number of questions and concerns.

We heard nothing formal from DLI after the IRRC’s critical comments until more than a year later.  On October 17, 2019, DLI submitted its final regulations on this topic to the IRRC and legislative oversight committees. The IRRC has scheduled a public meeting on November 21, 2019, to consider the final regulations.

If DLI’s final regulations are approved and take effect, they will increase the white-collar exemptions’ minimum salary requirements under the PMWA to:

  • $684 per week ($35,568 annually) effective January 1, 2020
  • $780 per week ($40,560 annually) effective January 1, 2021
  • $875 per week ($45,500 annually) effective January 1, 2022

That’s not all.  On January 1, 2023, and every third year thereafter, the minimum salary requirement would automatically change to an amount equal to the 10th percentile of all Pennsylvania workers who work in salaried exempt positions.  If the automatic “adjustment” works as intended, those employees whose salaries are in the bottom 10% of salaried exempt employees in Pennsylvania will need to receive compensation increases to meet the new increased requirement and qualify for an exemption.

The final regulations did incorporate the provision from the new FLSA regulations that would allow employers to meet up to 10% of the minimum salary amount with the payment of incentive compensation, non-discretionary bonuses, and/or commissions that are paid at least annually.

The final regulations also made certain changes to some of the PMWA exemptions’ duties tests to make those requirements more closely align the state law requirements with the FLSA.  However, these limited changes to the duties tests do not eliminate the majority of differences between the FLSA and PMWA that continue to vex employers.  For example, unlike the FLSA, the PMWA still will not have an explicit exemption for computer professionals, a highly compensated employee exemption, or a specific provision that exempts teachers, physicians, and lawyers from the exemptions’ salary requirement.

Thankfully, the minimum salary increase effective January 1, 2020 in the DLI’s final regulations would align the minimum salary requirements of the FLSA and PMWA for one year.  Unlike the final rule recently issued by the U.S. Department of Labor on the FLSA white-collar overtime exemptions, the PMWA regulations provide for additional increases to the minimum salary requirement in 2021, 2022, and 2023 and every three years thereafter.  If the new PMWA regulations take effect, Pennsylvania employers will face another significant increase in the minimum salary requirements for calendar year 2021.

The PMWA’s requirements apply to essentially all employers in Pennsylvania.  Pennsylvania employers are now one step closer to higher minimum salary requirements for the PMWA’s white-collar exemptions in 2020 and beyond.  Beginning in 2021, it will be only more difficult for employers to navigate conflicting legal requirements and ensure compliance with the requirements of both the FLSA and PMWA.

Pennsylvania employers must ensure compliance with federal and state legal requirements for minimum wage and overtime exemption classifications or face the risks of non-compliance in the form of costly class-based litigation and government agency investigations.  Now is the time for employers to begin the process of ensuring compliance with the new requirements that will take effect in 2020 and beyond.

Not all 401(K) and other qualified plans allow hardship withdrawals, but if your plan does allow hardship withdrawals, make sure it is compliant with the new rules finalized in September.   All of the changes are optional for a qualified retirement plan’s 2019 Plan year.  Operational compliance must begin January 1, 2020.  Key changes outlined in the regulations include:

  • In the past, participants were required to suspend deferrals to his/her 401(k) if he/she took a hardship withdrawal. Now, the six-month suspension of 401(k) contributions is eliminated. (Required for hardship withdrawals after January 1, 2020).
  • A new type of qualifying expense related to disaster relief is added to the list: expenses and losses incurred on account of a disaster declared by the Federal Emergency Management Agency, provided the employee lives or works in the area designated by FEMA. (Allowed to be effective for distributions made on or after January 1, 2018).
  • “Primary beneficiary under the plan” was added as an individual for whom qualifying medical, educational, and funeral expenses may be incurred. (Required January 1, 2020).
  • The Plan administrator may rely upon the participant’s written representation that he/she has insufficient cash or liquid assets to satisfy the financial need, but only to the extent that the plan administrator does not have actual knowledge to the contrary. (Required January 1, 2020).
  • The requirement that a loan be taken from the plan before a hardship withdrawal is approved can be eliminated. (Optional change).
  • Hardship distributions from earnings on elective deferrals may be permitted. (Optional change).
  • Hardship distributions from QNECs, QMACs, and earnings on these sources may be permitted. (Optional change).

What should you do next?

Plan procedures should be reviewed to ensure compliance with the regulations and to determine when adoption of conforming plan amendments will be necessary.  Plan administrators should also determine whether they intend to implement any optional changes.

Please feel free to contact any member of the McNees Wallace & Nurick Employee Benefits Practice Group if you have any questions regarding this article.

On September 24, the U.S. Department of Labor released its final rule changing the minimum salary requirements for the Fair Labor Standards Act’s “white-collar” overtime exemption regulations. As you may recall, the DOL issued a proposed rule in March 2019 that included increases to the minimum salary requirements and invited public comments.  This process came after the DOL’s ultimately unsuccessful attempt to more than double the same minimum salary requirements near the end of the Obama administration.

The key provisions of the DOL’s 2019 final rule include:

  • Raising the exemptions’ minimum salary requirement from $455 per week ($23,660 annually) to $684 per week ($35,568 annually);
  • Raising the total annual compensation requirement for the FLSA’s highly compensated employee exemption from $100,000 to $107,432; and
  • Allowing employers to use non-discretionary bonuses and incentive payments (including commissions) that are paid annually or more frequently to satisfy up to 10% of the minimum salary requirement.

Like the 2016 final rule, the 2019 final rule contains no changes to the white-collar exemptions’ duties tests or any other overtime exemptions (other than changes to special salary levels for workers in U.S. territories and the motion picture industry).

The DOL’s final rule differs somewhat from its March 2019 proposed rule.  The minimum salary requirement increase in the final rule is $5 per week higher than that contained in the March 2019 proposed rule.  Also, the new total annual compensation requirement for the highly compensated employee exemption of $107,431 is almost $40,000 less than the proposed rule.  Finally, the DOL dropped the proposed provision that provided for review of the minimum salary thresholds every four years.  With the final rule, any changes will need to be initiated by the DOL and follow the standard rulemaking process.

The DOL estimates that the changes in the 2019 final rule will make approximately 1.3 million currently exempt workers now eligible for overtime compensation.  By comparison, the DOL previously estimated that its 2016 final rule would make 4.2 million exempt workers eligible for overtime pay.  The 2019 final rule clearly is a more modest update to the existing requirements for the white-collar exemptions, which have not be revised since 2004.

The new minimum salary requirements take effect January 1, 2020.  Litigation challenging the new final rule is likely, but employers cannot assume that this final rule will be blocked from taking effect like the 2016 final rule was.  Thus, employers have a small window of time to take the necessary steps to ensure compliance before the calendar turns to 2020.  These steps should include:

  • Identifying employees who currently are classified as exempt under the FLSA white-collar exemptions and earn a weekly salary of less than $684 (taking into account the new ability to credit non-discretionary bonuses and incentive compensation for up to 10% of the minimum salary requirement); and
  • For those employees, considering whether to (1) increase their salaries and/or bonuses/incentive compensation by January 1 to meet the new minimum salary requirement or (2) convert them to non-exempt status for FLSA overtime pay and minimum wage purposes.

Unfortunately, this is not the only imminent challenge facing Pennsylvania employers in the area of overtime exemption classifications.  As we previously noted, the Pennsylvania Department of Labor and Industry in 2018 proposed big changes to the regulations on the minimum salary and duties requirements of the white-collar overtime exemptions under the Pennsylvania Minimum Wage Act.  These proposed changes were far more significant and impactful than the changes contained in the DOL’s 2019 final rule.  We anticipate that L&I may take action and issue final regulations sometime this fall or winter.

If that happens, Pennsylvania employers will need to work (and work quickly) to ensure compliance with changes to both the FLSA and Pennsylvania Minimum Wage Act’s white-collar overtime exemption requirements.  In the meantime, employers should begin the process of ensuring compliance with the DOL’s final rule before the New Year.

A lot of times, determining whether a worker is an independent contractor or an employee is tough.  Different laws have different standards, and government agencies and the courts often apply different tests in addressing this question.  Under any test, the analysis is highly fact intensive, and the consequences of misclassification can be steep.

Luckily, the National Labor Relations Board recently made clear that the misclassification of a worker as an independent contractor, when the worker is really an employee, is not in and of itself a violation of the National Labor Relations Act.

In Velox Express, Inc., the Board held that Velox, a medical courier service, misclassified its drivers as independent contractors.  The Board held that the drivers were employees under the Act. However, the Board refused to adopt an Administrative Law Judge’s separate finding that the misclassification alone violated the Act.  The Board found that conclusion was simply a “bridge to far.”

Section 8 of the Act prohibits employers from interfering with employee rights under the Act, and from coercing or restraining employees from exercising those rights.  The ALJ had found that misclassification dissuaded employees from exercising their rights under the Act.  The ALJ ruled that misclassification chilled employee exercise of protected activities, and therefore, violated Section 8 of the Act.

But the Board found that a misclassification was not the type of inherently threatening or coercive conduct that has historically been found to violate the Act. Essentially, absent additional conduct on the part of the employer, a misclassification alone is not enough to deter employees from exercising their rights.

Interestingly, the Board agreed with the ALJ that the employer’s decision to discharge a driver who raised concerns about how the drivers were classified was a violation of the Act. As noted above, the Board agreed that the drivers were really employees and not contractors.  The Board further agreed that the employer took action to discharge the driver because she engaged in activities protected by the Act, which is unlawful.

The Board’s decision is certainly a welcome relief for employers who engage independent contractors, especially in the transportation industry.  However, it is also a warning that while misclassification alone may not warrant consequences under the Act, if a worker is misclassified, liability under applicable labor and employment laws may await.  As this case demonstrates, misclassified independent contractors will be protected by the Act.

The Equal Employment Opportunity Commission (EEOC) announced on September 11, 2019 that it will not be seeking renewal for collection of EEO-1 Component 2 pay data, which requires employers with 100 or more employees to submit employee pay data on the new EEO-1 on an annual basis. Moving forward, the EEOC stated it would seek authorization for continued collection of only the EEO-1 Component 1 data, with 2019 data submissions due in March 2020. This welcome reprieve will be in place for filings in 2019, 2020, and 2021. The EEOC will be accepting public comments on its pay data collection rule up through November 12, 2019.

According to the notice released by the EEOC, “At this time, the unproven utility to its enforcement program of the pay data as defined in the 2016 Component 2 is far outweighed by the burden imposed on employers that must comply with the reporting obligation.”  While this is great news for future years, please note that if you’re one of the nearly 90,000 EEO-1 employers subject to filing, the submission of 2017 and 2018 EEO-1 Component 2 data still carries a quickly approaching September 30th deadline.

In addition to the web-based portal for the collection of pay and hours worked data for calendar years 2017 and 2018 which opened on July 15, 2019, a data file upload function and validation process is also open as an alternative data collection method for employers who prefer to utilize data file upload capability. Information regarding the data file upload function is available here. If you have any questions about your compliant and upcoming timely submission of the Component 2 pay data, contact any of the attorneys in the McNees Labor and Employment Group.

As the summer begins to wind down, the first whispers of fall rippling through cool evening breezes are a welcome reminder that school is back in session. That means it’s an opportune time for Pennsylvania’s 500 public school districts and many charter schools to examine their policies governing employee reporting of arrests and convictions and their handling of arrest and conviction reports.

Pennsylvania has long required that school district employees self-report arrests or convictions for many common offenses (e.g. kidnapping, endangering the welfare of children, sexual abuse of children, etc.). The law prohibits schools from hiring applicants with certain offenses, and requires immediate discharge of teachers/educators who are convicted of or who plead guilty to those same offenses.  In addition to the obvious violent crimes and crimes against children, PA law also requires self-reporting for all felony, first-degree misdemeanor, first-degree misdemeanor or felony DUI, and controlled substance-related offenses. The reporting requirement applies to all current and prospective employees of public and private schools, intermediate units, and vocational-technical schools, including independent contractors and their employees who have direct contact with children.

Obviously, in light of the potential consequences, employees were not really motivated to report arrests for these offenses.  For those employees who may have hoped to remain undetected following a reportable arrest or conviction, life just got a little harder. Thanks to a recently-implemented notification system, the Pennsylvania Department of Education (“PDE”) is now automatically notified by the Pennsylvania Justice Network (“JNET”) when an educator is arrested. Once notified, the PDE sends a notification to the Teachers Information Management System (“TIMS”) and the chief school administrator for the school in which the educator is employed. Once notified, the TIMS officer and administrator receive frequent reminders until the administrator acknowledges the arrest.

The chief administrative officer is then required to review the pending criminal charge. Importantly, the chief school administrator will be given access to a broader range of information than they would have if they were relying solely on the employee to self-report. The notifications sent from JNET to TIMS and the chief administrative officer include arrests, indictments, and charges that do not require self-reporting. For example, a second-degree misdemeanor may not otherwise be reported, but would come through JNET to the school district just the same as an arrest for a more serious offense.  As a result, school districts are becoming aware of potentially unflattering information about their employees they may otherwise never have received. Of course, an arrest is public information, and where school districts would formerly rely on the local newspaper’s “police roundup” section, they are now given convenient, broad access to such information on employees.

It is important for school districts to be mindful of their use of this information when making an employment decision. The school district must balance its obligations as an employer and duty to protect the integrity and safety of the educational institutions with the procedural and substantive due process rights of its public employees. The school district may also have obligations pursuant to a union contract or other contract.  As a result, any potential employment action in response to a report should be accompanied by thorough documentation and consultation with counsel.

Although school districts should already have a procedure in place for how to deal with teacher arrests, now would be a good time to review that procedure and determine if any updates are necessary.  Also, a procedure regarding how to process and handle the TIMS reports should be considered.

For questions or updates on this issue, contact any of the attorneys in the McNees Labor and Employment Group.

On July 29, 2019, the Department of Labor issued final rules clarifying when an employer group or association, or professional employer organization (“PEO”) may sponsor a defined contribution multiple employer retirement plan (“MEPs”).   Although MEPs already exist, the Department issued the regulation to alleviate the uncertainty surrounding the ability of PEOs and associations to sponsor MEPs, including a clarification that having a principal place of business in the same region meets the commonality of interest requirement of a MEP.   The Department posits that by participating in a MEP, small businesses will benefit from reduced costs achieved through the economies of scale for administrative costs and investment choices.

In order for a bona fide group or association of employers to establish a MEP (a.k.a Association Retirement Plan) under the Final Rules, the group or association must have at least one substantial business purpose unrelated to offering employee benefits.  The group or association must have a formal organizational structure, and its activities must be controlled by the employer members.  Each member of the group or association must have one employee who is a participant in the MEP, and participation through the association must not be available other than to employees and former employees of the employer members.  The employer members must also have a commonality of interest.   In order to meet the commonality of interest criteria, the employer members must be in the same trade, industry, line of business or profession or have a principal place of business in the same region that does not exceed the boundaries of a single state or metropolitan area (even if the metropolitan area includes more than one state).  The group or association cannot be owned or controlled by a bank or trust company, insurance issuer, broker-dealer, or similar financial services firm.

Similarly, the Final Rules allow bona fide PEOs to establish a MEP.  A PEO is a human-resource company that contractually assumes certain employer responsibilities of its client employers.  In order for a PEO to establish a MEP, it must (1) perform substantial employment functions on behalf of its client employers, (2) have substantial control over the functions and activities of the MEP, (3) ensure that each client employer that adopts the MEP is an employer of at least one employee who is a participant in the MEP, and (4) ensure that the MEP is only available to employees and former employees of the PEO and its client employers.

The Final Rules do not permit the creation of defined contribution retirement arrangements that cover employees of employers with no relationship other than their joint participation in the MEP, commonly known as “open MEPs” or “pooled employer plans”.  The Department is seeking further comment regarding whether open MEPs should be permitted and, if permitted, under what terms.

The new DOL regulations are likely to garner interest among small employers that are interested in offering an employee retirement plan but have found the associated administrative costs to be prohibitive.  Please contact any member of our Employee Benefits Group to learn more about the benefits and requirements of establishing a MEP.