An ever-increasing number of employers are sponsoring wellness incentives as a means of encouraging employees to developing healthy habits. In turn, employers gain healthier, more productive work forces.  Wellness incentive programs aren’t without their risks, however.  In this podcast, Denise Elliott discusses whether employees are covered by workers’ compensation benefits for injuries sustained while participating in an employer-sponsored wellness program.

The federal Fair Labor Standards Act (FLSA) establishes requirements for minimum wages and overtime pay.  The FLSA’s requirements can be complex, and employers can face significant liability for unpaid wages and liquidated damages by failing to ensure compliance with its myriad requirements.

The FLSA contains a somewhat unique quirk regarding its statute of limitations.  The statute of limitations for FLSA violations is two years.  However, if the plaintiff(s) can show that the violation was willful, the statute of limitations is extended to three years.  In other words, employers who commit willful violations face a potential additional year of damages (if the unpaid wages date back at least three years before the filing of the lawsuit).

In an FLSA case filed against Lackawanna County, the Third Circuit recently clarified what constitutes a willful violation to trigger the third year of liability under the FLSA.  In Souryavong v. Lackawanna County , the County failed to aggregate the hours worked by part-time employees who worked multiple jobs for the County.  For overtime pay purposes, all hours worked by a non-exempt employee for an employer must be recorded and counted.  If the total hours worked in any workweek exceeds 40, the employee is entitled to overtime pay, regardless of whether the hours were worked in one or multiple positions for the same employer.

Thus, it was undisputed that the County violated the FLSA by failing to aggregate weekly the hours worked for these part-time employees.  It also was undisputed that the County was liable for unpaid overtime pay and liquidated damages dating back two years from the date the lawsuit was filed.  What was in dispute was whether the County’s violation was willful, which would trigger a third year of damages.

The plaintiffs claimed that the violation was willful and pointed to testimony by the County’s chief financial officer and HR director that the County had been generally aware of its FLSA obligations since 2007.  The plaintiffs also identified an e-mail from the HR director to two other County officials regarding “wage and hour issues.”

The Third Circuit rejected the plaintiff’s willfulness argument.  Specifically, the Third Circuit found that the evidence did not establish that the County was aware of the specific overtime pay issue (i.e., aggregating hours worked by part-time employees who worked multiple jobs for the County) before or at the time that the FLSA violations occurred.  General awareness of the FLSA’s existence and its general requirements is not enough to prove a willful (i.e., intentional) violation of one of its specific requirements.

There are two important takeaways from the Third Circuit’s Souryavong decision:

  • To prove a willful FLSA violation and get that third year of potential damages, employees will need to prove that the employer actually knew of the specific FLSA requirement at issue at the time of the violation and intentionally did not comply with it. General FLSA awareness is not sufficient to prove a willful violation of a specific requirements.
  • Employers should keep this decision in perspective and understand what it means and what it does not.  Even with the Third Circuit’s favorable decision, the County still was liable for two years of unpaid wages for multiple employees, an equal amount in liquidated damages, an additional $56,000 for the plaintiffs’ attorneys’ fees, and an additional undisclosed amount for its own attorneys’ fees.  FLSA violations present significant potential liability for employers, and it is in every employer’s interest to audit its pay practices and ensure compliance before a lawsuit is filed or a Department of Labor investigation begins.  While this decision confirms that it can be hard to establish a willful violation, employees need to prove only a violation of the FLSA (regardless of whether the violation was intentional) to get two years of damages plus their attorneys’ fees paid by the employer.

In a closely watched case for employers, the Third Circuit Court of Appeals, which has jurisdiction in Pennsylvania, New Jersey, Delaware and the U.S. Virgin Islands, recently held that retiree healthcare benefits provided in a collective bargaining agreement (“CBA”) may be subject to modification following the expiration of the CBA.

Grove v. Johnson Controls, Inc. was a class action suit brought on behalf of a group of retirees, who were all former bargaining unit members.  Generally, the retirees alleged that they were entitled to healthcare benefits “for life” pursuant to the terms of the CBAs in place at the time of retirement.  When the employer placed a cap of $50,000 on the amount of benefits to be paid to the retirees, they brought suit.  The retirees argued that their entitlement to healthcare benefits had vested, and that the employer’s decision to cap their benefits was a violation of the Labor Management Relations Act and/or the Employee Retirement Income Security Act.

The appellate court affirmed the lower court’s decision and rejected these arguments.  The court held that the employer was not required to provide retirees healthcare benefits for life, and instead was only required to provide those benefits for the duration of the relevant CBA.  Essentially the court held that when the CBA expired, so did the employer’s obligation to continue to provide retiree healthcare benefits.  In reaching its decision, the court applied ordinary principles of contract interpretation, and noted that those principles provide that all contractual obligations cease upon the expiration of the CBA.

The court’s holding does leave open the possibility that other retirees could establish a vested entitlement to lifetime retiree healthcare benefits if the CBA language supported such a right.

As noted, this is an important decision for employers.  Many employers face significant legacy costs related to retiree healthcare, pension benefits and other post-employment benefits.  In light of Grove, many employers may begin to evaluate their post-employment benefit obligations.  However, these employers must carefully evaluate any such contractual obligations, because as Grove makes clear, whether retiree healthcare benefits are vested for life will be determined on a case-by-case basis with reference to the specific CBA language.

The Secretary of Labor, John Acosta, announced recently that no further delays will apply to the Department of Labor’s new Fiduciary Rule on investment advice conflicts of interest and related prohibited transaction exemptions.  The effective date of the Rule is June 9, 2017, with an enforcement date of January 1, 2018.  The final Fiduciary Rule significantly expands the circumstances in which broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries are treated as fiduciaries to ERISA plans and individual retirement accounts (IRAs).  When treated as fiduciaries, these individuals are precluded from receiving compensation that varies with the investment choices made or from recommending proprietary investment products, absent an applicable exemption.

Generally, the Fiduciary Rule provides that individuals providing fiduciary investment advice may not receive payments that pose a conflict of interest, unless a prohibited transaction exemption (PTE) applies.  The Rule recognizes several new PTEs, including

1)  “Best Interest Contract Exemption” (BIC Exemption):  Under the BIC Exemption, an advisor and firm may receive commissions and revenue sharing so long as the adviser and firm enters into a contract with its clients that:

  • Commits the firm and adviser to providing advice in the client’s best interest.
  • Warrants that the firm has adopted policies and procedures designed to mitigate conflicts of interest.
  • Clearly and prominently discloses any conflicts of interest that may prevent the adviser from providing advice in the client’s best interests.

2)  Principal Transactions Exemption:  Under this new PTE, an adviser may recommend fixed income securities and sell them from the adviser’s own inventory as long as the adviser adheres to the exemption’s consumer-protection conditions ensuring adherence to fiduciary norms and basic standards of fair dealing.

Financial institutions are advised to adopt policies and procedures ensuring that advisers comply with the Rule’s impartial conduct standards. However, during the transition period (until January 1, 2018), there is no requirement to give investors any warranty of their adoption, and those standards will not necessarily be violated if certain conflicts of interest exist.  Sponsors of ERISA-governed plans, as plan fiduciaries, are advised to clearly identify circumstances where their plan’s record keepers and advisors are acting as fiduciaries, and which services or actions are permitted under the rule’s carve-outs.

Finally, while we recommend complying with the Fiduciary Rule as soon as possible following the June 9th effective date, we note that there exists some uncertainty with the Fiduciary Rule as the DOL (i) continues to evaluate public comments, and (ii) under direction of the Trump Administration, is charged with reexamining the Fiduciary Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.

Back in 2015, Pittsburgh enacted a paid sick leave ordinance, following a trend among cities throughout the country. Pittsburgh’s paid sick leave ordinance required employers with fifteen employees or more to provide up to forty hours of paid sick leave per calendar year. Employers with less than fifteen employees were not spared. The ordinance required that those employers provide up to twenty-four hours per calendar year. The impact: 50,000 workers would receive paid sick leave.

But, what authority did Pittsburgh have to impose such a requirement?

The Pennsylvania Restaurant and Lodging Association, among others, challenged whether Pittsburgh actually had authority to enact the ordinance. Initially, the trial court found that the Steel City had no such authority. Pittsburgh appealed, arguing that because it had adopted a Home Rule Charter, it had authority to exercise broad powers and authority.

A few weeks ago, the Commonwealth Court of Pennsylvania issued its opinion, agreeing with the trial court that Pittsburgh indeed lacked the necessary authority. The court found that the Home Rule Charter Law has an exception with respect to the regulation of businesses. The exception specifically provides that “a municipality which adopts a home rule charter shall not determine duties, responsibilities or requirements placed upon businesses, occupations and employers . . . except as expressly provided by [separate] statutes . . . .” Although Pittsburgh attempted to point to various statutes which it felt provided it with the needed authority, the court was not convinced. Struck down by the court, it was – and remains – the worst of times for Pittsburgh’s paid sick leave ordinance.

But, what about Philadelphia? It is a home rule charter municipality. It has a paid sick leave ordinance. Does the Commonwealth Court’s opinion effectively render its ordinance invalid, too? Nope. Philadelphia’s authority is derived from a different law, which applies only to cities of the first class (oh, and Philly is the only First Class City in Pennsylvania under the law). It includes no such limitation on the regulation of businesses. Yet, while Philadelphia’s statute may be unaffected by the court’s opinion, it may not be best of times for Philadelphia’s ordinance either. The Pennsylvania State Legislature is making efforts to affect Philadelphia and all municipalities. Senator John Eichelberger’s Senate Bill 128 would ban municipalities from passing sick leave and other leave requirements that are stronger than those required by federal and state governments. The bill was voted out of committee and is set for consideration by the Senate.

So, for our blog subscribers with businesses only in the city limits of Pittsburgh, there is no requirement that you establish a paid sick leave program for your employees. However, Philadelphia’s paid sick leave ordinance remains alive and well, and you must abide by its requirements. While some do not expect the General Assembly to move this bill through both chambers before the end of the current session, we will track the bill’s progress and update this blog should it be considered and voted on by the Senate. So, stay tuned for future posts on legislation effecting Philadelphia’s and all municipalities’ authority to impose paid sick leave requirements.

On November 18, 2016, the IRS recently announced limited relief for employer reporting on Forms 1094 and 1095 for the 2016 tax year. The relief extends the deadline for furnishing statements to individuals, but does not extend the deadline for filings with the IRS. The IRS also provided penalty relief for some filers. The relief set forth in Notice 2016-70 provides:

  • Statements to Individuals Extended. The deadline for furnishing Forms 1095-B and 1095-C to individuals is extended by 30 days, from January 31 to March 2, 2017. No further extension may be obtained by application to the IRS.
  • No Extension for Returns Filed With IRS. The Notice does not extend the due date for filing Forms 1094-B and 1094-C (and related Forms 1095) with the IRS. Accordingly the deadline remains February 28, 2017 for paper filings, and March 31, 2017 for electronic filings. However, filers may obtain an automatic 30-day extension by filing Form 8809 on or before the regular due date.
  • Good Faith Penalty Relief. The IRS will again provide penalty relief for entities that can show they have made good faith efforts at compliance. No penalties will be imposed on entities that report incorrect or incomplete information—either on statements furnished to individuals or returns filed with the IRS—if they can show they made good faith efforts to comply with the reporting requirements. Penalty relief is not available to entities that fail to furnish statements or file returns, miss an applicable deadline, or are otherwise not making good faith efforts to comply.

While the Notice indicates that the IRS does not anticipate providing similar relief for the 2017 tax year, much will depend on changes to the Affordable Care Act under the Trump administration.

Now that we have all had some time to absorb the national election results, many are wondering how the Affordable Care Act will change during a Trump presidency.  While there is a great deal of uncertainty surrounding the future of the ACA, our recommendation to those currently covered by the Act is to continue to comply until any changes have been finalized.

Many believe that an immediate and complete repeal of the ACA is unlikely because the Republicans lack a congressional super-majority (e.g., control of the House of Representatives and a filibuster-proof Senate) and without a comprehensive alternative approach in place, 20 million Americans could lose health coverage in the event of a complete repeal.

Even though an immediate and complete repeal is unlikely, we do expect that there will be changes to specific sections of the Act through the budget reconciliation process, which reaches only the revenue components of the Act or by regulatory action, which modifies the official interpretation of certain aspects of the law.  Any modification or repeal of portions of the Act will require congressional action, which will not be filibuster-proof because the Republican-controlled Senate falls short of the 60 votes required to prevent filibuster.  On the other hand, changes brought by regulatory action would not involve Congress, but would require issuance of new regulations by the newly appointed Secretary of Health and Human Services.

While we can easily predict those sections of the Act that are likely to be targeted under the new administration (e.g., individual mandate, Cadillac tax, employer mandate, employer reporting), such changes are unlikely to be immediate.  However, as this election has shown us, anything is possible.  Nonetheless, we recommend that our clients stay the course with respect to ACA compliance and continue preparing for 2017 as though the Act will remain through the end of 2017.  We will continue to monitor developments in Washington in order to keep our clients up-to-date on changes to the Act and its regulations.

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.

 

 

This post was contributed by Erica Townes, a McNees Summer Associate. Ms. Townes is a rising third year law student at the Widener University Commonwealth Law School and is expected to earn her J.D. in May of 2017.

Recently you’ve noticed that an employee takes FMLA-covered leave the same week every year or always seems to have a medical emergency between Thanksgiving and January 1. Similarly, another employee regularly calls out of work requesting FMLA-covered, coincidentally on Fridays during football season. How can employers prevent this type of FMLA leave abuse? Several courts have addressed this issue.

Generally, employers are free to enforce company policies even with respect to employees on FMLA leave, provided that such policies are consistent with the FMLA.  Specifically, company policies cannot conflict with or diminish rights guaranteed under the FMLA.  Accordingly, the Third Circuit, the court of appeals that covers Pennsylvania, has routinely held that employers do not have to forego enforcement their call-in policies simply because an employee is FLMA eligible.

The Third Circuit has upheld an employer’s right to terminate employees for violating other policies while the employee was out on FMLA leave.  While employees may view these call-in policies as burdensome or intrusive, courts have expressly held that, despite the fact that employees have the right to take FMLA leave, employees do not have the right to be left alone when out on leave.

For example, one employer implemented a policy that required employees out on paid sick leave to stay home unless the employee was tending to a personal matter related to the reason they were on sick leave.  The employer further required employees to notify a hotline upon leaving and returning to their home, and if necessary, a sick leave investigator could call or visit the employee while he or she was out on leave.  In that case, the court held that the policy could be applied to an employee who was using FMLA-covered leave concurrently with paid sick leave, and that such application of the policy did not run afoul of the FMLA because nothing in the FMLA prevents employers from ensuring that employees are not abusing their leave.

In another case, an employee took FMLA and paid sick leave concurrently to have an operation done.  Only a few weeks after the operation, the employer learned that the employee had gone on a trip to Cancun, Mexico with friends, and as a result, the employee was terminated.  The employee brought a claim challenging her discharge under the FMLA.  Ultimately, the court held that the employee was bound by the employer’s sick leave and absenteeism policies, emphasizing that the FMLA, in no way, restricted the employer from preventing FMLA fraud.  As such, the discharge was upheld.

The Third Circuit has also held that an employer may enforce a written policy prohibiting moonlighting, or working part-time for a different employer, while the employee is out on FMLA leave.

The lesson learned from these cases is that employers have the right to safeguard against FMLA leave fraud and abuse.  To that end, employers may implement policies to reduce the fraudulent use of FMLA, so long as such policies do not abrogate rights guaranteed to the employee under the Act.

Practice Pointers

In addition to the policies mentioned above, consider the below practice pointers.

  • Consistency.  When handling FMLA leave, consistency is critical.  Providing an exception to the rule out of sympathy may hurt the employer in the long run as a disgruntled employee will use such exceptions against the employer in the future.  As the old adage goes, no good deed goes unpunished.
  • Records.  Maintain accurate records of FMLA leave so that (1) an employee’s FMLA eligibility can be accurately determined and (2) to identify suspicious patterns of absence.
  • Paid Leave.  Consider requiring employees to use paid leave concurrently with, or even before, FMLA leave. An employee will be less inclined to abuse FMLA leave if he or she has to exhaust their on time.
  • Abuse.  Immediately address employees who violate your policies.  Without doing so, employees may later argue that the employer excused the violation.
  • Seek Advice.  If you are still unsure whether you can enforce a particular policy, seek advice from legal counsel.