Employer Alert—June 2004

The countdown has begun. As prescribed by the Department of Labor (DOL), employers have 120 days to achieve compliance with the new Fair Labor Standards Act (FLSA) “white-collar” exemption regulations, which were issued April 23, 2004.

The DOL’s long-awaited revisions to the nearly fifty-year-old “white-collar” exemption regulations update and restructure the FLSA’s executive, administrative and professional overtime pay exemption tests and create several additional exemptions. Under the new regulations, employees earning less than $455 per week, or $23,660 annually, are guaranteed time-and-a-half overtime pay after working 40 hours in a week. Under the new “highly compensated” employee exemption, employees who earn $100,000 or more per year and who perform an “identifiable executive, administrative, or professional function” are no longer entitled to overtime.
The “long” and “short” versions of the duty tests have been eliminated and replaced by a “primary duty” test for each exemption. These tests redefine the range of tasks white-collar executives, administrators, and professionals must perform to be exempt from the Act’s minimum wage and overtime requirements. The list provides a more detailed overview of the revised requirements for each exemption.

Executive Employee Exemption

• The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

Administrative Employee Exemption

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Learned Professional Employee Exemption

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Creative Professional Employee Exemption

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Computer Employee Exemption

• The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; and
• The employee’s primary duty must consist of:
  • The application of systems analysis techniques and procedures;
  • The design, development, documentation, analysis, creation, testing or modification of computer systems or programs;
  • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
  • A combination of the aforementioned duties, the performance of which requires the same level of skills.

Outside Sales Employee Exemption

• The employee’s primary duty must be making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

Highly Compensated Employee Exemption

• Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

The new rules explicitly specify that employees in certain occupations are entitled to overtime regardless of their rank or rate of pay. For example, “blue-collar” workers who perform tasks involving repetitive operations with their hands, physical skill, and energy are not covered by the revised exemptions. The exemptions also do not apply to police, firefighters, emergency medical technicians, paramedics, and other public safety “first responders.” Similarly, the revisions incorporate language to ensure that veterans will not lose any rights to overtime pay and that licensed practical nurses and other comparable health care workers do not qualify as exempt.

Other significant changes have also been made. Although the new regulations will not become effective until 120 days after April 23, 2004, employers should begin taking steps to determine how many of their employees may be affected by the changes.

The proliferation of employment Websites such as hotjobs.com, careerbuilder.com and monster.com evidences a growing trend among employers to use online job posting and application procedures to meet their hiring needs. In many cases, the ease of Internet job postings, however, has proven to be a double-edged sword. Human resource and hiring departments that previously received a few hundred paper applications in response to a traditional newspaper listing now sort through thousands of e-resumes for that same position advertised online.

Compounding the problem are the record-keeping requirements of the Office of Federal Contract Complaince Programs (OFCCP) and the Equal Employment Opportunity Commission (EEOC), which require certain employers to keep applications and other demographic data on job “applicants” for specified periods of time. With little precedent in the area of e-resumes and electronic applications, human resource and hiring departments have, until recently, been left wondering, “Who really qualifies as an applicant?” and “How many e-resumes do I need to keep?”

In March 2004, the OFCCP, the EEOC, the Department of Justice’s Civil Rights Division, and the Office of Personnel Management attempted to answer these questions by jointly issuing proposed guidelines on how employers should handle Internet job applicants. Under the OFCCP’s proposed rule, an individual must meet four criteria to be considered an “Internet applicant”:

• the individual must have submitted an expression of interest in employment through the Internet or related technologies;
• the employer must have considered the job seeker for employment in a particular position;
  the job seeker’s expression of interest must have indicated the individual possesses the advertised, basic qualifications for the positions; and
• the job seeker did not subsequently indicate no longer having an interest in employment in the position.

If a person who applies for a job posting over the Internet meets these criteria, he or she is considered an “applicant” for OFCCP and EEOC record-keeping purposes.

Recognizing possible difficulties with its definition, the OFCCP has asked for comments from the public on its proposed guidelines. In the meantime, employers can reduce the risk of controversy regarding their application procedures by having a clear written application policy, making certain it is consistently implemented, ensuring that it does not discriminate against any demographic group, and informing all applicants, Internet or otherwise, of their application procedures.

Employers in California should beware of this new act, which seemingly provides new lucrative incentives for workers and their private attorneys to file lawsuits against employers. In summary, the act:

• Creates a private right of action to enforce all Labor Code violations
• Imposes new penalties of up to $200 “per aggrieved employee”
• Provides that half of penalties collected would be paid to California's General Fund, with 25% to a California Training Fund and the remaining 25% to the “aggrieved employees”
• Provides for the recovery of penalties, both individually and “in a civil action filed on behalf of [an individual] and other or former employees against whom one or more of the alleged violations was committed creating a potential new source for class-action litigation”

In 1992, the Governor of California signed into law a paid family and medical leave program in the form of Family Temporary Disability Insurance (FTDI). FTDI provides "disability compensation" for up to six weeks for employees who need to take time off for family and medical needs. Employers have been anticipating FTDI for some time. This year the law will begin to affect employers.

FTDI has the following key provisions:

• Funded by employees. Effective January 1, 2004, employees began contributing to the FTDI fund to build up an initial six-month reserve for expected claims.
• Six weeks of paid leave. Effective July 1, 2004, the FTDI will provide up to six weeks of paid leave within any 12-month period, replacing approximately 55% of an employee's wages while he or she is on leave, up to a maximum of $728 a week in 2004 and $840 a week in 2005.
• Applies to employers with one or more employees covered by SDI. FTDI applies to employers who have employees covered by State Disability Insurance or an approved voluntary plan.
• Covers family care needs. A paid leave is available to care for a new child (birth, adoption, or foster care) or a seriously ill family member (which includes a parent, child, spouse, or domestic partner); FMLA and CFRA do not mandate leave to care for a domestic partner.
• No minimum qualification requirements. Qualifying for the paid leave does not require any minimum number of hours (1,250 hours in the prior 12 months under FMLA and CFRA), minimum length of service (12 months under FMLA and CFRA) before an employee qualifies for the leave, or minimum number of employees at the work site (50 or more employees at or within 75 miles of the employee's work site under FMLA and CFRA).
• Application and procedure similar to current SDI. An employee applies for FTDI benefits in the same manner as SDI benefits; moreover, anyone receiving SDI, unemployment insurance, or welfare payments cannot also receive FTDI benefits.
• Seven-day waiting period. FTDI requires an employee to wait seven consecutive days before receiving benefits.
• Use of vacation pay. Allows an employer to require that an employee use a maximum of two weeks of vacation time before receiving FTDI benefits (one week is to be used to cover the seven-day waiting period).
• No independently guaranteed re-employment. The new statutory provisions do not guarantee an employee who takes an FTDI leave an automatic right to reinstatement when the employee's leave is not covered by FMLA or CFRA; applicable re-employment requirements come from FMLA, CFRA, other applicable statutes, or public policy.
• Employer notice requirements. Employers are required to provide notice of the availability of FTDI benefits and leave to all new employees who are hired on or after January 1, 2004 and to all employees taking a leave beginning on or after July 1, 2004.

As an employer, do you:

• provide cash payments or other benefits to employees whose employment is terminated;
• have a policy of providing for severance pay in lieu of termination notice;
• include severance pay provisions in employment contracts; or
• othewise provide for severance pay on an ongoing basis?

Depending on the facts and circumstances surrounding your company’s severance arrangement, you may have created an “employee benefit plan” subject to the requirements of ERISA. If you have created an ERISA plan, but have not complied with the requirements of ERISA, you may be subject to penalties and civil litigation. If you have not created an ERISA plan, you may wish you had if an employee sues.

A severance pay arrangement may be a “pension plan” if (1) the payment of benefits is contingent on the employee’s retirement; (2) the total amount of such payments exceeds twice the employee’s annual pay during the year immediately preceding the employee’s termination; and (3) all payments are not completed within 24 months of termination. (Labor Reg. Sec. 2510.3-2(b))

If the conditions of a pension plan have not been met, a severance pay arrangement may be a “welfare plan” if it requires an “ongoing administrative program.” Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), the Supreme Court case on this issue, held that a one-time lump sum payment to employees in the event of a plant closing was not an ERISA plan because no administrative scheme was necessary. Courts since Fort Halifax, when faced with the question of whether an employer’s severance arrangement employs an administrative scheme, have looked to factors such as (1) whether the plan’s eligibility determinations involved discretion (such as a determination of whether an employee had been terminated for cause), (2) whether the form of payment required ongoing administration, and (3) whether the continuation of medical benefits or other benefits required ongoing administration.

For example, an employer’s separation plan that provided a lump-sum payment and a three-year continuation of certain benefits to a limited number of executives terminated within two years of change of control was determined not to be an ERISA plan because the executives were to receive benefits regardless of the reason for termination; therefore, no administrative scheme was needed (Fontenot v. NL Industries, 953 F.2d 960 (5th Cir. 1992)). However, a company’s management policy manual that provided for severance pay in lieu of notice of termination was an ERISA plan because the plan was not created with a particular closing in mind, had been in existence for some time, and required an administrative set-up in order to make payments to employees (Whittemore v. Schlumberger, 976 F.2d 922 (5th Cir. 1992)).

Even if you did not intend to create an ERISA plan and do not have a formal written document, the arrangement may be covered under ERISA. If your company’s severance arrangement is an ERISA plan, you need to comply with ERISA’s requirements, such as a written plan document, a summary plan description, and the filing of an annual report in some cases. Most employers find that the advantages of having an ERISA plan outweigh the disadvantages, however. ERISA preempts most state law and provides the exclusive remedy to participants in severance plans that fall under its purview. A lawsuit may be brought under ERISA only in federal court and only after the participant has exhausted his administrative remedies by filing a claim with the person or committee designated by the employer as the plan administrator. If the plan is properly drafted, the decision of the plan administrator will generally be given deference by the court and will be overturned only if it is determined to be “arbitrary and capricious.” In addition, potential plaintiffs have no right to a jury trail or punitive damages in an ERISA lawsuit.

Therefore, if you have a severance arrangement which you have not been treating as an ERISA plan, or if you are anticipating a restructuring, reduction in force, change of control or other event that might give rise to a severance pay obligation, you may want to contact an ERISA attorney to discuss your company's severance arrangement.

The impact of the Sarbanes-Oxley Act of 2002 (the Act) on public companies, accounting firms, law firms, and investment banks is slowly beginning to be felt. Prior to the enactment of the Act, protection of corporate whistleblowers was historically limited to state law. The Act’s sweeping new federal whistleblower cause of action contains several measures designed to encourage public company employees to report fraud and to shield them from retaliation when they provide information that they reasonably believe to be a violation of federal securities law, the rules of the SEC, or “any federal law relating to fraud against shareholders.”

Courts across the nation are beginning to rule on aspects of the Act. The Federal District Court in New York considered the issue of whether whistleblowing claims under the Act may be arbitrated. Boss v. Saloman Smith Barney, 263 F. Supp.2d 684 (S.D.N.Y. 2003). In this case, the employer argued that the employee was required to arbitrate the claim under both its employment policy and mandated industry arbitration guidelines. The court found nothing in the Act or the legislative history indicating an intention to prohibit arbitration of such claims.

In another case, Murray v. TXU Corporation, 279 F. Supp.2d 799 (N.D. Tex. 2003), the Texas Federal District Court addressed issues concerning the Act’s notice provisions—specifically, when a claimant’s actions or inactions constitute bad faith. Under the Act, a claimant who believes he has been retaliated against in violation of the Act’s whistleblower provisions must file a complaint with the Secretary of Labor within 90 days of the alleged violation. If the Secretary fails to issue a final decision within 180 days of the filing of the complaint and there is no showing that the delay is due to bad faith on the part of the claimant, the claimant can file suit in federal court. The employer, TXU, filed a motion to dismiss Murray’s suit based on a bad faith theory. TXU argued that Murray acted in bad faith by failing to contact the Secretary of Labor after not receiving a written report within a reasonable time period after filing suit. Such “failures or omissions,” the court said, “did not by themselves indicate bad faith.” The DOL’s delay in issuing a final decision and a claimant’s failure to follow up with the agency for a decision will not keep the claimant from suing. As the courts deal with the rise of federal whistleblower actions, issues like these will continue to have to be resolved through litigation.

In the past several years, many employers have implemented significant reductions in force. There may finally be some light at the end of the tunnel in the form of tax relief. Based on a recent decision by the US Court of Federal Claims, CSX Corp. v. United States, 52 Fed. Cl. 208 (Fed. Cl. 2002), granting summary judgment on other issues, 58 Fed. Cl. 341 (Fed. Cl. 2003), employers may be able to claim refunds for FICA and FUTA taxes on severance paid to involuntarily terminated employees. Over the span of six years, CSX Corporation, Inc. (CSX) implemented several reductions in force that resulted in the termination of approximately 20,000 employees. The affected employees were entitled to certain reduction in force payments from CSX depending on their employment status. As required by law, CSX withheld the employee portion of the FICA taxes on the RIF payments, paid the applicable employer component, and remitted the aggregate amount to the Internal Revenue Service (IRS). CSX filed timely claims for refunds with respect to the FICA taxes paid on its own behalf and on behalf of some of the affected employees (i.e., those who either consented to participate in the refund claim or could not be located by CSX). The basis for CSX’s refund claims was that the RIF payments did not constitute taxable wages for FICA purposes. The IRS disallowed the claims. CSX then filed suit in the Federal Claims Court. In this lawsuit, CSX argued that it was entitled to its claim for refunds because the Internal Revenue Code (the Code) imposes FICA taxes only on “wages” as such term is defined in Section 3121(a) of the Code, which expressly does not include “supplemental unemployment compensation benefits” as defined in Section 3402(o) of the Code. Section 3402(o) of the Code defines “supplemental compensation unemployment benefits” as “amounts which are paid to an employee pursuant to a plan to which the employer is a party, because of an employee’s involuntary separation from employment (whether or not such separation is temporary), resulting directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, but only to the extent includible in the employee’s gross income.”

The Claims Court accepted CSX’s arguments, finding that supplemental unemployment compensation benefits were neither wages nor remuneration for services and not subject to taxation under FICA. Of the three types of RIF payments made by CSX to its employees from 1984-1990, the Claims Court found that only one type of payment—severance payments made to employees involuntarily laid off by CSX—were supplemental unemployment compensation benefits and were not subject to FICA taxation. The Court reasoned that the affected employees were not performing services for CSX and had effectively experienced a separation from employment at the time of receipt of such payments.

To what extent should employers rely on CSX Corp. v. United States? Because the decision is still subject to appeal and the IRS has not yet announced its future position on the issue, caution is warranted. In general, claims for refunds for FICA and FUTA taxes are subject to a three-year statute of limitations that runs from the time that the relevant tax return was filed or was deemed filed. It may, therefore, be prudent for employers to file protective refund claims with the IRS now with respect to any FICA and FUTA taxes paid on severance payments to involuntarily terminated employees before the limitations period expires to preserve such refund claims until the law in this area is settled. As noted above, for severance payments to qualify as supplemental unemployment benefits, such payments must have been made pursuant to a plan and the separation from employment must have been involuntary on the part of the employee and due to a reduction in force.

For future reductions in force, the best course of action would be to pay the FICA and FUTA taxes and then file for a refund.

ADEA (Fifth Circuit)

On March 29, 2004 the US Supreme Court agreed to review one of the most disputed questions in civil rights law: whether employers may be liable for age discrimination under the theory of “disparate impact,” which allows a plaintiff to argue that the employer's employment practices should be deemed illegal because such practices affect older workers more harshly than others and cannot be justified by business necessity. The plaintiff is not required to offer evidence of the employer's intention to treat older workers unfavorably.

The case in which this issue was raised, Smith v. City of Jackson, Miss., 351 F.3d 183 (5th Cir. 2003), cert. granted, 72 USLW 3539, 72 USLW 3611, 72 USLW 3614 (U.S. Mar 29, 2004) (No. 03-1160), was brought by a group of police officers 40 years or older in Jackson, Mississippi on the basis that new wage scales implemented by the City, intended to make the pay for more recently hired officers more competitive with other police departments in the region, had the effect of giving proportionately smaller increases to the more senior officers. Both the Federal District Court in Jackson and the US Court of Appeals for the Fifth Circuit, in New Orleans, ruled for the City on the ground that the Age Discrimination in Employment Act (“ADEA”) requires proof of “disparate treatment,” meaning a showing that an employer has intentionally treated someone less favorably because of his age. (In a recent decision, the Texas Court of Appeals reached the same conclusion as the Fifth Circuit in holding that age discrimination claims under Texas law can not be proven under a theory of disparate impact. See Texas Parks and Wildlife Department v. Dearing, ___S.W.3d ___, 2004 WL 35543 (Tex. App.-Austin 2004).) Under this ruling, facially neutral policies that may have a differential impact on different age groups are not covered by the ADEA.

Other federal appellate circuit courts have reached the opposite conclusion, finding that age discrimination may be proven absent proof of intentional discrimination. The US Supreme Court has approved the disparate impact theory under Title VII, but has never directly addressed the issue under the ADEA. The US Supreme Court ruling will determine whether or not employers’ facially neutral policies can be used against them by older workers to prove age discrimination under the ADEA. The Fifth Circuit covers Texas, Louisiana, and Mississippi. Federal Courts of Appeals which have approved the disparate impact theory in ADEA cases include the Second, Eighth, and Ninth Circuits covering Arizona, Arkansas, California, Connecticut, Idaho, Iowa, Montana, Minnesota, Missouri, Nebraska, New York, Nevada, South Dakota, North Dakota, Oregon, Vermont, and Washington.

ADA (US Supreme Court)

In a case involving the Americans with Disabilities Act (ADA), Raytheon Co. v. Hernandez, 124 S. Ct. 513 (2003), the US Supreme Court issued an important ruling concerning basic theories of proving employment discrimination. Its impact on employers, however, is unclear because the Court did not clarify whether the ADA confers preferential rehire rights on workers who are lawfully discharged for misconduct (i.e., testing positive for drugs) after they have undergone rehabilitation.

In this case, a long-term employee (“Hernandez”) was required to participate in a drug test in accordance with company policy after arriving at work under the influence of drugs. He tested positive for cocaine. In lieu of termination, the company allowed him to resign and his termination notice reflected that he had “quit in lieu of discharge.” Nearly three years later, Hernandez reapplied for a job with the company. He acknowledged in his application that he was formerly employed with the company and also attached a reference letter to his application from his Alcoholics Anonymous counselor stating that he regularly attended meetings and was in recovery for his drug and alcohol addictions. The company rejected his application based on an unwritten policy of not rehiring workers who either had been terminated or resigned in lieu of discharge.

Hernandez filed suit under the ADA, arguing that he had been discriminated against (under a theory of "disparate treatment," which requires intentional discrimination) based on his record of drug addiction or because he was regarded as a drug addict. After the company filed a motion to dismiss the suit, Hernandez also contended that the company’s “no-rehire” policy violated the ADA because the policy, although facially neutral, adversely affected recovered drug addicts (i.e., had a “disparate impact”). The Ninth Circuit, which covers Arizona, California, Idaho, Montana, Nevada, Oregon, and Washington, agreed with Hernandez, finding that such a strict policy unlawfully “screens out persons with a record of addiction who have been successfully rehabilitated.” Because Hernandez raised the issue of the policy too late in the legal proceedings, the Supreme Court did not address the “no-rehire” policy issue and limited its decision to whether or not as a matter of law Hernandez could establish that his application was rejected because of his record of addiction or being regarded as a drug addict.

The good news for employers is that the Supreme Court clearly held that no-rehire policies are a legitimate, non-discriminatory reason for not rehiring a former worker who was previously terminated for engaging in misconduct. It is critical that no-rehire policies be consistently applied. The Supreme Court provided no guidance on the issue of whether or not a no-rehire policy can be challenged under the theory that it affects a protected group under the ADA (e.g., recovered addicts) more harshly than others. As a result, this issue will only be resolved through additional litigation. In the meantime, employers will be better positioned to defend such claims if they take the time now to closely assess the overall impact of their blanket no-rehire policies on protected status groups.