Category Archives: Legal

September 26, 2016

Tax Reporting For Deferred Compensation Payments Following Death of Employee: Are You Reporting Correctly?

By Rebecca Hudson and Arthur Hundhausen

When an employee dies, deferred compensation may be due and payable to the employee’s beneficiary or estate. Employers are often tripped up by the corresponding tax reporting and withholding requirements and whether income tax and FICA tax withholdings are due from such payments. This article briefly addresses these tricky questions.

No Income Taxes Should Be Withheld

Under many employer-sponsored deferred compensation arrangements, employees earn compensation in one year that will not be paid until a future date. This may include traditional deferred compensation plans, short-term and long-term incentive arrangements, and stock awards, to name a few. When an employee/plan participant dies, the terms of the plan or arrangement typically dictate when and how the future payments are to be made to the employee’s beneficiary or estate. Employers should follow the terms of the plan and make payments and plan distributions to beneficiaries at the required times.

The proper income tax treatment of compensation that is earned preceding death, but is unpaid at the time of death, and is ultimately paid to a beneficiary or the estate of the deceased employee is outlined in IRS Revenue Rulings 71-456 and 86-109. These rulings provide that for income tax withholding purposes, these amounts do not constitute “wages.” Consequently, employers should not withhold income taxes on the amounts paid to a beneficiary or estate following an employee’s death.

FICA Taxes Still Withheld and Due If Compensation Paid In Year of Death

In an odd, and less-than-intuitive provision, the federal tax code (Code) treats FICA tax withholding differently depending on whether the compensation payments are made to the beneficiary/estate in the calendar year of the employee’s or former employee’s death, or in succeeding calendar years. Section 3121(a)(14) of the Code states that if compensation amounts are paid in the calendar year of the employee’s death or former employee’s death, such amounts will constitute FICA “wages” and therefore, are subject to FICA (Social Security and Medicare) tax withholding. However, Code Section 3121(a)(14) also confirms that these amounts will not constitute “wages” for FICA purposes, and therefore will not be subject to FICA tax withholding, if they are paid in the calendar year or years after the year in which the employee or former employee died.

Form W-2 or 1099?1099 MISC

So what tax reporting forms must be issued to the beneficiary or estate to reflect the compensation payments made following an employee’s death? Under IRS Revenue Ruling 64-150, all amounts earned but unpaid at an employee’s or former employee’s death received by an estate or beneficiary of a deceased employee should be reported as non-employee compensation on a Form 1099-MISC. But, as explained below, the amounts reported on the Form 1099-MISC must take into account FICA tax withholding and therefore, will depend on whether the payments are made in the calendar year of the employee’s or former employee’s death or in the calendar year(s) after the death.

Specifically, for payments made in the same calendar year as the employee or former employee died, the payments are not subject to income tax withholding but are subject to FICA withholding. Therefore, employers should issue a Form W-2 for that year in the name of the employee or former employee (with the social security number of the employee), solely to reflect the FICA wages and the corresponding FICA tax withheld. The compensation/plan distributions should be reported in box 3, Social Security wages, and box 5, Medicare wages and tips, on the Form W-2. The corresponding employee Social Security tax withheld should be reported in box 4, and the corresponding employee Medicare tax withheld should be reported in box 6, on the same Form W-2. Finally, the net amount of the compensation/plan distributions made to the beneficiary/estate in that calendar year (“net” meaning the full amount of the payment less the amount of FICA taxes withheld) should be reported on a Form 1099-MISC, box 3, Other income, issued to the beneficiary/estate.

For payments made in the calendar year(s) following the year in which the employee or former employee died, no income tax or FICA taxes should be withheld and no Form W-2 is required. Instead, the full amount of the distribution payments should be reported on a Form 1099-MISC, box 3, Other income, issued to the beneficiary/estate.

September 25, 2014

Colorado Employers Must Use Updated Employment Verification Form Beginning October 1, 2014

Collis_SBy Steve Collis 

The Colorado Department of Labor and Employment (CDLE) recently updated the form that employers must use to comply with the Colorado Employment Verification Law, C.R.S. § 8-2-122.  The new Affirmation of Legal Work Status form must be used for all Colorado employees hired on or after October 1, 2014. 

Form Must Be Completed Within 20 Calendar Days 

The updated form does not differ greatly from previous versions of the Colorado employment verification form.  It does, however, clarify that the form must be completed within 20 calendar days after each new employee is hired.  (The prior form specified that it must be completed within 20 days, but did not specify  whether it was calendar days or business days.)  The new form is available on the CDLE’s website in a fillable PDF format . The revision date on the new form is 09/01/14 with an expiration date of 10/01/17. 

Complying with Colorado’s Employment Verification Law 

Colorado’s Employment Verification Law has been in effect for over seven years, yet many employers remain confused because it differs from federal employment verification requirements. Key details for employers to know in order to comply with Colorado’s law include: 

  • All private and public employers with employees in Colorado must comply with the Employment Verification Law;
  • Use of the Affirmation of Legal Work Status form provided by the CDLE is mandatory;
  • Electronic copies of the affirmation form are acceptable;
  • Employers must make and keep copies of the identity and employment authorization documents used to complete federal Form I-9 for each newly hired employee (Note: this differs from federal law, which does not require employers to retain copies of the identity and authorization documents);
  • Employers may complete the form before the person begins work as long as he/she has been offered and has accepted the job; it may not, however, be used as a pre-screening tool;
  • Employers must retain copies of the affirmation forms and supporting documents for as long as the employee is employed;
  • Employers do not need to submit the forms and documents to the CDLE unless specifically requested; and
  • Compliance with federal Form I-9 or E-Verify requirements is not a substitute for complying with Colorado’s Employment Verification Law. 

The new affirmation form is prefaced with two pages of instructions that offer employers an overview of the Colorado Employment Verification Law as well as instructions regarding how to complete the form.  In addition, the CDLE has updated its Fact Sheet and provided Frequently Asked Questions regarding the Employment Verification Law to help guide employers through the process.  These documents are available on the CDLE website on its Employment Verification Law page.  

Penalties for Non-Compliance 

Fines for failing to complete and retain the required Colorado affirmation forms and copies of new hire identification and authorization documents can mount up quickly.  An employer who, with reckless disregard for the law, fails to comply may be subject to a $5,000 fine for the first offense and up to $25,000 for any subsequent offenses.  The CDLE conducts random audits of Colorado employers and will audit employers upon receipt of a complaint.  Employers should keep their verification documents organized and readily available in case the CDLE requests to examine verification records to determine compliance. 

If in Violation, Don’t Correct—Comply Going Forward 

The CDLE advises that if an employer has not properly completed the affirmation form within 20 calendar days of hiring a new employee or has failed to keep copies of the identification and authorization documents, the employer should not complete the form after the 20-day period has expired.  The CDLE states that backdating or entering false information on the form could result in further fines, depending on the circumstances.  Instead, employers should comply with the Employment Verification Law going forward and properly complete the mandatory forms and retain the necessary documents for all future new hires.  

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April 8, 2014

Keep Good Payroll Records to Defend Wage Claim

By Jason Ritchie 

An employee can prove a wage claim based on his or her own records if the employer does not keep records of the employee’s pay and hours.  Think about that for a moment.  Your company’s liability for unpaid wages may rest solely on an employee’s notes, emails, text messages, diary, check stubs, bank statements or memory.   If that doesn’t make you quake in your boots, perhaps this will – failure to pay wages at the time specified by Montana law can result in a penalty of up to 110% of the amount of unpaid wages owed.  The significance of keeping good payroll records was driven home by the Montana Supreme Court in a recent wage case where a roofing company struggled to defend a salesman’s claim for unpaid commissions because of its poor recordkeeping practices. America’s Best Contractors, Inc. v. Singh, 2014 MT 70. 

Unpaid Commissions Under Verbal Agreement Leads to Wage Claim 

Salesman Jasvinder Singh was hired by America’s Best Contractors, Inc. (ABC) in 2003 to sell roofing, siding and gutter repairs in numerous states.  Singh typically sold jobs for ABC from March through November and then returned to his home state where he serviced the contracts for the remainder of the year.  Singh was initially paid a 10% commission, but in 2009, ABC agreed to pay Singh 12% on his sales and an additional 1% on the sales by other ABC salespersons.  ABC did not have a written employment agreement with Singh.  In 2010, Singh relocated to Billings to begin selling ABC’s repair services in Montana. 

Singh and ABC’s President Dwane Drury, were close friends.  In 2010, Singh loaned Drury $25,000 so that Drury could go on hunting trips.  

Singh kept track of the money ABC paid to him by noting on the checks which ones were to repay the loans, which checks were for commissions from contracts sold in other states and which checks were for commissions for Montana contracts.  ABC, on the other hand, failed to keep accurate payroll and commission records.  By June 2011, Singh demanded to Drury that ABC pay him outstanding commissions and when it failed to do so, he quit.  A month later, Singh filed a claim with the Montana Department of Labor and Industry (DOLI) alleging he was owed unpaid commissions of approximately $41,000 from June 2010 to June 2011. 

Check Notations 

The DOLI’s Wage and Hour Unit investigated Singh’s wage claim and determined that ABC owed Singh unpaid commissions.  ABC appealed. DOLI’s Hearings Bureau held a hearing at which the Hearings Officer heard testimony from numerous witnesses, including Singh and Drury, and considered evidence presented by the parties.  The Hearings Officer issued a Final Agency Decision concluding that ABC owed Singh $39,080.43 in unpaid commissions plus a penalty of 55% of the unpaid wages, which amounted to an additional $21,494.23.  ABC appealed to the District Court which concluded that there was substantial evidence in the record to support the findings of the Hearings Officer.  ABC then appealed to the Montana Supreme Court. 

On appeal, ABC argued, among other things, that there was insufficient evidence to find that certain payments made by ABC to Singh were for collateral obligations rather than for Singh’s commissions earned in Montana.  The problem was that ABC could not produce evidence to show that certain payments made to Singh were in fact commission payments.  

The Supreme Court reviewed the evidence presented at the DOLI hearing and found that Drury admitted that he did not keep track of records on commissions paid and the records he did offer into evidence had all been edited by Drury after Singh had filed his wage claim.  Singh, on the other hand, produced sales reports, email exchanges, text messages, checks, other memoranda and his own testimony to establish the contracts he sold in Montana, the amount of commissions owed to him on those contracts and what he was paid.  He produced checks that included notations indicating whether they were for reimbursements, commissions earned in another state, commissions earned in Montana or for providing office services when Singh was in the Billings office.  With no evidence but Drury’s testimony to counter Singh’s evidence, the Supreme Court affirmed the Hearings Officer’s findings that ABC owed commissions to Singh. 

Good Recordkeeping of Hours and Pay is Essential 

Montana employers have a duty to maintain accurate records of hours worked by employees and the amount of pay provided for those hours.  Montana law also requires that employers pay employees earned wages, including commissions, within the time frames contained in the Wage Protection Act.  Failure to do so can result in penalties up to 110% of the unpaid wages owed.  In addition to the statutory recordkeeping obligations, employers need good payroll records in order to defend against employees’ wage claims.  As ABC found out, in the absence of payroll records from the employer, DOLI Hearings Officers will consider evidence provided by the employee to substantiate the employee’s wage claim, even if that evidence is in the form of notes, emails and text messages.  Spending the time and effort to set-up and maintain good payroll records is essential in managing your workforce and minimizing risks of wage claims.  Review your recordkeeping practices now and shore up any deficiencies so that you don’t find yourself at the mercy of an employee’s notes.

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April 3, 2014

Severance Payments Are Wages Subject to FICA Tax

By Arthur Hundhausen and Mark Wiletsky 

Employers offer severance payments to separating employees for numerous reasons, including rewarding long-time employees affected by a plant closure, to maintain goodwill, to secure a release and waiver of existing or potential claims, or to comply with company policies or agreements that require such payments.  But whether the severance is dictated by policy or an individually-negotiated benefit, one sticky issue that employers may neglect to address is whether severance payments are subject to FICA taxes. The U.S. Supreme Court recently settled that issue by confirming that severance payments made to employees terminated against their will are taxable wages under FICA.  United States v. Quality Stores, Inc., No. 12-1408, 572 U.S. ___ (2014).  The Supreme Court’s ruling was consistent with the longtime IRS historical position on this issue. 

Involuntary Terminations Due to Bankruptcy Triggered Severance Payments 

Quality Stores terminated thousands of employees in connection with its involuntary Chapter 11 bankruptcy filing in 2001.  The employees received severance payments under one of two plans, ranging from six to eighteen months of severance pay.  Initially, Quality Stores reported the severance payments as wages for FICA purposes on the Forms W-2 filed with the IRS and the employees.  Consistent with such reporting, Quality Stores paid the employer’s required share of FICA taxes and withheld the employees’ share of FICA taxes as well.  Quality Stores then decided to file FICA tax refund claims with the IRS, totaling over $1 million in paid FICA taxes.  The IRS neither allowed nor denied the refund claims, so Quality Stores sought a refund as part of its bankruptcy proceeding.  Both the District Court and the Sixth Circuit Court of Appeals concluded that severance payments were not “wages” under FICA, meaning Quality Stores and its affected employees were entitled to a refund of the FICA taxes paid.  

The Sixth Circuit’s decision, however, directly contradicted rulings by other Courts of Appeals, which concluded that at least some severance payments constitute “wages” for purposes of FICA taxes. The U.S. Supreme Court agreed to review the issue to resolve the split among the courts. 

FICA’s Broad Definition of Wages Includes Severance Payments 

FICA defines wages as “all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash.”  Under the plain meaning of this definition, the Court found that severance payments made to terminated employees constitutes “remuneration for employment.”  The Court noted that severance payments are made to employees only, often will vary depending on length of service, and are made in consideration for past services in the course of employment.  

Looking at statutory history, the Court noted that in 1950, Congress repealed an exception from “wages” for “[d]ismissal payments which the employer is not legally required to make” from the Social Security Act and since that time, FICA has not excepted severance payments from the definition of “wages.”  Agreeing with the government’s position in the case, the Court ruled that severance payments are taxable wages for FICA purposes. 

Implications for Employers 

The Court’s ruling confirms that employers are obligated to pay their portion of FICA taxes and withhold the employees’ portion of FICA taxes from severance payments.  Depending on the amount of the severance at issue, this FICA obligation can greatly change the total payout amount for the employer.  It also can catch unknowing employees off guard if they are expecting to receive a higher severance payment without FICA taxes being withheld.  Employers should factor the FICA tax obligation into any severance offer to ensure that both the company and the separating employee understand the total amount that is at issue and the final amount that the employee will receive.  In addition, employers offering severance payments should review their policies and practices to ensure that proper tax payments are made.  

If employers identify past severance payments where no FICA taxes were paid or withheld, such employers should consult with their tax counsel to determine whether any corrective steps are required.  In general, the applicable statute of limitations for an employer’s payroll tax liability begins on April 15 of the year following the year in which wages are paid (when prior year payroll tax returns are “deemed” to be filed), and expires after three years.  For example, the applicable statute of limitations for payroll taxes owed for 2010 began on April 15, 2011 and expires on April 15, 2014.

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March 13, 2014

Overtime Pay Exemptions to Change Pursuant to President Obama’s Directive

By Jason Ritchie 

President Obama signed a Presidential Memorandum today directing Secretary of Labor, Tom Perez, to update the regulations that establish which employees qualify for overtime protection under federal law.  Without directing any specific changes, President Obama indicated that the minimum salary threshold that applies to the “white collar” exemptions needs to be updated.  The intended result of the new rules would be to increase the number of workers who qualify for overtime pay.  

“White Collar” Exemption Salary Threshold Currently Below Poverty Line 

The Fair Labor Standards Act (FLSA), enacted in 1938, is the federal wage law that sets a minimum wage and overtime pay requirement that applies to private sector workers in the U.S.  The most common exemptions from the minimum wage and overtime pay rules are the so-called “white collar” exemptions for executive, administrative and professional workers.  Regulations defining these exemptions allow employers to avoid paying minimum wage and overtime pay for hours worked in excess of forty hours per week for workers who are paid a salary of at least $455 per week and who perform certain executive, administrative or professional duties.  The $455 per week salary threshold was established in 2004 and equates to an annual salary of $23,660.  

The Obama Administration seeks to increase the salary threshold for the “white collar” exemptions which, at $23,660 per year, is below the current poverty line for a family of four. In 1975, the salary threshold for the white collar exemptions was $250 per week.  According to the White House, 65 percent of U.S. workers in 1975 were paid below that threshold, meaning those workers were entitled to overtime pay.  Today however, only 12 percent of salaried workers are paid less than $455 per week.  Consequently, the remaining 88 percent of salaried workers who perform some executive, administrative and professional duties are ineligible for overtime pay and minimum wage protections. 

Retail and Fast-Food Likely To Be Hit Hard 

In his signing conference, President Obama cited two companies, Costco and The Gap, that have voluntarily chosen to pay their workers more than the minimum wage and have reduced employee turnover as a result.  Despite those examples, the business community is already criticizing the initiative, arguing it will increase costs and discourage companies from hiring more workers.  Both the retail and fast-food industries may be hard hit by the proposed changes because supervisors in those industries routinely work 50-60 hours each week and are currently exempt, but may become entitled to overtime pay under the new rules.  The new rules also are intended to curb exemptions for workers who spend the majority of their time stocking shelves or serving customers and a minimal amount of time on exempt executive or administrative duties. 

The President’s directive to Secretary Perez is to amend the overtime regulations to:

  • Update existing protections in keeping with the intention of the FLSA;
  • Address the changing nature of the American workplace; and
  • Simplify the overtime rules to make them easier for both workers and businesses to understand and apply. 

When the Department of Labor issues its proposed rule changes in the coming months, we will let you know the details of what may change.  Because the rulemaking process will take some time, any changes in overtime pay will likely take effect in late 2014 or in 2015.  Stay tuned.

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March 10, 2014

Safety Violation Or Too Much Intermittent FMLA Leave? Tenth Circuit Says Jury Must Decide Wyoming Employee’s FMLA and ADA Case

By Brad Cave 

Did Solvay Chemicals fire long-time employee Steven Smothers because of a first-time safety violation or because the company was tired of his frequent absences due to an ongoing medical disability?  The Tenth Circuit Court of Appeals recently ruled that Smothers provided sufficient evidence to suggest that Solvay’s stated reason for his termination was pretextual, allowing his claims for unlawful retaliation under the Family and Medical Leave Act (FMLA) and discrimination under the Americans with Disabilities Act (ADA) to proceed.  Smothers v. Solvay Chem., Inc., No. 12-8013 (Jan. 21, 2014).  The Court affirmed the grant of summary judgment on his state law claim for breach of an implied employment contract. 

Medical Treatments and Severe Pain Lead to Frequent FMLA-Protected Absences 

For eighteen years, Smothers worked as a surface maintenance mechanic in Solvay’s trona mine in Sweetwater County, Wyoming. The company considered him to be an excellent mechanic who did great work and got along with everyone.  In 1994, Smothers injured his neck and developed degenerative disc disease in his spine.  Over the next five years, Smothers had three surgeries to his neck as well as numerous other medical procedures.  Despite treatment by a specialist, Smothers continued to have severe ongoing neck pain, severe migraine headaches and lower back problems.  At times, Smothers was unable to work without pain treatments and he often was able to sleep only a few hours each night due to the pain. 

Smothers asked for and was granted FMLA leave for intermittent absences caused by his condition.  Managers and co-workers began to complain about his absenteeism, especially because he worked on the graveyard shift where there were fewer workers to absorb his absences resulting in increased overtime costs.  Solvay’s production superintendent Melvin Wallendorf pressured Smothers to change to the day shift, but Smothers refused as the shift change would have cost him about $7,000 a year.  Solvay’s human resources department advised Wallendorf that urging Smothers to switch shifts would violate the FMLA so Wallendorf stopped pressuring Smothers but did not stop complaining about his absences. 

At one point, Wallendorf and Rick Wehrle, Smothers’ direct supervisor, gave Smothers a poor performance rating on his evaluation due to his absenteeism.  In 2005 or 2006, Smothers applied for a promotion but was told that he was rejected because of his absences. 

Safety Issue Explodes into Argument 

In 2008, the graveyard crew conducted a routine maintenance acid wash to remove build up in its equipment.  After a line ruptured, Smothers saw that a damaged “spool piece” had caused the problem and prepared to remove it.  Another mechanic, Dan Mahaffey, suggested that Smothers wait for a line break permit, which is a form that certifies that employees have completed a checklist of precautions before a line can be safely disconnected.  Smothers said that a permit wasn’t required because the line was already broken.  Mahaffey and Smothers then argued.  Mahaffey offered help on the repair which Smothers refused.  Mahaffey took offense and accused Smothers of hypocrisy since Smothers had previously reported others for safety violations.  Smothers made an offensive comment to Mahaffey and told him he did not want his kind of help.  Smothers removed the broken piece and began the repair.  

Mahaffey immediately reported the argument and Smothers’ removal of the spool piece without a line break permit to the area supervisor.  Later that same day, three managers called Smothers in to discuss the safety violation.  Although completing the line break permit may not have been absolutely necessary, Smothers later conceded that he should have locked out the pump valve before removing the part according to Solvay’s safety policies. Smothers apologized for not locking the pump valve before removing the piece and promised it wouldn’t happen again.  Smothers was sent home pending an investigation.  

Six managers were involved in deciding what to do about the argument and the safety violation.  Three of the managers personally talked with Mahaffey about the argument but no one spoke to Smothers about it.  About eight days later, Solvay fired Smothers.  Smothers sued in Wyoming federal court, alleging, among other claims, unlawful FMLA retaliation, ADA discrimination and breach of an implied employment contract based on Solvay’s employee handbook. 

FMLA Claim Bolstered By Disparate Treatment and Previous Retaliatory Acts 

The trial court granted summary judgment to Solvay on Smothers’ FMLA and ADA claims.  On appeal, the Tenth Circuit decided that Smothers presented enough evidence for a trial about whether Solvay’s real reason for his termination was his use of FMLA leave or his disability.  Smothers provided evidence that other employees who committed similar safety violations were not fired.  Five of the six decision-makers who fired Smothers were also involved in at least one decision in which a similarly situated employee was treated more favorably after violating the same or comparable safety rules.  Smothers also pointed to the negative comments, negative performance rating, failure to promote and pressure to change shifts because of his FMLA-protected absences as evidence that the safety violation was a pretext for firing him for his FMLA leave.  Moreover, Smothers showed that the decision-makers had failed to sufficiently investigate the argument he had with Mahaffey, basing their decision almost entirely on Mahaffey’s version of events.  The Court decided that a reasonable jury could find that Solvay’s investigation into the quarrel was not fair or adequate.  Based on this evidence, the Court found that there were issues of fact on whether Solvay’s termination reasons were pretextual and reversed the dismissal of Smothers’ FMLA retaliation claim. 

Smothers Was Disabled Under ADA 

Smothers also asserted that his firing was in violation of the ADA.  He presented evidence that his medical condition was an impairment that substantially limited a major life activity, specifically his ability to sleep.  Because the facts would allow a reasonable jury to conclude that Smothers’ sleep was substantially limited, Smothers satisfied his burden of establishing a prima facie case of disability discrimination.  As with the FMLA claim, the Court found sufficient evidence that Solvay’s stated termination reasons may have been a pretext for disability discrimination. Therefore, the Court reversed the dismissal of Smothers’ ADA claim as well. 

No Breach of Implied Contract Based on Employee Handbook 

Smothers also alleged that Solvay violated the terms of its employee handbook, giving rise to a claim for breach of implied contract under Wyoming law.  The Court disagreed.  Wyoming recognizes a claim for breach of implied contract if an employer fails to follow its own required procedures, such as the procedures laid out in an employee handbook.  Solvay’s handbook contained a four-step progressive disciplinary process, with termination as the last step.  But it also contained a provision that allowed Solvay to terminate an employee immediately for a serious offense, including a safety violation.  Because the discipline policy unambiguously gave Solvay the discretion to fire employees who violate safety rules, the Court found that Solvay’s decision to terminate Smothers for violating a safety rule did not violate the terms of the employee handbook.  Therefore, the appeals court upheld the trial court’s dismissal of Smothers’ breach of implied contract claim. 

Back To Court They Go 

We don’t know whether Smothers or Solvay will prevail if this case goes to trial but we do know that the appellate court thought that some of the evidence about the actions of Solvay managers could demonstrate that Solvay acted with a discriminatory motive:   

  • Supervisors and co-workers gave Smothers a hard time about taking FMLA-protected leave.
  • Solvay failed to properly investigate all sides in the quarrel, accepting one employee’s version of events as fact.
  • The decision-makers treated Smothers more harshly than other similarly-situated employees who had violated similar safety rules.
  • Managers and supervisors considered Smothers’ FMLA absences when providing his performance evaluation and rejecting him for a promotion.  

Evidence of these actions prevented Solvay from obtaining a grant of summary judgment on appeal. While Solvay may dispute Smothers’ evidence when the case actually goes to trial,  this case stands as a lesson about the kinds of supervisory comments and actions that can feed into a discrimination claim, and a good reminder of how carefully employers must manage employees with injuries or disabilities.

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March 6, 2014

SOX Whistleblower Protection Extends to Employees of Private Contractors, According to Supreme Court

WhistleblowerBy Jude Biggs and Jeff Johnson 

On March 4, 2014, the U.S. Supreme Court ruled that employees of private contractors and subcontractors who contract with public companies are protected under the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (SOX).  Lawson v. FMR LLC, 571 U.S. ___ (2014).  The ruling means that private employers who have a contract with a public company may not retaliate against their employees who report a potential fraud.  As pointed out in the dissenting opinion, the holding by the six-justice majority creates the potential for increased litigation as it offers private sector employees another avenue to bring retaliation claims.  In addition, it implies private sector employers with such contracts may need to strengthen their corporate compliance and complaint procedures to discover and fix problems early. 

Whistleblowers Reported Potential Fraud In Mutual Fund Operations 

Two former employees of private companies that contracted to advise and manage mutual funds filed separate administrative complaints alleging retaliation under 18 U.S.C. §1514A, the whistleblower provision of SOX.  The mutual funds themselves were public companies, but they did not have any employees.  Instead, the funds contracted with private companies to handle the day-to-day operation of the funds, including making investment decisions, preparing reports for shareholders and filing reports with the Securities and Exchange Commission (SEC).  

Jackie Hosang Lawson was the Senior Director of Finance for a private advisory firm that contracted to provide services to the Fidelity family of mutual funds.  Lawson alleged that she suffered a series of adverse employment actions that resulted in her constructive discharge after she raised concerns about certain cost accounting methods being used with the funds.  She alleged that she believed that expenses associated with operating the funds were being overstated. 

The second petitioner, Jonathan M. Zang, was a portfolio manager for a different division of the company that advised Fidelity mutual funds.  Zang alleged that he was fired after he expressed concerns about inaccuracies contained in a draft SEC registration statement concerning some of the mutual funds.  

After pursuing their administrative complaints, both whistleblowers filed retaliation lawsuits under §1514A in federal court in Massachusetts.  Their employers, collectively referred to as FMR, moved to dismiss the suits, arguing that §1514A only protects employees of public companies, and because FMR is a private company, neither plaintiff had a viable claim under §1514A.  The District Court denied FMR’s motion to dismiss.  FMR sought an interlocutory appeal to the First Circuit, which reversed, ruling that §1514A only refers to employees of public companies, not a contractor’s own employees.  The Supreme Court agreed to hear the case to resolve a division of opinion on the issue.   The question before the Supreme Court was whether the SOX whistleblower provision shields only those employed by a public company itself, or also shields employees of privately held contractors and subcontractors who perform work for the public company. 

“Employee” Presumes an Employer-Employee Relationship Between the Retaliator and the Whistleblower 

Section 1514A provides: “No [public] company . . ., or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].”  FMR argued that the prohibition against retaliating against “an employee” meant an employee of the public company.  The Court (in an opinion by Justice Ginsburg) disagreed.  It looked at the provision as stating that “no . . . contractor . . . may discharge . . . an employee” and found that the ordinary meaning of “an employee” in that context was the contractor’s own employee.  The Court stated that contractors are not ordinarily in a position to take adverse actions against employees of the public company for which they contract so to interpret the provision as FMR did would “shrink to insignificance the provision’s ban on retaliation by contractors.”  The Court rejected FMR’s argument that Congress included contractors in §1514A’s list of governed parties only to prevent companies from hiring contractors to carry out retaliatory terminations, such as the “ax-wielding specialist” portrayed by George Clooney in the movie “Up in the Air.” The majority believed that Congress presumed that there must be an employer/employee relationship between the retaliating company and the whistleblower. 

Purpose of SOX Supports Extending Whistleblower Protections to Employees of Private Contractors 

The Court emphasized that SOX was enacted to safeguard investors in public companies and to restore trust in the financial markets after the collapse of Enron Corporation.  The Court found that because outside professionals, such as accountants, lawyers and consultants, have great responsibility for reporting fraud by the public companies with which they contract, such employees of contractors and subcontractors must be afforded protection from retaliation by their employers when they comply with SOX’s reporting requirements.   The fear of retaliation was a major deterrent to the employees of Enron’s contractors in reporting fraud.  Consequently, the Court’s reading of §1514A extending whistleblower protection to the employees of private contractors is consistent with the purpose for which SOX was enacted. 

Mutual Fund Industry Should Not Escape Ban on Retaliation 

Because virtually all mutual funds are structured as public companies without any employees of their own, the Court expressed the need to protect the employees of the investment advisors who are often the only firsthand witnesses to shareholder fraud in the mutual fund industry.  To rule otherwise, said the Court, would insulate the entire mutual fund industry from §1514A. 

Dissent Worries About Opening the Floodgates to More Retaliation Claims 

Justice Sotomayor, joined by Justices Kennedy and Alito, dissented from the majority, believing that the Court’s holding creates an “absurd result” that subjects “private companies to a costly new front of employment litigation.”  According to Sotomayor, the Court’s ruling means that any employee of an officer, employee, contractor or subcontractor of a public company, including housekeepers, nannies and gardeners, can sue in federal court under §1514A if they suffer adverse consequences after reporting potential fraud, such as mail fraud by their employer’s teenage kids.  The majority dispels this concern, stating that there is “scant evidence that [this] decision will open any floodgates for whistlelowing suits outside §1514A’s purposes” given that FMR did not identify a single case in the past decade in which an employee of a private contractor had asserted a §1514A claim based on anything other than shareholder fraud.  Still, the dissent believes that only employees of a public company should be protected from retaliation for whistleblowing activities under §1514A. 

Private Employer Take-Aways 

Despite the majority’s reassurances that employers will not see a substantial increase in new whistleblower retaliation cases, only time will tell if they are right.  Private employers who contract with public companies should review their employment policies to ensure that employees are protected from retaliation as a result of reporting concerns or unlawful activities involving the public companies with whom they do business.  Employers also should train their managers, supervisors and human resources professionals on this new development so that decision-makers do not inadvertently expose their company to the risk of a whistleblower retaliation claim under §1514A.

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January 30, 2014

Firing for Off-Duty Medical Marijuana Use to be Reviewed by Colorado Supreme Court

By Emily Hobbs-Wright 

The Colorado Supreme Court announced that it will review last year’s lower court decision that upheld the termination of an employee who tested positive for marijuana but was unimpaired at work following his off-duty marijuana use for medical reasons.  As we previously wrote on this blog (see this post), last April, the Colorado Court of Appeals ruled that using pot during non-working hours is not a “lawful activity” under the state’s lawful off-duty activity statute (C.R.S. §24-34-402.5).  Coats v. Dish Network LLC, 2013 COA 62. The Court of Appeals reached its decision by relying on the fact that marijuana use remains illegal under federal law and therefore, medical marijuana use, though legal in Colorado, was not “lawful” for purposes of the Colorado lawful off-duty activity statute. 

The Colorado Supreme Court will review two questions: 

1. Whether the Lawful Activities Statute protects employees from discretionary discharge for lawful use of medical marijuana outside the job where the use does not affect job performance; and 

2. Whether Colorado’s Medical Marijuana Amendment makes the use of medical marijuana “lawful” and confers a right to use medical marijuana to persons lawfully registered with the state.  

Over the next few months, the parties will submit written briefs to the Court presenting their positions on these two questions.  With the importance of this case for both Colorado businesses and the marijuana industry, watch for additional groups to ask permission to submit briefs advocating their respective viewpoints.   Though the case before the Colorado Supreme Court deals with medical marijuana, the Court’s decision could establish precedent that would apply to the legal use of recreational marijuana.  We will watch this case very closely and will report on any new developments as they occur.

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January 21, 2014

Requiring Exempt Employees to Work Certain Hours

ClocksBy Joanna Vilos 

You likely know that salaried exempt employees aren’t eligible for overtime pay.  But did you know that you can require an exempt employee to work specific hours and track his or her hours worked?  Under the Fair Labor Standards Act, employers may require exempt employees to comply with scheduling and tracking procedures, such as working certain days and times, being available by telephone, email or text and recording hours worked. 

Why would you want exempt employees to comply with scheduling and time-keeping policies?  For  a variety of reasons, including ensuring that exempt decision-makers are available to address operational concerns throughout the day, for client billing purposes, to determine employees’ eligibility or accrual of certain benefits, etc. Depending on the nature of your business, you may want only certain exempt employees to work set hours or track their time, so it need not be a requirement for every exempt employee at your company.  Just be careful not to impose these requirements on an employee or group of employees for discriminatory or retaliatory reasons. 

The sticky issue is what you may legally do with time and attendance information related to your exempt employees. Say, for example, you would like your exempt managers to work set hours from 8:00 am until 5:00 pm.  What should you do if a manager continually rolls into the office at 9:00 am?  Or what happens if a manager fails to keep track of her work time?  

If an exempt employee fails to comply with your attendance and time-keeping requirements, you need to treat the violation as a discipline issue, not a pay deduction issue.  Assuming no contractual provisions to the contrary, you’re entitled to discipline exempt employees for their failure to adhere to your company policies.  Discipline may include verbal and/or written warnings, performance improvement plans, and even termination, as warranted by your policies and the circumstances.  You should not, however, tie the payment of an exempt employee’s salary to the number of hours worked in a week.  You also should not dock an exempt employee’s salary for partial day absences.  You may dock pay for a suspension for an infraction of workplace conduct rules involving serious misconduct, such as rules prohibiting sexual harassment, drug use, workplace violence, etc.  However, such unpaid suspensions must be for one or more full days.  This type of unpaid suspension may be made only when the employer is enforcing its written policies that are applicable to all employees. Prorating an exempt employee’s salary based on hours worked or making improper deductions from an exempt employee’s salary will risk the loss of that employee’s exempt status.  

Although not a legal matter, you may want to consider the effect that requiring set hours and tracking daily time will have on your exempt employees and their productivity and morale.  Some professionals and higher level exempt employees may feel micro-managed when their employer sets their work hours and requires daily time-keeping.  Others feel they work around the clock via electronic devices and remote access to email and computer systems so keeping track of total work time may be difficult.  Depending on your corporate culture and the circumstances of your operation, the intangible effect of implementing more oversight of exempt employees’ attendance and time records may be worth further evaluation.

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December 30, 2013

OSHA Proposing that Employers Submit Injury and Illness Data and Allow Public Access

Newrelease_11072013By Cole Wist 

An employer generally is not required to submit workplace injury and illness data to the Occupational Safety and Health Administration (OSHA) unless the employer is subject to an OSHA inspection, has a fatality or multiple hospitalization event or is part of the OSHA Data Initiative.  Even so, only limited data collected by OSHA is readily available to the public, absent a specific request under the Freedom of Information Act (FOIA).  OSHA is proposing to change that by requiring employers to submit workplace injury and illness data to OSHA electronically and by making the data available to the public via a searchable online database.  

Proposed Rule to Require Electronic Submission of Data 

In a recently proposed rule, OSHA seeks to require employers to submit injury and illness records electronically as follows: 

  • Non-exempt employers with 250 or more employees would be required to submit information from the required Part 1904 injury and illness records on a quarterly basis;
  • Non-exempt employers with 20 or more employees who are in certain designated industries would be required to submit information from the OSHA annual summary form (Form 300A) on an annual basis; and
  • As otherwise notified by OSHA. 

OSHA states that its proposed rule does not add or change any obligation to complete and retain injury and illness records under Part 1904.  Instead, it modifies certain employers’ obligations to transmit information from these records to OSHA. 

OSHA has provided a mock-up of the secure website to be used for data collection. After registering with the site, employers would be provided a login ID and password.  The website would permit direct data entry as well as batch file uploads. 

Searchable Online Database for Public Access to Employer Data 

OSHA also proposes to make public the data it collects from employers.  Although it states that certain data elements will be restricted from publication under FOIA, the Privacy Act and specific provisions within Part 1904, OSHA proposes a searchable online website that would include the following data submitted by employers: 

  • OSHA Form 300A (Summary form) – all data fields;
  • OSHA Form 300 (Log) – all data fields except the employee’s name; and
  • OSHA Form 301 (Incident report) – all data fields on the right side of the form (i.e., case number, date of injury or illness, time employee began work, time of event, what the employee was doing just before the incident occurred, what happened, what the injury or illness was, what object or substance directly harmed the employee and the date of death, if applicable). 

A mock-up of the proposed searchable website shows how members of the public would be able to search by company name and view that company’s Form 300 and individual incident reports (Forms 301) as well as the establishment’s workplace injury and illness profile and summary. 

Reasons Behind Proposed Rule 

OSHA states that providing employers, employees, the government and researchers with better access to workplace injury and illness data will encourage earlier and more effective identification of workplace hazards and enhance efforts to make establishments safer for workers. OSHA also anticipates that this information will help it use its resources more effectively by focusing on industries and workplaces posing the greatest risks to employees. 

Many employers are certain to feel differently.  Particularly troubling to employers may be the public access to injury and illness data and the related misuse of such data by the press and the plaintiffs’ bar.  There are also potential risks associated with the breach of employee privacy.  Ironically, public access to this data could ultimately result in an underreporting of incidents or downplaying of the severity of injuries.  Clearly, there are many important policy and legal issues to be addressed. 

Next Steps 

The public has 90 days, through February 6, 2014, to submit written comments on the proposed rule.  On January 9, 2014, OSHA will hold a public meeting on the proposed rule in Washington, D.C.  Please contact us with any questions or concerns.  More information may be found on OSHA’s website.   We will keep you posted on developments. 

Disclaimer: This article is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal advice and are not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.

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