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 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 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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December 3, 2013

Divided Fifth Circuit Overturns D.R. Horton on Enforceability of Employer’s Arbitration Agreement Prohibiting Class Claims

By Jeffrey T. Johnson 

In a much-anticipated decision, the Fifth Circuit Court of Appeals rejected the National Labor Relations Board’s controversial D.R. Horton decision, which held that an arbitration agreement requiring an employee to waive his or her right to bring class claims violated the National Labor Relations Act (NLRA).  Agreeing with its sister circuit courts, the Fifth Circuit held that the NLRA did not override the Federal Arbitration Act (FAA) meaning the employer’s arbitration agreement must be enforced according to its terms, including the agreement’s preclusion of class claims.  D.R. Horton, Inc. v. NLRB, No. 12-60031 (5th Cir. Dec. 3, 2013).  The Court upheld, however, the NLRB’s finding that the arbitration agreement could be misconstrued by employees as precluding the filing of unfair labor practice charges which violates Section 8(a)(1) of the NLRA. 

Arbitration Agreement Prohibiting Class Claims Does Not Violate NLRA 

The Fifth Circuit’s ruling puts to rest a thorny issue for employers who have struggled with the Board’s D.R. Horton decision.  The controversy arose in early 2012 when the NLRB concluded that home builder D.R. Horton violated Sections 7 and 8(a)(1) of the NLRA by requiring employees to sign a Mutual Arbitration Agreement that precluded employees from filing class or collective claims related to their wages, hours or other working conditions. In re D.R. Horton, Inc., 357 NLRB No. 184 (Jan. 3, 2012).  The Board found that the agreement interfered with the exercise of employees’ substantive rights under Section 7 of the NLRA which allows employees to act in concert with each other for their mutual aid or protection.  

Two of the three judges on the Fifth Circuit panel disagreed.  First, the majority found that the use of class action procedures is not a substantive right but is instead a procedural device.  Then, the judges analyzed whether there is a conflict between the NLRA and the FAA that would preclude application of the FAA to enforce the arbitration agreement according to its terms.  Relying on the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), the Fifth Circuit determined that requiring a class mechanism is an impediment to arbitration and violates the FAA so the Board’s attempt to fit its rationale into the FAA’s “savings clause” failed.  The Court then concluded that neither the NLRA’s statutory text nor its legislative history contains a congressional command to override the FAA.  Failing to find an inherent conflict between the NLRA and the FAA, the Court ruled that the arbitration agreement must be enforced according to its terms under the FAA. 

The Fifth Circuit pointed out that every one of its sister circuits to consider this issue had refused to defer to the NLRB’s rationale in D.R. Horton, and had held arbitration agreements containing class waivers enforceable.  The two judges in the majority stated, “we are loath to create a circuit split.”  Judge Graves dissented, stating that he agreed with the Board that the arbitration agreement interfered with the exercise of employees’ substantive rights under Section 7 of the NLRA. 

Agreement Violates NLRA Because Employees Might Believe it Prohibits Filing Unfair Labor Practice Charges 

The arbitration agreement used by D.R. Horton required that employees agree to arbitrate “without limitation[:] claims for discrimination or harassment; wages, benefits, or other compensation; breach of any express or implied contract; [and] violation of public policy.”  Although the agreement provided four exceptions to arbitration, none of the exclusions referred to unfair labor practice charges.  All three judges found that this could create a reasonable belief that employees were waiving their administrative rights, including the right to file unfair labor practice charges under Section 8(a)(1) of the NLRA.  Therefore, the Court enforced the Board’s order that D.R. Horton violated Section 8(a)(1) because an employee would reasonably interpret the arbitration agreement as prohibiting the filing of a claim with the Board, validating the need for D.R. Horton to take the ordered corrective action. 

Challenges to Composition of the Board Rejected 

While this case was on appeal to the Fifth Circuit, the D.C. Circuit issued its Noel Canning decision which vacated an order of the three-member panel of the Board by ruling that recess appointments of the panel members were invalid.  Noel Canning v. NLRB, 705 F.3d 490 (D.C.Cir. 2013) cert. granted 133 S.Ct. 2861 (U.S. June 24, 2013)(No. 12-1281).  Because the panel that decided the D.R. Horton case included a member appointed by recess appointment, the Fifth Circuit asked the parties to submit briefs on whether it must consider the constitutionality of the recess appointments.  The Court ultimately decided it need not consider the issue, finding that it retained jurisdiction to resolve the dispute at hand and leaving it to the U.S. Supreme Court to decide the constitutionality of the Board’s recess appointments.  The Fifth Circuit also rejected D.R. Horton’s challenges that Board Member Becker’s recess appointment expired before the Board issued its decision, and that the Board had not been delegated authority to act as a three-member panel. 

Favorable Result for Employers 

Although there are pros and cons to using arbitration agreements in the employment context, today’s ruling by the Fifth Circuit (absent review by the Supreme Court) removes the impediment to incorporating class action waivers in employment arbitration agreements.  The decision reinforces, however, that certain language within an arbitration agreement may violate the NLRA if it is reasonably seen as limiting an employee’s right to file an unfair labor practice charge.  Employers should consult with employment counsel to review whether arbitration agreements are appropriate for their workforce, and if so, to ensure the wording of the agreement is enforceable.

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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October 21, 2013

Tips for Paying Wages via Payroll Cards

By Mark Wiletsky 

DebitcardOffering payroll cards for the payment of employee wages may be a viable, cost effective alternative to paper paychecks.  It also can be an attractive offering for workers who do not have a checking or savings account at a bank or other financial institution.  Employers must be aware, however, that certain federal and state laws regulate payroll card accounts.  The Consumer Financial Protection Bureau (CFPB) recently issued Bulletin 2013-10 describing the application of the Electronic Fund Transfer Act (EFTA) and Regulation E, which implements the EFTA, to payroll card accounts.  Here are some tips for keeping your payroll card program in compliance with these laws. 

  • No Mandatory Use of Payroll Cards. You may not require that employees be paid on a payroll card from a particular institution.  You may offer payroll cards as a method of wage payment as long as you offer an alternative method, such as direct deposit to an account of the employee’s choosing or paper paychecks.  Acceptable methods of paying wages typically are governed by state wage payment laws.
  • Disclosure of Fees, Transfers, and Other Payroll Card Requirements. Employees to be paid on a payroll card are entitled to be informed of any fees, limitations or requirements related to making electronic fund transfers with the card that will be imposed by the financial institution who issues the card.  Clear, understandable written disclosures must be provided to cardholders in a form that the consumer may keep.
  • Account History Must Be Accessible.  The payroll card issuer must make each cardholder’s account history available, either through periodic statements, telephone balance inquiries, internet/web-based account history, or by providing 60 days of written account history upon request of the cardholder. 
  • Cardholder Liability for Unauthorized Use Must Be Limited.  Payroll cardholders are entitled to limited liability protections for the unauthorized use of their payroll cards, however they must report any unauthorized transfers in a timely period.
  • Cardholders’ Rights to Error Resolution.  Upon the timely report of an error regarding a payroll card account, financial institutions must respond to the cardholder.  In order to ensure a response, the cardholder must report an error within 60 days of either accessing his or her payroll card account history or receiving a written account history containing the error, whichever is earlier, or within 120 days after the alleged error occurred. 

In addition to the federal payroll card laws, state wage payment laws often regulate when and how payroll cards may be used to pay employee wages.  For example, in Colorado, employers may deposit employee wages on a payroll card provided the employee may access the full amount on the card for free at least once during the pay period, or the employee is given the choice to receive their pay through other means, such as direct deposit to an account of the employee’s choosing or a paycheck.  Be certain to check the wage payment laws in the states in which you operate to ensure compliance with any state payroll card requirements.

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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October 9, 2013

Idaho Supreme Court Changes Tack and Applies McDonnell Douglas Burden Shifting Analysis at Summary Judgment Stage

By A. Dean Bennett 

Since 2008, employers defending employment claims in Idaho have faced a higher burden of proof, thanks to the Curlee v. Kootenai County Fire & Rescue decision of the Idaho Supreme Court.  In that case, the Court decided that the well-known McDonnell Douglas burden shifting analysis used in employment cases did not apply at the summary judgment stage, making it more difficult for employers to get a favorable outcome without going to trial.  Recently, however, the Idaho Supreme Court changed its position, deciding that the McDonnell Douglas burden shifting analysis did apply at the summary judgment stage, resolving a five-year debacle in which Idaho employers faced different burdens of proof depending on whether employment claims were litigated in state or federal court.  See Hatheway v. Bd. of Regents of the Univ. of Idaho, No. 39507 (Idaho Sept. 6, 2013). 

Federal Framework Applied to Age Discrimination Claim Under the Idaho Human Rights Act (IHRA) 

The McDonnell Douglas burden shifting analysis has been widely used to resolve a variety of federal employment law claims since 1973.  The analysis allows a plaintiff to put forth indirect evidence of discrimination to establish a prima facie case.  The burden of production then shifts to the employer to articulate a legitimate, nondiscriminatory reason for the employer’s actions.  If the employer provides such reason, the burden of production then swings back to the plaintiff to show that the proffered reason is in fact pretext for unlawful discrimination. At all times, the plaintiff bears the burden of persuasion, meaning the plaintiff must convince the judge or jury that his or her position is correct. 

Many state courts have adopted the McDonnell Douglas burden shifting analysis when adjudicating employment claims brought under analogous state laws.  In Curlee, the Idaho Supreme Court appeared to adopt the McDonnell Douglas analysis, but went on to rule that the analysis explicitly governed the burden of persuasion at tria, and did not apply at the summary judgment stage. 

The Hatheway decision appears to change that.  Without specifically mentioning or overruling its Curlee decision, the Court applied the McDonnell Douglas burden shifting analysis at the summary judgment stage of Hatheway’s IHRA discrimination claims against the University of Idaho.  The Court reiterated that federal law guides the interpretation of the IHRA and applied the same degree of proof and standards to an IHRA age discrimination claim as is used to analyze discrimination claims under the federal Age Discrimination in Employment Act.  

Why Employers Should Care 

If this all sounds like legal mumbo-jumbo, let’s put it in practical, real-life terms.  Employers want to get employment claims dismissed at the earliest possible stage for numerous reasons, including avoiding expensive litigation, disruption to their operations and unfavorable publicity.  Following the 2008 Curlee decision, Idaho employers had to prove more of their case early on, making it difficult to get a favorable judgment prior to trial.  This prolonged meritless cases and cost employers more in legal fees and litigation-related expenses.  Now, with the application of the traditional burden shifting analysis at the summary judgment stage, employers facing employment claims in Idaho state courts will have a better chance of getting employment claims dismissed earlier in the legal process with fewer cases proceeding to trial.

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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September 11, 2013

Family Medical History Request Results in First EEOC GINA Lawsuit

By Dora Lane

Employers may not request a family medical history from employees or applicants, even as part of a post-offer medical examination.  In its first lawsuit alleging a violation of the Genetic Information Nondiscrimination Act (GINA), the Equal Employment Opportunity Commission (EEOC) sued an employer whose contracted medical examiner required applicants to complete a family medical history questionnaire.  EEOC v. Fabricut, Inc., No. 13-cv-248 (N.D. Okla. filed May 7, 2013).  Review of this case offers a timely opportunity for employers to review their employment practices for compliance with GINA. 

Investigation of ADA Claim Finds Illegal Family Medical History 

Temporary employee, Rhonda Jones, worked for Fabricut, a distributor of decorative fabrics, as a memo clerk for 90 days.  She then applied to work in the same position as a regular employee.  Fabricut made her an offer of employment, contingent on the results of a pre-employment drug test and physical.  Fabricut sent Jones to Knox Laboratory, a medical examining facility that provided examination services to Fabricut on a contract basis.  As part of the process, Knox Laboratory instructed Jones to complete a questionnaire that asked about the existence of heart disease, hypertension, cancer, tuberculosis, diabetes, arthritis and mental disorders in her family. 

The examiner conducting Jones’ pre-employment physical concluded that Jones may be predisposed to or already suffer from carpal tunnel syndrome and recommended further evaluation.  Although Jones’ personal physician conducted a battery of tests and concluded that she did not have carpal tunnel syndrome, Fabricut withdrew its offer of employment.  Jones filed a discrimination charge with the EEOC alleging a violation of the Americans with Disabilities Act (ADA) on grounds that she was denied employment because Fabricut regarded her as having a disability, carpal tunnel syndrome. 

As part of its investigation of Jones’ ADA claim, the EEOC obtained from Fabricut copies of Jones’ post-offer, pre-employment medical examination.  The records revealed the family medical history questionnaire that Jones had been instructed to complete at the start of her pre-employment physical.  Finding that the questionnaire included unlawful inquiries into genetic information, the EEOC notified Fabricut that its investigation would look into its compliance with GINA regarding its solicitation of family medical histories of applicants. 

EEOC Pursues GINA Lawsuit 

The EEOC filed suit against Fabricut in federal court alleging violations of both the ADA and GINA.  GINA, which took effect in 2009, makes it illegal for employers to discriminate against employees or applicants because of genetic information, which includes family medical history, and restricts employers from requesting, requiring or purchasing such information, among other things.  The lawsuit alleges that Fabricut violated GINA by requesting and requiring Jones and other applicants to indicate whether or not they had a family medical history for a variety of diseases and disorders as part of its post-offer, pre-employment medical examination as conducted for Fabricut by its agent, Knox Laboratory, who then provided the information to Fabricut for its use in hiring and employment decisions. 

Lawsuit Settled for $50,000 and Additional Relief 

Without admitting any violation of law, Fabricut agreed to settle the case for payment of $50,000 to Jones as compensatory damages.  The settlement also requires Fabricut to post notices in its workplace stating that Fabricut will comply with all federal employment laws, including the ADA and GINA, conduct two hours of live training for all management and human resources personnel, create or revise personnel policies prohibiting discrimination and be subject to monitoring and reporting requirements for two years. 

Review Practices for GINA Compliance 

Although GINA has been in effect since 2009, many employers may not be familiar with its requirements and prohibitions.  What may have been routine employment practices in past years, such as collecting a family medical history from employees or applicants, may now be unlawful under GINA.  Employers should review their job applications, interview questions and any employment medical testing practices to ensure that no family medical history is requested.  The regulations implementing GINA specifically state that a covered entity must tell health care providers not to collect genetic information, including family medical history, as part of a medical examination used to determine an individual’s ability to perform a job.  29 C.F.R. § 1635.8(d).  In addition, if an employer finds out that family medical histories are being collected, it must take reasonable measures, including not using the health care provider, to prevent the information from being collected in the future. 

Under certain circumstances, employers may receive genetic information that it did not request.  Such inadvertent acquisition of genetic information is not a violation of GINA.  To help establish that genetic information was acquired inadvertently, employers should take advantage of a safe harbor provision in the GINA regulations.  When an employer needs to request health-related information, such as to support a request for sick leave or a reasonable accommodation under the ADA, the employer should warn the employee and the health care provider not to provide genetic information.  The regulations suggest the following language to accompany the request for health-related information: 

The Genetic Information Nondiscrimination Act of 2008 (GINA) prohibits employers and other entities covered by GINA Title II from requesting or requiring genetic information of an individual or family member of the individual, except as specifically allowed by this law. To comply with this law, we are asking that you not provide any genetic information when responding to this request for medical information. "Genetic information," as defined by GINA, includes an individual's family medical history, the results of an individual's or family member's genetic tests, the fact that an individual or an individual's family member sought or received genetic services, and genetic information of a fetus carried by an individual or an individual's family member or an embryo lawfully held by an individual or family member receiving assistive reproductive services.

When employers provide this warning, any resulting acquisition of genetic information will generally be considered inadvertent and therefore, not in violation of GINA.

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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