Monthly Archives: September 2014

September 23, 2014

Cheyenne Jury Awards $1,481,000+ On FMLA Retaliation Claim

The series of large verdicts for Wyoming employees seems to be marching forward. The most recent example occurred recently when a Cheyenne jury awarded over $740,000 to a trona miner after deciding that he was fired because he took FMLA leave. With liquidated damages available in an FMLA case, the Wyoming court entered judgment in an amount in excess of $1.48 million in favor of the employee. This case stands as yet another example about the importance of supervisor training and careful, well-documented and consistent decision making.

Long Term Employee With A Pain in the Neck. We first told you about this case in March of this year, when the Tenth Circuit Court of Appeals sent the case back to Wyoming for trial after reversing the trial court’s dismissal of the case. (Safety Violation or Too Much Intermittent FMLA Leave?). Here is a short recap of the facts.

Steven Smothers had been employed by Solvay Chemical for 18 years when his employment was terminated. Smothers had experienced back problems since 1994 resulting in three surgeries on his neck and other medical procedures, and an extended course of medical treatment by specialists. Over the years, Smothers took intermittent FMLA leave for his medical appointments and when he was unable to work due to the pain. The amount of FMLA leave he took did not go unnoticed. He was pressured by the production superintendent to change shifts to lessen the additional overtime cost caused by his absences, but such a change would have cost him about $7,000 per year in shift differential pay. Solvay also gave Smothers a negative rating on his performance evaluation because of his absences, and he was told that he was rejected for a promotion because of the leave.

Smothers’ Safety Rule Violation. In August 2008, Smothers and his coworkers were performing an acid wash, which Solvay did every six months to clean residual trona out of the equipment. When Smothers noticed that a damaged spool piece had caused a leak, he began to fix it without obtaining a line break permit which was required by Solvay safety rules. Smothers and a co-worker, Mahaffey, argued about whether the permit was necessary, and after Smothers removed the spool piece without first getting the permit, Mahaffey immediately reported Smothers’ actions to a supervisor.

Solvay terminated Smothers’ employment on August 28, 2008, based on a joint decision of six Solvay managers. Five of the six decision makers testified that the argument between Smothers and Mahaffey weighed heavily in the group’s decision to fire Smothers. Although the trial court originally dismissed the case, the Tenth Circuit believed that Smothers had presented enough evidence to create doubt about the real reasons for Smothers’ termination. So, the case was sent back to the trial court for trial.

What’s the Real Reason for Smothers’ termination? Like all retaliation cases, the jury in this trial was asked to decide whether Smothers was fired for a safety rule violation, as the employer contended, or because his employer retaliated against him for using intermittent FMLA leave or discriminated against him because of his disability. We don’t have a transcript of the trial, so we cannot tell you what evidence the jury heard or what facts persuaded the jury. We do know that the Tenth Circuit reasoned that the jury could disbelieve Solvay’s reasons because:

Supervisors criticized Smothers informally and in his performance evaluation for taking FMLA-protected leave, and rejected him for a promotion because of his time off;
Solvay did not give Smothers an opportunity to describe or explain his side of the argument with Mahaffey, even though the argument was a central reason for the decision to terminate Smothers’ employment;
Other Solvay employees who committed safety rule violations were not terminated.

And the Jury Returns.The jury found in favor of Smothers on his FMLA claim, and awarded Smothers the amount of $740,535 for his lost wages and benefits from the date of his termination, August 27, 2008, through the date of trial. But the potential damages don’t stop with the lost wages. Under the FMLA, the successful employee may be entitled to an additional amount equivalent to the jury’s award for liquidated damages – in other words, a penalty against the employer for the violation. As a result, the court has entered judgment against Solvay in the total amount of $1,481,070, twice the amount of the jury’s verdict, plus interest since the date of termination. The trial court declined to award Smothers any future lost wages. However, Smothers is entitled to an additional judgment for his reasonable attorneys’ fees and costs, which could add hundreds of thousands of dollars to the total.

Bottom Line. Regardless of the final number after adding prejudgment interest and attorneys’ fees, this is one of the largest judgments ever entered against a Wyoming employer. We cannot speculate about what evidence led the jury to its verdict, but we can share some lessons, with the benefit of twenty-twenty hindsight, that will help any employer avoid this kind of result:

Managers and supervisors must be trained and committed to the fact that taking FMLA leave is protected by federal law, and must not be the reason for formal criticism, denied opportunities, or informal complaining. FMLA-protected leave cannot be held against an employee for any reason whatsoever. Any comment or suggestion to the contrary can be used as evidence of pretext.
Investigations must be thorough and even-handed. While we don’t know all the evidence in this case, the jury may have heard that Solvay spent much more time asking Mahaffey about the argument with Smothers, while never asking Smothers for his side of the argument. Everybody should get the same opportunity to tell their side of the story. An inadequate investigation can be used as evidence of pretext.
Employees must be treated consistently. Smothers had evidence that other Solvay employees intentionally violated safety rules without being terminated. Employers need to mete out comparable discipline for comparable violations, or have a compelling reason why an employee gets tougher punishment.
Employers must respect long years of service. Of course, keeping a job for eighteen years does nothing to technically change the legal relationship or create any new rights or protection for the employee. But, after that length of time with a good performance record, it becomes difficult for a jury to believe that termination is an appropriate response for one incident.

Wyoming juries have delivered substantial employee verdicts over the last few years. Employers should pay attention.

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September 9, 2014

Employee Equity Purchase Programs: Ensuring a Great Idea Remains a Good Idea

By Bret Busacker

With the return of some prosperity in the economy, we have seen an uptick in employers granting or selling equity (stock or partnership interests) in their businesses to their employees. In some cases, these grants are part of a broad-based employee stock purchase program. In other cases, employers use equity to reward and incentivize key players in their business. In all cases, these programs can be very successful in creating loyalty and incentivizing employees. However, these arrangements are subject to a variety of regulatory requirements. A few insights on some common issues that arise with respect to these arrangements:

Sale of Equity to an Employee May be Compensation. The transfer of equity to an employee (or other service provider) in connection with the performance of service to the employer is a compensatory transaction under Internal Revenue Code Section 83. The amount of the compensation income to the employee is the difference between the fair market value of the equity at the time of grant and the amount the employee pays for the equity. Depending on the situation, an independent valuation of the business may be necessary to establish the fair market value of the equity granted. In all cases, the employer should document that a reasonable valuation method was followed in establishing the fair market value of the equity.

Employees May Elect Early Taxation of Unvested Equity. If an equity award requires the employee to continue to provide services after the date of grant in order for the employee to retain the right to the equity, the equity may be unvested. Unvested equity is not taxable to the employee at the time of grant, but becomes taxable to the employee once the equity vests. An employee who believes an equity award will increase in value and generate a larger tax hit on the vesting date rather than the grant date may elect to accelerate the taxation of the equity to the date of grant (and thus pay taxes when the equity is worth less). This election is commonly referred to as an 83(b) election. Employers should ensure that employees are aware of the 83(b) election option.

Unvested Equity May Not Create Ownership. The Internal Revenue Code provides that an employee is not treated as the owner of the equity granted to an employee unless the equity is fully vested or the employee files an 83(b) election with the IRS. Further, employment agreements, operating agreements and shareholder agreements often contain provisions that create ambiguity as to whether an equity award is vested or unvested. Accordingly, if the parties want to ensure that an employee receiving an equity grant is treated as an owner for tax purposes, including allocations, distributions and dividends, a protective Section 83(b) election could be filed to ensure the employee is treated as the owner of the equity.

Equity Grants May Impact Employee Benefits. Equity grants of partnership interests or stock in an S corporation may have a significant impact on the medical and fringe benefits of employees receiving those grants. If the equity is vested or the employee files an 83(b) election, the employee may be treated as an owner for benefits purposes. Partners in a partnership and owners of more than 2% of the stock of an S corporation are generally not eligible to participate on a pre-tax basis in the medical benefits and other fringe benefit programs otherwise available to employees. In addition, employers should review their retirement plans when granting equity awards to employees to ensure that the compensatory value of the equity awards are accounted for in accordance with the terms of the plan document.

Equity Grants Should Be Accomplished Through a Compensatory Plan. In general, unless securities exemptions exists at both the state and federal levels, the grant or sale of employer stock or partnership interests to employees must be registered under the Securities Act of 1933. This rule applies to private non-publicly traded companies as well as publicly traded companies. Many private companies may take advantage of a special federal securities exemption from the registration requirement by satisfying what is referred to as Rule 701. However, Rule 701 and many state securities laws may only be relied upon if the grants were made pursuant to a written compensation contract or compensatory benefit plan for employees, consultants and/or directors. Further, in some cases it may be required, but it is always a good practice, to provide the award recipients a summary of the material terms of the equity award, a risk of investment statement, and annual financial statements to minimize misunderstanding and the risk of legal claims.

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September 2, 2014

Benefit Plans: Upcoming Compliance Deadlines and End of Year Planning

By Bret Busacker and Bret Clark (formerly of Holland & Hart)

Now that fall is in the air and school has started, we thought this would be a good time to summarize some of the key health and welfare benefit deadlines that are approaching this fall:

September 22

Updated Business Associate Agreements. New HIPAA privacy and security rules adopted last year require revisions to most HIPAA business associate agreements by September 22, 2014. Employer-sponsored health plans that are subject to HIPAA (generally including self-insured health plans and all health flexible spending arrangements (FSAs)) are required to have agreements with business associates, service providers dealing with participant health information on behalf of the plan, that require business associates to comply with the HIPAA privacy and security rules. Your business associates may have already contacted you about revising your agreements. However, employers are ultimately responsible to identify all business associates and ensure that compliant business associate agreements are in place before the deadline.

September 30

Summary Annual Report for Calendar Year Plans. Plans (including retirement plans and welfare plans) that filed the 2013 Form 5500 by July 31, 2014 must provide the Summary Annual Report for the 2013 calendar year to plan participants no later than September 30, 2014. Plans that file the 2013 Form 5500 extension to file by October 15, 2014 must provide the Summary Annual Report by December 15, 2014.

October 14

Medicare Part D Notice of Creditable Coverage. Employers who offer prescription drug coverage to employees and retirees should provide a notice to plan participants and beneficiaries who are eligible for Medicare Part D (or to all participants) by October 14, 2014 stating whether the employer prescription drug coverage is creditable coverage.

November 5

Deadline to Obtain Health Plan Identifier. All self-insured larger group health plans (those with annual costs of $5 million or more) must obtain a unique group health plan identification number (HPID) from CMS by November 5, 2014. The HPID will be used in electronic communications involving plan-related health information. For this reason, third party administrators of self-insured plans will either obtain the HPID or will coordinate with the plan sponsor in obtaining the HPID. Employers should confirm with their TPA that the plan will have an HPID by the deadline. Please note that employers should obtain an HPID for each group health plan they maintain. Accordingly, employers who have established a single wrap-around group health plan that incorporates all of the group health plans of the employer may only need to obtain a single HPID. However, employers who maintain separate HRA, FSA, and/or medical/dental/vision plans may be required to obtain one HPID for each such group health plan. Smaller group health plans have until November 5, 2015 to obtain an HPID. Please go to this website for more information.

November 15

Transitional Reinsurance Fee Enrollment Information Due. Self-insured health plans must submit their enrollment information to HHS by November 15, 2014 for purposes of calculating the 2014 Transitional Reinsurance fee for 2014. Self-insured health plans that are self-administered are exempt from the Transitional Reinsurance Fee in 2015 and 2016, but must pay the fee for 2014. Based on the enrollment information provided to HHS in 2014, self-insured plans will pay the fee beginning in January 2015.

General Fall Planning (no specific deadline)

ACA Shared Responsibility Planning. The Affordable Care Act employer shared responsibility penalties will begin to be imposed on employers with 100 or more full-time or full-time equivalent employees beginning January 1, 2015. Employers should start now to establish a policy for purposes of determining whether the employer will be subject to the ACA employer shared responsibility penalties and whether the employer is covering those full-time employees that must be offered coverage in order to avoid the shared responsibility penalty.

Summary of Benefits and Coverage, Women’s Health and Cancer Rights Act Notice, Medicaid/CHIP Premium Assistance Notice, HIPPA Notice of Privacy Practices, and Exchange Notice. Employers should confirm that these notices are included with the enrollment materials provided to participants during open enrollment and to participants at the time of any mid-year enrollment due to becoming newly eligible for the plan. If these notices are not included with enrollment materials prepared by your provider, consider supplementing the enrollment materials with these notices. Employers should also confirm that their COBRA notices have been updated to reflect recent changes to the model COBRA notice to reflect the establishment of the Health Marketplace Exchanges.

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