Business & Employment Law Newsletter

Summer 2009

PENNSYLVANIA EXPANDS HEALTH INSURANCE LAWS TO PROVIDE GREATER COVERAGE TO EMPLOYEES OF SMALL BUSINESSES AND ADULT CHILDREN

“Mini-COBRA" Law

Pennsylvania recently enacted legislation designed to supplement the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) and provide for the continuation of medical insurance to employees of small businesses. Act 2 of 2009 provides for the creation of “Mini-COBRA” coverage. The Act expands upon federal COBRA coverage by requiring employers with between two and 19 employees that sponsor group medical insurance to offer employees, and their dependents, the opportunity to purchase nine months of additional insurance coverage upon a qualifying loss of medical coverage.

The Pennsylvania Mini-COBRA law applies only to employers who are not covered under the federal COBRA law, which applies to employer health plans with 20 or more employees. The Act requires that employer sponsored group major medical, hospital, or surgery policies provide for the continuation of coverage to employees, and eligible dependents, whose coverage terminates as a result of a “qualifying event.” “Qualifying events” are defined the same as under federal law. Furthermore, the benefits offered must be the same level of benefits the individual received prior to the qualifying event.

Mini-COBRA coverage is offered at the employee’s or qualified dependent’s expense for up to nine months after the qualifying event. An employer is permitted to charge up to 105% of the cost of the group insurance rate which is being continued.

In order to be eligible for Mini-COBRA coverage an individual must have been continuously enrolled under the employer’s group policy for three months prior to the qualifying event. Moreover, they must not be eligible for Medicare or covered by, or enrolled in, other private group health insurance policies.

Furthermore, the Act requires notice of the new law be provided to policyholders within 45 days from the July 10, 2009, effective date of the law. Additionally, employers of covered employees must notify the employee, or dependent, within 30 days of the qualifying event of the ability to continue coverage. The eligible employee, or dependent, then has 30 days from the day he or she receives the notice to notify the employer’s plan administrator of his or her desire to continue coverage, which shall be effective as of the date of the qualifying event.

The Pennsylvania Mini-COBRA Act allows employees to take advantage of the 65% federal subsidy provided by the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA provides a subsidy of 65% of the cost of the continuation of COBRA and state Mini-COBRA programs for nine months, so long as the employee, or dependent, pays the remaining 35%. Therefore, employees who are subject to a qualifying event between July 10, 2009 and December 31, 2009, will be eligible for this federal subsidy in order to defray the cost of continuing their coverage.

Health Insurance for Adult Children

In an effort to reduce the total number of uninsured individuals in Pennsylvania, Governor Rendell also signed into law Act 4 of 2009. This Act requires that insurers in Pennsylvania provide health insurance coverage to dependent adult children up to age thirty. Prior to the enactment of this law, insurers were only required to provide coverage to dependents up to 19 years of age.

While the Act requires insurance companies to provide the coverage if requested, it does not require employers to offer health insurance coverage to adult dependent children. Instead, the Act notes that the expansion of coverage occurs at the discretion of the employer. Furthermore, in instances where an employer decides to offer this expansion of coverage, the insurance companies are permitted to charge higher premiums for the continuation of coverage past age 19.

 In order to be eligible, the adult child must: (1) not be married, (2) have no dependents, (3) be a resident of Pennsylvania or be enrolled as a full-time student at an institution of higher learning, and (4) not have any other form of health insurance. Moreover, the Act only applies to new health contracts and the renewal of contracts.

SIX TIPS FOR AVOIDING OVERTIME WAGE AND HOUR PROBLEMS

In recent years, there has been a surge in litigation and enforcement by the government under the federal Fair Labor Standards Act (“FLSA”). In fiscal year 2008, for example, the Department of Labor (“DOL”) Wage and Hour Division concluded 28,242 compliance actions and assessed nearly $9.9 million in civil money penalties. As a result of these actions, more than 197,000 employees received a total of $140.2 million in minimum wage and overtime back wages.

Following are tips for avoiding these type of problems:

(1) Properly classify whether employees in a particular position are overtime exempt or non-exempt through a careful analysis of the position. A common area of problems for employers is the misclassification of overtime non-exempt employees as exempt. Titles are not what counts in making these determinations. Instead a careful analysis must be made of the actual duties in a position. For an employee to be considered an exempt executive, for instance, he or she must have as his or her primary duty the supervision of the equivalent of at least two full-time employees. To come under the administrative exemption, an employee must have as his or her primary duty the exercise of discretion and independent judgment with respect to matters of significance as defined under the law.

(2) Be sure to record and pay for all compensable hours of work. Employers are required to pay for all work performed between the first and last principal activities of the day. In the retail industry, this may include when an employee is required to pass through a security check before leaving the store at the end of the workday and in telephone call centers where employees must turn on computers before beginning work. In addition to misconceptions regarding what constitutes compensable working time, employers also get into trouble through inadequate or improper recordkeeping practices and supervisory misconduct.

(3) If rounding policies are used, they must be neutral to the employee in rounding out minor discrepancies. Rounding policies are acceptable by the DOL if the company’s practices average out so that employees are fully compensated for all the time they actually work. The setting of a certain interval as a minimum block of time to be recognized as a rounding unit will likely be found acceptable by the DOL if time missed or worked within that interval is not deducted or added to time worked. In other words, if an employer sets 15 minutes as the rounding interval, and an employee is required to start work at 8:00 a.m., his or her pay may not be affected if he or she starts work between 7:45 and 8:15. That is not to say that the employee cannot be separately disciplined for tardiness, but his or her pay cannot be affected in order for the rounding policy to be upheld.

(4) If an employee is provided a compensated meal period, be sure that it is uninterrupted. Bona fide meal periods of 30 minutes or more are not considered to be compensable work time. However, in order for the exception to apply, an employee must not be interrupted by work during that period. Courts have held that requiring office employees to eat at their desks or factory workers to remain at their machines constitutes working and does not qualify as a bona fide meal period.

(5) Do not pro rate the salary of a part-time exempt employee to less than $455 per week. A part-time employee loses his or her exempt status if he or she receives less than $455 per week, pursuant to the FLSA salary level test. This could be an issue with work hour cutbacks in many companies.

(6) Do not make improper deductions from the salaries of exempt employees. In order for salaried exempt employees not to lose their exemption, the law prohibits the docking of the employee’s pay, with a few specified exemptions, because of variations in the quality or quantity of work performed. Exempt status requires the payment of a full week’s salary for any week in which the employee performs any work. Deductions for unauthorized absences, recouping the cost of lost or damaged equipment, or recouping the costs of employee errors are prohibited. An employer is only allowed to deduct full-day absences for personal reasons or for sickness or disability pursuant to a bona fide policy or practice. These rules do not prohibit an employer leave policy, in which an employee is provided a certain amount of paid time off. However, if a salaried employee exhausts such leave and does not otherwise fit any of the exemptions, such as by taking a half day off beyond the leave limits, he or she must still be paid the full salary for that week in order to retain the exemption. He or she may be subject to a separate disciplinary procedure for taking the leave, however, if it was unauthorized.

HOW TO AVOID TEN COMMON MISTAKES MADE BY EMPLOYERS IN REGARD TO DISCRIMINATION

Statistics show that the economic downturn, with its layoffs and terminations of employment, are resulting in a big upswing in discrimination complaints. In fiscal year 2008, the number of charges filed with the Equal Employment Opportunity Commission on the basis of race were up 35%, charges filed on the basis of sex discrimination were up 30%, age discrimination complaints were up 26%, disability related complaints were up 20% and charges of retaliation were up 34%. There are many steps that an employer can take to lessen the change of such charges being filed. Here are 10 tips:

1. Be aware of the law. Changes in discrimination laws are ongoing. Most notable recently were changes in the Americans with Disabilities Act. An employer who does not keep up to date on these changes is risking legal problems.

2. Establish and communicate policies to prevent discrimination. This is particularly important in the area of sexual harassment, where the failure to have and communicate a strong and legally sufficient policy against sexual harassment negates an important defense for employers when such claims are brought. Employers need to communicate their discrimination policies on a regular basis. This can be accomplished periodically through paycheck inserts or by listing the policy on the company web site. Employees should be required to sign off when they receive the policy, at least initially or when a change is made, and the employer should keep record of periodic distributions of the policies.

3. Enforce policies uniformly and fairly. Employers must treat "similarly situated" persons in a like manner in regard to the hiring process, the terms and conditions of employment, and terminations. Employers must be consistent in the application of rules for employment infractions. An employee should not be given a lesser penalty because he or she is “a nice person” and likewise, an employee should not be given a harsher penalty simply because he or she is disliked.

4. Train management personnel, especially front line managers, regarding civil rights protections and how to deal with discrimination complaints. It is common for employers to get into trouble for emotional or snap decisions made by front line managers. A solution is to require two people to make firing decisions. Do not limit responses regarding discrimination to written complaints. Do not make the complaint process overly difficult.

5. Conduct impartial, objective and prompt investigations of complaints regarding harassment and discrimination. Blindly taking the side of management employees can lead to big trouble for employers. Follow up on investigations and resolve disputes promptly. Follow up with a complainant after the fact to ensure that the problem is not reoccurring. Do not assume the problem is solved because no one is complaining. Make findings based upon a preponderance of the evidence in “he said, she said” situations. It is important to make a determination on discrimination complaints if at all possible. An employer can rely upon the credibility of the complainant and the respondent in making such determinations. Also be sure to interview all persons with relevant knowledge of the complaint, even if they did not directly witness the incident that gave rise to the investigation.

6. Do not invite retaliation actions by employees who file discrimination complaints. Some employers think they can "get tough" with employees who file a complaint. They may institute new guidelines or rules that only apply to the individual who filed the complaint. Fear of retaliation is the most common reason given by employees for failure to report discrimination. They must see by the employer’s actions that discrimination will not be tolerated and that employees will be protected, such as by keeping investigation information confidential. Avoid inadvertent retaliation, such as by moving the harassed party to a less desirable location or job rather than the harasser.

7. Keep sufficiently detailed disciplinary records. If your company has a progressive discipline policy, document the steps that were taken to follow the policy. Communicate problems and performance deficiencies as they occur. Do not wait until the annual review (or worse) until termination to honestly communicate about problems. For discipline less than termination, always communicate how to overcome deficiencies.

8. Be direct and specific about the reasons for termination. Focus only on big issues and stay away from trivial problems.

9. Treat employees with dignity and respect.

10. Focus on a person's skills relative to the job in question in hiring interviews or when making termination decisions. A company should consider its stated and verifiable needs and focus on the person's qualifications, skills and experience in regard to those needs when making such decisions.

ACT 32 AND THE NEW EMPLOYER WITHHOLDING RULES

The tax reforms and mandated consolidated county-wide tax collection provisions of Act 32 include new withholding rules for employers. These major changes become effective January 1, 2012, or possibly earlier if decided by the tax collection district. Employers will need to understand and be prepared for the following changes:

Under the new rules, employers will be required to deduct from each employee’s compensation, the greater of the employee’s resident tax or the employee’s non-resident tax. Information regarding the applicable resident and non-resident tax withholding amounts will be found in the DCED tax register. The certificate of residency, which is a form to be supplied by DCED, will supply the information regarding the applicable municipality and school district for each employee. After completing the initial certificate of residency, any employee who changes residence must complete a new certificate. The certificate is attached as an addendum to the federal form W-4.

Employers will also be required to determine from the DCED register, the identity of the tax collector for the place of employment. In all cases, the tax collector will be a county-wide collector as provided under Act 32. Employers must file tax returns and pay all tax withheld to the tax collector for the employee’s place of employment and can no longer pay tax directly to the collector for a school district or municipality if that collector is not the collector for the place of employment.

Finally, employers will be required to file more detailed tax returns. DCED has been directed to promulgate a new employer quarterly tax return form which will be used state-wide and require substantially more information. In some cases, employers may be required to file monthly returns.

SUCCESSION PLANNING FOR THE CLOSELY HELD BUSINESS – PART V

This fifth article in the series will discuss involuntary transfers of shares of a closely held business.

Often an important concern for small businesses, buy-sell agreements can be used to restrict the involuntary transfer of shares- i.e., the transfer of shares to a creditor or to an estranged spouse as part of a divorce settlement. The most common method of dealing with this issue is to provide for the automatic offer of stock subject to an involuntary transfer to the company and/or the remaining shareholders immediately before an involuntary transfer would otherwise take effect.

Although there is no downside risk to inclusion of such a clause in a buy-sell agreement, there unfortunately is no way to ensure that a bankruptcy court will uphold such a provision. Furthermore, depending on state law, a spouse may be able to take the position that a restriction on involuntary transfers is not effective unless the restriction complies with applicable statutes governing marital or premarital agreements. Such statutes generally require fair and reasonable disclosure of the assets or financial obligations of the other party (the shareholder-spouse in this case) prior to the spouse's consenting to the marital or premarital agreement.

Two tools can reduce the possibility that a restriction on involuntary transfer will be held unenforceable. First, the spouse of each shareholder can execute a spousal consent as part of the buy-sell agreement. The consent would confirm that the spouse has read and agrees to the terms of the agreement, including the methodology for determining valuation of the shares in the event of an involuntary transfer. Second, the buy-sell agreement can provide a fair and reasonable method for determining the price used in the event of an involuntary transfer.

Other transfer situations include:

Termination of employment or retirement. It is a good idea to document the restrictions that apply to stock held by a shareholder who is terminating employment, whether due to retirement or some other reason. Most business owners do not want a shareholder who has terminated employment or retires to retain his or her shares. The build-up of cash surrender value in certain life insurance policies or money saved and placed in escrow can provide funds to buy all or a certain portion of a termination shareholders' shares. The balance of the purchase price can be paid pursuant to the terms of a promissory note. If funding is not assured, the purchaser (i.e., either the corporation or the remaining shareholders) can have the option but not obligation to acquire the shares. It may also be prudent to provide that the purchase price in the event of termination "for cause" is less than the purchase price that would otherwise have applied.

Disability. The parties may want to address-separately from other reasons for termination of employment-the disposition of shares if a shareholder has to terminate employment as a result of disability. The company or the other shareholders may want to acquire disability insurance to provide funds to buy a shareholder's shares upon his disability.

Disclaimer and IRS Circular 230 Notice:

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