Winter 2007
Employer COBRA Notification Responsibilities
Employers providing employee health care coverage need to be aware of the responsibilities placed on them by COBRA’s notification requirements. What some employers might not realize is that the law makes them responsible for providing health care continuation coverage notices to their covered employees and dependents. Furthermore, not all health care insurers provide COBRA notification services, so the burden falls on the employer to make sure the proper notifications are made.There are two notices that the law requires employers present to their employees. The first is the general notification of COBRA rights, which must be provided to employees within 90 days of coverage under a health plan. Secondly, an employer must provide a detailed explanation upon the termination of an employee’s or dependent’s coverage under the employer sponsored plan, as would occur when a employee quits or is fired, divorces a spouse, or when a child reaches the maximum covered age.
An employer who fails to properly notify its covered employees could face severe consequences and could find itself paying for a former employee’s or dependent’s health care, at least up to the level that the employee would have been covered under the original health care plan. Furthermore, an employer could face an excise tax and statutory penalties totaling $200 per day per violation and paying the former employee’s or dependent’s legal fees and costs.
FLSA Overtime Issues
Employers should put in some overtime research to make sure they are in compliance with the Fair Labor Standards Act (FLSA) regarding overtime pay to hourly waged employees. FLSA class action lawsuits have cost Starbucks $18 million, Bank of America $22 million and Rite Aid $25 million. While some employees are exempt from overtime pay, like those in executive, administrative, professional, certain computer, or outside-sales positions, the exemption determinations need to be made on a case-by-case basis and not solely by job title alone. This distinction is an important one as some employees with the same job title actually do different work and may require different classifications.
To avoid costly liability, employers should conduct an in-house audit of wage practices and job classifications to make sure all employees are correctly designated as overtime exempt or non-exempt and are receiving the appropriate overtime payouts. The best opportunity for this kind of self-evaluation is following an internal reorganization or increase in business which affects the number of hours worked by employees. One method for conducting such an audit is to develop or update detailed job descriptions and to have an attorney skilled in this area of the law review initial exemption determinations based on those descriptions.
The FLSA is stacked in favor of employees and allows them up to two years to claim an employment violation (three years in the case of willful violations). Those employers found to be operating in violation of the FLSA are not only liable for the unpaid wages, but also an equal amount in liquidated damages and are further on the hook for the employees’ attorneys’ fees and court costs
Succession Planning for the Closely Held Business – Part I
Although many small business owners envision passing along their company to children or other family members, without proper business succession planning, transfer taxes and liquidity problems often cause even the most successful businesses to be sold or liquidated upon the death of a key owner. This series of articles will focus on planning techniques that can be implemented to insure the smooth and successful transfer of a closely held business to future generations. Part I, included in this newsletter, will discuss the use of buy-sell agreements. Later newsletters will discuss issues such as: life insurance as a funding mechanism, valuation, funding retirement of key owners, and involuntary transfer of shares in the event of divorce, employment termination, or disability.
Sometimes referred to as a stock purchase agreement, a buy-sell agreement is an arrangement among the shareholders of a corporation that imposes restrictions on the transferability of stock held by each of the parties to the agreement. The use of a binding agreement by the shareholders of a closely held corporation can assure that:
- a shareholder can convert his/her stock in the business into liquid assets;
- shares will be sold only to parties approved by the other shareholders;
- a shareholder’s beneficiaries can receive diversified assets upon the death of a shareholder;
- valuation of the stock for estate tax purposes is established.
Restrictions on who can purchase the stock of a shareholder can be particularly important for S Corporations because such restrictions can insure that the corporation won’t be disqualified as an S Corporation due to sale of stock to a non-qualifying purchaser.
There are two basic types of buy-sell agreements, the cross-purchase agreement, and the stock redemption agreement; however, a combination of the two is possible. While these agreements can be drafted to allow some discretion as to the purchase obligations, buy-sell agreements can only be truly effective in certain situations if they include mandatory purchase provisions.
Cross-purchase Agreement
A cross-purchase agreement is an arrangement among the shareholders of a corporation to purchase the remaining shares of a shareholder who is retiring or who has died. The agreement can be drafted to arrange for the stock to be purchased in equal shares by the remaining shareholders or according to a percentage interest in the corporation. However, the purchasing shareholder is responsible for funding the purchase, which can be difficult for younger shareholders.
Stock Redemption Agreement
A stock redemption agreement requires the corporation to purchase or redeem the stock of a retiring or deceased shareholder, and may provide for redemption under other circumstances such as employment termination. This type of agreement requires the corporation to have sufficient assets to redeem the shareholder’s stock, which can be accomplished by establishing a fund set aside for this purpose. However, an unexpected shareholder death can put a corporation in the position of not having sufficient assets to redeem the shares. Corporations and shareholders (or the shareholder’s estate administrator) may consider or include provisions for installment payments for the redemption of shares.
Combination Agreements
A buy-sell agreement can be drafted to require the corporation to redeem a certain number of shares and the remaining shareholders to purchase the remaining shares, or it can provide for the shareholders to get first option to purchase as many shares as they desire and then require the corporation to redeem any remaining shares.
Uniformed Services Employment and Reemployment Rights Act
With reserve troops still being called to serve in Iraq, employers should be aware of their own and their employees’ rights under the Uniformed Services Employment and Reemployment Rights Act (USERRA). This Act protects civilian employment for those reservists called to active duty.
The Act requires that all employers keep a serviceperson’s position open for them to return to regardless of the duration or frequency of their tours of duty. Upon returning, servicepersons must be reemployed in the same position they would be in had they not left, and receive the same pay, benefits and training that they originally would have received.
Employees have the responsibility of notifying their employers in advance of all military duties requiring an absence from work. The timeline, in which an employee has to return back to work following military service in order to be covered under USERRA, is determined by the amount of time he or she spent on military duty, and varies from the next shift to 90 days. All claims against employers for violation of USERRA go through the United States Department of Labor, and any employer found to be willfully violating the Act may be required to pay liquidated damages and attorney fees.
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