July 2009 Archives

July 31, 2009

Employment-A Good Question: The Second Circuit Asks the New York Court of Appeals Whether The Faragher-Ellerth Defense Is Available Under The New York City Human Rights Law

Zakrzewska v. The New School, No. 09-0611-cv, is one of an increasing number of employment discrimination cases that has been brought in federal district court under one or both New York anti-discrimination laws--the New York State Human Rights Law ("NYSHRL") and the New York City Human Rights Law (the "NYCHRL"), rather than under Title VII of the Civil Rights Act of 1964 ("Title VII") . In the case, plaintiff Dominika Zakrzewska sued her co-worker, defendant Kwang-Wen Pan, and her former employer, defendant The New School ("TNS"), alleging sexual harassment and retaliation in violation of the nondiscrimination requirements of the NYCHRL. On a motion for summary judgment by TNS, the question of whether the "Faragher-Ellerth defense", which is an affirmative defense to a claim of sexual harassment by the employer in cases arising under Title VII, applies to sexual harassment and retaliation claims brought under the NYCHRL. The District Court certified this question to the Second Circuit. In turn, the Second Circuit certified the question to the New York Court of Appeals, due to the absence of authoritative state court decisions, particularly the absence of any decision by the New York Court of Appeals, the importance of the matter to the state, and the need to answer the question to resolve the instant case.

The Faragher-Ellerth defense originated in two Supreme Court cases: Faragher v. City of Boca Raton, 524 U.S. 775 (1998) and Burlington Industries, Inc. v. Ellerth, 524 U.S. 742 (1998). Under the Faragher-Ellerth defense, an employer is not liable under Title VII for sexual harassment committed by a supervisory employee if it sustains the burden of proving that (1) no tangible employment action, such as discharge, demotion, or undesirable reassignment, was taken as part of the alleged harassment, (2) the employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and (3) the plaintiff employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise.

In Zakrzewska, the District Court concluded that, if the Faragher-Ellerth defense applies to the plaintiff's claims under the NYCHRL, then the defendant, TNS, is entitled to judgment as a matter of law. As to whether this defense applies, the District Court examined the provision of the NYCHRL (found in section 8-107, subdivision 13(b) of the New York City Administrative Code) which sets forth three circumstances under which an employer can be held liable for the acts of an employee that violate the nondiscrimination rules of the NYCHRL:

(1) the employee exercised managerial or supervisory responsibility;

(2) the employer knew of the employee's discriminatory conduct, and acquiesced in
such conduct or failed to take immediate and appropriate corrective action; or

(3) the employer should have known of the employee's discriminatory conduct and
failed to exercise reasonable diligence to prevent such conduct.
The District Court found that there was at least some evidence that defendant-Pan was a manager employed by TNS (circumstance (1) above), so that TNS has liability for Pan's harassing and retaliatory conduct under the NYCHRL unless the Faragher-Ellerth defense applies.

Interesting Point: The NYCHRL takes a different and less employer-protective approach to employer vicarious liability than the Faragher-Ellerth defense. The NYCHRL creates vicarious liability for an employer for the acts of its managerial and supervisory employees even where the employer has exercised reasonable care to prevent and correct any discriminatory acts, and even where the aggrieved employee unreasonably has failed to take advantage of employer-offered corrective opportunities. Further, the Local Civil Rights Restoration Act of 2005 (the "Restoration Act") requires that the NYCHRL be construed liberally, without regard to how Federal or New York State civil and human rights law has been interpreted. This different and less employer-protective approach of the NYCHRL, coupled with the Restoration Act, may tempt the New York Court of Appeals to decide that the Faragher-Ellerth defense does not apply to a case brought under the NYCHRL. In a footnote in Zakrzewska, the Second Circuit itself says that in Williams v. New York City Hous. Auth., 872 N.Y.S.2d 27 (1st Dept. 2009) the York Supreme Court, with the Restoration Act in mind, suggested that the Faragher-Ellerth defense is not available in lawsuits brought under the NYCHRL because "the text and legislative history represent a desire that the NYCHRL meld the broadest vision of social justice with the strongest law enforcement deterrent."

July 29, 2009

ERISA-Sixth Circuit Rules That CBA Provides Lifetime Health Care Benefits, But Remands Case To Determine The Scope Of Those Benefits

Reese v. CNH America LLC, Nos. 08-1234/1302/1912 (6th Cir. 2009) is the latest federal appellate court case dealing with whether and to what extent an employer may eliminate or modify retiree health care benefits. The case was brought by a group of former employees and their spouses who sought, among other things, a declaration that they are entitled to lifetime health care benefits from the employer. The case ultimately found its way to the Sixth Circuit Court of Appeals. There, the Court found that a collective bargaining agreement (the "CBA") granted retirees health care benefits for life. However, the Court was unable to determine the scope of those benefits, and remanded the case to the district court to make that determination.

In analyzing the case, the Court said that, while ERISA heavily regulates a promise to provide lifetime pension benefits to retirees, a promise to provide lifetime health care benefits to retirees is regulated solely by contract. The promise of health care benefits is reviewed by the Court differently, depending on whether or not the promise stems from a CBA. If the health care benefits were not collectively bargained, the Court requires a clear statement in the plan document that lifetime coverage was intended in order to conclude that the employer meant to promise health care benefits for life. By contrast, where-as here-the health care benefits stem from a CBA, the Court will apply ordinary principles of contract interpretation to determine whether those benefits are to be provided for life.

In this case, the CBA, as in effect during 1998, stated that an employee who retires under the company hourly pension plan after 7/1/94, or his or her surviving spouse if eligible to receive a pension under that plan, is eligible for health care benefits, and no contributions are required to receive these benefits. The Court concluded that this language indicates an intention to create health care benefits for life. It ties entitlement to the health care benefits to retirement and to eligibility for a pension, and it does not contain a specific clause which limits the duration of the benefits. The Court noted that the governing SPDs warn that an amendment or termination of the company's benefit plans may affect a retiree's health care coverage. This warning may be treated as a reservation of rights, which prevents the health care benefits from being lifetime benefits, so that the employer may terminate or change the health care benefits at any time. However, the Court further noted that the SPDs also contained language indicating that the governing CBAs represent the full commitment of the employer as to benefits, and that the CBAs will govern in the case of any discrepancy between the CBAs and the SPDs. Thus, notwithstanding the reservation of rights clause in the SPDs, these other statements in the SPDs prevent the employer from having a unilateral right to terminate or change the health care benefits. Based on the foregoing, the Court concluded that the retirees' health care benefits are lifetime benefits.

But exactly what health care benefits were promised? The Court could not tell. The Court found that the CBA and related documents did not say anything about subsequent modifications to the health care benefits, and the provisions of the CBA, extrinsic evidence provided by the parties and common sense suggests that the parties contemplated reasonable modifications. As such, the Court ruled as follows. The plaintiffs are entitled to health care benefits for their lives. But this does not mean that that these benefits must be maintained precisely at the level provided by the CBA in effect in 1998. The employer cannot terminate all health care benefits for the retirees, but it may reasonably alter them. Subject to this guidance, the case is remanded to the district court to decide how and in what circumstances the employer may alter the retiree's health care benefits.

July 28, 2009

Employee Benefits-IRS Is Concerned About Tax Scams Involving Retirement Plans

The IRS has been publishing various tax tips on its website this summer. In one of the tips, titled "Five Tax Scams to Avoid this Summer", the IRS reminds us to beware of tax scams involving retirement plans. The IRS says that it continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits.

July 28, 2009

ERISA-The Sixth Circuit Rules That A Program of Insured Benefits To Which An Employer Pays The Premiums For At Least One Employee Is Subject To ERISA As To All Employees

In Helfman v. GE Group Life Assurance Company, No. 08-2168 (6th Cir. 2009), the Court faced the question of whether a program, which consisted of two insurance policies that paid long-term disability benefits to employees (the "Program"), was subject to ERISA. The plaintiff did not want the Program to be subject to ERISA, because he was bringing a state law claim against the insurers under the Program which ERISA would preempt. The case centered on whether the Program was exempt from ERISA under the "safe harbor" found in the Department of Labor's regulations at 29 C.F.R. § 2510.3-1(j). For the safe harbor to apply to the Program, among other requirements of the regulations, no premiums may be paid to the Program by an employer (the "No Premium Condition").

In the case, the plaintiff's employer paid all of the premiums under the Program, except as to the plaintiff, since the plaintiff had reimbursed the employer for the premiums the employer had paid to the Program on the plaintiff's behalf. The plaintiff argued that, since he paid his own premiums, the No Premium Condition is satisfied as to the plaintiff, and the Program should not be subject to ERISA with respect to the plaintiff. The Court responded to this argument by stating that the purpose of ERISA preemption is to avoid conflicting federal and state regulation and to create a nationally uniform administration of employee benefit plans. Thus, a program providing employee benefits cannot be subject to ERISA as to some employees, but not subject to ERISA, and thus subject to state law, as to the others. Where, as here, the employer pays the premium due on behalf of at least one employee, and regardless of whether the other employees pay their own premiums in full by direct payment to the insurer, by reimbursing the employer or by some other means, the No Premium Condition is failed as to all employees, and ERISA must apply to the program in question in its entirety. Thus, the Program is subject to ERISA, as to all employees.

July 27, 2009

ERISA-Seventh Circuit Holds That Letters Denying A Claim For Disability Benefits Without Refuting Contrary Evidence Were Not Sufficient To Support Summary Judgment

In Love v. National City Corporation, No. 08-1722 (7th Cir. 2009), the plaintiff, Nancy Love, had worked for National City Corporation for twenty years before leaving due to health problems. After her physician diagnosed her with multiple sclerosis, Love applied for and received short term disability benefits--and subsequently long-term disability benefits--through National City's Welfare Benefits Plan ("the Plan"). However, three years after Love began receiving disability benefits, the Plan administrator terminated her benefits, by a letter stating that she no longer fit the Plan's definition of "disabled." To be "disabled" under this definition, an employee can no longer perform any job. Love appealed the benefits-termination decision and the Plan denied her appeal, again by letter. Love then sued the Plan under ERISA, alleging that her disability benefits were terminated without sufficient explanation or medical support. The district court granted summary judgment for the Plan. However, the Seventh Circuit found that the Plan did not adequately explain why it concluded Love was no longer disabled. Therefore, it reversed the judgment of the district court, with instructions to remand to the Plan administrator for further proceedings.

As to Love's ERISA claim, the Court noted that ERISA requires a plan administrator to communicate specific reasons for a denial of benefits to the claimant, and to address any reliable evidence of eligibility for those benefits put forward by the claimant. The Plan had received reports and records which contained evaluations and conclusions of Love's own treating physicians, and which indicated that Love could not perform any job and was "disabled" within the Plan's definition. Here, neither the initial benefits termination letter from the Plan administrator, nor the subsequent letter denying Love's appeal, sufficiently explained the denial. Both letters asserted that all relevant medical evidence had been considered in determining that Love was not disabled, but neither letter addressed the contrary evaluations and conclusions of Love's own physicians or explained why the reviewer discredited those evaluations and conclusions.

July 27, 2009

Employee Benefits-Tax Court Case Reminds Us To Be Careful With Plan Loans

An article appearing in TheStreet.com says that borrowing from retirement plans has been surging. In hard times like the present, these loans are attractive to plan participants. As this article points out, it relatively easy to get this type of loan, as there is no bank or other institutional lender involved. Also, there is usually no risk of denial or need for collateral, and (when the lender/plan is a defined contribution plan-the most usual case) the interest due on the loan is paid to the participant's own account in the lending plan.

The problem to watch out for is the plan loan, and even more, becoming taxable. To the extent that the loan is taxable for federal income tax purposes, the loan is taxed at ordinary income rates and further, if the participant is under age 59½, a 10% penalty is imposed on the amount taxable.

What rules govern loan taxability for federal tax purposes? In the case of a qualified retirement plan (again, as are most of the retirement plans which make loans), the rules are found in Section 72(p) of the Internal Revenue Code. Under those rules, generally, a loan from a qualified retirement plan is treated as being a taxable distribution. However, as an important exception, a loan will not be taxable:

--to the extent that the loan, when added to the outstanding balance of all other loans from the plan, does not exceed the lesser of: (1) $50,000 (reduced by the excess, if any, of the highest outstanding balance of loans from the plan during the 1-year period ending on the day before the date on which the new loan is made, over the outstanding balance of loans from the plan on that date (the "1-year excess") or (2) the greater of one-half of the value of the participant's vested benefit under the plan (e.g., the participant's vested account balance in a defined contribution plan) or $10,000; and

--if the loan, by its terms, is required to be repaid within 5 years (except for a loan to finance a principal residence), and to be amortized in substantially level amounts, with payments due at least quarterly, over the term of the loan.

The Treasury regulations under Section 72(p) add a few more requirements (See Treas. Reg. Sec. 1.72(p)-1).

Billups v. Commissioner of Internal Revenue, T.C. Summary Opinion 2009-86, illustrates a failure to meet the foregoing exception, so that a new plan loan, and even more, was taxable. In this case, the taxpayer, not yet 59 ½ years old, was employed by the New York City Transit Authority (the "NYCTA"), and was participating in the New York City Employees' Retirement System ("NYCERS"), a qualified retirement plan. On April 29, 2005, the taxpayer replaced a prior loan from NYCERS with a new 5-year loan, and received cash proceeds of $12,630 from NYCERS as a result. The prior loan had an outstanding balance of $27,012.73. The taxpayer's receipt of $12,630 increased his outstanding loan balance under NYCERS to $39,642.73, the amount of the new loan. On April 29, 2005, the taxpayer's vested account balance in NYCERS was $52,863.38, and ½ of that amount was $26,431.69.

Under these facts, to avoid tax on the new loan, the $39,642.73 amount of that loan, when added to the outstanding balance of all other loans from the plan, $27,012.73, could not exceed the lesser of (1) $50,000 (reduced by the 1-year excess-assumed by the Tax Court to be negligible for lack of information provided) or (2) the greater of $26,431.69 or $10,000. Here, however, the $39,642.73 amount plus the $27,012.73 old loan balance equals $66,655.46, which exceeds the $26,431.69 limit, resulting in a taxable amount of $40,223.77 (although the Tax Court made some further adjustments to the actual taxable amount here). Since the taxpayer was under age 59 ½, the Tax Court imposed the 10% penalty on the taxable amount.

Note: Since the new loan had a 5-year term, the statutory maximum, the entire new loan could be outstanding after the term of the replaced loan had ended. Thus, the entire amount of the new loan is taken into account when computing the amount taxable. Taxwise, it might have made more sense for the taxpayer to leave the old loan in place, and borrow only $12,630 (the total proceeds he received upon taking the new loan and cancelling the old one) with a 5-year term, since the taxable amount (without the Tax Court adjustment) would then have been only $13,211.04 (which is the $27, 012.73 old loan balance plus the $12,630 new loan minus the $26, 431.69 limit).

July 24, 2009

Employment-Today is July 24-Remember To Put Up Posters Showing The New Minimum Wage Rate

Effective today, July 24, the Federal minimum wage rate increases to $7.25/hr. The New York State minumum wage rate likewise increases to $7.25/hr. Don't forget to put up revised minimum wage rate posters, which show the new rate, at the workplace. The revised Federal poster can be found here. The revised New York State poster can be found here.

July 24, 2009

Employment-New York Reports Highest Unemployment Rate In The State Since 1992

The following unemployment statistics were reported on July 16, 2009 by the New York State Department of Labor on its website. New York State's unemployment rate increased to 8.7 percent in June 2009, its highest level since October 1992. New York City's rate increased to 9.5 percent in June (the highest level since July 1997), while the rate outside of New York City climbed to 8.2 percent, the highest since June 1983. In June 2009, the number of unemployed state residents jumped to 854,200, the greatest number on record (current data extend back to 1976). The report is here.

July 23, 2009

ERISA-Tenth Circuit Holds That The Plan Fiduciary Is Not Liable For The Employer's Failure To Adequately Fund A Medical Benefits Plan

The case: In Holdeman v. Devine, No. 07-4235 (10th Cir. 2009), the Court ruled that the plan fiduciary was not liable for the employer's failure to adequately fund its self-funded medical benefits plan.

In this case, the plaintiff was the representative of a class of employees and their dependents who were participants in a self-funded medical benefits plan, known as the State Line & Silver Smith Casino Resorts Employee Benefits Plan ("the Plan"). The Plan was sponsored and funded by State Line Hotel, Inc. and its related entities ("State Line"). The plaintiff and his class members were left with significant outstanding medical bills when State Line failed properly to fund the Plan, and then terminated the Plan and filed for bankruptcy. The plaintiff sued Michael Devine, in his capacity as the Plan's fiduciary, for violations of ERISA alleging that Devine had failed to assure that the Plan was sufficiently funded to pay all submitted medical claims. Devine was the Plan's trustee and plan administrator, and thus the Plan's fiduciary. He was also an officer, and eventually the Chief Executive Officer, of State Line.

In analyzing the case, the Court stated that it was reviewing the district court's factual findings for clear error and its legal conclusions de novo. The Court noted that, under the liability-creating provision of Section 409 of ERISA, any individual who is a fiduciary with respect to a plan, and who breaches any of his fiduciary duties to that plan, is liable for any losses resulting from that breach. Section 502(a)(2) of ERISA provides that beneficiaries of the plan may bring a private cause of action against a fiduciary to enforce Section 409. To prevail on this claim, however, there must be a showing of some causal link between the alleged breach and the loss the beneficiaries seek to recover.

The Court continued by noting that, under ERISA, a fiduciary has a duty to collect all funds to which the plan is entitled, so those funds can be used on behalf of plan participants and beneficiaries . In this case, however, the plaintiff cannot prevail. Even assuming that Devine breached his duty to collect all funds, the plaintiff has failed to establish that the district court's factual finding on cause of loss is clearly erroneous. The district court had found that it was more likely than not that Devine's breach of his collection duty did not cause the under-funding of the Plan and consequently the Plan's inability to pay participants' medical bills. The district court indicated that State Line had serious financial problems, for example, it needed any available funds to pay its creditors or face being shut down or other adverse consequences. Even if Devine, as trustee of the Plan, had pursued aggressive tactics to make State Line fund the Plan, such as, for example, threatening to sue State Line for its outstanding obligations to the Plan, it was highly unlikely that the Plan would have been able to receive additional funding from State Line. Thus, it was State Line's poor financial condition, not anything Devine did or failed to do, that caused the loss in the form of unpaid medical bills. Without a causal link between Devine's breach and the losses claimed by the plaintiff, Devine has no liability as plan fiduciary.

Note to Employers: The plan fiduciary may have escaped liability here, but that was due to the employer's precarious financial situation. This case serves as a reminder that at least one plan fiduciary has responsibility, under ERISA, to collect delinquent contributions and to otherwise make sure that a plan receives the funds to which it is entitled.

July 22, 2009

Employee Benefits-Third Circuit Rules That Payments To An ESOP To Redeem Stock Are Not Deductible Due To Code Section 162(k)(1)

In Conopco, Inc. v. United States of America, No. 07-3564 (3rd Cir. 2009), the Third Circuit ruled that the taxpayer could not deduct approximately $13.8 million in payments it had made to its employee stock ownership plan (the "ESOP") to redeem stock of departing participants, due to Section 162(k)(1) of the Internal Revenue Code.

In this case, the ESOP's trust (the "Trust") had purchased 2.2 million shares of voting convertible preferred stock (the "Shares") from Conopco, Inc. ("Conopco"), using funds the Trust had acquired by issuing bonds. Under the ESOP's terms, the Shares were allocated to the employee-participants' accounts. When a participant ended his or her employment with Conopco, the participant could generally choose to receive the value of the Shares in a number of forms, including cash. If the participant elected to receive the cash, Conopco would redeem the Shares which had been allocated to the participant's account in the ESOP by making a cash payment to the Trust to buy back the Shares, and then the Trust would distribute the cash to the participant, within 90 days of the close of the plan year of the redemption by Conopco.

The question before the Court is whether the payments by Conopco to redeem the Shares are deductible under Section 404(k)(1). The Court stated that Section 404(k)(1) allows a C corporation, such as Conopco, to claim "as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation with respect to applicable employer securities." In turn, under Section 404(k)(2)(A)(ii), an "applicable dividend" is defined in relevant part as "any dividend which, in accordance with the plan provisions . . . is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than 90 days after the close of the plan year in which paid." However, Section 162(k)(1) of the Internal Revenue Code provides that "no deduction otherwise allowable shall be allowed ...for any amount paid or incurred by a corporation in connection with the reacquisition of its stock."

The Court concluded that the payments in question (assumed to be "applicable dividends" for purposes of Section 404(k)) could not be deducted because of Section 162(k)(1), since the payments had been made for the reacquisition of its stock. This obtains even though the distribution of cash from the Trust to the participant, by itself, is not a reacquisition, as the distribution cannot be separated from payment to the Trust to redeem the Shares when applying Section 162(k)(1). This is particularly so, since Section 404(k) itself requires, for a deduction to be allowable, a payment of a dividend to the plan coupled with a distribution of cash to participants. The payments in question had been made prior to 2001, but the Court noted in a footnote that, for payments made on or after August 30, 2006, its conclusion on the issue may be bolstered by Treasury Regulation section 1.162(k)-1, which states that amounts paid or incurred in connection with the reacquisition of stock include amounts paid by a corporation to reacquire its stock from an ESOP that are used in a manner described in section 404(k)(2)(A) (that is, generally, the amounts are ultimately paid in cash to the plan participants).

July 22, 2009

ERISA-Tenth Circuit Determines That Elimination Of A Pension Plan's Death Benefit Does Not Violate ERISA's Anti-Cutback Rule

Under the anti-cutback rule of ERISA Section 204(g), and the parallel anti-cutback rule under the Internal Revenue Code Section 411(d)(6), an employer generally cannot amend it's pension plan to eliminate or reduce:

-- an accrued benefit earned prior to the amendment;

--an optional form of payment, as to benefits earned prior to the amendment; or

-- a retirement-type subsidy or early retirement benefit, as to benefits earned before the amendment and, in the case of a retirement-type subsidy, for which the service requirements are met either before or after the amendment.

But is a death benefit, or a plan feature which pays out a lump sum actuarial equivalent of the death benefit at retirement, protected from elimination by the anti-cutback rule? The Tenth Circuit Court of Appeals says "no" in Kerber v. Qwest Pension Plan, No. 08-1387 (10th Cir. 2009).

In Kerber, the pension plan in question had a feature called the "Pensioner Death Benefit." This feature provided a death benefit, for certain qualified beneficiaries of retired employees receiving a service or disability pension. If no qualified beneficiary survived the retiree, then no Pensioner Death Benefit was paid on his or her behalf, except for a discretionary burial expense of up to $500. The amount of the Pensioner Death Benefit was generally equivalent to the retiree's wages for the year preceding March 1, 1993, and the Pensioner Death Benefit was payable only with respect to individuals hired before March 1, 1993. The pension plan allowed certain management employees to elect, upon retirement, a lump sum payout of their retirement benefits, and to include in that lump sum payout a discounted version of the Pensioner Death Benefit (the "DLS Equivalent"), which assumed the retiree would be survived by a beneficiary. During 2003, the employer amended the pension plan to eliminate the DLS Equivalent and the Pensioner Death Benefit for employees retiring after 2003. The plaintiffs, former employees, challenged this amendment on a number of grounds.

In dealing with the plaintiffs' claims, the Court indicated that the Pensioner Death Benefit was not an accrued benefit, citing the Third Circuit's decision in In re Lucent, 541 F. 3d 250 (3rd Cir. 2008) for this conclusion, and noting that the pension plan's definition of accrued benefit expressly excluded any death benefit and the Pensioner Death Benefit did not accrue on a year to year basis. Therefore, the Pensioner Death Benefit was not protected from elimination by the anti-cutback rule. The Court implied that the DLS Equivalent was likewise not an accrued benefit or an optional form of payment. Further, the Court concluded that the DLS Equivalent was not a retirement-type subsidy or an early retirement benefit. It said that the term "subsidy," as employed in the phrase "retirement-type subsidy," refers to a benefit which continues after retirement, and thus does not include a lump sum payment made to an employee upon retirement such as the DLS Equivalent. Also, to be a retirement-type subsidy, under the definition found in IRS regulations, the DLS Equivalent would have to be a retirement-type benefit, and the DLS Equivalent does not qualify as such because it does not relate to an accrued benefit-it relates to the Pensioner Death Benefit which is not an accrued benefit- and the DLS Equivalent itself is not a benefit which accrues year by year. Similarly, to be an early retirement benefit, under the definition found in IRS regulations, the benefit must be a retirement-type benefit, and again the DLS Equivalent does not qualify as such. Thus, the anti-cutback rule did not protect the DLS Equivalent from elimination.

July 20, 2009

ERISA-DOL Offers Some Relief On Form 5500 Reporting Requirements For 403(b) Plans

In Field Assistance Bulletin No. 2009-02, the Department of Labor (the "DOL") provides some relief on the Form 5500 reporting requirements for 403(b) plans, with respect to funding vehicles issued or established before January 1, 2009.
A 403(b) plan is a retirement plan which is intended to meet the requirements of Section 403(b) of the Internal Revenue Code, and which may cover only the employees of public schools, employees of certain tax-exempt organizations, and certain ministers. A 403(b) plan may be funded through one or more annuity contracts, or through custodial accounts invested solely in mutual funds. Generally, a 403(b) plan of a tax-exempt organization is subject to the reporting requirements of Title I of ERISA, including the requirement that a Form 5500 be filed, while a 403(b) plan of a public school or a church is not subject to these requirements.

The DOL has separately published revisions to Form 5500 and the related final regulations, generally effective for Form 5500s to be filed for plan years beginning after 2008. These revisions eliminated special limited reporting for 403(b) plans. Under the new rules, "large" 403(b) plans (generally plans with 100 or more participants) subject to ERISA Title I are required to include audited financial statements with their Form 5500. Small 403(b) plans (generally fewer than 100 participants) subject to ERISA Title I need not comply with the audit requirement. They will typically be able to use the Form 5500-SF (Short Form 5500); however, they must report aggregate financial information regarding the plan on this form. A concern has arisen that the historical treatment of 403(b) plans as a collection of individual annuity contracts and custodial accounts, with respect to which employees could engage in a range of actions without the consent or involvement of an employer or plan administrator, could make it costly, and in some cases impossible, to identify and obtain the financial information required to be included in the revised Form 5500s about certain of these contracts and accounts.

In view of this concern, the DOL has provided the following relief in Field Assistance Bulletin No. 2009-02. In preparing a Form 5500 (including a Form 5500-SF), the administrator of a 403(b) plan does not have to treat an annuity contract or custodial account as part of the 403(b) plan, provided that:
1. the contract or account was issued to a current or former employee before January 1, 2009;
2. the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions, to the contract or account before January 1, 2009;
3. all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
4. the individual owner of the contract or account is fully vested in the contract or account.

Further, current or former employees with only contracts or accounts that need not be included in the 403(b) plan's Form 5500 or Form 5500-SF under the above transition relief do not have to be counted as participants covered under the plan for purposes of preparing the Form 5500. The DOL will not reject a Form 5500 on the basis of a "qualified," "adverse" or disclaimed audit opinion, if the accountant expressly states that the sole reason for such an opinion is due to any contract or account, which is subject to the above relief, not being covered by the audit or included in the 403(b) plan's financial statements.

July 19, 2009

Employment-EEOC Provides Guidance On Understanding Waivers Of Discrimination Claims In Employee Severance Agreements

On its website, the Equal Employment Opportunity Commission (the "EEOC") has issued guidance on an employee's waiver of discrimination claims contained in a severance agreement. As the EEOC points out, an employer's decision to terminate or lay off certain employees, while retaining others, may lead discharged workers to believe that they were discriminated against based on their age, race, sex, national origin, religion, or disability. To minimize the risk of litigation, many employers offer departing employees money or benefits in exchange for a release (or "waiver") of liability for all claims connected with the employment relationship, including discrimination claims under the civil rights laws enforced by the (EEOC) -- the Age Discrimination in Employment Act (ADEA), Title VII, the Americans with Disabilities Act (ADA), and the Equal Pay Act (EPA). These employees are typically offered severance agreements and asked to sign a waiver at the time of termination. When presented with a severance agreement, many employees wonder if it is legal, and whether the employee should sign it.

The EEOC guidance is intended to answer questions that an employee may have about being offered a severance agreement in exchange for a waiver of actual or potential discrimination claims. The guidance:
-- provides basic information about severance agreements;
-- explains when a waiver is valid;
--addresses waivers of age discrimination claims that must comply with provisions of the Older Workers Benefit Protection Act (the "OWBPA"); and
--includes a checklist with tips on what an employee should do before signing a waiver in a severance agreement and a sample of an agreement offered to a group of employees giving them the opportunity to resign in exchange for severance benefits.

Although addressed to employees, this guidance would be helpful to any employer thinking about asking an employee to sign a waiver of claims as part of a severance agreement. The guidance is here.

July 17, 2009

ERISA-District Court Dismisses Stock Drop Case Against Computer Sciences Corp.

In In re Computer Sciences Corp.ERISA Litigation, Nos. CV 08-02398 and CV 08-02409, the Court granted summary judgment in favor of Computer Sciences Corp. and other defendants against a claim, among others, that they were imprudent under ERISA in having the company 401(k) plan continue to invest in employer stock.

In this case, Computer Sciences Corporation ("CSC") had made the CSC Matched Asset Plan, a 401(k) defined contribution plan (the "Plan"), available to its employees. Under the Plan, the employees could invest a percentage of their monthly compensation in various investment options, including the CSC Stock Fund. The Plan requires that CSC stock be offered as an investment option. CSC had apparently been "backdating" stock options granted to management. On June 29, 2006, CSC announced that the SEC had made an "informal request for information related to CSC's stock option grants and stock option practices," and that CSC was initiating a $2 billion buy back of its stock. The following day, the price of CSC stock declined 12%, resulting in corresponding declines in the Plan accounts of participants who had invested their accounts in the CSC Stock Fund. Plan participants, the plaintiffs here, filed a suit against CSC and others, claiming that the defendants had breached their fiduciary duty under ERISA by, among other things, imprudently continuing to invest Plan assets in CSC stock, since a lack of internal control over the stock option program led to an SEC investigation and the 12% stock price decline.

The Court rejected the plaintiffs' claims and granted summary judgment against the plaintiffs. In As to the claim of imprudence, the Court said that the plaintiffs did not present any evidence or argument that the defendants had failed to be prudent within the meaning of ERISA. A decline in stock price is not sufficient to make continued investment in employer stock imprudent. Holding fiduciaries liable for continuing to invest in employer stock would place them in an untenable position, as they could also be liable if they ceased investment in the declining stock and it later rebounded, or if selling off the investment itself caused a price decline. Further, the plaintiffs failed to prove that the defendants' actions caused any losses to the Plan participants, primarily because they failed to show that an alternative investment for the Plan would have produced better investment results, or that the plaintiffs would have paid a lower price for the investment in the CSC Stock Fund they had made for their Plan accounts if they had been aware of information that the defendants were concealing.

July 16, 2009

ERISA-Ninth Circuit Finds That A Participant Has Standing To Sue Under ERISA Even Though His Benefit Has Been Paid

In Harris v. Amgen, Inc., No. 08-55389 (9th Cir. 2009), Steve Harris and Dennis F. Ramos (the "Plaintiffs") sued Amgen, Inc. ("Amgen") and several Amgen directors and officers. The Plaintiffs alleged that the defendants had breached their fiduciary duties under ERISA in their operation of two defined contribution retirement plans, by allowing the plans to purchase and hold Amgen stock while knowing that the stock price was artificially inflated because of improper off-label drug marketing and sales, resulting in losses to the plan participants due to a significant decline in the stock price after the off-label activity became public. The district court had dismissed Harris's complaint on the ground that he lacked standing as an ERISA plan "participant" because he had earlier withdrawn all of his assets from his account in the retirement plan in which he had participated. The Ninth Circuit reversed the dismissal of Harris's complaint, finding that he has standing as an ERISA plan participant to seek relief under Section 502(a)(2) of ERISA.

In determining that Harris has standing as a plan participant, the Court noted that a plan participant under ERISA is any employee or former employee who is or may become eligible to receive a benefit of any type from the plan. This definition includes a former employee who has a colorable claim to vested benefits, but not a former employee who is seeking only a damage award. According to the Court, a former employee, who has received a full distribution of his or her account balance under a defined contribution plan, is treated as having a colorable claim to vested benefits, and not as seeking a damage award, when suing to recover losses to his or her account occasioned by a breach of fiduciary duty which allegedly reduced the account balance. Therefore, Harris has standing to sue. Also, the Court determined that, under these circumstances, Harris has standing to sue under Section 502(a)(2) of ERISA (suit against plan fiduciaries), even though he may also sue under Section 502(a)(1)(B) of ERISA (suit against the plan itself). In addition, the Court rejected the defendants' argument that Harris lacked standing under Article III of the United States Constitution because Harris has not sustained an injury that is redressable by the Court.

July 15, 2009

ERISA-Ninth Circuit Applies Abuse Of Discretion Standard To Uphold A Plan Administrator's Identification Of A Top Hat Plan's Beneficiary

In Sznewajs v. U.S. Bancorp Amended & Restated Supp. Benefits Plan, No. 07-16489 (9th Cir. 2009), the Court ruled that, when reviewing a plan administrator's identification of the beneficiary under a "top hat" plan, the "abuse of discretion" standard must be used. What is a "top hat" plan? It is an unfunded plan which is maintained by an employer primarily to provide deferred compensation to either a select group of management or a group of highly compensated employees.

In Sznewajs, an employee named Robert was a participant in the company's top hat plan (the "Plan"). Benefit payments under the Plan begin after the employee has both terminated employment with the company and has attained age 55. While still employed, Robert elected to have his benefit under the Plan paid in the form of a joint and survivor annuity, with the survivor annuity to be paid to his surviving spouse. However, Robert did not identify his spouse on the election form. At the time Robert made this election, he was married to Franciene. Robert left the company at age 53. Before reaching age 55, Robert divorced Franciene and married Virginia. Upon reaching age 55, Robert began to receive monthly annuity payments from the Plan, calculated based on the life expectancies of Robert and Virginia. Franciene then filed a claim with the Plan, requesting that it recognize her, and not Virginia, as Robert's surviving spouse, for purposes of receiving the survivor annuity upon Robert's death.

The Plan provided that the survivor annuity would be payable to the survivor designated "at retirement". The plan administrator determined that "retirement" meant the time that benefit payments were calculated and started, as opposed to the time that the employee left the company, so that Virginia should be treated as the surviving spouse. Franciene's claim eventually found its way to the Ninth Circuit Court of Appeals.

The issue before the Court was whether the plan administrator's decision that Virginia is the surviving spouse is correct. In analyzing this issue, the Court noted that the Plan grants the plan administrator discretionary authority to interpret the Plan. Therefore, under ERISA (after Metropolitan Life Ins. Co. v. Glenn, ___ U.S. ___, 128 S. Ct. 2343 (2008) ), the abuse of discretion standard, as opposed to the de novo standard, is to be used to review the plan administrator's decision, treating any conflict of interest that the plan administrator has as a factor to be taken into account in deciding whether it's discretion has been abused. Here, however, there is no conflict of interest. The identification of Franciene or Virginia as the surviving spouse will not have a financial impact on the Plan or the company. The present value of the anticipated benefits -- the amount of the Plan's liability --is the same either way, because any difference between Virginia and Franciene is offset by a recalculation of the amount of the monthly payment. Further, the de novo review standard, rather than the abuse of discretion standard, does not apply merely because the plan at issue is a top hat plan. While some cases suggest otherwise, it would be too confusing to treat a top hat plan differently from any other employee benefit plan for these purposes.

Continuing, the Court said that, in applying the abuse of discretion standard under ERISA, the Court must determine whether the plan administrator, in reaching the decision in question, exercised its discretion reasonably, meaning that its decision was based on a reasonable interpretation of the plan's terms and was made in good faith. Here, the plan administrator's decision centers on its interpretation of the term "retirement", which is not otherwise defined by the plan. The meaning of that term, as it applies to this case, is ambiguous, and nothing indicates that the plan administrator's interpretation was unreasonable or made in bad faith. Thus, the Court upheld the plan administrator's decision to treat Virginia as the surviving spouse.

Note for Employers: Even a top hat plan should provide that the plan administrator has discretion to interpret and apply the terms of the plan. As seen in Sznewajs, this will help ensure that a court will apply the abuse of discretion standard, rather than the de novo standard, when reviewing a decision of the plan administrator.

July 14, 2009

ERISA-Second Circuit Upholds Time Period Imposed By Plan For Bringing Suit

One protection that a plan and its fiduciaries have against litigation under ERISA is the statute of limitations, or any other limit on the time period, for filing a law suit. It is helpful when a court upholds a limit, imposed by the plan itself, on the period of time for bringing suit. This happened in Burke v. PricewaterhouseCoopers LLP, No. 08-1611-cv (2nd Cir. 2009).

The Case: In Burke, an employee had a claim under ERISA against the PricewaterhouseCoopers LLP Long Term Disability Plan (the "Plan"). The lower court had dismissed the employee's case. The facts were as follows. After the employee had been receiving disability benefits under the Plan for several months, on March 28, 2003, the plan administrator requested a Proof of Loss from the employee. The Plan itself required the employee to furnish the plan administrator with the Proof of Loss within thirty days after the date on which the plan administrator's request for the Proof of Loss is made. Although the employee furnished the Proof of Loss within the thirty day period, the plan administrator raised some additional matters, and subsequently informed the employee that her disability benefits were terminated, as of April 30, 2003, for lack of medical evidence. On September 25, 2006, the employee filed a suit in federal court, under Section 1132(a)(1)(B) of ERISA (which creates a cause of action for a participant to recover benefits), challenging the plan administrator's termination of her disability benefits.

The issue before the Court was whether the employee had filed her law suit before the applicable limitations period for filing had expired. The Plan itself provided that a claimant could not bring a legal action more than three years after the date by which Proof of Loss is required to be furnished. The Court noted that ERISA itself does not prescribe a limitations period for claims brought under Section 1132. Therefore, the applicable limitations period is the one specified in the most nearly analogous state statute, which, in this case, was New York States' six year limitations period for contract actions. However, New York permits contracting parties to shorten a limitations period, and to specify when the shortened limitations period begins, by written agreement. In this case, the three-year limitations period set forth in the Plan controls, and, as the Plan provided, this period begins on the date by which the Proof of Loss is required to be furnished (even though this beginning date could precede the first date on which the suit could be filed). Thus, the employee was required to file the law suit by April 27, 2006 -- three years from the date by which the Proof of Loss was due (such due date being April 27, 2003, which is 30 days after the date the Proof of Loss was requested). Accordingly, her filing on September 25, 2006 was late by almost five months. As a result, the Court upheld the lower court's dismissal of the case.

Thoughts for Employers: In Burke, the plan's having an express limitation on the period of time for a participant to file a suit resulted in a reduction of the applicable limitation period for filing from six to three years. Burke suggests that employers review their employee benefit plans and make sure that each of the plans expressly sets forth a time limit for a participant to file a suit for benefits or otherwise. At a minimum, the plan's provision setting forth the limitation period should indicate the length and starting date of the period. The limitation period should be reasonable, but it's length should be less than the length of the period which would otherwise apply under law. As seen from Burke, when considering the length and start of the plan's limitation period, attention must be paid to both ERISA case law and relevant State law. If the employer now amends a plan to add or revise a limitation on the period of time for filing a suit, the plan's participants should be notified of this amendment.

July 13, 2009

Employment-New Jersey Court Rules That An Employee's E-Mails Exchanged With Her Attorney Over The Employer's Computer System Is Subject To Attorney-Client Privilege

The Case: The opinion of the New Jersey appellate court in Stengart v. Loving Care Agency, Inc., No. A-3506-08T1 (Appellate Division/Superior Court, N.J. 2009) is must reading for an employer who provides e-mail access to its employees (practically all employers!), since it deals specifically with whether personal (non business) e-mail messages exchanged by an employee and his or her lawyer over the employer's computer system may be accessed and read by the employer, and it discusses generally the enforceability of company policy pertaining to employee privacy.

In Stengart, the employer had provided the employee with a laptop computer, a work e-mail address and a personal, web-based, password-protected Yahoo e-mail account. Prior to her resignation and in anticipation of suing the employer for discrimination, the employee communicated with her attorneys about this suit-a personal matter-by e-mail using this laptop and e-mail account. After her resignation and filing this suit, the employer extracted and created a forensic image of the hard drive from the computer the employee had been given. In using this image to review the employee's Internet browsing history, the employer's attorneys discovered and read the e-mail communications between the employee and her attorneys. Upon learning that the employer's attorneys had those e-mail communications, the employee's attorneys demanded, among other things, that the communications be returned to the employee. This request found its way to the New Jersey appellate court.

The employee claimed that the e-mail communications were protected by attorney-client privilege. The employer countered that, according to company policy, the employer had the right to access and review any e-mail sent or received over equipment it provided. The Court stated that it needed to review the enforceability of the company policy, and this review requires a balancing of the company's right to create and obtain enforcement of reasonable rules for conduct in the workplace against the need to maintain the attorney-client privilege.

The Court started its review by saying that New Jersey courts have recognized that employers may unilaterally disseminate company rules and policies through handbooks or manuals and impose their contents on employees. However, an employer's rules and policies must be reasonable, in that they must concern the terms of employment and reasonably further the legitimate business interests of the employer, to be enforceable by the courts. Here, the company policy reflects the entirely proper imposition of the employer's right to own and possess communications made by the employee in the furtherance of the employer's business. As interpreted by the employer, however, the policy purports to reach into the employee's personal life without a sufficient nexus to the employer's legitimate interests. The employer's claimed right to the employee's personal information seems to be based principally on the fact that the computer used to make personal communications is owned by the employer. The Court stated that it does not accept the employer's ownership of the computer as the sole determinative fact in determining whether to enforce a policy by which an employee's personal e-mails may become the company's property. Such a policy furthers no legitimate business interest. Individuals possess a reasonable expectation that personal communications will remain private.


The Court continued its review by noting that, under New Jersey law, communications between a lawyer and client in the course of their relationship and in professional confidence are privileged. The Court weighed the need to maintain the attorney-client privilege, which applies to the e-mails exchanged between the employee and her attorneys in this case, against the employer's claimed interest in ownership of or access to those e-mails based on company policy, and held that the latter must give way. Accordingly, the Court ruled that those e-mails were protected by the attorney-client privilege, and that the copies of the e-mails held by the employer's attorneys should be returned to the employee.

Thoughts for Employers: We may not have heard the last of this case, since the Court's decision is still subject to review in New Jersey. Also, it is not clear how the courts in other states would handle the issues presented. But while we are waiting for further judicial developments, we can note that the language of the Court's opinion provides instruction on what is required for company policy on personal use of employer-provided computers and media systems, and probably on any other matter pertaining to employee privacy in the workplace, to be enforceable. To obtain enforceability, such company policy needs to be:

-- clearly written and reasonable;

-- concerned with the terms and conditions of employment; and

--consistent with the employer's legitimate interests, e.g., the need to have an employee spend the workday focusing on his or her job, rather than attending to personal matters.

As to the policy pertaining to personal use of employer-provided computers and media systems, the policy may permit personal use-given that it is almost impossible to enforce a policy permitting no personal use-so long as the personal use does not interfere with providing sufficient attention to and the timely completion of work. The policy could have additional restrictions on personal use, e.g., allowing personal use only during lunch time and other designated work breaks. It should emphasize that an employee is not entitled to an expectation of privacy in any messages exchanged over the employer's computers and media systems. The policy should allow the employer to access and review all personal messages exchanged on its computers and media systems, except where the law requires otherwise. To avoid violating the law, e.g., when the communication being reviewed is subject to the attorney-client privilege, the policy can identify one person, such as the human resource director, as the only person who can access and review any employee messages, and mandate that if any such message appears to be confidential by law, the message be discarded and its contents not revealed to any other person or used for any purpose.

In any event, Stengart provides an impetus for an employer to review and revise its policies on an employee's personal use of employer-provided computers and media systems, and on other matters pertaining to employee privacy in the workplace, or to develop and disseminate such policies if the employer does not already have them.

July 9, 2009

ERISA-District Court Rules That Wachovia Did Not Violate ERISA By Announcing A Merger Of Investment Funds

In Olivet Boys' & Girls' Club of Reading and Berks County v. Wachovia Bank, N.A., NO. 5:08-cv-4702 (E.D. Pa. 2009), the Court was faced with the following facts. The plaintiffs were Olivet Boys' & Girls' Club of Reading and Berks County (the "Club") and the Club's money purchase pension plan (the "Plan"). All of the Plan's assets were invested in the Evergreen Limited Duration Fund (the "Limited Duration Fund"). The plaintiffs claimed, among other things, that defendant Wachovia Bank, N.A. ("Wachovia") had breached its fiduciary duty under ERISA. This claim was based on a form letter which Wachovia sent to the Club, explaining that the Limited Duration Fund would be merging into the Evergreen Ultra Short Opportunities Fund ("Ultra Short Fund"), and requesting that the Club consent to the exchange of the Plan's shares of the former fund for those of the new fund. The plaintiffs claim that, in the form letter, Wachovia misrepresented that the two Funds' investment objectives and principal investment strategies were "substantially similar." They allege that a simple review of the two Funds' investment strategies "makes it clear" that they are not similar. Nevertheless, the plaintiffs consented to the exchange of their shares, and the Plan subsequently lost $200,000 on the investment in the Ultra Short Fund.

The Court dismissed the claim of breach of fiduciary duty on two grounds. The simpler ground was that the plaintiffs did not detrimentally rely on any misrepresentation by Wachovia. As to the alleged misrepresentation, namely the statement in the form letter that the two Funds are "substantially similar", the allegation by the plaintiffs that a "simple review" would make Wachovia's alleged misrepresentation clear undermines any argument of reliance on that misrepresentation.

The second and more interesting ground was that Wachovia is not a fiduciary under ERISA, and thus has no fiduciary duty, because it did not render investment advice to the plaintiffs. The plaintiffs describe Wachovia's actions with respect to the new Ultra Short Fund as marketing, which does not rise to the level of investment advice. To rise to this level, under ERISA's regulations (at 29 C.F.R. Section 2510.3-21(c)), the alleged fiduciary must:

(1) either advise the plan as to the value of assets, or make recommendations to the plan as to the advisability of investing in, purchasing, or selling assets; and

(2) either (a) have discretionary authority or control with respect to the purchase or sale of the plan's assets, or (b) provide the advice or recommendations in (1) to the plan on a regular basis pursuant to a mutual agreement, arrangement or understanding with the plan under which the alleged fiduciary's services will serve as a primary basis for investment decisions with respect to the plan's assets, and that the advice or recommendations will be individualized.

Here, focusing on prong (2), the plaintiffs have not shown that Wachovia has the authority or control required in (a), or that the agreement, arrangement or understanding in (b) exists. Thus, Wachovia's "marketing" does not rise to the level of or otherwise constitute investment advice.

July 9, 2009

Employment-Sixth Circuit Rules That The Anti-Retaliation Provision Of Title VII Does Not Create A Cause of Action For An Individual Who Has Not Personally Engaged In A Protected Activity

In Thompson v. North American Stainless, LP, No. 07-5040 (6th Cir. 2009), the Court faced the question of whether § 704(a) of Title VII of the Civil Rights Act of 1964-which generally proscribes retaliation against an individual who exercises his or her rights under Title VII- creates a cause of action for an individual who is a victim of third-party retaliation, but who has not personally engaged in an activity protected by Title VII. After reviewing § 704(a), the Court announced that it was joining the Third, Fifth, and Eighth Circuit Courts of Appeal in holding that § 704(a) provides a cause of action only for an individual who has personally engaged in an activity protected by Title VII by opposing a practice, making a charge, or assisting or participating in an investigation.

In Thompson, from February 1997 through March 2003, the plaintiff, Eric Thompson, worked as a metallurgical engineer for defendant North American Stainless, LP ("North American Stainless"). Thompson met Miriam Regalado, currently his wife, when she was hired by North American Stainless in 2000, and the couple began dating shortly thereafter. Regalado had filed a charge with the Equal Employment Opportunity Commission ("EEOC") in September 2002, alleging that her supervisors discriminated against her based on her gender. On February 13, 2003, the EEOC notified North American Stainless of Regalado's charge. Slightly more than three weeks later, on March 7, 2003, the defendant terminated Thompson's employment. At the time of the termination, Thompson and Regalado were engaged to be married, and their relationship was common knowledge at North American Stainless. Thompson alleges that he was terminated in retaliation for his then-fiancée's EEOC charge, while North American Stainless countered that performance-based reasons supported the plaintiff's termination. Thompson's suit eventually found its way to the Sixth Circuit Court of Appeals.

In ruling on the case, the Court noted that § 704(a) of Title VII provides that "It shall be an unlawful employment practice for an employer to discriminate against any of his employees or applicants for employment . . . because he has opposed any practice made an unlawful employment practice by this subchapter, or because he has made a charge, testified, assisted, or participated in any manner in an investigation, proceeding, or hearing under this subchapter" (emphasis added). The Court read § 704(a) as creating a cause of action for a limited class of individuals. To be included in this class, an individual must show that the individual's employer discriminated against him because the individual personally engaged in an activity described in § 704(a). In the instant case, Thompson did not claim that he engaged in any of those activities, either on his own behalf or on behalf of Miriam Regalado. Thompson' financée had engaged in one of the activities by filing the charge with the EEOC, but Thompson himself had not. Thus, the Court concluded that § 704(a) does not provide Thompson with a cause of action.

July 8, 2009

Employment-Third Circuit Rules That Knowledge Of Employees Below Management Level May Not Be Imputed to Employer For Purposes OF Imposing Liability Under Title VII

In Huston v. Proctor & Gamble Paper Products Corporation, No. 07-2799 (3rd Cir. 2009), the Court faced a suit under Title VII of the Civil Rights Act of 1964 ("Title VII") for sexual harassment and retaliation. The plaintiff/ employee was appealing a summary judgment by the District Court in favor of the defendant/employer, Proctor & Gamble Products Corporation ("P & G"). The major issue facing the court was whether two P&G employees-namely, Traver and Romanchick- qualify as "management level", so that their knowledge may be imputed to P&G for purposes of imposing liability on P & G under Title VII.

The Court affirmed the District Court's summary judgment against the plaintiff. In doing so, the Court noted that, in the case of a claim for sexual harassment under Title VII, the employer is liable only if the employer either:

-- failed to provide a reasonable avenue for complaint; or

--knew or should have known of the harassment, and failed to take prompt and appropriate remedial action.

The primary question was whether P & G had knowledge of the sexual harassment of the plaintiff by her coworkers. Traver and Romanchick knew about the sexual harassment. But did P & G itself have this knowledge? The Court indicated that, for purposes of a Title VII suit for sexual harassment, knowledge of management level employees is imputed to the employer, while knowledge of lower level employees is not. The question then becomes whether Traver and Romanchick were management level employees. The Court answered this question as follows. The Court said, in effect, that an employee's status as a management level employee depends on the particular claim being brought against the employer. As such, an employee's knowledge of sexual harassment may be imputed to the employer when the employee is employed to report or respond to sexual harassment. An employee may be treated as being so employed in two circumstances:

--first, the employee is sufficiently senior in the employer's governing hierarchy, or is otherwise in a position of administrative responsibility over the employees under him, such as a departmental or plant manager, so that any knowledge of sexual harassment is important to the employee's general managerial duties. In this case, the employee usually has the authority to stop the harassment by, for example, disciplining employees under him or changing work assignments.

--second, the employee is specifically employed to deal with sexual harassment. Typically, this employee will be a part of the employer's human resources, personnel or employee relations group.

In the instant case, Traver and Romanchick did not qualify as management level employees, as described above. They had not been specifically employed to deal with sexual harassment. The District Court heard testimony that that P&G hired two types of employees at the plant in question: managers and technicians. The managers were salaried employees who have the authority to hire, discipline, and discharge the technicians, while the technicians, like Traver and Romanchick, were paid hourly wages and did not have the authority to hire, discipline, and discharge other employees. While they had some supervisory responsibility, Traver's and Romanchick's functions were limited to overseeing the production line work of their fellow technicians, to ensure that the other technicians were doing their jobs and that the machines ran smoothly. They had no authority to police for and stop harassment, or to otherwise affect any individual's employment status. Consequently, despite any knowledge by Traver and Romanchick of acts constituting sexual harassment of the plaintiff, Traver and Romanchick were not management level employees and their knowledge of these acts is not imputed to P & G.

July 7, 2009

Employee Benefits-IRS Finds That A Transfer Out Of An IRA Results In A Modification To A Series of Substantially Equal Payments Triggering 10% Penalty, While Tax Court Concludes Differently On A Withdrawal to Pay Higher Education Expenses

Section 72(t)(1) of the Internal Revenue Code (the "Code") imposes a 10% tax on early distributions (the "10% penalty") from qualified and tax-favored retirement plans, including an IRA. One exception, available under Section 72(t)(2)(A)(iv) of the Code, is that the 10% penalty will not apply to a distribution which is a part of a series of substantially equal periodic payments that:
-- are made not less frequently than annually; and
-- are made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and his or her beneficiary.
However, Section 72(t)(4) of the Code provides that, if the series of payments is subsequently modified (other than due to death or disability) before the later of the date on which the employee attains age 59 ½ or the 5th anniversary of the day on which the first payment in the series is made, then generally all payments in the series made before modification become subject to the 10% penalty retroactively. The IRS has provided guidance on the application of the substantially equal payment exception to the 10% penalty, including how to calculate the amount of the payments in the series, in Notice 89-25 and Revenue Ruling 2002-62.

An important issue under the substantially equal payment exception to the 10% penalty is what constitutes a modification. That was the subject of PLR 200925044. In that PLR, the taxpayer had begun taking distributions from her IRA at Company M in a manner which satisfied the substantially equal payment exception. However, to convert a portion of the securities in the IRA into a certificate of deposit, she transferred a portion of her account balance in the IRA at Company M (plus the account balance of her IRA at Company Y) -in a nontaxable trustee- to- trustee transfer- to an IRA at Company Z. The question facing the IRS was whether the transfer out of the IRA at Company M was a modification, and if so whether the modification could be corrected by returning the amount transferred plus earnings from the IRA at Company Z to the IRA at Company M. The taxpayer had not yet reached age 59 ½ or the 5th anniversary of the day on which the IRA distributions had started.

The IRS ruled that a modification had occurred due to the transfer out of the IRA at Company X, and that the modification could not be corrected. In so ruling, the IRS relied on Section 2.02(e) of Revenue Ruling 2002-62, which indicates that a modification will result from a nontaxable transfer of a portion of the IRA's account balance to another retirement plan, which is exactly what the taxpayer had done.

The Tax Court recently came to a different conclusion on whether a modification had occurred in a different situation. In Benz v. Commissioner of Internal Revenue, 132 T.C. 15 (2009), the taxpayer was receiving distributions from her IRA which satisfied the substantially equal payment exception to the 10% penalty. In addition to the distributions included in the series of payments, the taxpayer withdrew money from her IRA to pay for higher education expenses. Under Section 72 (t)(2)(E), a withdrawal for this purpose is a separate exception to the 10% penalty. The Tax Court ruled that the withdrawal did not result in a modification to the series of payments the taxpayer had been receiving, since there is no reason why two exceptions to the 10% penalty-here the substantially equal payment exception and the exception for a withdrawal to pay higher education expenses-could not apply.

The Tax Court's holding in Benz probably should not be seen as being at odds with the IRS's conclusion in PLR 200925044. In Benz, the alleged modification-the withdrawal to pay for higher education expenses-is covered by an express exception in the Code to the 10% penalty. On the other hand, there is no express exception in the Code to the 10% penalty, or to the "no modification" rule, for a nontaxable transfer out of the IRA making the series of payments, and if the transfer is treated as being an exception, a taxpayer could all too easily avoid the "no modification" rule simply by transferring amounts out of the IRA.


July 7, 2009

Employment-Federal And New York State Minimum Wage Rate Will Increase Effective July 24

As a heads up, the Federal minimum hourly wage rate will increase from $6.55 to $7.25, effective July 24, 2009. Since this increase will cause the Federal rate to be higher than New York State's rate, the State's minimum hourly wage rate will increase from $7.15 to $7.25, also effective July 24.

July 6, 2009

Employee Benefits-IRS Revises The Web Page For Its EP Large Case Program

The Summer, 2009/ Volume 9 edition of Employee Benefits News contains an interview with Monika Templeman, Director of EP Examinations at the IRS, in which the IRS's revised EP large case program web page is discussed. According to the interview, due to the significant growth of the IRS's EP large case program, better known as Employee Plans Team Audit (EPTA), the web page was revised to provide useful web-based tools and resources to help keep large qualified retirement plans in compliance with the tax laws, and to reduce the burden on plan sponsors and practitioners by posting helpful information and tips about the EPTA program and the issues impacting large plans found during EPTA audits.

The interview reveals that the web page contains the following items:

EPTA Trends and Tips: This provides a comprehensive list of plan errors found by EP examiners during audit, as well as those submitted through the IRS's voluntary compliance program, and tips on how to avoid these errors before they occur. There are also links relating to fixing plan mistakes and procedures on self-correcting operational errors.

Internal Controls Questionnaire: This is a list of questions that EP examiners ask during an audit to gain an understanding of a plan sponsor's internal controls and administrative procedures. Plan sponsors and administrators can review these questions, prior to an audit, so they can determine whether they have proper internal controls in place.

Taxpayer Documentation Guide: This is a comprehensive list of documents the EP examiner will need when reviewing issues identified for audit. This guide lets plan sponsors know which documents an EP examiner might request, and which the plan sponsor should therefore keep current and readily available.

EPTA Presentation: This is a PowerPoint presentation on the EPTA program that has been shared with practitioners at regional and national conferences.
EPTA Video: This is a video containing the latest information on the EPTA program (not necessarily found in the EPTA Presentation).

A visit to the web page shows that it also offers FAQs, contact information and a glossary of terms. All in all, the web page appears to be a very useful resource in helping to keep a retirement plan compliant with the tax laws and prepared for any audit by the IRS. It can be used by both small and large qualified retirement plans.

July 2, 2009

Employee Benefits-IRS Reminds Us That SIMPLE IRA Plans Cannot Be Terminated Once The Year Has Started

In the Summer, 2009/Volume 9 edition of Employee Plans News, the IRS discussed the case of a small business which was maintaining a SIMPLE IRA plan for its employees. Before the beginning of this calendar year, the business owner notified eligible employees that they would each receive a 2% nonelective contribution for the year. Now, the business owner asks whether she can change her mind and not make the 2% nonelective contribution for this year, or otherwise terminate the SIMPLE IRA plan before the end of this year.

The IRS answered that the business owner may not decide during the year to stop making the contributions promised in the pre-year notification. A SIMPLE IRA plan is maintained on a whole-calendar year basis, and must continue for the entire calendar year, funding all contributions so promised. However, the business owner has until the filing deadline of her business's tax return (for the year to which the contributions relate), including extensions, to deposit the nonelective contributions in the employees' SIMPLE IRAs.

The IRS added that an employer can terminate its SIMPLE IRA plan prospectively, beginning with the next calendar year, after it has notified its employees that there will be no SIMPLE IRA plan for the upcoming year. This notification must be provided within a reasonable period of time prior to the start of that year.

July 1, 2009

Employment-DOL Settles Lawsuit For Back Wages And Damages Against Car Washes For $3.4 Million: Employers Beware-More Action May Be Coming From The DOL

In a press release dated June 30, 2009, the Department of Labor (the "DOL") announced that it has settled a lawsuit for back wages and liquidated damages against several New York City area car washes for $3.4 million. In the lawsuit, the DOL had alleged that the car washes had violated the minimum wage, overtime and recordkeeping requirements of the federal Fair Labor Standards Act (the "FLSA").

According to the press release, this settlement brings to a conclusion the suit filed by the DOL in the U.S. District Court for the Southern District of New York, which named as defendants a number of related car wash and auto lube businesses and the individuals who operated them. The suit (presumably including this and prior settlements) has resulted in a total recovery of more than $4.7 million in back wages, liquidated damages and post-judgment interest for more than 1,300 employees. Further, overall over the past two years, the DOL has recovered more than $5.4 million for workers in the New York City car wash industry.

Is the DOL finished? Apparently not. The press release quotes DOL Secretary Labor Hilda L. Solis as saying "This case should be a loud wake up call to other employers of vulnerable workers that the U.S. Department of Labor will not hesitate to pursue them in federal court in order to compel them to pay employees properly for all hours worked," and "[e]mployers must be aware of their obligation to comply with all federal labor laws, and we are here to make sure that they do."

July 1, 2009

ERISA-District Court Rules That A Waiver Of A Qualified Joint and Survivor Annuity Can Be Challenged Based On The Fiduciary's Breach of Duty To Disclose Material Information

In Canestri v. NYSA-ILA Pension Trust Fund And Plan, No. 07-1603 (D.C.N.J. 2009), the Court denied a pension plan's motion for summary judgment that a waiver of a qualified joint and survivor annuity-which meets all requirements of the Internal Revenue Code and ERISA- is valid even if the plan fiduciary's failed to disclose important information.

In Canestri, the plaintiff is the surviving spouse of a participant in the NYSA-ILA Pension Trust Fund (the "Trust Fund"). When applying for benefits under the Trust Fund, the plaintiff and her spouse signed, among other things, a waiver of the Trust Fund's qualified joint and survivor annuity (the "QJSA"). By waiving the QJSA, the plaintiff and spouse gave up the plaintiff's right to receive a survivor annuity (or other death benefit) from the Trust Fund if the spouse should die first, in exchange for the spouse receiving a single life annuity, under which the payments are higher than under the QJSA because all payments stop upon the spouse's death. The Trust Fund made pension payments to the plaintiff's spouse until his death, approximately sixteen months after the benefits were applied for. No payments were made after the spouse's death.

Despite having signed the waiver, the plaintiff sued the Trust Fund for a survivor benefit, claiming that the waiver of the QJSA was not made knowingly and voluntarily. The Trust Fund asked the Court for a summary judgment in its favor, on the grounds that the waiver complied with all requirements of the Internal Revenue Code and ERISA. For purposes of ruling on the motion for summary judgment, the Court accepted as fact that (1) neither the plaintiff nor her spouse had read the QJSA waiver or any other papers included in the application for benefits before signing them, (2) the documents were not adequately explained to them, and that (3) the plaintiff's spouse was not feeling well on the day that the plaintiff and her spouse completed the waiver and the rest of the application for benefits.

The Court stated that, generally, a QJSA waiver-at least one which facially complies with all Code and ERISA requirements- speaks for itself and may not be challenged by assertions that it was not what a party intended or understood. However, under ERISA, the waiver is valid only so long as the plan fiduciary who procured the waiver acts in accordance with his fiduciary duties. The plan fiduciary has the legal duty to disclose to a plan beneficiary, such as the plaintiff, those material facts which are known to the fiduciary but not to the beneficiary and which the beneficiary must know for her own protection. Thus, the fiduciary has an affirmative duty under ERISA to inform the beneficiary of material facts when the fiduciary knows that silence might be harmful. Here, the alleged facts indicate that the plan fiduciary breached its fiduciary duty by knowing that a waiver of the QJSA would only be beneficial if the plaintiff's spouse was expected to live many more years, which he was not, but failing to disclose this information despite evidence that the plaintiff did not understand the forms she was signing. As such, the Court denied the Trust Fund's motion for summary judgment.