August 2009 Archives

August 28, 2009

Employee Benefits-IRS Posts A Reminder That COBRA Subsidy Recipients Who Later Become Eligible For Other Group Health Coverage Should Notify Their Plan To Avoid A Penalty

The IRS has posted on its website a reminder that any individual who has qualified for and is receiving the 65 percent subsidy for COBRA health insurance, due to involuntary termination from a prior job from September 1, 2008 through December 31, 2009, should notify the plan providing the COBRA coverage, in writing, if he or she becomes eligible for other group health plan coverage. Such other coverage includes group health plan coverage from a new job or Medicare.

The model general notice that the United States Department of Labor issued for advising individuals of their right to subsidized COBRA continuation payments includes a form that individuals may use to notify the plan that they have become eligible for other group health plan coverage. If an individual continues to receive the subsidy after becoming eligible for such other coverage, the individual may be subject to the new Internal Revenue Code § 6720C penalty of 110 percent of the subsidy provided after he or she became so eligible.

August 28, 2009

Employment-New York Appellate Court Holds That A Disabled Employee's Request For Leave Must Be Treated As A Request For Reasonable Accommodation, So That The Employer Must Engage In Interactive Discussion With The Employee Before Denying The Leave

In Phillips v. City of New York, 2009 N.Y. Slip Op. 05990 (S. Ct. First Department), the Court examined the "reasonable accommodation" provisions of the New York State and City Human Rights Laws (HRLs). In this case, the plaintiff, Deborah Phillips, was hired by the defendant, the Department of Homeless Services ("DHS"), in a noncompetitive civil service job in 1988. After 18 years of satisfactory employment, she was granted an unpaid medical leave of absence, under the Family and Medical Leave Act, extending from about July 26 to October 30, 2006, due to a serious medical condition -- breast cancer. The plaintiff requested, but was denied, additional unpaid medical leave, since DHS policy did not provide such additional medical leave to those employed in a noncompetitive civil service position. Further, DHS told the plaintiff that she and her medical benefits would be terminated if she failed to return to work by October 30, 2006. The plaintiff failed to return to work by that date and was terminated. She subsequently brought suit against DHS on the grounds that, among other things: (1) she is a disabled person within the meaning of the State and City HRLs, (2) her request for an extension of medical leave sought a reasonable accommodation under those statutes, and (3) defendants violated the statutes by denying her request and terminating her employment. The lower court had dismissed the plaintiff's claims.

In evaluating the plaintiff's claims, the Court determined that the plaintiff's request for unpaid medical leave beyond October 30 must be treated as a request for reasonable accommodation. As such, the denial of the request for this medical leave, without engaging in an individualized interactive process with the plaintiff to determine if the leave or some other action would constitute a reasonable accommodation, is a violation of the State HRL (specifically, Executive Law Section 296(3)(a)) and the City HRL (specifically, New York City Administrative Code § 8-107(15)(a)). Since DHS had failed to engage in such interactive process with the plaintiff, the Court held that a violation of the State and City HRL had occurred. In so holding, the Court acknowledged that the reasonable accommodation requirements of the State HRL are broader than under the federal Americans with Disabilities Act (the "ADA"), and that such requirements of the City HRL are broader than under the State HRL.

The Court also determined that the plaintiff had stated a cause of action for disability discrimination under both State and City HRLs. The Court overturned the dismissal of the plaintiff's claims, and remanded the case to the lower court for further proceedings consistent with its holdings.


August 27, 2009

Employment-New York State Requires Health Care Workers To Get Flu Shots

The New York State Department of Health (the "DOH") has issued emergency regulations which require health care workers (with some exceptions) at covered employers to get flu shots each year. The covered employers are: hospitals, diagnostic and treatment centers, certified home health agencies, long-term home health care programs, AIDs home care programs, licensed home care service agencies and hospices. The flu shots must be received either at the employer's facilities or elsewhere, at no cost to the workers, by November 30 of the year. The employer must document that the shots have been received, and submit a report to the DOH, indicating the status of the shots, by May 1 of the year. The regulations are effective as of August 13, 2009.

August 27, 2009

Employment-District Court Holds That Requiring An Employee to Produce A Doctor's Note For Medical Absences On Three Day's Notice Violates FMLA

In Smith v. CallTech Communications, LLC, No. 2:07-cv-144 (S.D. Ohio 2009), the plaintiff, Stephanie Smith, had been employed by the defendant, CallTech Communications, LLC ("CallTech"). Both before and throughout her employment at CallTech, the plaintiff was diagnosed as suffering from chronic major depressive disorder and dysthymic disorder. During her employment at CallTech, the plaintiff, on numerous occasions, showed up tardy, left work before her shift was over, and missed entire shifts. The ostensible reason for this behavior was her medical condition. At one point, the plaintiff requested leave under the Family and Medical Leave Act (the "FMLA"), and CallTech granted this request, designating the plaintiff as eligible for intermittent leave under the FMLA for her medical problems. CallTech had a policy (the "Attendance Policy") under which an employee, who qualifies for intermittent FMLA leave, must provide a physician's note verifying that every instance of absence, tardiness, or early departure is directly related to the employee's medical condition.

Despite being approved for intermittent FMLA leave, the plaintiff's continued tardiness, sick days and early departures produced poor results on the system CallTech was using to track and evaluate employee behavior. Eventually, the plaintiff was told by CallTech that she would be terminated unless, within 3 days, she provided it with a doctor's note indicating that at least some of her absences were the result of her medical condition. Thinking that she could not visit the doctor soon enough to meet this deadline, the plaintiff stopped reporting to work altogether. The Court thus faced the question as to whether CallTech's Attendance Policy could be applied to require the employee to furnish the doctor's note on only 3 day's notice without violating the FMLA.

In answering this question, the Court explained that neither the statute nor the underlying regulations dealt with a request by the employer for a doctor's note made after intermittent FMLA has been approved. However, under §§825.305 and 825.08 of the FMLA regulations, an employer may request that an employee, who asks for FMLA leave, furnish it with a certification (arguably different than just a note) from a health care provider. This request must provide the affected employee with the time frame to respond, and this time frame cannot be less than 15 days from the date of the request. Section 2913(a) of the FMLA requires an employee to provide any required medical documentation to the employer in a timely manner. Similarly, when FMLA leave is unforeseeable, under §825.303 of the FMLA regulations, the employee will be expected to provide more information when it can readily be accomplished as a practical matter, taking into consideration the exigencies of the situation. Based on the statute and the foregoing regulations, CallTech had to give the plaintiff a reasonable amount of time to provide the doctor's note. What is reasonable depends on the exigencies of the situation. Here, given the coordinated effort necessary to schedule a doctor's appointment and/or to obtain a note from the doctor, and from the totality of the circumstances indicated in the record for the case, the Court held that that allowing the plaintiff only three days to obtain the doctor's note was unreasonable as a matter of law and thus violated the FMLA.

August 25, 2009

ERISA-District Court Extends 404(c) Protection To A Directed Trustee Of A 401(k) Plan, So That The Trustee Will Not Have Liability For Losses Caused By An Investment Advisor

In Tullis v. UMB Bank, N.A., No. 3:06 CV 7029 (N.D. Ohio 2009), the plaintiffs were two physicians who were participants in the Toledo Clinic Employees' 401(k) Profit Sharing Plan ("Plan"). Pursuant to the terms of the Plan, the plaintiffs had chosen Continental Capital Corporation ("Capital") to be the investment advisor of the plaintiff's accounts under the Plan. Subsequently, the U.S. Securities and Exchange Commission entered a temporary restraining order against Capital because two of its brokers were engaged in fraudulent activities. The plaintiffs allege that the defendant, UMB Bank, which served as the Plan's directed trustee, knew of this fraud yet failed to inform them, and continued to accept and honor forged investment directives from Capital without consulting or warning the plaintiffs. Consequently, the plaintiffs did not dismiss Capital as the investment advisor of their Plan accounts. It was later discovered that a number of Capital's investments did not exist, resulting in significant loss to the plaintiffs' accounts under the Plan. The plaintiffs asked the Court to grant them summary judgment against the defendant, on the grounds that its conduct-the failure to warn the plaintiffs and stop taking direction from Capital- constituted a breach of fiduciary duty under ERISA.

The Court noted that Section 404(c) of ERISA relieves fiduciaries from liability for losses in a defined contribution plan caused by a participant's individual exercise of control over the plan's assets. This so-called "safe harbor" provided by Section 404(c) represents an affirmative defense to a claim of breach of fiduciary duty under ERISA. Section 404(c) will apply when (1) the participant exercises independent control over the assets held in his or her account in the plan, (2) the participant is able to choose from a broad range of investment alternatives and (3) a number of requirements of the regulations underlying Section 404(c) are satisfied, for example, the participant must be afforded (a) a reasonable opportunity to give investment instructions to a plan fiduciary obligated to comply with those instructions, and (b) sufficient information to make informed decisions regarding investment alternatives available under the plan.

The Court found that, in the instant case, the requirements of Section 404(c) were satisfied with respect to the plaintiffs. In particular, the plaintiffs had exercised complete control over the investment of their accounts under the Plan. The governing documents and manuals:

--indicated that the Plan was intended to comply with Section 404(c);

-- provided each plaintiff with an individual account under the Plan;

-- vested each plaintiff with the power to direct the investment of his Plan account, and to delegate this power to his selected agent, Capital, thus giving each plaintiff an opportunity to give investment instructions to a plan fiduciary who is obligated to comply with those instructions;

--gave the plaintiffs sufficient information to make investment decisions, and to otherwise properly furnish them with the opportunity to exercise control over the assets in their Plan accounts; and

--gave the plaintiffs a broad range of investment alternatives, since they allowed the Plan to invest in any asset which is administratively feasible for the Plan to hold, and which is allowed as a Plan investment by law.

Since the requirements of Section 404(c) were met, that Section shields the defendant from liability for breach of fiduciary duty.

Further, the court noted that the "safe harbor" defense of Section 404(c) is not available when a plan fiduciary conceals material nonpublic facts from plan participants. However, ERISA does not require a fiduciary to guarantee that all material facts are conveyed to participants. Rather, ERISA prohibits the fiduciary from concealing facts, and requires the fiduciary to speak truthfully when it chooses to do so. Moreover, the cases which have held that a fiduciary has an affirmative obligation under ERISA to disclose material nonpublic information involved an inquiry initiated by a plan participant. In the instant case, no such inquiry was made, and therefore nothing in the instant case makes the Section 404(c) "safe harbor" defense unavailable.

The Court also held that the defendant could not be responsible for any prohibited transaction involving the plaintiffs' accounts under the Plan, nor for any undervaluation of the investments made by those accounts. Since the participants controlled the activities of their own Plan accounts, the defendant-as directed trustee-only allowed, but did not cause, a prohibited transaction or undervaluation to occur with respect to those accounts. The Court did not grant summary judgment to the plaintiffs, and ultimately dismissed all of the plaintiffs' claims in the case.

August 24, 2009

Employment-Sixth Circuit Case Illustrates That Close Proximity Of Firing An Employee To The Employee's Filing A Charge Against The Employer Can Help Establish A Prima Facie Case of Retaliation Under Title VII

Establishing a prima facie case can be necessary for a plaintiff to prevail in a case of retaliation brought under Title VII of the Civil Rights Act of 1964 ("Title VII" ). In Upshaw v. Ford Motor Company, No. 08-3246 (6th Circuit 2009), the Court was faced with, among other things, the question of whether the plaintiff, Carolyn Upshaw, had established a prima facie case in support of her claim that the defendant, Ford Motor Company, had retaliated against her by firing her because she had filed numerous EEOC charges and a lawsuit against it.

The Court noted that Title VII prohibits an employer from retaliating against an employee for filing an EEOC charge. To make out a prima facie case of retaliation, the plaintiff must establish that: (1) she engaged in Title VII-protected activity, (2) the defendant knew that she engaged in this activity, (3) the defendant subsequently took an adverse employment action against her, and (4) the adverse action was causally connected to the protected activity. Only element (4) is in question here. To establish the causal connection, the plaintiff must offer evidence sufficient to raise the inference that her protected activity was the likely reason for the adverse action. The Court said that, at the prima facie stage, the plaintiff's burden is light. All the plaintiff must do is put forth some credible evidence that enables the Court to deduce that there is a causal connection between the protected
activity and the retaliatory action.

Here, the close temporal proximity between the plaintiff's EEOC filings, the protected activity, and her firing, the adverse action, provides sufficient evidence to establish a prima facie case. Although the firing occurred almost 19 months after her initial EEOC charge, the plaintiff made two additional charges with the EEOC and filed her lawsuit against the defendant only four months before she was fired. Also, there was a close temporal proximity between the plaintiff's first EEOC charge and certain internal requests at the defendant for disciplining the plaintiff and for information from other employees documenting the plaintiff's complaint activity, evidencing that plaintiff's filing an EEOC charge ultimately led to her being fired. Thus, the Court found that the plaintiff had established a prima facie case of retaliation.

August 21, 2009

Employment-IRS Offers Tips On Determining Whether A Worker Is An Independent Contractor Or An Employee

One problem often faced by a business is determining whether a worker is an independent contractor or an employee. The IRS offers ten tips on dealing with this problem in IRS Summertime Tax Tip 2009-20. Although these tips refer to small businesses, they can apply to large businesses as well.

The IRS begins by noting that, if you are a small business owner, whether a worker is an independent contractor or an employee will impact how much taxes you pay and the amount of taxes you withhold from his or her paycheck. Additionally, it will affect how much additional cost your business must bear, what documents and information the individual must provide to you, and what tax documents you must give to him or her.

With that said, the IRS offers the following as the top ten things every business owner should know about determining whether a worker is an independent contractor or an employee:

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the worker and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your worker is most likely an employee.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your worker is probably an independent contractor.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding - with the IRS.

10. You can learn more about the critical determination of a worker's status as an independent contractor or employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).



August 18, 2009

Employee Benefits-IRS Provides Guidance On Taking Withdrawals From Retirement Plans

In the Summer 2009 Retirement News For Employers, the IRS provides guidance on permitting employees to take withdrawals from retirement plans. The IRS notes that, under law, some retirement plans, for example 401(k) and 403(b) plans, may allow participants to withdraw certain amounts from the plan because of a financial hardship. IRS regulations provide guidelines for plans to follow to ensure they satisfy the law's requirements. Under these requirements, a plan can make a hardship distribution only:

-if permitted by the plan;

-because of an immediate and heavy financial need of the employee and, in certain cases, of the employee's spouse, dependent or beneficiary; and

i-n an amount necessary to meet the financial need.

The IRS lists the following 7 steps for an employer to take when permitting a hardship withdrawal from a retirement plan to which the above legal requirements apply:

Step 1 - Review the terms of your plan, including whether the plan allows hardship distributions, and the plan's procedures and limits which apply to an employee's request for a hardship distribution.

Step 2 - Ensure that the employee complies with the plan's procedural requirements.

Step 3 - Verify that the employee's specific reason for hardship qualifies for a distribution using the plan's definition of what constitutes a hardship.

Step 4 - If the plan, or any of your other plans in which the employee is a participant, offers loans, document that the employee has exhausted them prior to receiving a hardship distribution. Likewise, verify that the employee has taken any other available distributions, other than hardship distributions, from these plans.

Step 5 - Check that the amount of the hardship distribution does not exceed the amount necessary to satisfy the employee's financial need. However, the amount required to satisfy the financial need may include amounts necessary to pay any taxes or penalties that are due because of the hardship distribution. Under some plans, a hardship distribution is not considered necessary if the employee has other resources available, such as spousal and minor children's assets (excluding property held for the employee's child under an irrevocable trust or under the Uniform Gifts to Minors Act).

Step 6 - Make sure that the amount of the hardship distribution does not exceed any limits under the plan and is made only from the amounts eligible for a hardship distribution.

Step 7 - Most plans also specify that the employee is suspended from contributing to the plan and all other plans that the employer maintains for at least six months after receiving a hardship distribution. Inform the employee and enforce this provision. Failing to enforce the plan's suspension provision is a common plan error but may be corrected through the IRS's Employee Plans Compliance Resolution System (the "EPCRS").

The newsletter has some more on hardship withdrawals in a topic entitled "ABCs of Loans and Hardship Distributions."

The IRS also cautions employees to know the tax rules before taking a withdrawal from a retirement plan. It says that if you are under age 59 ½ and plan to withdraw money from your retirement account, you will likely pay both income tax and a 10% early distribution tax on any previously untaxed money that you take out. Withdrawals from a SIMPLE IRA before you are age 59 ½ and during the "2-year period" may be subject to a 25% additional early distribution tax instead of 10%. The 2-year period is measured from the first day that contributions are deposited. So, consider the decrease in your retirement savings and the increase in tax before you withdraw from either your IRA or a retirement plan, for example, a 401(k) or 403(b) plan.

There are some different exceptions to the 10% early distribution tax depending on whether you take money from an IRA or a retirement plan. Exceptions for an IRA include using the amount withdrawn (1) to pay medical insurance premiums while unemployed, (2) to pay qualified higher education expenses, or (3) to buy, build or rebuild a first home. An exception also applies if you receive distributions in the form of an annuity. Exceptions for retirement plans include (1) you separate from service and are age 55 or older in that year or (2) you elect to receive the money in substantially equal periodic payments after separation from service.

August 17, 2009

ERISA-Tenth Circuit Case Illustrates How To Build A Record To Support An Insurer's Decision To Deny Benefits

ERISA-Tenth Circuit Case Illustrates How To Build A Record To Support An Insurer's Decision To Deny Benefits

In Holcomb v. Unum Life Insurance Company of America, No. 08-6183 (10th Cir. 2009), the plaintiff, a participant in her employer's insured long-term disability plan (the "Plan"), sued the Plan's insurer under ERISA, challenging the insurer's decision to deny her benefits under the Plan. The Court reviewed and upheld the insurer's decision. The case is noteworthy because it illustrates how an insurer may take steps and build the administrative record to support its decision to deny benefits.

In this case, the Plan gave the insurer the discretionary authority to determine eligibility for benefits and to interpret the terms and provisions of the Plan. Therefore, the Court reviewed the insurer's decision to deny the benefits for abuse of discretion, and said that its review is limited to the administrative record--the materials compiled by the insurer in the course of making its decision. The Court noted that here, the insurer operates under an inherent conflict of interest, since it is in a position to favor its own interest-preserving its assets by not having to pay benefits- over the interests of the Plan's participants. Under Metropolitan v. Glenn, 128 S. Ct. (2008) this conflict of interest is a factor to be considered in determining whether there has been an abuse of discretion by the insurer in denying the benefits. The conflict assumes greater importance if circumstances suggest a higher likelihood that it affected the benefit denial, and assumes lesser (or no) importance if the insurer has taken has taken active steps to reduce potential bias and to promote accuracy.

The Court reviewed the administrative record to determine if the insurer had abused its discretion. The administrative record shows that the insurer took steps to reduce the inherent conflict of interest by hiring two independent physicians--one who reviewed the plaintiff's file and one who examined her- and by basing its decision to deny the benefits at least in part on the physicians' findings. In hiring the independent physicians, the insurer did not rely solely on the evaluations and medical opinions of its own on-site physicians and nurses. The insurer had furnished the two independent physicians with all of the necessary information for the plaintiff's situation, including information from the plaintiff's personal physician that challenged the insurer's decision to deny the benefits. As such, the Court gave the conflict of interest factor limited weight in evaluating whether the insurer had abused its discretion in denying the benefits. Further, the administrative record demonstrates that the insurer diligently endeavored to discover the nature of the plaintiff's ailments. According to the record, the insurer had routinely requested the plaintiff's updated medical records, and had conducted its own clinical review of these records. The insurer also solicited expert evaluations from independent medical and psychological examiners, and it performed both vocational assessments and occupational analysis. Based on this review, the Court concluded that the insurer did not abuse its discretion in deciding to deny benefits to the plaintiff.

August 14, 2009

Employee Benefits-IRS Seeks Comments On New Combined 401(k)/Defined Benefit Plans

In Notice 2009-71, the IRS announced that it plans to issue guidance on the new combined 401(k)/defined benefit plans, permitted under Section 414(x) of the Internal Revenue Code. Section 414(x) was added to the Code by the Pension Protection Act of 2006, and becomes effective after 2009. The combined plan is intended to be a vehicle through which an employer can maintain both a 401(k) plan and a defined benefit plan in a single plan, reducing the administrative burdens and costs of maintaining 2 separate plans. For example, only a single Form 5500 must be filed for the combined plan.

Generally, under Section 414(x), an employer will be eligible to establish a combined plan only if it is a "small employer", that is, an employer who, taking into account the aggregation rules of Section 414 of the Code, employed an average of at least 2 but not more than 500 employees on each business day during the preceding year and at least 2 employees on the first day of the current year. The defined benefit portion of the combined plan must provide each participant with an annual benefit which is not less than the "applicable percentage" of his or her "final average pay". The applicable percentage is 1 percent multiplied by the participant's years of service with the employer, up to 20 percent. Final average pay is determined using the period of consecutive years (not exceeding 5) during which the participant had the greatest aggregate compensation from the employer. A participant must be fully vested in this benefit after completing 3 years of service.

The 401(k) portion of the combined plan must offer an automatic contribution arrangement, that is, an arrangement in which an employee automatically participates and makes elective deferrals, unless he or she affirmatively elects otherwise. If an employee automatically participates, he or she will make elective deferrals at the rate of 4 percent of pay. The employee can elect to change this rate, or to stop making elective deferrals altogether. In addition, the employer must make matching contributions to the plan, for each participating employee, equal to 50 percent of the employee's elective deferrals, to the extent that the elective deferrals do not exceed 4 percent of pay. The employer may make the matching contributions at a higher rate, but subject to certain conditions. Also, the employer may make nonelective contributions to the plan. An employee must immediately be fully vested in his or her elective deferrals and in any matching contributions that he or she receives, and must be fully vested in any nonelective contributions that he or she receives after completing 3 years of service.

Certain notice and other technical requirements apply to the combined plan under Section 414(x). In Notice 2009-71, the IRS requests comments regarding possible issues to be addressed in guidance to be provided for Section 414(x). The comments are due by October 15, 2009.

August 13, 2009

ERISA-Second Circuit Finds That Company Officer Is Not An ERISA Fiduciary, But Is Still Liable For Unpaid Plan Contributions Resulting From Dishonored Checks He Signed

In Finkel v. Whiffen Electric Co., Inc., 07-2558-cv (2nd Cir. 2009), Whiffen Electric Co., Inc. ("Whiffen" ) was an employer that participated in several multiemployer plans (the "Plans"). Ramonowicz was an officer of Whiffen who was authorized to sign checks. As a participant in the Plans, Whiffen was obligated to withhold specified amounts of its employees' wages and, on a monthly basis, remit them to the Plans. However, from September 2004 through October 2005, Whiffen failed to remit these contributions. Rather, during that period, Whiffen either sent checks to the Plans that were signed by Ramonowicz and subsequently dishonored due to insufficient funds, or sent nothing at all. In March 2006, the administrator of the Plans sued Whiffen, as employer, and Ramonowicz, as alleged fiduciary of the Plans, under ERISA for the unpaid contributions. The administrator also sued Ramonowicz under New York law for the unpaid contributions resulting from the dishonored checks. The issue before the Second Circuit was Ramonowicz's liability for the unpaid contributions.

In resolving this issue, the Court said that under the applicable part of Section 3(21)(A)(i) of ERISA, to be a fiduciary, a person must exercise authority or control over the management of a plan's assets. The Court noted that the amounts withheld from wages by Whiffen, and not remitted to the Plans due to the checks being dishonored or otherwise, were nevertheless assets of the Plans. However, the Court concluded that Romanowicz is not a fiduciary of the Plans, within the meaning of Section 3(21)(A)(i), even though Romanowicz was an officer of Whiffen, was authorized to sign checks on Whiffen's behalf, had some general knowledge that amounts had been withheld from employees' wages for remittance to the Plans, and had maintained the unremitted assets for his own and Whiffen's benefit. As to the unremitted assets, Romanowicz did not determine which of Whiffen's creditors to pay or in what order. As to the Plans themselves, Romanowicz did not select or exchange the Plans' investments, undertake any other transaction typical to a pool of retirement plan assets, or otherwise enjoy any authority or control over the management of the Plans' assets. Since Romanowicz was not a fiduciary of the Plans, he cannot be sued for the unpaid contributions on that basis.

However, the Court found that, under New York's Uniform Commercial Code, Ramonowicz was personally liable for the unpaid contributions represented by the dishonored checks, since the checks did not indicate, and Ramonowicz did not establish as an affirmative defense, that Ramonowicz had signed the checks in a representative capacity.

August 11, 2009

Employee Benefits-Congressman Makes Certain Information About Health Care Reform Available

America's Affordable Health Choices Act of 2009 (H.R. 3200) (the "Act") was proposed in the House of Representatives on July 14, 2009. The Act is intended to ensure that health insurance coverage and employment-based health plans provide, for all Americans, access to affordable health coverage, essential health benefits, and other protections. The Act is still making its way through the House. However, a number of town hall meetings held by members of Congress during the Congressional recess this month were the site of protests and disruptions by so-called opponents of the Act.

I just received an email from my Congressman, Gary Ackerman, about these meetings and disruptions. He says that the disruptors have no interest in discussing the merits of any health care reform, but want to make sure that no discussion takes place. Many of them were recruited and sent by ideological and trade groups intent on stopping health care reform. To counter the activities of the disruptors, Congressman Ackerman has made the following information about the Act available. Information about the myths being perpetuated about the Act is here. The answers to some of the most common questions about health care reform is here. Finally a line-by-line debunking of attacks on the Act is here.

August 10, 2009

ERISA-Seventh Circuit Sends Case Back To District Court To Deal With Conflict Of Interest

The number of cases which apply the Supreme Court's opinion in Metropolitan Life Insurance Company v. Glenn, 128 S. Ct. 2343 (2008) , when reviewing under ERISA a decision to deny or terminate employee benefits by a plan administrator with a conflict of interest, continue to grow. In Raybourne v. Cigna Life Insurance Company of New York, No. 08-2754 (7th Cir. 2009), the Court was faced with such a review.

In this case, the plaintiff was a participant in his employer's long-term disability benefits plan. The plan was insured by the defendant, Cigna Life Insurance Company of New York. The plaintiff had been receiving long-term disability benefits under the plan. However, after a period of time, the defendant determined that the plaintiff no longer qualified for the benefits, since the plaintiff could no longer meet the plan's definition of disability, and therefore terminated the benefits. Under the plan, the defendant had the discretion to determine eligibility for benefits. The plaintiff sued the defendant to reinstate the benefits, and the case would up in the Seventh Circuit. The question before the Court was the appropriate standard of judicial review under ERISA of the defendant's decision to terminate the plaintiff's benefits, in view of Glenn.

The Court found that, due to the defendant's discretion under the plan to determine benefit eligibility, the Court must apply the abuse-of-discretion standard when reviewing the defendant's decision to terminate the benefits. However, when applying this standard, as required by Glenn, the Court must take into account the "structural" conflict of interest which exists because the defendant both determines eligibility for benefits and pays any benefits which are awarded. A structural conflict is one factor among many that are relevant in the abuse-of-discretion analysis--including whether the decision maker overemphasized medical reports that favored its decision and whether it gave its medical examiners all of the relevant evidence--and will act as a tiebreaker when the other factors are closely balanced. Glenn emphasizes that a court should give additional weight to a structural conflict where the decision maker has a history of biased claim administration or helped a claimant obtain a social security award it then disregarded. The conflict may be less important (perhaps to the vanishing point) when the decision maker has taken active steps to reduce potential bias and to promote accuracy.

The Court found that the district court had given only cursory treatment of Glenn, and remanded the case back to the district court to consider the impact of the structural conflict of interest on the defendant's decision to terminate the benefits.

August 10, 2009

ERISA-Ninth Circuit Rules That ERISA Fiduciary Responsibility Can Apply To Company Decisions

In Johnson v. Couturier, Nos. 08-17369, 08-17373, 08-17375, 08-17631 (Ninth Circuit 2009), the Court broadened some of the thinking on the application of ERISA. In this case, in his capacity as president and a director of Noll Manufacturing Company and its successors ("Noll"), the defendant, Clair R. Couturier, Jr. had channeled $34.8 million of company assets to his own possession by applying that amount to buy out certain deferred compensation agreements (the "Buy Out"). Couturier was also a trustee of Noll's employee stock ownership plan (the "ESOP"). The plaintiffs, who are participants in the ESOP, filed suit against Couturier alleging breach of fiduciary duties under ERISA. The Court faced a number of issues, including some interesting ERISA matters.

As to whether Couturier had breached his fiduciary duties, the Court said that Couturier, as ESOP trustee, was a fiduciary of the ESOP and therefore subject to the duties of loyalty and care, as well as the prohibition against self-dealing, under ERISA. Company decisions relating to compensation generally do not fall within ERISA's purview. But since the assets of an ESOP include the company's stock, the value of those assets are affected by the compensation paid by the company. Where, as here, an individual is both an ESOP fiduciary and a corporate director or officer, ERISA fiduciary duties are imposed on business decisions from which that individual could directly profit-such as the decision to compensate the individual by applying company assets to buy out the deferred compensation agreements. As such, the Court said that the plaintiffs are likely to prove that Couturier failed to meet his ERISA duties due to the Buy Out. The Buy Out involved a decision to use $34.8 million of company assets- approximately 2/3 of the company's assets- to benefit Couturier by buying out the deferred compensation agreements. Those agreements were worth only between $6 million and $9 million, so that the Buy Out put Couturier's financial interests ahead of the ESOP.

As another matter, Courturier had entered into an indemnification agreement with Noll. This agreement generally indemnified Couturier for any liabilities incurred in his service as director of Noll or as ESOP trustee. It required Noll to advance defense costs to Couturier. However, the district court had issued a preliminary injunction against any such advancement of costs by Noll, and the Ninth Circuit upheld this injunction. In doing so, the Court noted that Section 410(a) of ERISA specifies that any provision in an agreement which purports to relieve a fiduciary from liability for any responsibility, obligation, or duty under ERISA is void as against public policy. While this provision has been interpreted to allow insurance or a third party agreement to indemnify a fiduciary, the ERISA plan itself may not indemnify the fiduciary. In this case, payment by Noll under the indemnification agreement is tantamount to the ESOP indemnifying Couturier, since Noll is liquidating, so that any money taken from Noll to pay Couturier's defense costs will, dollar for dollar, reduce the funds available for distribution to the ESOP and ultimately its participants.

Points for Employers: For many years, courts have followed the "business judgment rule", under which a company's business decision-whether to pay more salary, establish an employee benefit plan or otherwise- is not subject to ERISA. In ruling that ERISA fiduciary responsibilities can apply to a company's business decision-even though the Court limited this ruling to situations in which an ESOP fiduciary is also a company director or officer and can directly profit from the decision-the Court has made a surprising incursion into the business judgment rule. If an employer sponsors an ESOP, or any plan which has invested in employer stock, to avoid the application of ERISA fiduciary rules to company decisions, the employer might consider appointing a fiduciary to the ESOP or plan who is not a director or officer of the company. It is not clear that, under the Court's view in this case, merely excluding the plan fiduciary, who is a director or officer, from participating in the company decision to benefit him or her will prevent the application of ERISA fiduciary rules.

Also, the case encourages employers to use liability insurance to protect plan fiduciaries, rather than an indemnification agreement under which the employer itself could be required to indemnify the fiduciary. Following the Court's reasoning, under some future circumstances, payment by the employer under an indemnification agreement could be construed by a court as depleting plan assets and thus be disallowed.

August 6, 2009

ERISA-Seventh Circuit Uses A Deferential Review To Uphold An Insurer's Decision to Terminate LTD Benefits

In Fischer v. Liberty Life Assurance Company of Boston, No. 08-2617 (7th Cir. 2009), the Seventh Circuit was faced with a decision by an insurer to terminate a participant's long term disability benefits.

In this case, a participant in an insured long term disability benefit plan sued the insurer to reinstate his benefits under the plan, after the insurer had decided to terminate the benefits. The insurer, who paid the benefits, was the plan administrator with respect to the determination of benefit eligibility and continuation. The Court said that where, as here, the plan confers discretionary authority to determine benefit eligibility and continuation, judicial review of the plan administrator's decision to terminate the benefits is deferential, and thus made according to the arbitrary and capricious standard. Further, under Metropolitan Life Insurance Co. v. Glenn, 128 S. Ct. 2343 (2008), where, again as here, the person who pays the benefits is the same person who determines benefit eligibility and continuation, the Court is required to take this obvious conflict of interest into consideration--along with all of the other relevant factors-- in determining whether the person's decision to terminate the benefits was arbitrary and capricious.

The Court continued by saying that a plan administrator's decision will be upheld, so long as it is possible to offer a reasoned explanation for the decision, based on the evidence, plan documents, and relevant factors that encompass the important aspects of the problem. Thus, to be upheld, when a plan administrator decides to terminate benefits, the specific reasons for this decision must be communicated to the participant and the participant must be afforded an opportunity for full and fair review of the matter by the plan administrator.

Using the arbitrary and capricious standard of review, in the manner discussed above, the Court concluded that participant cannot prevail. The insurer/plan administrator's decision to terminate the participant's benefits finds rational support in the record. The record indicates that the insurer based its decision on 13 expert opinions, some of which supported the decision very strongly, so the decision is not arbitrary. The Glenn conflict-of interest factor-which acts as a tiebreaker in a close case- does not play an important role here.

Note for employers and plan administrators: This case illustrates the importance of the plan administrator developing a detailed record which supports its decision to terminate benefits. The Court felt that this type of record is important, even when the arbitrary and capricious standard of review is applied by a court to examine the plan administrator's decision.

August 4, 2009

Employee Benefits-Governor Paterson Signs A Law To Extend "Mini COBRA" To 36 Months For New Yorkers

For years, New York State has provided "mini COBRA", under which an employee, who loses his or her job, could elect to receive continued insured group health coverage under New York State law, if Federal COBRA is not available to that employee. Now, Governor Paterson has signed a law which extends the period of New York State "mini COBRA" coverage to 36 months.

More specifically, New York State Insurance Law section 3221 (m) permits an employee, who is covered under a commercial group or blanket accident and health insurance policy which is not subject to Federal COBRA law, to elect to receive continued health care coverage under that policy in the event of job loss or reduction in work hours. The employee must elect to receive the continuation coverage within 60 days after the later of (1) the date of the event which qualifies him or her for the coverage, or (2) the date of the receipt of a notice of the right to elect the coverage. The employee pays the full premium for the continuation coverage, which is capped at 102 percent of the group rate. Prior to the new law, the period of continuation coverage for an employee was generally limited to 18 months, at which time the right to the continuation coverage was lost.

The new law amends Insurance Law section 3221(m) to require commercial insurers offering group policies to extend the period of the New York State continuation coverage for employees from 18 months to 36 months. Importantly, the new law allows an employee, who had been receiving and has exhausted Federal COBRA coverage, to elect to continue receiving insured group health coverage under New York State law for up to 36 months (including the period of Federal COBRA coverage), if the employee had been entitled to less than 36 months of Federal COBRA coverage.

The new law also requires a not-for-profit corporation or health maintenance organization (an"HMO"), which offers a group contract (or a group remittance contract) that is subject to New York State insurance law, to extend continuation health care coverage from18 months to 36 months, under the same terms and conditions as a commercial insurer.

The new law takes effect as of July 1, 2009 and applies to all policies and contracts issued, renewed, modified, altered or amended on or after that date.

Note to Employers: The most significant feature of the new law is that an employee can elect to receive continuation health care coverage under New York State law for 18 months after he or she was receiving Federal COBRA coverage for 18 months and the Federal COBRA coverage ends. It appears that the insurer, not the employer, is responsible for providing the continued health care coverage required by New York State law. Still, an employer maintaining an insured group health plan, which is subject to Federal COBRA and the new law, should consider coordinating with its insurer and revising its COBRA policy, employee notices, election forms and summary plan descriptions to make this additional 18 months of continuation health care coverage available to its employees.

August 4, 2009

Employee Benefits-Governor Paterson Signs A Law To Allow Dependent Children To Remain Covered Under The Employer's Health Plan Through Age 29 In New York.

Governor Paterson has signed a law that revises New York State Insurance Law section 3221 to require a commercial insurer, which provides a group health insurance policy to an employer, to offer an election to an employee under that policy to continue the health care coverage of his or her dependent children who have otherwise "aged off" of the coverage. These children may continue to be covered under the group policy through age 29, as long as they do not become eligible for other employer sponsored health insurance coverage, and are not covered by Medicare. The children need not be financially dependent on their parents to receive this coverage. For purposes of the new law, a "dependent child' is any child of an employee who is unmarried and is under age 30.

Under the new law, an electing employee pays the full cost of the continued coverage for his or her dependent children. The election to receive this coverage must be made: (1) within 60 days following the date the child's coverage would otherwise terminate due to age, under the terms of the policy covering the employee; (2) within 60 days after meeting the definition of "dependent child" , if coverage previously terminated; or (3) during an annual 30-day open enrollment period. Dependent children, whose coverage terminated prior to the effective date of the new law, will have a period of 12 months after the effective date to elect coverage under the new law.

The new law also requires a not-for-profit corporation or a health maintenance organization (an "HMO"), which offers a group contract or a group remittance contract that is subject to New York State insurance law, to include an election to cover dependent children through age 29 under the same terms and conditions as a commercial insurer.

The new law will take effect on September 1, 2009, and applies to all policies and contracts issued, renewed, modified, altered or amended on or after that date.

Note to Employers: It appears that the insurer, not the employer, is responsible for providing the election to employees required by the new law. Still, an employer providing health care coverage through a group health insurance policy, which is subject to New York State insurance law, should consider coordinating with its insurer and revising its employee notices, election forms and summary plan descriptions to make this election available to its employees.


August 3, 2009

Employment-Ninth Circuit Rules That Casino Managers Could Be Liable For Unpaid Wages under the FLSA

In Boucher v. Shaw, Nos. 05-15454 and 05-15702 (9th Cir. 2009), three former employees of the Castaways Hotel, Casino and Bowling Center (the "Castaways"), acting for themselves and a class of other Castaway employees, and the employees' local union sued the Castaways' individual managers for unpaid wages under Nevada and Federal Law. The Castaways had filed for Bankruptcy under Chapter 13, and was later liquidated under Chapter 7. The plaintiffs alleged the following facts as to the defendant-managers. One manager, Dan Shaw, had been the Castaway's Chairman and Chief Executive Officer. The second manager, Michael Villamor, was responsible for handling the Castaway's labor and employment matters. The third manager, James Van Woerkom, was the Castaways' Chief Financial Officer. Shaw had a 70 percent ownership interest in the Castaways, and Villamor had a 30 percent ownership interest. Each defendant had custody and control over the plaintiffs, their employment and their place of employment at the time the wages were due.

In accordance with the answer received after certifying the question to the Nevada Supreme Court, the Ninth Circuit found that the defendants were not liable for the unpaid wages under Nevada law. As to Federal law, the Court indicated that the Fair Labor Standards Act (the "FLSA") governs. The Court said that the defendants will be individually liable for the plaintiffs' unpaid wages if they are "employers" within the meaning of the FLSA. The FLSA defines "employer" as any person acting directly or indirectly in the interest of an employer in relation to an employee.

The Court noted that the FLSA's definition of "employer" is not limited by the common law concept of employer, but is to be given an expansive interpretation in order to effectuate the FLSA's broad remedial purposes. If an individual exercises control over the nature and structure of the employment relationship, or exercises economic control over this relationship, that individual is an employer within the meaning of the FLSA. The Court held that, if the facts alleged as to the defendants are true, each defendant is an "employer" and thus liable for the unpaid wages. The Court also ruled that the Castaway's bankruptcy and liquidation has no effect on the outcome of the case. The Court remanded the case back to district court to determine the facts.

August 1, 2009

Executive Compensation-The Latest On Say On Pay Legislation

I just received an email from my Congressman, Gary Ackerman, telling me that the House of Representatives has now passed the Corporate and Financial Institution Compensation Fairness Act, H.R. 3269. This Act would require that any public company with assets greater than $1 billion must hold an advisory shareholder vote on the compensation packages of the company's top executives at least once per year. It would also empower federal regulators to limit inappropriate or imprudently risky executive compensation packages. Acccording to the email, the Act is intended to help end the now all-too-familiar practice of executives taking excessive risk at the expense of their shareholders and, ultimately, the American taxpayer.