Washington State legislature passes paid family (really parental) leave act

Washington is now only the second state in the United States to provide for paid family leave – the other state is California.  Under the recently enacted Engrossed Second Substitute Senate Bill 5659,  employees will be able to apply to the state for up to two hundred and fifty dollars per week in wage replacement benefits for parental leaves of absence lasting up to five weeks.  Such paid leave becomes available October 1, 2009.  Leave is available for bonding with a newborn or newly placed adopted child.

The enacted bill is less comprehensive than a prior version that would have in addition provided paid leave for the employee's serious health condition or for the serious health condition of a family member.  It also leaves unresolved how the paid parental leave will be funded.  The enacted bill simply establishes a task force charged with determining the most appropriate method of financing and administering the paid leave program.  The task force is required to report to the legislature by January 1, 2008.

ERISA and prenuptial agreements don't always mesh

Benefit plans that provide benefits upon a participant's death allow the participant to designate a beneficiary to receive the post-death payments.  A frequent source of controversy is participants' failure to update beneficiary designations following a divorce, marriage or other change in circumstances.

Problems can arise when a participant seeks to provide the benefit to children of a former marriage instead of a new spouse.  Often, a prenuptial agreement explicitly addresses the benefits and the new spouse may agree to waive any interest in the benefit.  However, almost as often, the participant then forgets to file a new beneficiary designation form with the plan administrator. 

Most employer-sponsored benefit plans are subject to ERISA, which has very strict rules about beneficiaries.  For example, ERISA provides that a participant cannot designate a non-spouse beneficiary without the spouse's written consent witnessed by the plan administrator or a notary.  Often, such consents are signed before the spouse is actually married to the participant, as in a pre-nuptial agreement.  In such a case, courts require the plan to pay the spouse since ERISA requires the plan to do so, unless a beneficiary designation, consented to by the spouse, indicates otherwise.

Does a prenuptial agreement satisfy the ERISA requirement?  No, because when signed, the prenuptial agreement is not signed by a "spouse" -- the couple are not yet married.  As clearly stated in the Dept. of Labor's regulations: "An agreement entered into prior to marriage does not satisfy the applicable consent requirements."  What if the agreement is signed after the wedding?  At least then the timing is proper, and if the form of the agreement and its execution are proper, then it may satisfy the requirement.  A better practice is to use the plan's beneficiary form and have the new spouse indicate their consent on the form, witnessed by a notary or plan administrator.

The lesson for participants is to periodically check beneficiary designations to ensure that the any post-death benefits will go to the persons the beneficiary wants to receive them, not the person ERISA would otherwise require.  For plan fiduciaries, the lesson is to know and understand the consent requirements and ensure that they are followed.  Otherwise, the plan risks paying a benefit twice: to the person the plan thought should have received the benefit, and to the one who won the lawsuit against the plan for paying the wrong person.

Employers may be charged for unemployment benefits even when employees are physically or mentally unable to do their jobs

If you thought that an employer that discharges an employee for inability to do his job couldn’t possibly be responsible for unemployment benefits, you would be wrong, just as the employer was in Vavrosky Maccoll Olson Busch & Pfeifer, PC v. Employment Department.  In that case, decided last week by the Oregon Court of Appeals, the employer law firm terminated the employment of an attorney whose bipolar disorder and the medication he used to treat it interfered with his ability to work. The employer sought relief from charges under ORS 657.471(5)(b) after the employee was granted unemployment benefits. That statute creates an exception from charges when an employee is “unable to satisfy a job prerequisite required by law or administrative rule.”  The Court of Appeals gave the law a narrow interpretation, holding that it applies only when the employer has no choice but to discharge the employee due to the employee’s inability to satisfy a readily ascertainable legal requirement, such as licensing. Even if the attorney discharged in this case was unable to satisfy the standards of his profession, he remained licensed to practice law. Consequently, the court affirmed the Employment Department’s refusal to grant the employer relief from charges.

Oregon Supreme Court strengthens plaintiff's hand in shareholder derivative litigation

A shareholder who files a derivative action against corporate directors seeking changes in corporate policies can be awarded attorney fees in the action even if the defendants later voluntarily make those changes, mooting the litigation.  That was the holding last week by the Oregon Supreme Court in Crandall Capital Partners v. Shelk, a case that may embolden shareholders seeking to challenge corporate governance. 

The shareholders had filed suit to require the directors to remove the corporation's takeover defenses and to engage in negotiations with a proposed purchaser.  Before judgment was entered, the corporation took the very actions which the plaintiffs sought in their lawsuit.  Equitable principles allow a court to award fees to a shareholder whose actions have conferred a benefit on the corporation.  According to the court, a claim for fees based on those equitable principles does not become moot simply because plaintiffs' substantive claims are moot.  The court remanded to the Court of Appeals to determine whether plaintiffs' lawsuit had conferred a benefit on the corporation, entitling plaintiffs to fees.

Court of Appeals applies "frustration of purpose" doctrine to energy contract

The failed deregulation of the California energy markets in the late 1990s continues to have repercussions in the courts.  Yesterday the Oregon Court of Appeals held that the manipulation of those markets, resulting in skyrocketing prices in 2000 and 2001, may have been sufficiently severe to void a contract between an electrical utility and its customer in Oregon.  In Wah Chang v. Pacificorp, the court held that Wah Chang, an electricity customer of Pacificorp, brought forward evidence "that California's energy markets had been subjected to manipulation so egregious and pervasive, and so unprecedented in its scope and magnitude, as to be beyond the parties' reasonable contemplation" when they entered into their contract in 1997.  This evidence is sufficient to proceed to trial on Wah Chang's theory that the rarely-used doctrine of "frustration of purpose" voided its obligations under the contract.

New IRS regulations address post-termination 401(k) deferrals

As a general principle, only an active employee may make deferrals into a 401(k) plan, because an individual who is not an active employee does not satisfy the plan's eligibility provisions and the IRS deferral rules.  Given this rule, plan administrators have struggled to determine whether they may take deferrals out of a commission check earned before termination but paid afterwords, or a severance payment made to induce early retirement.

Last week the IRS updated its 1981 limitations on benefits and contributions under qualified retirement plans.  One area of particular interest to employers was handling post-severance salary or other payments.  The IRS general rule is that amounts received after severance from employment are not considered "compensation" from which contributions to a plan may be made, since the recipient is no longer an active employee.  But in last week's new regulations, the IRS created several exceptions to the general rule. 

Payments made under bona fide sick, vacation or other leave plans that would have been available if termination had not occurred are "compensation" (eligible for contributions) if made within 2½ months of termination or the end of the plan's current limitation year, if later.  So, employers that make lump sum payments of unused sick or vacation leave to departing employees at or shortly after employment termination may now include those amounts as eligible for plan contributions (but may require a plan amendment to do so). 

Post-severance distributions from non-qualified deferred compensation plans that would have occurred at the same time if the individual had remained employed are also now included as "compensation" if they occur within that same 2½ month/limitation year time period, as are amounts included in income under Code section 409A.  And post-termination payments to permanently disabled participants are also excepted, if certain conditions are met. 

The lengthy new regulations make many other adjustments and clarifications, some of which have already been well-established in practice over the last 25 years based on IRS Announcements, Notices or other non-regulatory guidance.  As with any other changes to the rules governing a qualified plan, consider how these changes might affect your plan, which ones provide potential benefits to your employees, and discuss with your plan counsel how your plan should respond.

Court of Appeals upholds mandatory arbitration in employment contract

This week the Oregon Court of Appeals reversed the trial court's finding of unconscionability and upheld a mandatory arbitration clause in an employment contract, sending an employee's discrimination and other claims to an arbitrator instead of a jury.  Upon initial employment with the defendant, plaintiff signed an agreement to arbitrate all disputes rather than file suit in civil court.  Both federal and Oregon law favor arbitration, but the enforceability of any arbitration agreement in Oregon is governed by Oregon contract law.  "Unconscionability" is one defense to the enforcement of contracts in Oregon.  The test for "unconscionability" has two parts, one procedural and the other substantive.  A contract is procedurally unconscionable, and therefore not enforceable, if there is "oppression" or "surprise" in the "conditions of contract formation," but unequal bargaining power alone is insufficient for a finding of procedural unconscionability.  A contract is substantively unconscionable if the "terms" of the contract are "unreasonably" one-sided, such that their "effect" makes the parties' respective obligations "so unbalanced as to be unconscionable."

The Court reviewed the terms of the arbitration ageement in light of the foregoing, and held that the agreement was enforceable, sending the case back to be litigated in the agreed-upon arbitration forum.  In doing so, the Court noted that the agreement did not unfairly impair the employee's rights because it provided for the same law as would have applied in court, and for many of the same procedures followed by the courts.  Further, the agreeement did not impose restrictions on the type or amount of recovery that could be awarded by the arbitrator; did not exclude punitive damages or attorney fees; did not impose unreasonable limits on discovery or admissible evidence; and did not impose tight deadlines on the filing of claims.  To read the entire opinion in Motsinger v. Lithia Rose-FT, Inc., click here.

Battle of the artificial sweeteners

Starting on Monday, a jury is set to consider whether the Splenda advertising slogan "made from sugar, so it tastes like sugar" is false advertising.  Merisant, the manufacturer of artificial sweetener Equal, has sued McNeil Nutritionals, the maker of market-leader Splenda, in federal court in Philadelphia, claiming violations of the federal Lanham Act and Pennsylvania state law.  Whether the slogan is false will involve issues of both marketing and chemistry:  Is Splenda really made from sugar?  And does the slogan falsely imply that the product is "natural"?

See the New York Times description of the case here, and law blog coverage here and here.

7th Circuit prohibits mandatory exhaustion of paid leave benefits during paid FMLA leave

Most employers require employees who want to take family medical leave (FML) -- which is typically unpaid -- to use accrued paid leave (e.g., vacation and sick leave) benefits during the period of absence.  If an employee has not yet used his annual paid leave benefits, this requirement has the effect of limiting the amount of time employees can spend away from work each year.  Requiring the use of paid leave during an unpaid portion of FML is permissible under state and federal law.  However, an employer's ability to require the use of paid leave is not absolute.

In Repa v. Roadway Express, Inc., the 7th Circuit Court of Appeals recently found an employer in violation of the Family Medical Leave Act when it required an employee who was receiving disability pay (from a health and welfare benefit fund to which the employer contributed) to use her accrued sick and vacation leave benefits.  The court relied on a Department of Labor Regulation, 29 CFR 825.207(d), which provides that when an employee is receiving disability or workers compensation pay, the leave is not unpaid and the section of the regulation allowing for the substitution of paid leave is inapplicable.  Although Roadway argued that the regulation contravened Congressional intent and was therefore invalid because it allowed employees to take time off in excess of 12 weeks, the court refused to consider the argument because Roadway failed to assert it in the lower court.

As the federal regulation remains intact for now, Oregon employers who are subject to the Federal Family Medical Leave Act (those with 50 or more employees) are well advised to follow it.  However, employers who are only covered by the Oregon Family Leave Act (those with 25 to 49 employees), should be aware of the difference between state and federal law on the subject of exhaustion of paid leave benefits.  Under OFLA regulations, the employer, with the employee's consent, may make deductions from the employee's sick leave while the employee is receiving workers compensation, provided the sick leave payments make up for, but do not exceed, the employee's daily wage that is not covered by time loss benefits.  See OAR 839-009-0280(3) (citing ORS 656.240).  OFLA regulations do not otherwise limit an employer's ability to require employees to use paid leave benefits concurrently with other types of paid or unpaid leave.