Northwest Business Litigation

COBRA subsidy extended - again!

Last night, President Obama signed into law an extension of the COBRA subsidy period until March 31.  The extension allows employees who are involuntarily terminated between March 1 and March 31 to receive the 65% COBRA premium subsidy for up to 15 months.  The new law also broadens the definition of "assistance eligible individual" to include employees who lost coverage due to a reduction in hours, but did not elect COBRA then and were later terminated.  Under the original law, such employees were not eligible for the subsidy, since the involuntary termination did not cause the loss of coverage.

The new law is effective as of March 1, so employees who terminated after February 28 when the subsidy period expired are eligible for the extension.  Although the extension is for only the month of March, several pending bills would provide for much longer extensions.

Ninth Circuit: Tip pooling does not violate Fair Labor Standards Act.

Last month in Cumbie v. Woody Woo, Inc., the Ninth Circuit addressed whether a restaurant violates the Fair Labor Standards Act (FLSA) when, despite paying a cash wage greater than the minimum wage, it requires its wait staff to participate in a "tip pool" that redestributes some of their tips to the kitchen staff. 

Judge O'Scannlain, writing for the court, began with the default rule that an arrangement to turn over or redistribute tips is presumptively valid, unless such arrangement is forbidden by statute. The plaintiff, a server at a Portland restaurant, argued that tip pooling violates section 203(m) of the FLSA, which provides that restaurants must allow employees to keep all of their tips, except when the employee participates in a tip pool with other "customarily tipped employees."  The plaintiff argued that members of the kitchen staff are not "customarily tipped employees," thus rendering her tip pool "invalid."  The Ninth Circuit rejected the plaintiff's interpretation, finding that the FLSA "imposes conditions on taking a tip credit and does not state free standing requirements pertaining to all tipped employees."  (Emphasis in original.)

While rendering judgment for the employer here, the court hinted that the outcome may be different in situations where a restaurant pays its wait staff less than the minimum wage and utilizes a "tip credit" to make sure the employees' wages exceed the minimum wage.

IRS begins employment tax audit initiative

The "tax gap" is the difference between what the IRS collects and what it thinks it is owed.  In 2005, the IRS estimated the gap was $345 billion, including approximately $60 billion in employment taxes.  To help close the gap, the IRS announced it would conduct a National Research Project (NRP), randomly auditing over 6,000 employers over the next three years.  NRP audits are used to generate baseline data that the IRS uses internally in determining what are typical numbers on a return.  As a result, the audits are very comprehensive.  The IRS is now about to begin the audits.

The NRP audits will focus on four areas: employee classification, fringe benefits, expense reimbursements and compensation paid to owners.  The classification issue (whether a worker is an independent contractor or an employee) has long been fruitful ground for the IRS due to the lack of clear standards.  Likewise, whether a distribution to an owner is a return on investment (exempt from employment taxes) or compensation for services (subject to employment taxes) is also an issue without absolute answers.  The other two audit areas are documentation issues -- whether a benefit plan conforms to the tax code, and whether it is operated correctly.  Of course, in auditing these issues the IRS will be looking at correctness and timeliness of tax reporting and deposits.  Although they are not the focus areas, it is common for the IRS to discover errors and inconsistencies.

The initiative is a reminder that the IRS is interested in how a business pays its employees and owners.  Since the classification and compensation issues involve grey areas, it may be worth while to discuss them with counsel now instead of the IRS later.

Washington domestic partnership law may complicate employee benefits

Washington's domestic partnership law, which went into effect on December 3, 2009, provides that for all purposes, registered domestic partners must be treated the same as married spouses, unless doing so would conflict with state law.  "Registered domestic partners" include same-sex domestic partners, and also opposite-sex domestic partners, provided one of them is at least 62 years old.

For employers, this means that employment-related benefits must be extended to the registered domestic partners of employees on the same basis as spouses -- that is, unless the benefit is governed exclusively by federal law.  FMLA is one such law; ERISA is another.  This means that employers subject to FMLA and the corresponding state leave laws (the Washington Family Leave Act,  state pregnancy disability laws, and state military leave laws) cannot count against an employee's annual FMLA entitlement any leave that is covered by state law but not FMLA.  One such example is leave taken to care for a registered domestic partner or his/her family member with a serious health condition.  A complication resulting from that difference is that employers covered by the FLSA (federal wage and hour law) cannot make deductions for partial-day absences for leave that qualifies under state law but not under FMLA.   

Another area of conflict between state and federal law exists with respect to group health plans.  To the extent group health plans are regulated under state insurance law, which is the case when the plan is funded by insurance, the benefits must be made available to the registered domestic partners of employees on the same terms as they are made available to employees' spouses.  However, self-funded plans are governed exclusively by ERISA, under which there is no requirement to provide benefits to registered domestic partners.

In practice, administering benefits in light of these differences can be complicated.  Questions should be reviewed with employment counsel.

COBRA Subsidy Extended

Today the President signed an extension to the COBRA subsidy (see pages 64-65 regarding section 1010) previously approved by Congress in a rare Saturday session.  The new law extends the eligibility period for the COBRA premium subsidy for an additional two months (through Feb. 28, 2010) and the maximum period for receiving the subsidy for an additional six months (from nine to 15 months).  One immediate effect is to provide eligibility for December terminations that cause a loss of health plan coverage on January 1, which under the previous statute were not eligible for the subsidy. 

Subsidy recipients who had reached the end of the subsidy period before the legislation extended it to 15 months will have additional time to pay the reduced premiums related to the extension.  To continue their coverage they must pay the 35% of premium costs by February 17, 2010 or, if later, 30 days after notice of the extension is provided by the plan administrator.

COBRA Administrators now have some immediate tasks:

(1) For December terminations, provide a new subsidy notice that incorporates the new provisions.

(2) For COBRA beneficiaries that lost subsidy eligibility at the end of November, provide information regarding the extension of the subsidy period through June 30, 2010 (subject to earlier termination for loss of COBRA eligibility).

(3) Update COBRA subsidy Notice forms to reflect the extensions of the eligibility period and the subsidy period for use with future terminated employees.

Join us for a seminar on employee benefits, September 17 at Bridgeport Brewing

Ater Wynne's next Roundtable session, entitled "20/20 Benefits Planning for 2010," will be held on September 17 at Bridgeport in the Pearl.  For more information, go here.

IRS allows "safe harbor" plan cutbacks

Recently, the IRS proposed amendments to the 401(k) "safe harbor" plan regulations.  A "safe harbor" plan is one that complies with certain mandatory employer contribution, vesting and notice requirements.  Safe harbor plans are not subject to many of the discrimination rules that apply to 401(k) plans.  One condition of safe harbor status is the employer must make a mandatory matching contribution to all plan participants that defer, or a 3% of pay contribution on behalf of all eligible employees.  Previous IRS rules allowed employers to drop out of the matching arrangement mid-year.

Until the recent proposal, the IRS refused to allow employers to drop out of the 3% safe harbor arrangement mid-year.  Now, in recognition of the severe economic hardship most businesses are facing, the IRS proposes to allow employers to eliminate the safe harbor contribution mid-year.  The proposal requires the employer to provide notice to plan participants at least 30 days before the contribution will cease to allow them to make any changes to their deferral elections.  The plan will then have to comply with the discrimination requirements for the entire year, not just the post-change period.

The IRS is accepting comments on the proposal through August 18, and expects to issue final regulations shortly thereafter, which allow plan amendments back through May 18.  Employers therefore do not need to wait for the final regulations to implement the proposal.

Ninth Circuit on standing to seek plan benefits

"Standing" is the legal doctrine that requires a plaintiff to have a sufficient stake in a controversy before seeking judicial remedies.  Standing is often an issue in ERISA litigation, where benefit plans may seek to dismiss a participant's claims for lack of standing. 

A recent Ninth Circuit decision, in the case of Poore v. Simpson Paper Co., discussed the standing of participants in a retiree health plan.  The plan provided benefits to members of a union.  The collective bargaining agreement between the employer and the union provided that retirees over age 55 would receive retiree health benefits until they turned 65 or became eligible for Medicare.  The employer specifically reserved the right to alter, amend or cancel the retiree benefit at any time.

Eventually, the employer decided to terminate the retiree health benefit.  A group of retirees sued, claiming that their rights to benefits under the plan had "vested," or become permanent, and were no longer subject to the termination right of the employer.  (ERISA prohibits an employer from eliminating a vested benefit.) 

Initially, the Ninth Circuit held the plaintiffs' benefits had not vested, and as a result they did not have standing.  Without a vested benefit, the participants had no stake in a controversy that the court could resolve.  But after dismissing the case, the court withdrew its initial decision and reversed itself, holding that ERISA provides that plan participants may seek judicial enforcement of plan benefits and that a recent U.S. Supreme Court decision held "plan participant" for ERISA purposes "may include a former employee with a colorable claim for benefits" - without the requirement that the benefit be vested.

The Ninth Circuit did not reach the merits of the plaintiffs' claim -- whether they were entitled to retiree health benefits -- but merely that they had standing to pursue the claim.  This decision is a reminder of the statutory intricacies of ERISA, and the difficulties both participants and plans have in resolving a dispute.

Washington State expands domestic partnership law

On April 23, 2009, SB 5688, an expanded version of the original State Registered Domestic Partnership (SRDP) Act. was delivered to Governor Christine Gregoire, who is expected to sign it into law.  The new law expands on previous domestic partnership laws providing same-sex domestic partners all the rights and benefits that Washington state offers married couples.  To be registered as partners, couples must share a home, must not be married or in a domestic relationship with someone else, and be at least 18 years of age.  Unmarried hetersexual senior couples also are eligible for domestic partnerships if one partner is at least 62.  Lawmakers stated that provision is necessary to help seniors who are at risk of losing pension rights and social security benefits if they remarry.

Among the rights and benefits provided by the law are:

• the right to use sick leave to care for a domestic partner;
• the right to wages and benefits when a domestic partner is injured, and to claim unpaid wages upon the death of a domestic partner;
• the right to unemployment and disability insurance benefits;
• the right to worker's compensation coverage;
• insurance rights, including rights under group policies, policy rights after the death of a domestic partner, conversion rights, and continuing coverage rights;
• rights related to adoption, child custody, and child support; and
• business succession rights.

Employers need to continue to pay attention to the domestic partnership law so that their policies are implemented in a nondiscriminatory manner.  For example, a domestic partner will now have the right to use sick leave to care for an ill partner.  The law does not, however, supersede federal law, which does not recognize domestic partnerships. 

DoL and IRS issue guidance on Stimulus Bill's COBRA subsidy

In February, I wrote about employers' new obligations under the Stimulus Bill's COBRA Subsidy.  Since then, the Department of Labor has published a variety of additonal information for employers on their responsibilities, including several model notices to qualified beneficiaries.   In addition, the IRS recently issued guidance in a question and answer format that address a number of issues that have arisen regarding the law's requirements.  For example, the guidance provides detailed information on the meaning of "involuntary termination" under the new provisions.  The IRS provides additional information here.  For those employers offering Oregon state continuation coverage, information is available here on attempts to pass related legislation in Oregon.