Northwest Business Litigation

Supreme Court agrees with Ninth Circuit that drug company representatives are ‘salesmen’

Last week the Supreme Court affirmed a decision of the Ninth Circuit holding that pharmaceutical sales representatives are not entitled to overtime under the Fair Labor Standards Act because they are covered by the FLSA's "outside sales" exemption.  In Christopher v. SmithKline, the Court issued a 5-4 decision, with the majority reasoning that "[the representatives were] hired for their sales experience. They were trained to close each sales call by obtaining the maximum commitment possible from the physician. They worked away from the office, with minimal supervision, and they were rewarded for their efforts with incentive compensation.”

The dissent agreed with the Obama administration that the "outside sales" exemption does not apply to pharmaceutical sales representatives because the representatives do not actually sell the drugs.  Writing for the dissenters, Justice Stephen G. Breyer wrote, “At most [the sales representative] obtains from the doctor a ‘nonbinding commitment’ to advise his patient to take the drug (or perhaps a generic equivalent) as well as to write any necessary prescription.”

See our earlier coverage of Christoper v. SmithKline here.

IRS delays non-discrimination requirements for insured health plans

One of the many changes resulting from the Patient Protection and Affordable Care Act is that non-discrimination rules applicable to self-insured health plans for many years are to be extended to insured arrangements effective for plan years beginning after September 22, 2010.  However, the Act did not just add "insured health plans" to those rules.  No, the Act says that insured plans must comply with rules similar to those applied to self-insured plans.  And, since the IRS has not issued any regulations explaining which parts of the rules will be applied the same way and which ones won't, how are insured plans supposed to avoid the excise tax penalties and other sanctions imposed by the Act?

Fortunately, the IRS has issued Notice 2011-1 which delays compliance with the non-discrimination rules until regulations are issued related to this provision of the Act.  The Notice also solicits input on several topics regarding how the IRS should implement the statutory mandate, and provides that the other agencies potentially affected (Labor, HHS and Treasury) have all agreed with the IRS position. 

Health care reform ruled unconstitutional in part

A federal district court judge in Virginia has ruled that one of the centerpieces of the health care reform law enacted earlier this year is unconstitutional.  Judge Henry Hudson, in Virginia v. Sebelius, found illegal the part of the law mandating that every U.S. citizen maintain a minimum level of health insurance.  Although courts have ruled on standing issues in other cases challenging health care reform, this is the first decision addressing the substance of the law.

Several other cases are pending, including one brought by the attorney generals of some 20 states  challenging certain financial underpinnings of the law. 

The federal government will appeal the decision and it is nearly certain that, absent a legislative change to the challenged portions of the law (making the appeal moot), the Supreme Court will eventually decide the issue. 

The Judge severed the provisions he found to be unconstitutional and left in effect the remainder of the law, portions of which will become effective on January 1 for calendar year plans.  Employers should therefore continue to prepare for the law's various effective dates.

ISO and ESPP reporting deadline nears

We previously reported that for transactions in 2010 or later, the IRS requires employers to file information returns regarding their employees' exercise of Incentive Stock Options (ISOs) or purchases made under an Employee Stock Purchase Plan (ESPP).  The returns are filed using Form 3921 for ISOs and Form 3922 for ESPPs.  The general instructions include the filing deadlines and procedures, how to make corrections, information on distributing the employee statements, penalties, and other helpful information.  In addition to filing the returns with the IRS, companies are required to provide a copy of the return to employees (this requirement previously existed).

Deadlines

The deadlines to file Forms 3921 and 3922 with the IRS are February 28 for paper filers and March 31 for electronic filers.  The deadline for distributing the statements to employees is still January 31.  Even if employers file the returns with the IRS electronically, most will likely still distribute hardcopy statements to employees because the requirements to distribute the statements electronically are very difficult to satisfy. 

Electronic Filing

Employers are required to file Forms 3921 and 3922 electronically if they have at least 250 returns to file.  This is a per-form requirement, so if an employer has 251 Forms 3921 to file and only 249 Forms 3922, then it must file only the Forms 3921 electronically.  Likewise, if it has 249 of each to file, then it is not required to file either of the forms electronically.  However, employers may always file electronically on a voluntary basis since doing so extends the filing deadline.  If employers are eligible to file paper forms, they may complete the forms manually, as handwritten forms are acceptable (provided the writing is very neat and legible).  Additional instructions for electronic filing are available in IRS Publication 1220(a reprint of Rev. Proc. 2010-26).

Employers subject to mandatory electronic filing may eventually be able to request a waiver by filing Form 8508.  Unfortunately, the form does not yet include Forms 3921 and 3922.  The IRS may fix that in the near future.  Until then employers may want to use the assistance of an electronic filing vendor to help them file electronically.  The IRS posted a list of such providers in January of this year. 

Employers should continue planning for Health Care Reform

The Health Care Reform Acts adopted earlier this year remain in the news as several members of Congress have announced they intend to seek repeal some or all of the new laws.  However, even if the new Congress manages to pass such a repeal, it is uncertain whether there is enough support to overcome a likely Presidential veto. Employers and their health insurers should, therefore, move ahead with preparations to comply with the new laws' provisions, many of which become effective on January 1, 2011 for calendar year plans.  Ater Wynne's Health Care Reform Timeline lists some of the major provisions of the new laws and when they become effective.

  

Ater Wynne's December 9 Employment Law Seminar in Portland will include an overview of Health Care Reform provisions that become effective in 2011 and beyond.  Watch your e-mail for an invitation or see our website for details.

IRS delays reporting health care costs and releases new W-2 for 2011

The IRS recently released a draft version of the 2011 form W-2, used to report compensation paid to employees.  The draft form includes instructions for reporting the cost of health care coverage provided to employees (Box 12, using code DD).  That is a new requirement following the adoption of the health care reform bills last March.

The IRS recently made reporting the health care amount optional for 2011, delaying mandatory reporting until 2012.  Expect some IRS guidance on how to determine the cost of coverage and similar issues before then.  

 

Healthcare reform without the hype: What it means for your business

Join us on October 7, at Ater Wynne's Seattle office, for a seminar on the new healthcare reform law.  John Walch, chair of the firm's Employee Benefits Group, will talk about how the new law impacts employers.  See details here.

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.