Labor Department Scraps Unpaid Intern Test and Adopts More Flexible Approach

The U.S. Department of Labor (DOL) recently announced that it will apply a new, more flexible test for determining whether interns working for “for-profit” companies are entitled to minimum wage and overtime protection under the federal Fair Labor Standards Act (FLSA). The new test is set forth in DOL Fact Sheet #71 (updated January 2018).

The FLSA requires employers to pay “employees” minimum wage and overtime. It has long been recognized, however, that certain categories of workers are not “employees” for purposes of the FLSA. This includes unpaid interns. Prior to this announcement, the DOL applied a strict test that required private employers to establish six different factors to demonstrate that workers were appropriately classified as unpaid interns. In the past few years, as litigation over the use of unpaid interns increased, that test had been rejected by courts, including the United States Courts of Appeals for the Second and Ninth Circuits. Decisions issued by those courts favored a more flexible test that holistically examines the relationship between an intern and employer to determine who is the “primary beneficiary” of the relationship.

The announcement by DOL is intended to align its enforcement policies with this more recent case law and provide DOL investigators with greater flexibility in analyzing issues involving unpaid interns on a case-by-case basis.

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Proposed Changes to UK Law on the Taxation of Payments In Lieu Of Notice

The draft UK Finance Bill 2017 (the “Bill”) proposes some significant changes to the tax treatment of a payment in lieu of notice (“PILON”) for employees.  Where a UK employer exercises a contractual right to make a PILON, the payment is fully taxable and subject to national insurance contributions (“NICs”) as income, in the same way as salary.  However, where there is no contractual right to make a PILON, and the employer chooses to terminate the employee’s contract in lieu of notice, any payment made to the employee to cover the amount that they would have received if they had worked their notice in full constitutes damages for breach of contract. Such payment could therefore be paid free of tax up to £30,000, and free of both employer and employee NICs.

The Bill proposes that, from April 6, 2018, all PILONs (contractual and non-contractual) will be taxed as income, and will therefore be subject to income tax and both employer and employee NICs. This would apply only to the basic pay that the employee would have earned during this period.

In addition, any amounts in excess of the £30,000 tax exemption are currently subject to income tax, but not to any NICs. The UK government has proposed to subject such excess to employer (but not employee) NICs. If passed, this provision would take effect from April 2019.

Although the Bill is only in draft form currently (and its scope subject to change between now and April 2018), UK employers should carefully consider any proposed terminations that may be made after April 6, 2018, in order to minimise any potential tax liabilities that could arise for both the employer and the employee.

DOL Proposes to Relax Regulations Governing Association Health Plans

On January 5, 2018, the Department of Labor (DOL or the “Department”) published a proposed rule to allow more Association Health Plans (AHPs) to be regulated as large group health plans. 83 Fed. Reg. 614 (Jan. 5, 2018) (to be codified at 29 C.F.R. pt. 2510). The proposed regulation was developed in response to President Trump’s October 12, 2017 Executive Order 13813, directing the executive branch to facilitate the purchase of insurance across state lines and, specifically, directing the DOL to “consider proposing regulations or revising guidance . . . to expand access to health coverage by allowing more employers to form AHPs.” The proposed regulation fulfills this charge by relaxing the Department’s existing interpretation of the conditions under which an association is considered the employer sponsor of a single multiple employer welfare arrangement under the Employee Retirement Income Security Act (ERISA). 83 Fed. Reg. at 626. An AHP that is a single multiple employer arrangement more easily qualifies as a plan offered in the large group market because it may aggregate employees of all employer members to determine the plan’s market. In some cases under the proposed rules, an AHP may be offered to employers in more than one State, even if the AHP is insured.

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The Effect of American Health Care Act on Employers

Legislation proposed by the Republicans to repeal and replace the Affordable Care Act, called the American Health Care Act (“AHCA”), repeals most of the taxes that were imposed by the Affordable Care Act on employers, their health plans and employees, such as the employer mandate and 0.9% Medicare surtax. The AHCA would not repeal the Affordable Care Act’s insurance coverage mandates, including the elimination of lifetime and annual dollar limits on essential health benefits or requirements to cover dependent children up to age 26. Below is a summary of the key provisions that would affect employers and their health plans.

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Twenty-First Century Cures Act Includes HIPAA Provisions

A new post on Covington’s eHealth blog discusses HIPAA-related provisions in the Twenty-First Century Cures Act, signed by President Obama on December 13.   These provisions direct HHS to consider HIPAA’s effects on mental health treatment and the availability of health data for research purposes.  Read the full post here.

What Employers Need to Know About the Fiduciary Conflict Rule

Our colleague Jason Levy recently published an article in The Actuary Magazine on the Department of Labor’s fiduciary conflict rule.  More than six years in the making, this rule represents perhaps the most significant regulation from the DOL during the Obama Administration.

The fiduciary conflict rule expands the definition of fiduciary to cover, with certain exceptions, all investment advice provided to a retirement plan (like a 401(k) plan, defined benefit pension plan, or an IRA), or to a participant or beneficiary in any of those retirement plans.  The rule imposes fiduciary status on a broad category of professionals, including many broker-dealers who previously had taken the position that they were not investment advice fiduciaries based on a DOL regulation that had been in place since 1975.

In contrast to the sweeping changes it imposes on investment advice professionals, the fiduciary conflict rule will have a far more modest effect on employers.  The rule is not intended to confer fiduciary status on sponsors of retirement plans.  Likewise, there had been concern under the proposed version of the rule that human resources and other employees who interact with participants might be considered fiduciaries when they discuss retirement plan investments with their co-workers.  However, the final version of the rule provides that, absent unusual circumstances, such employees would not be covered.

Nevertheless, the fiduciary conflict rule has important implications for employers that sponsor retirement plans.

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Learning to Live with Clawbacks: The New, Long String on Executive Compensation

Existing rules in Europe require, and proposed rules in the U.S. would require, companies and financial institutions to have in place effective clawback policies.  Under such policies, employers have the ability to recover compensation paid to employees when certain events occur or information comes to light that could have an adverse effect on the employer.  The aim, of course, is to create a direct link between reward and conduct so as to promote good corporate behavior and ensure effective risk management.

Clawback provisions have been around for a number of years and they are now a fairly well-known feature in a variety of different bonus and equity incentive programs. They often complement other measures that employers can deploy to address adverse events and circumstances, the most common of which is the ability to forfeit or downward adjust unvested compensation. With executive scrutiny and accountability on the rise, the significance of these policies and their effectiveness will undoubtedly be put to the test.  This article looks briefly at the legal and practical challenges companies face at each stage of a clawback policy – from design and implementation to operation and enforcement.

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California’s Increased Paid Family Leave Benefits and San Francisco’s Paid Parental Leave Ordinance

Long considered to be at the forefront of providing benefits to employees who take family and medical leave, California recently enacted a new law aimed at increasing the benefits paid out to employees who take time off to care for an ill or injured family member or for new child bonding. Meanwhile, San Francisco’s Board of Supervisors also recently passed a new ordinance requiring employers to provide “supplemental compensation” to employees who work in San Francisco and who take time off for new child bonding, making San Francisco the first city to require such paid parental leave.

Even if you don’t do business in California or San Francisco, these new laws reflect a growing trend across the country to provide greater protections and benefits to employees who take family leave. New York, for example, recently passed a law similar to California’s, providing wage replacement benefits to individuals who take family leave.  Similar legislation is also pending in Connecticut, Massachusetts, and Washington, D.C.  These laws continue the recent trend of mandating paid leave to employees that began with mandatory paid sick leave laws, which have passed in 28 jurisdictions at the state, county or city level.

Read on to find out more about the new California laws.

Increased Benefits Under California’s Paid Family Leave Law

California was the first state in the country to establish a paid family leave insurance program. Called the Paid Family Leave law or PFL, this law provides employees with wage replacement benefits for periods of leave taken to care for a seriously ill family member or to bond with a newborn baby, newly adopted child, or new foster child.  Under a recent amendment, employees commencing a covered leave on or after January 1, 2018, but before January 1, 2022, will be entitled to increased weekly PFL benefits of 60% or 70% of their weekly wages, depending on the highest quarterly wages earned during a base period.  These increased benefits also apply to disability benefits for individuals who are unable to work due to non-work related illness or injury, pregnancy, or childbirth.  Effective January 1, 2018, the amendment also eliminates an existing 7-day waiting period.

San Francisco’s Newest Ordinance on Paid Parental Leave

Employers who do business in San Francisco should also be aware of a new city ordinance requiring them to pay “supplemental compensation” to employees who take leave to bond with a new child and are receiving PFL benefits. This new ordinance, the first of its kind in the country, requires employers to make up the difference between an employee’s regular wages and their weekly wage replacement benefits under the PFL program.

Following are key highlights of the new ordinance:

  • It applies to any employer with 20 or more employees regardless of location. The exact date on which an employer must begin complying depends on the size of the employer.
  • Covered employees must meet several requirements, including minimum length of employment and required hours worked in San Francisco, as well as PFL eligibility for new child bonding.
  • With some caveats, employers will be obligated to supplement an employee’s PFL benefits during the time an employee is on leave for new child bonding for a period of up to six weeks so that the employee’s compensation during that time is 100% of their normal gross weekly wages.
  • Employers can require employees to use up to two weeks of accrued vacation during the time they are on leave for new child bonding to help satisfy or otherwise offset their obligation to pay supplemental compensation. Caution should be exercised, however, if the employee otherwise qualifies for leave under the California Family Rights Act in light of new regulations under that statute which prohibit an employer from requiring an employee to use accrued vacation when receiving PFL benefits or similar partial wage replacement benefits.
  • Employers can also require employees to reimburse them for the supplemental compensation if the employee voluntarily terminates their employment within 90 days of the end of their leave.
  • Employers will be subject to notice and record-keeping requirements.
  • Terminating an employee who has requested supplemental compensation under the new ordinance comes with increased risks; the employer may be required to continue supplemental payments after termination and may be subject to a rebuttable presumption concerning retaliation.
  • The Office of Labor Standards Enforcement is authorized to enforce the ordinance and employees also have a private right of action, subject to administrative exhaustion. Remedies include administrative penalties, liquidated damages, reinstatement, backpay, and attorneys’ fees and costs.

While no immediate action is required with respect to PFL benefits, employers may wish to review their policies to ensure that they accurately reflect and state what benefits are provided through this state program. For employers who have employees that work in San Francisco, it may be prudent to beginning reviewing your parental leave policies and consult with experienced counsel to make sure they are in compliance with the new ordinance.


DOL Issues Guidance on Its Broad View of Joint Employment

On January 20, the Department of Labor’s Wage and Hour Division (WHD) issued new guidance on joint employment under the Fair Labor Standards Act (FLSA).  The guidance marks the third time in recent years that WHD has stressed the broad definition of “employment” under the FLSA, following June 2014 guidance on joint employment in the home health care industry and July 2015 guidance on misclassification of employees as independent contractors.  WHD’s consistent focus reiterates that the agency believes that many workers are classified incorrectly and will focus its enforcement activity on these areas.

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Supreme Court Reiterates High Pleading Bar for Stock Drop Cases

As noted in our earlier blog post, the U.S. Supreme Court’s 2014 decision Fifth Third Bancorp v. Dudenhoeffer made clear that participants bringing stock-drop cases are subject to heightened pleading standards to help “divide the plausible sheep from the meritless goats.”

In its first substantive ruling in a post-Dudenhoeffer stock-drop case, the U.S. Supreme Court yesterday held that the Ninth Circuit had failed to hold the plaintiffs in Amgen Inc. v. Harris to these high standards.  In the Supreme Court’s view, the Ninth Circuit in Harris failed to assess a factor that the Dudenhoeffer decision specifically instructed lower courts to consider: whether the complaint “plausibly alleged” that a prudent fiduciary in the same position “could not have concluded” that removing the company stock fund from the plan’s investment lineup “would do more harm than good.”  The court remanded the case for the district court to determine whether to allow the plaintiffs to amend their complaint.

The Harris decision reinforces the requirement that a stock-drop complaint should be dismissed unless the complaint alleges specific facts addressing each factor laid out in the Dudenhoeffer decision.  As a result, it will continue to be difficult for plaintiffs to bring stock-drop suits that can survive a motion to dismiss.

Covington & Burling LLP and Keating Muething & Klekamp PLL represented the employer, Fifth Third Bancorp, in the U.S. Supreme Court.