183809648-57a54ae55f9b58974ab92602As my colleague Keith Ashmus recently noted, most employers currently ask job applicants for their salary histories. This is a reasonable question, and one that employers find useful to help attract and retain talented employees. Given recent legislative initiatives and judicial decisions on this topic, however, employers should tread carefully.

In the past few weeks, both the state of Oregon and New York City have joined a growing list of jurisdictions that restrict employer inquiries into job applicants’ salary histories. Other states include California and Massachusetts, while other notable cities include Philadelphia, New Orleans, and Pittsburgh. At least 20 other states and many other cities are considering similar legislation. Several of these laws impose fines on employers for violations, and some even include potential jail time.

By way of example, the New York City law, which took effect last month, makes it an “unlawful discriminatory practice” for employers: (1) “to inquire about the salary history of an applicant for employment;” or (2) “to rely on the salary history of an applicant in determining the salary, benefits or other compensation for such applicant during the hiring process, including the negotiation of a contract.”

“Salary history” is broadly defined to include an applicant’s “current or prior wage, benefits or other compensation.” This concept does not, include, however, any “objective measure of the applicant’s productivity, such as revenue, sales or other production reports.” “Inquiry” is likewise broadly defined as “any question or statement to an applicant, an applicant’s current or prior employer, or a current or former employee or agent of the applicant’s current or prior employer, in writing or otherwise, for the purpose of obtaining an applicant’s salary history.” The inquiry restriction includes searching publicly available records.

Even for employers who operate in jurisdictions that do not prohibit salary-history inquiries—such as Ohio—other laws may limit the extent to which such information may be used in determining compensation. According to the  Sixth Circuit Court of Appeals (which includes Ohio, Michigan, Kentucky, and Tennessee), for example, the federal Equal Pay Act prohibits employers from relying on salary history as the sole justification for paying two otherwise-equal employees differently, particularly if those employees are different genders.

With these issues in mind, multi-state employers should ensure that they do not run afoul of any state or local laws regarding the procurement or use of salary history. Additionally, all employers should also be cautious when considering salary history as a lone or significant factor in setting compensation, particularly in light of the potential for perpetuating gender pay disparities. Employers should, at a minimum:

  • Avoid relying on salary history as the lone determination of starting pay;
  • Periodically review compensation practices to ensure non-discriminatory and equitable treatment;
  • Document market factors that contribute to any discretionary determination of starting pay, including the individual’s education, prior experience, special skills, and expertise, individual negotiations by the candidate, market factors, and other job-related factors; and
  • Comply with state and local laws regarding salary history inquiries and use of prior salaries in making compensation determinations (and stay abreast of increasing changes).

imagesRepresentative Tom MacArthur (R-NJ), a leader of the so-called “Tuesday Group” of moderate Republicans, introduced an amendment to the American Health Care Act (“AHCA”) (Kaiser Family Foundation summary) after negotiations with the Freedom Caucus, the group of conservative House Republicans. The MacArthur Amendment does several things designed to obtain conservative support for the AHCA. Because some of these measures would impact employers, it is worth discussing them briefly.

More State Flexibility.  The MacArthur Amendment allows states, with permission from the Department of Health and Human Services, to go without certain of the “essential health benefits” provided for under the Affordable Care Act (“ACA”). To obtain the waiver, a state will have to show that it will lower premiums and encourage more individuals to become insured. States could also provide greater leeway for charging higher premiums for those with pre-existing health conditions who do not maintain continuous coverage, as discussed in more detail below. Employers in the small group market or who obtain coverage in the individual market in waiver states may need to check more carefully to ensure that desired benefits are part of their plans.

Easing of Pre-Existing Condition Restrictions on Insurers.  The essential bargain of the ACA was that everyone could get insurance no matter how sick they were or expensive their care was, but everyone would have to buy insurance no matter how healthy they were. The individual mandate was the means to enforce that second part of the bargain. It turned out to be very ineffective. Sick people got their coverage at community rates and healthy people stayed uninsured unless or until something bad happened. The predictable result has been rising community rates and insurers exiting markets. The AHCA would eliminate the individual mandate, making the adverse selection problem even worse. The MacArthur Amendment addresses this issue by allowing insurers to charge higher premiums for those with pre-existing conditions who do not maintain continuous coverage or who, upon losing coverage, do not obtain new insurance within sixty days.

In order for this to occur in a state, though, that state would have to provide some protection of the sick individuals who might otherwise be priced out of the “market.” This can be done by the creation of a high risk pool where individuals with expensive conditions can be covered with government subsidies, or by a so-called “invisible high risk pool,” which protects the carriers. This can be thought of as similar to a reinsurance program.

The MacArthur Amendment would not prevent individuals with expensive health conditions from obtaining or keeping coverage. Such persons would not be locked into their employer’s coverage if they preferred to go to another employer or start their own business.

Implications of the MacArthur Amendment.  It is difficult to see how the MacArthur Amendment would reduce premiums, unless the high risk pool provisions work much better than anticipated. It is also hard to think of a way that selling across state lines (a concept embraced by many business groups) would work if the states are operating under a patchwork of waivers and conditions agreed upon to obtain those waivers.

Politically, the Freedom Caucus has indicated that its members will now support the AHCA. Some moderates may drop their support. No Democrats are likely to vote for the amended AHCA, so its fate rests with the Republican majority holding itself together to repeal the ACA and replace it with the AHCA. Once through the House, the AHCA faces strong headwinds in the Senate. Even under the filibuster-proof procedures of budget reconciliation, the AHCA currently lacks support of fifty Republican Senators, and the MacArthur Amendment is unlikely to change that.

Small Business Owner Green Road Sign and Clouds
Small Business Owner Green Road Sign and Clouds

Within the many pages of the 21st Century Cures Act, just passed by Congress and awaiting signature by President Obama, is the Small Business Healthcare Relief Act. This creates a new health benefit plan for small employers called Qualified Small Employer Health Reimbursement Arrangements (“QSEHRA’s”). It allows employers to provide pretax reimbursement to employees who obtain health insurance for themselves, such as through Affordable Care Act exchanges. If an employee has either individual or group health coverage (such as through a spouse’s employer’s plan) that meets the ACA’s definition of Minimum Essential Coverage, it also provides for reimbursement of eligible unreimbursed medical expenses. Prior to this taking effect, the Internal Revenue Service had specifically outlawed this benefit, and provided devastating penalties for employers who tried to help out their employees in this way.

There are a few points to keep in mind. First, the employer must be a small one, defined as under the fifty employee threshold. Second, the employer can’t be offering group coverage to any of its employees. Third, only the employer can contribute, and must do so on a non-discriminatory basis. The maximum annual support is $4,950 for single coverage and $10,000 for family coverage, prorated by months of coverage. The QSEHRA premium reimbursement is only for the purchase of individual, not group coverage, and is tax free for unreimbursed medical expenses if the employee is enrolled in a plan that meets the minimum essential coverage requirements under the Affordable Care Act. Finally, QSEHRA reimbursements will not count towards the Cadillac Tax if that ever goes into effect.

This could be a welcome opportunity for small businesses to provide a significant health care benefit to their employees without the hassle of purchasing group coverage. For employees, subject to the minimum essential benefit requirements, they can purchase coverage most suitable to their own situations, rather than what is best for the employer’s entire workforce.

For a more detailed explanation of QSEHRA programs, see this White Paper.

family-getty-crop-600x338As the results of the November 2016 election confirmed, there is a growing push throughout the country to require employers to provide certain types of paid leave to their employees. To date, we have witnessed the imposition of paid leave requirements through ballot initiatives, legislation, and executive orders. The most popular forms of paid leave currently being discussed include paid sick leave and paid parental leave. Some of the recent paid leave initiatives also cover things such as time off for child care under certain circumstances and domestic violence or other similar situations.

In terms of paid sick leave, voters in two states—Arizona and Washington—approved ballot initiatives last month requiring employers to provide paid sick leave to employees who work within those states. Arizona and Washington now join five other states (California, Connecticut, Massachusetts, Oregon, and Vermont) and the District of Columbia, all of which currently require or soon will require employers to provide some type of paid sick leave to their employees. Several counties and municipalities throughout the country have also imposed such requirements on employers.

With respect to paid parental leave, as we previously noted, President-Elect Donald J. Trump has offered a proposal whereby employers will be required to provide their female employees with paid maternity leave. Male employees are not included in President-Elect Trump’s proposal. Should President-Elect Trump follow through on his proposal, it will be the first paid maternity leave mandated at the federal level for private employers. It will also follow similar requirements imposed, or promised to be imposed, in a handful of states (California, New Jersey, New York, Rhode Island, and Washington), the District of Columbia, and a few other major cities in the country (e.g., New York and San Francisco).

Notably, and consistent with the trends discussed above, Democrats introduced a bill in the Ohio legislature earlier this year that would have required employers to provide twelve weeks of paid family leave to Ohio employees. Although the bill did not garner much support in the Republican-dominated Ohio legislature, should Republicans at the federal level suddenly support President-Elect Trump’s paid leave proposal, or other similar proposals, there may be renewed interest amongst Republicans for similar legislation at the state level.

In summary, this year’s election should remind employers that paid leave requirements will likely be imposed upon them in the near future, if they are not already required to provide certain forms of paid leave to their employees now. With both political parties expressing support for paid leave requirements, future changes in this regard are highly probable.

outsickSince Connecticut’s 2011 passage of the first law requiring employers to issue paid sick leave benefits, over 30 states, counties, and cities — mostly on the East and West coasts — have enacted similar statues. These include Massachusetts, California, Oregon, Vermont, San Francisco, Seattle, New York City, and Philadelphia.  Chicago and Minneapolis have also passed paid leave ordinances.

On September 7, 2016 Saint Paul, Minnesota joined its Twin City in following this bi-coastal trend when its City Council unanimously passed a paid sick time ordinance. Under the new St. Paul Ordinance, employees may earn up to 48 hours of sick time per year with the option of carrying over hours into the following year. No more than 80 hours may be accrued at any time. The St. Paul Ordinance contains no express limit on the amount of paid sick time that an employee can use in a year.

As is the case in other states in which multiple paid sick leave laws have been passed by local governments, St. Paul and Minneapolis’ ordinances differ in material respects. First, while the Minneapolis Ordinance exempts businesses with five or fewer employees, the St. Paul Ordinance applies to businesses of all sizes. The St. Paul Ordinance also provides for a private right of action against employers for retaliation, while the Minneapolis Ordinance currently does not. Duluth has now also begun exploring its own individualized sick leave ordinance, which could potentially lead to more inconsistency within the State.

Both before and after its passage, members of the business community as well as the St. Paul Chamber of Commerce asked the St. Paul City Council to consider amending the Ordinance to align with Minneapolis’ small company exemption, and to include additional exemptions for highly-compensated part-time workers and student workers at private colleges. Those requests were rejected.

The St. Paul ordinance will take effect July 1, 2017 for employers with 24 or more employees and January 1, 2018 for employers with fewer than 24 employees.

Employers operating in various locations around the country need to be alert to these local ordinances, which are not always consistent. Shying away from the coasts is no longer a reliable method of avoiding the imposition of these costs upon employers. Accordingly, covered employers should review their policies and handbooks carefully to ensure compliance with the various paid sick leave laws across the country.

Many employers have turned to employee wellness programs to curtail rising health care costs and improve productivity. These wellness programs typically involve health screenings and/or services to aid in reducing health risks (e.g. tobacco use, blood pressure), often coupled with financial incentives for the employee’s participation.

Over the past few years, the Equal Employment Opportunity Commission (EEOC) has taken aim at wellness programs and brought a number of lawsuits challenging their legality under discrimination laws such as the Americans with Disabilities Act of 1990 (ADA) and the Genetic Information Nondiscrimination Act of 2008 (GINA), suffering a string of defeats (click here and here) in the process. Last month, the EEOC issued final rules addressing the interaction between wellness programs and the ADA and GINA, and explaining how employers can comply with these laws. The final rules have been met with criticism by many who believe that the rules are inconsistent with the provisions supporting broader use of wellness plans and incentives contained in the Affordable Care Act (ACA). Still, these rules, found here and here become effective in January 2017.

The final rules require, among other things, that employers provide an annual notice to employees, informing them “what information will be collected, how it will be used, who will receive it, and what will be done to keep it confidential.” Employers with wellness programs must provide this notice to employees by the first day of the plan year beginning on or after January 1, 2017. It is important that employers either incorporate the required notice information into those already used (such as for HIPAA) or provide a separate notice with this information, otherwise their wellness programs will not be deemed voluntary. On June 16, 2016, the EEOC released a sample notice for employers to use in connection with wellness programs.

In what is undoubtedly a victory for beneficiaries of ERISA-regulated plans, the United States Supreme Court enlarged the duty of prudence owed by plan fiduciaries to plan beneficiaries and also broadened the statute of limitations applicable to claims alleging a breach of this duty in Timble v. Edison International, 575 U.S. ___ (2015). While the duty of prudence previously arose when selecting investments, the Supreme Court, through the Timble decision, expressly expanded that duty to include the duty to monitor and remove imprudent investments.

In the Timble decision, several individual beneficiaries of an ERISA-regulated plan brought suit in 2007 alleging that plan fiduciaries breached their fiduciary duty in 1999, and again in 2002, when they added three higher priced retail-class mutual funds as 401(k) investments when materially lower priced institutional-class mutual funds were available. Although agreeing with the beneficiaries’ argument regarding the mutual funds added in 2002, the United States District Court held (a holding which was affirmed by the United States Court of Appeals for the Ninth Circuit) that the six-year statute of limitations under ERISA had run with regard to the mutual funds added in 1999. According to the lower courts, although the fiduciaries owed a duty to exercise prudence in selecting an investment, the 1999 selections had occurred more than six years prior without any significant change in circumstances and so the claim was time barred.

The Supreme Court disagreed with the holdings of the District Court and the Court of Appeals for the Ninth Circuit. The Supreme Court determined that, in addition to the duty to exercise prudence in selecting investments, ERISA fiduciaries also owe a “continuing duty to monitor trust investments and remove imprudent ones.” This duty to monitor arises under well-established trust law, as explained by the Supreme Court. Although it refused to detail the contours of the continuing duty to monitor, the Court advised that a fiduciary must “discharge his responsibilities ‘with the care, skill, prudence, and diligence’ that a prudent person ‘acting in a like capacity and familiar with such matters’ would use.” (quoting ERISA, 29 U.S.C. § 1104(a)(1)).

Having elaborated on the continuing duty owed, the Supreme Court then determined that the relevant point in time, for purposes of measuring the six-year statute of limitations, was when the alleged breach had occurred. “[S]o long as the alleged breach of the continuing duty occurred within six years of suit, the claim is timely.” With this direction, the Supreme Court remanded the case back to the Court of Appeals to determine the factual questions of whether the fiduciaries in Timble had appropriately fulfilled their duty to monitor and, related, whether any breach of that duty had occurred less than six years prior to the filing of the lawsuit.

In light of the Timble decision, plan fiduciaries should be cognizant of their newly-expanded duty of prudence, which now includes the continuing duty to monitor plan investments and to remove imprudent ones. In other words, plan fiduciaries should periodically review investment options as to their performance versus similar investment vehicles, as well as the costs associated with the investment vehicle. Plan fiduciaries should also ensure that the types of investments offered to beneficiaries are permitted by the pertinent plan documents.

On January 26, 2015, the U.S. Supreme Court published M&G Polymers USA, LLC v. Tackett, 574 U.S. ___ (2015); 2015 U.S. LEXIS 759 (Jan. 26, 2015), addressing a long-standing issue concerning retiree medical benefits that has plagued employers of unionized facilities for over thirty years. The M&G Polymers Court reviewed a case from the U.S. Court of Appeals for the Sixth Circuit (which presides over Ohio, Kentucky, Tennessee and Michigan) and unanimously held that reviewing courts may not infer that parties to a collective bargaining agreement intended retiree medical benefits to vest for life where the duration of such benefits is not expressly addressed in the agreement. Instead, according to the Court, the determination as to lifetime vesting should rest on the application of ordinary principles of contract law – at least to the extent that such principles are consistent with federal labor policy.

The M&G Polymers case arose out of a disagreement between a group of retirees and their former employer – M&G Polymers USA, LLC. In 2000, upon the purchase of a manufacturing plant, the employer entered into a master collective bargaining agreement and related pension, insurance, and service award agreement (“P&I Agreement”) with a predecessor of the United Steelworkers Union. The P&I Agreement provided that certain retirees, along with their surviving spouses and dependents, would “receive a full Company contribution towards the cost of [health care] benefits;” that such benefits would be provided “for the duration of [the] Agreement;” and that the agreement would be subject to renegotiation in three years.

Following the expiration of the collective bargaining agreement, the employer announced that it would require retirees to contribute to the cost of their health care benefits. Three named retirees, in turn, filed a class action lawsuit against the employer and its company-sponsored health plans, asserting that the P&I Agreement created a vested right to lifetime, contribution-free health care benefits.

The Sixth Circuit agreed with the retirees. In so holding, the Sixth Circuit applied the so-called “Yard-Man inference,” which favors lifetime vesting of retiree medical benefits provided for in a union contract. The rule was first recognized in Union, United Auto, Aerospace, & Agricultural Implement Workers of America v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983). While the collective bargaining agreement in Yard-Man included a general “durational clause” that provided that all obligations thereunder expired at the end of the agreement’s term, the Sixth Circuit found that the agreement was ambiguous as to the duration of retiree medical benefits. To resolve the ambiguity, the court looked to the “context” of labor negotiations and inferred that parties engaged in collective bargaining would intend retiree benefits to vest for life. Since the Yard-Man decision was published in 1983, the Sixth Circuit has expanded the doctrine even further, ultimately holding that retiree medical benefits are intended to vest for life where a collective bargaining agreement is silent as to the duration of such benefits.

In a unanimous opinion authored by Justice Thomas, the M&G Polymers Court rejected the “Yard-Man presumption” as inconsistent with ordinary contract principles, stating that it “distorts the attempt to ascertain the intention of the parties by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements.” The Court also rejected the Sixth Circuit’s approach to durational clauses, holding that a contract that is silent as to the duration of retiree benefits precludes an inference that the parties intended those benefits to vest for life. The Court thus remanded the matter to the Sixth Circuit with directions to review the collective bargaining agreement at issue under ordinary principles of contract law.

In a concurring opinion, Justice Ginsberg rejected the employer’s assertion that “clear and express” language was necessary to vest retiree health benefits. Justice Ginsberg noted that post contract obligations may not only be derived from express contract terms, but implied terms as well. Justice Ginsberg urged the Sixth Circuit on remand to examine the entire agreement to determine whether the benefits had vested.

While at first blush the M&G Polymers case appears to be a clear win for employers doing business within the Sixth Circuit, its impact remains to be seen. At a minimum, the decision provides employers with a reasonable assurance that well-crafted contractual language and/or extrinsic evidence will weigh in their favor when faced with potentially crippling claims for lifetime benefits. Because the issue of vesting typically arises in litigation – long after the applicable contracts have been drafted and implemented – the central focus necessarily becomes the intent of the parties at the bargaining table. The M&G Polymers decision provides some measure of objectivity for employers in 2015, as they assess whether to modify retiree health benefits going forward. The new test, conducted without the “thumb on the scales,” establishes a better foundation for employers seeking to argue against lifetime vesting.

Amid the ObamaCare Supreme Court decision watch, the Department of Health and Human Services announced the initial calculations of medical loss ratios (MLR) for the nation’s insurance companies.  Under the Patient Protection and Affordable Care Act, insurers must spend at least 85% of their premium income on paying benefits (80% in the individual and small group markets.)  If they spend a lower percentage, they must provide rebates to their customers.  For employer plans, the rebates are split between the employers and employees based on the percentage of premiums paid by each.  For individuals, the rebate goes to the policyholder.  The rebates are to be paid prior to August 1, 2012, based on the 2011 results (of course subject to what the Supreme Court decides about the law as a whole.)  The HHS announcement provides a state-by-state summary of the rebate amounts, for individual, small group and large employer plans.

The HHS announcement states that insurers who failed to meet the MLR standards will rebate more than $1.1 billion to 12.8 million policyholders, with an average return of $151 per household.  HHS thus gives the total number of individuals affected, but calculates the average payment on a “per household” basis, so care must be taken to gain a clear understanding of the numbers.  In addition, the numbers are not for all policyholders, but only for those in plans where the insurer failed the MLR test.  Consumers Union, the parent of Consumer Reports, has a list of insurers by state and the amounts by which they exceeded the MLR limits.  The list for Ohio is as follows:

Ohio
Individual Market

  • John Alden Life Ins Co: $380,135.00
  • Time Ins Co: $409,486.00
  • Humana Ins Co: $8,900.00
  • Companion Life Ins Co: $1,062.00
  • Mega Life & Hlth Ins Co The: $381,269.00
  • Community Ins Co: $6,633,894.00
  • Total: $7,814,746.00

Small Employer Market

  • Trustmark Life Ins Co: $1,027,486.00
  • John Alden Life Ins Co: $1,008,037.00
  • Humana Ins Co: $77,670.00
  • UnitedHealthcare Ins Co of the River: $700,208.00
  • Humana Hlth Plan of OH Inc: $99,427.00
  • Total: $2,912,828.00

The MLR test is one of the more controversial components of the Affordable Care Act, since, while it sounds fine on the surface to keep insurance companies from spending too much of their premiums on administrative costs, there are both unintended consequences and problems with the definitions.  For example, since the MLR is a ratio, there is a significant incentive for carriers to increase rates.  (15% of $1000 is greater than 15% of $500.)  At least some of the increases in rates since the passage of the Affordable Care Act can be attributed to this effect. As another example, anti-fraud investigation and enforcement efforts by insurers are treated as administrative costs.  Since one of the main drivers of cost increases in health care is fraud, treating fraud prevention as an administrative cost discourages prevention.  This also tends to increase the cost of health care.

In any case, insurers who fail the test must provide their rebates through one of the following methods: a lump sum check in the mail; a lump sum credit to the debit or credit card account from which the payments were made; a credit against 2012 premiums; or a payment through the employer using one of those methods.  If the insurer provides the rebates to the employer, the employer must then go through the exercise of calculating the portion due to its employees and providing them with their appropriate shares. 

This post was coauthored by Inna Shelley.

Princeton economics professor, Uwe E. Reinhardt, recently posted an interesting article on the New York Times “Economix” blog entitled “The Fork in the Road for Health Care.” The post discusses the seeming inevitability of healthcare rationing and attributes rising healthcare costs under employer-provided health policies to rising healthcare prices rather than increased utilization of healthcare services.

For example, the Milliman Medical Index tracking average annual medical costs for a typical family of four has found that average healthcare costs increased from $8,414 to $20,728 between 2001 and 2012, with a 6.9% increase in the prior year alone. Given the fact that about 50% of U.S. households have an income of $50,000 or less, the expected average out-of-pocket family contribution of $8,584 in 2012 begs the question of how our society will handle the rising costs.

Dr. Reinhardt outlines several potential options, including government action to cap health care costs or segregating health care into income classes by eliminating tax preferences and subsidies for high-income groups, setting up “reference pricing” arrangements that tie reimbursement to regional low-cost rates, utilizing high-deductible policies and coinsurance for the middle class, and establishing public health systems for low-income persons similar to the Veterans Administration system to deliver services and control costs.

Regardless of which option society chooses down the road, healthcare rationing by income level may be inevitable (many would say it exits already). As Dr. Reinhardt writes, economists understand that the employer’s portion of healthcare costs is often effectively shifted back to employees in the form of lower pay increases. Thus, shifting increasing healthcare costs to employers is usually counter-productive as these cost increases are almost always offset by stagnant wages and reduced bonuses and are ultimately indirectly shouldered by employees.

At the same time, another study recently released by the Commonwealth Fund looks at individual plans. These plans are generally medically underwritten and are purchased by persons using their own funds. Individual purchasers can buy whatever coverage they choose, since once they meet the underwriting standards, they can select any plan they prefer, so long as they are willing to pay the cost.

The new study finds that over half of the individual policies currently in force will be below the minimum coverage allowed to be provided on the health insurance exchanges under the Patient Protection and Affordable Care Act. Thus, many current individual policyholders will be forced to purchase plans with higher benefits—and consequently, higher costs. As a result, the individual coverage markets will face considerable upward price pressure, as half of the current purchasers must give up coverage they now like in order to buy more expensive options.