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When an employee leaves an organization, one issue the employer often confronts is whether to pay the employee for unused vacation time or other paid time off (PTO). The employer may seek to withhold PTO for myriad reasons: from encouraging employees to use their PTO during employment, to offsetting an employee debt, to encouraging compliance with an obligation (e.g., providing advanced notice of a resignation). But regardless of the reason, the extent of the employer’s ability to withhold PTO  (at least in Ohio) depends on the terms of its PTO policy. This lesson comes harder to some employers than others, as a recent case from the Ohio Court of Appeals for the Seventh District confirms.

In this case, 48 employees sued their employer, an area non-profit Company, after the Company declined to pay out their accrued PTO when their employment ended. The Company’s Handbook contained the following provision:

Any employee with PTO hours to a maximum of 200 hours remaining at December 31, 2011 under the former PTO policy shall have those hours “grandfathered” and banked going forward. The banked PTO hours will be available to those employees for any use that would have been allowable under the old PTO policy. Program and operation requirements will continue to override any request for leave, and the rules for using those banked hours remain the same. At the end of employment with [the Company] unused PTO balance hours will be paid out according to the schedule.

In defense of its position, the Company rightly argued (among other things) that its Handbook contained a disclaimer expressly stating that the Handbook was not a contract; thus, the Company asserted, the PTO policy was not enforceable. Nevertheless, the Court granted summary judgment in favor of the employees.  The Court noted that “although employee handbooks and policy manuals are not in and of themselves contracts of employment, they may define the terms and conditions of an at-will employment relationship if the employer and employee manifest an intention to be bound by them.”  The Court then concluded that by placing the above PTO policy in its Handbook and disseminating that policy to employees with the expectation that they would rely on it, the Company manifested an intent to be bound by it. Therefore, the Court held that the employees had a right to enforce the policy’s terms.

Key Takeaways

This case serves as a good reminder that when it comes to PTO policies, Ohio employers have a lot of flexibility in determining (1) whether to offer PTO; (2) the manner in which PTO time is earned and accrued; (3) the extent to which PTO carries over from year to year; and (4) whether PTO is paid out on termination, and if so, the terms of eligibility for or forfeiture of the payout.  However, employers must practice what they preach by ensuring that the policy accurately conveys its intent.

Multi-state employers should also know that some states are less flexible than Ohio. In California, for example, vacation and other paid time off that can be used for any purpose (as opposed to sick leave) is considered wages, and generally, this time must be paid out upon termination regardless of the employer’s policy. Therefore, it is important to comply with the PTO laws of each state in which the employer operates

The Employee Benefits Security Administration of the Department of Labor has just released for public consideration, and published for comment, a significant new interpretation of the term “employer” under ERISA. Under the proposal, small businesses and sole proprietors would have more freedom to band together to provide health coverage for employees in what are referred to as “Small Business Health Plans” or “Association Health Plans”.  The proposal would allow employers to form a Small Business Health Plan on the basis of geography or industry. A plan could serve employers in a state, city, county, or a multi-state metro area, or it could serve all the businesses in a particular industry nationwide.

Up until now, most association arrangements, such as Multiple Employer Welfare Arrangements (MEWAs), have been considered as a collection of individual employer plans, rather than a single plan. This meant that the plans were treated as being in the small employer group market or the large employer group market based on the number of participants in each employer’s workforce. The effect of the new interpretation would be to put all the employer populations together, so they would all be in (most commonly) either the large group market or, if the association decides to be self-insured, in the self-insured market.

In addition, the new interpretation would permit sole proprietors and partners to be treated as both employers, for certain purposes, and employees for the purpose of being able to participate in the Association Health Plan. In the past, “employee-less” groups were treated as not covered by ERISA. Now, entrepreneurs with zero employees can obtain coverage through the association, and business owners who are active in the business can obtain coverage alongside their employees.

A third major part of the new interpretation is a non-discrimination requirement. As currently envisioned, an association cannot discriminate against employers based upon any health characteristic of the employer’s workforce. Nor can the plan discriminate within an employer group based on health characteristics of any participant. However, the association can establish different rates for “non-health” characteristics, such as bargaining unit membership, beneficiary vs. participant status, retiree vs active status, full- vs. part-time status, and occupation. The specifics of what associations can do to “police” member employer conduct and how the association can encourage wellness initiatives will require additional interpretation.

The fourth major change from current interpretative guidance is that associations may be formed specifically for the purpose of having a benefit plan. Until now, an association had to have had a reason to exist apart from providing benefits, such as promoting the industry in which its members operate. The limitation is now that the association may be formed specifically to offer health plans if it offers them (1) within a state or (2) within a metropolitan area, even if the metropolitan area covers more than one state. The definition of the metropolitan area is one of the points as to which the DOL is seeking input.

As with all things ERISA, the new interpretation is complex and raises significant issues for small- and medium-sized employers who are not already self-insured. Interested parties now have 60 days to submit comments. Because the initiative for the new interpretation was an Executive Order, it is anticipated that the time from the close of comments to issuance of a final rule will be short. Employers would be well-advised to follow developments closely, submitting comments where appropriate and encouraging any associations to which they belong to weigh in.

On Thursday, November 2, 2017, Mimi Walters (R-California), Cathy McMorris Rodgers (R-Washington), and Elise Stefanik (R-New York) introduced in the House of Representatives the Workplace in the 21st Century Act (H.R. 4219). The bill would amend the Employee Retirement Income Security Act (ERISA) to include a voluntary option for employers to provide employees with guaranteed paid leave and qualified flexible workplace arrangements.

The bill would exempt employers from having to comply with the patchwork of state and local paid leave laws if they voluntarily offer employees a minimum level of paid time off and at least one of the following flexible working arrangements: compressed work schedule, biweekly work program, telecommuting program, job-sharing program, or a flexible or predictable schedule. Employees would not be required to adopt a flexible work schedule in order to receive paid leave.

The minimum amount of paid leave that an employer would be required to provide under the plan depends on the size of the employer and the employee’s length of service. The minimum amount of compensable leave provided to an employee each year cannot be fewer than the minimum days as follows:

Number of employees employed by an employer Minimum number of compensable days of leave per plan year
Employees with 5 or more years of service with the employer Employees with fewer than 5 years of service with the employer
1000 or more 20 days 16 days
250 to 999 18 days 14 days
50 to 249 15 days 13 days
Less than 50 14 days 12 days

Under the bill, employers would be mandated to offer paid leave to both part time and full time employees, with prorated minimum leave requirements for part-time employees based on the number of hours they work. Only employees who have been employed for at least 12 months by the employer and have worked at least 1,000 hours during the previous 12 months would be eligible for a workflex arrangement.  Employers would be responsible for the cost of the paid leave.

Several states and local jurisdictions have adopted their own paid leave laws. The Workplace in the 21st Century Act would preempt state and local paid leave laws for employers located within those jurisdictions.  The bill would not affect state or local laws on unpaid leave or the Family and Medical Leave Act.

Ultimately, the bill, if passed, will have no immediate effect on employers located in jurisdictions with no paid leave mandate (such as Ohio). However, for employers in jurisdictions with more restrictive paid leave mandates, the Workplace in the 21st Century Act would provide another option to meet paid leave requirements if they adopt the voluntary plan. The bill was immediately referred to the House Education and the Workforce committee and its future is unknown. Frantz Ward will keep close track of the bill and provide updates on the Workplace in the 21st Century Act’s progress.  The full text of the Workplace in the 21st Century Bill is available here.

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.