This post was co-authored by Inna Shelley.

Employers should have counsel review their non-compete agreements in order to ensure that a merger or other restructuring would not affect the successor company’s right to enforce the agreement.  On May 24, the Ohio Supreme Court decided Accordia of Ohio, LLC v. Fischel, a case in which four employees signed non-compete agreements promising not to compete with their employer for two years after leaving the company. The non-compete agreements lacked language addressing mergers, such as that the agreement extended to the company’s successors or assigns. After a merger, the contracting company ceased to exist because it was subsumed into the successor, and the four employees continued to work for the successor entity. These employees later quit and began competing with their former employer.

However, the Ohio Supreme Court held that the new entity could not enforce the non-compete agreements past the original 2-year period specified in the agreements. This 2-year period began to run after the employees stopped working for the original company when it ceased to exist in the merger. By the time the employees left the successor company, the 2-year non-compete period had expired.

The Ohio Supreme Court held that although non-compete agreements transfer as a matter of law to the successor entity in a merger between companies, they are enforceable only according to their terms. The successor will only receive the benefit of the bargain struck by the original contracting entity and nothing more. As a result, the Court concluded that enabling the successor employer to enforce the non-compete agreements would be against the agreements’ plain language, which stated that they applied only to the original company. While the successor obtained all the rights to the new contracts, it was unable to enforce them more than two years after the “old” employer disappeared in the merger.

The majority opinion insisted that the decision was consistent with long-established Ohio merger law providing that the successor company in a merger takes over all the previous company’s assets, property, and contacts. However, the dissenting justices believed that the decision departed from century-old precedent holding that a successor entity steps into the shoes of its predecessor and acquires the right to enforce agreements in its capacity as the successor. 

Employers can avoid the result in Accordia by ensuring that their non-compete agreements state that they are made between the employee and the company, plus the company’s successors and assigns. Non-compete agreements should also state that all of the company’s rights under the agreement also flow to the company’s successors and assigns and that the company’s successors and assigns may enforce the agreement.  Businesses contemplating acquisitions should review their agreements with key employees to make sure that they have appropriate language; if not, the employees can be asked to sign new agreements.  Continued employment is sufficient consideration in Ohio for non-compete agreements. 

Businesses that have made acquisitions in the past may also wish to review the covenants, representations, and warranties contained in their merger agreements to determine if they might have claims against the seller for transferring unenforceable agreements.

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.

This post was coauthored by Inna Shelley.

The National Labor Relations Board decision in the Specialty Healthcare case has continued paving the way for the certification of increasingly fragmented micro bargaining units. On May 4th, the director of NLRB Region 2 approved a collective bargaining unit of full-time and part-time salespersons in the women’s shoe departments on the 2nd (Designer Shoes) and 5th (Contemporary Shoes) floors of a Bergdorf Goodman department store. The approved unit would likely consist of less than 12% of the store’s sales associates and an even lesser percentage of the store’s non-supervisory workers. The full text of this Neiman Marcus Group decision is available here.

Neiman Marcus Group continues the recent Board trend of allowing fragmented micro-units. Such units allow unions to gain a foothold by organizing only an increasingly small subset of employees. Unions no longer have to expend resources to organize the bulk of an employer’s workforce as long as they can identify any group of employees who share an alleged “community of interest” under the traditional criteria. This analysis is often quite subjective and considers whether employees (1) are organized into separate departments (2) have distinct skills and training (3) have distinct job functions or whether there is job overlap (4) are functionally integrated with other employees (5) have frequent contact with other employees (6) interchange with other employees, and (7) have distinct terms and conditions of employment.

Under Specialty Healthcare, if a unit is found appropriate under the above standard, it will be recognized even though a larger unit would be even more appropriate. To successfully challenge a smaller unit, the employer must demonstrate that employees in a petitioned-for, smaller unit share an “overwhelming community of interest” with other employees in a larger unit.

In approving a unit of women’s shoe sales associates on two store floors, Neiman Marcus Group emphasized that salespersons in the shoe departments were paid on a different wage scale than salespersons in other departments. It also distinguished the sale of shoes from that of other merchandise, claiming that shoe salespersons needed different skills and training and that many of them had significant prior experience selling shoes before their hire. Shoe salespersons also made minimal sales of other merchandise and transfers of salespersons from other departments to shoes were uncommon.

It did not matter that sales employees across all departments were subject to the same personnel policies, including health benefits, vacation and holiday policies, evaluations, probation, or use of a common cafeteria. Interestingly, the regional director concluded that salespersons of men’s shoes should not be in the unit because men’s shoes were sold in the men’s section of the department store located across the street and there was allegedly little association between the men’s and women’s shoe salespersons despite access to a common cafeteria.

The decision also analyzed Specialty Healthcare’s Footnote 29, which stated that Specialty Healthcare was not meant to disturb special industry presumptions and occupational rules. There is, of course, a longstanding presumption in the retail industry that the appropriate unit is store-wide. While recognizing that industry presumptions must still be followed after Specialty Healthcare, the regional director rejected the retail industry presumption. Instead, the director relied upon isolated retail cases, including those with stipulated units and those finding that appropriate units consisted of all salespersons, as opposed to only those who sell particular merchandise. Thus, as long as an exception allowing a smaller unit can be identified in a particular industry, even via voluntary approval, employers may not be able to successfully rely on long-established industry practice to challenge a proposed fragmented unit.

Neiman Marcus Group also affirms that in the post Specialty Healthcare world, it is now increasingly difficult for employers to challenge a proposed micro-unit by claiming that there is an “overwhelming community of interest” with a larger employee group. Such an “overwhelming community of interest” exists only where almost every community of interest factor overlaps almost completely. Any perceived difference in job functions or other terms or conditions of employment may justify a bargaining unit of a small employee group.

As a result, employers may find themselves under the obligation to engage in collective bargaining with a multitude of splintered employee groups, in spite of vastly overlapping interests that do not quite rise to “overwhelming” by the Board’s assessment. Cases like Neiman Marcus Group demonstrate that when the Board said in Specialty Healthcare that its decision did not presage any major changes, it wasn’t quite telling the truth, the whole truth and nothing but the truth.

The United States District Court for the District of Columbia ruled that the NLRB’s new rules on extremely fast union elections had not been properly issued, due to lack of a quorum. While Member Brian Hayes participated in earlier portions of the rulemaking process, he did not participate in the final deliberations or vote upon the rule itself.  With only two other members of the Board in office at the time, that meant only two members acted.  Since a quorum for the Board to conduct business is three members, U.S. District Judge James Boasberg found the rule invalid.  He did not reach the other arguments raised by the plaintiffs in the case (the U. S. Chamber of Commerce and the Coalition for a Democratic Workplace).  In light of the nature of the ruling, the Board can elect to appeal, or it can take action upon the rulemaking record with a quorum, which it now can muster (at least assuming that the recess appointments made by President Obama are found to be valid.)  The order of Judge Boasberg is below.

 

Dr. John Goodman, of the Health Alert blog, has written an excellent blog post on the various options for covering health costs, besides conventional third-party insurance (FSA’s, HSA’s, HRA’s, Roth HSA’s and even 401k’s).  The current system is clearly haphazard, and could be improved without legislation.  Individual savings options will become more important in the coming years, whether the Affordable Care Act is upheld, overturned or partially preserved.  It would be a good use of resources to make the current savings options for paying health expenses more effective and more coordinated.

The U.S. Equal Employment Opportunity Commission (EEOC) has just issued new Guidelines on employers’ use of criminal records to make employment decisions.  Despite the opposition of employer groups, its guidelines represent a significant restriction upon what the EEOC thinks employers can do, and how employers can justify to the EEOC their use of criminal convictions in filling job openings.  The EEOC’s assumptions that criminal convictions represent, without individualized analysis by the employer, non-job-related criteria and that different conviction rates among different ethnic groups create disparate impacts in the job market are unsupported by logic or by empirical studies of the justice system.  A criminal conviction is not an immutable characteristic, nor is it a protected category under Title VII.  Every state has collateral sanctions attendant to criminal convictions, which are given short-shrift by these Guidelines.  Ohio, for example, has over 600 civil consequences for criminal convictions in areas of employment, civic participation, public benefits and so on.  The new Guidelines give deference only to Federal collateral sanctions. This kind of expansionist activity by a government agency only serves to reduce the level of respect accorded to it, and diverts it from its core mission.  Fortunately for employers, most of them can continue to do what they have been doing, and consider criminal convictions of job applicants in light of their own needs and the jobs in question, without engaging in expensive and superfluous analysis.  If the EEOC chooses to bring an action, this is one area where the right to a jury trial will put the advantage in the employer’s corner.

As was illustrated by a House Judiciary Committee Hearing on April 18, immigration enforcement is nowhere near consensus.  A bill introduced by Rep. Lamar Smith (R-Texas), HR 2885, would make use of E-Verify mandatory for all employers.  Rep. Smith regards the bill as a measure to stop identity theft, especially including theft of children’s identities by unauthorized workers. Such theft is often not uncovered for many years, by which time the futures of the children may be seriously impacted.  On the other hand, Rep. Zoe Lofgren (D-Cal) contended that the new law, if passed, would aggravate the problem while costing taxpayers billions.  Her position is that E-Verify cannot uncover identity theft, since it only matches social security numbers with names.  She noted that the real problem is with immigration.  Even Rep. Smith conceded that the underground market for false identity papers grew after the passage of the Immigration Reform and Control Act, which required employers to obtain documentation of identity and work eligibility for all new hires.  Other issues for E-Verify requirements include fair and efficient ways to deal with incorrect responses from the system.  With millions of people being hired at new jobs each year, even a low percentage of false replies on work eligibility means that thousands of eligible workers would be denied jobs for as long as it takes the government to correct the mistake.  The National Small Business Association (NSBA) has noted this problem as a major concern with mandatory E-Verify.  Members of both parties have spent enough time on this issue (the April 18th hearing was the sixth hearing in this Congress just on E-Verify) to know that comprehensive immigration reform is necessary.  E-Verify is just a tool, and doesn’t approach being a solution to the underlying problem.  Unless coupled with sensible changes in immigration policy, using it (and especially making it mandatory) is likely to do more harm than good.

As indicated in our previous post, the Congressional Budget Office and the Joint Committee on Taxation have been examining the impact of the Patient Protection and Affordable Care Act (“Affordable Care Act” or “Obamacare”) on employer-provided health insurance, and the impact of that upon the costs of the Act.  They have now released a summary of their study, which finds that the more employers dump their employees into the Exchanges, the less costly the Act will be in terms of adding to the federal deficit.  The reason is that the study assumed that all the employers who stop providing insurance would add the equivalent amount to employee pay.  Therefore, the employers would pay more payroll tax and the employees would pay more payroll tax and more income tax, thus overcoming the increase in subsidies provided through the exchange.

The report summary states the key conclusions as follows:

CBO and JCT’s Key Findings

  • CBO and JCT continue to expect that the ACA will lead to a small reduction in employment-based health insurance. That projection arises from the agencies’ modeling of the many changes in opportunities and incentives facing employers and employees under the ACA, and it is consistent with the findings of other analysts who have carefully modeled the nation’s health insurance system.
  • Significant changes in some of the key assumptions underlying the estimates lead to somewhat higher or lower projections of the change in employment-based health insurance and the budgetary impact of the ACA. However, differences in the projected change in employment-based health insurance tend to have limited effects on the projected budgetary impact of the law because changes in the availability and take-up of such insurance affect the federal budget through several channels that are partly offsetting. Indeed, one scenario examined here shows that larger reductions in employment-based health insurance than expected by CBO and JCT might lower rather than raise the cost of the insurance coverage provisions of the ACA.
  • In CBO and JCT’s judgment, a sharp decline in employment-based health insurance as a result of the ACA is unlikely and, if it occurred, would not dramatically increase the cost of the ACA.

The “small reduction” in employees provided with employer-based coverage is 3 to 5 million.  In some scenarios modeled, the reduction was a total loss of employer-based coverage of 20 million people.  Again, the assumptions in the study were that the lost benefit costs would be replaced by salaries and wages:

If a firm chose not to
offer insurance coverage under the ACA, some of its workers and their families might enroll in Medicaid or CHIP or be eligible to receive subsidies through the insurance exchanges; as a result, the cost of those programs would increase. At
the same time, the reduction in that firm’s compensation to workers that was
provided in the form of health benefits would generally be offset by an increase in
the compensation it provided in the form of wages and salaries. Because health benefits are generally not taxed but wages and salaries are, that shift in the
composition of compensation would raise federal revenues. In addition, the federal government would generally receive penalty payments from the employer and from any employees who ended up without health insurance.

It is also worth noting that the issue for this study is the effect upon the deficit, not the cost of the provision of coverage.  It is arguable that there could be deficit offsets in the form of increased taxes, but there can be no dispute that having billions of premium dollars of coverage no longer paid by employers and then provided through the exchanges, with subsidies, will affect the cost of the Affordable Care Act.  Even as to the deficit, if employers (especially small employers not subject to employer penalties) simply get out of the health care business without increasing their pay rates the anticipated offsets for higher income and payroll taxes simply will not occur and the deficit will increase.

The CBO has issued a new estimate for the costs of the Patient Protection and Affordable Care Act (“PPACA”). Compared with the original projected total cost of approximately $900 billion over a ten year timeframe, the new estimate is nearly double.  At the same time, the impact on the deficit is more positive than in prior estimates, due, in part, to the inability or unwillingness of small businesses to take advantage of the tax incentives provided in the law  for small employers who provide coverage for their employees. Since the time-frame of the estimate is from the present until ten years in the future (2012-2021), it covers an additional year of full implementation of the law, compared with the 2011-2020 estimate.  The entire report is worth examining, since it demonstrates the changes in the many moving parts of the cost estimation process–from changes in implementation schedules, to changes in economic outlook, to changes in real-world experience compared with initial assumptions, to changes in laws and regulations.  It is also worth noting that CBO has noted the concern of many third parties as to the “rosy” estimates of the number of employers who will continue to offer health insurance to their employees after implementation of PPACA and has promised to issue an analysis “shortly”:

Some observers have expressed surprise that CBO and JCT’s previous estimates did not show a much larger reduction in the number of people receiving employment-based health insurance. CBO and JCT’s estimates take account of the expanded eligibility for Medicaid and the subsidies to be provided through the insurance exchanges, but they also recognize that the legislation leaves in place substantial financial incentives for firms to offer health insurance coverage and also creates new financial incentives for firms to offer such coverage and for many people to obtain it through their employers. Shortly, CBO will release an extensive analysis conducted with JCT of the incentives for firms to offer or not offer health insurance under the ACA, as well as a range of estimates of sources of coverage and federal budgetary outcomes that would result from the ACA under alternative assumptions about employers’ behavior.

HHS has made its final (in some cases “interim final”) Exchange regulations under the Patient Protection and Affordable Care Act (“PPACA”) public.  They are to be formally published in the Federal Register on March 27.  The 644 pages of the HHS Regulations Final Rule on Health Plan Exchanges 032712.pdf cover standards for states to follow in setting up exchanges for individuals and small businesses to obtain insurance coverage.  More information will be forthcoming as the regulations are more closely examined, but a couple of key points are 1. that states must apparently have both individual and Small Employer Health Care Option Plans (“SHOP”) exchanges; 2. that multi-employer welfare (“MEWA”) plan products and church-based mutual-aid type health plans will not necessarily be entitled to be offered on exchanges (which in turn means that those who purchase such plans would be ineligible for subsidies); and 3. that the January 2013 date for approval of state exchanges by HHS will not be changed.  HHS believes that meeting the October 2013 date for open enrollment requires that the plans be approved or rejected by January of that year.