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News from Cross, Gunther, Witherspoon & Galchus - September 2012

Submitted by Firm:
Cross, Gunter, Witherspoon & Galchus, P.C.
Firm Contacts:
Abtin Mehdizadegan, J. Bruce Cross, Misty Wilson Borkowski
Article Type:
Legal Update
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What the New Health Care Bill Means for Employers -- Greg Northen 

The Supreme Court's much-anticipated ruling on President Obama's Patient Protection and Affordable Care Act of 2010(PPACA) has come and gone, and many groups of people still have little understanding about how PPACA actually affects them. While much of the media hype surrounding PPACA involved the individual mandate (requiring individual citizens to obtain health insurance), group health plans carried by employers and providers will also be significantly changed in the near future. Understanding not only what changes are coming, but also when they become effective, is key to preventing new penalties being levied against your company. 

Notably, there are a few new rules already enforced under PPACA. For instance, all health insurance plans now cover adult children up to the age of 26, even if they are married. Also, pre-existing condition exclusions for new applicants under the age of 19 have been eliminated. Both lifetime and annual limitations on coverage amounts (for essential health benefits) have already been erased by PPACA. Finally, the Internal Revenue Service will no longer consider over-the-counter medications as qualified medical expenses that can be paid using tax advantaged funds through health accounts. This includes flexible spending accounts, health reimbursement arrangements and health savings accounts. Flexible spending accounts will be limited to $2,500 per year, and the penalty for nonqualified purchases made with health savings account funds prior to age 65 is increasing from 10 percent to 20 percent. 

However, many upcoming changes to group health insurance plans have yet to be enforced under PPACA, and understanding how the Act affects you is vital to avoiding new penalties (or taxes as the Supreme Court found them). PPACA's impact on an employer depends on number of Full-time Employees (FTEs) (Note: 30 hours/week = FTE under PPACA). The following is a simplistic breakdown of the categories in which employers will be placed (and the effect of their classification) for purposes related to PPACA: 

25 FTEs or less = Smallest Employer

  • Employers with 25 or fewer employees and an annual payroll average of less than $50,000 per employee will receive a graduated tax credit (maximum 35% in 2010, up to 50% by 2014).

26 - 50 FTEs = Small Employer

  • Small employers with an annual payroll of less than $750,000 will not be mandated to provide insurance under the Act, but they will not receive a tax credit for doing so.

50-199 FTEs = Mid-Sized Employer

  • Employers with more than 50 employees must pay provider insurance or pay fines of $2,000 for each employee who receives a federal subsidy from the "health care exchange" set up by PPACA. This is commonly referred to as the "Pay or Play" provision. Thus, employers must either: (1) offer "qualified and affordable" insurance; or (2) Opt out and pay fines (monthly) to the government.
    • A "qualified plan" is one that is expected to pay at least 60% of allowed charges and meet minimum benefit standards.
    • An "affordable plan" is one where employee contributions do not exceed 9.5% of the employee's household income.

200+ FTEs = Large Employer

  • Automatic enrollment if employer offers any health insurance plan to its employees.
  • Employees can opt out, but must elect to do so themselves.
  • Employers must provide notice of effect of opting-out, and must notify employees about health care exchanges and available premium assistance if employer contributes less than 60% of costs.

PPACA does not become fully implemented until January 1, 2014. However, there are many other changes in the Act that are not discussed in this brief overview, such as W-2 reporting requirements for 2012 and other notice requirements that go into effect throughout 2013. It is critical that employers begin reviewing and preparing to revise, if necessary, any health care benefit plans offered to employees to avoid being penalized by the new provisions under PPACA. 

The Supreme Court’s Decision in Arizona – What Does it Mean? -- Mary Cooper

In 2010, Arizona enacted state statute S.B. 1070 to address several issues related to increased illegal immigration in the State. The law sought to create state immigration offenses and expand local law enforcement's immigration policing authority. The United States sued to enjoin the Arizona law, arguing that it was preempted by federal law. The district court granted a preliminary injunction preventing four provisions of the law from taking effect and the Ninth Circuit affirmed. Arizona appealed the case to the United States Supreme Court, which heard oral arguments on April 25, 2012. On June 25, 2012, the Supreme Court issued its opinion affirming in part and reversing in part the Circuit Court's holding. 

On appeal, Arizona argued that the Circuit Court erred in preventing four provisions of S.B. 1070 from taking effect. Section 3 makes failure to comply with federal alien-registration requirements a state misdemeanor; Section 5(C) makes it a misdemeanor for an unauthorized alien to seek or engage in work in the State; Section 6 authorizes state and local law enforcement officers to arrest without a warrant a person "the officer has probable cause to believe...has committed any public offense that makes the person removable from the United States"; and Section 2(B) requires officers making a stop, detention or arrest, in some circumstances, to verify the person's immigration status with the Federal Government. The Supreme Court held that Sections 3, 5(C), and 6 of S.B. 1070 were preempted by federal law. The Court found that it was without sufficient interpretation from the lower courts to determine whether Section 2(B) conflicts with federal law and remanded that provision back to the District Court for further adjudication. 

In its opinion, the Court first set out the history and scope of the Federal Government's broad constitutional power over immigration and alien matters and its inherent sovereign power to control and conduct foreign relations. The Court noted that the Federal Government has exclusive power to regulate immigration matters such as categories of aliens that are ineligible to enter the United States, alien registration and proof-carrying requirements, imposing sanctions on employers who hire unauthorized workers, and the specific aliens which may be removed from the United States and the procedures for removal. These matters are exclusively enforced by Immigration and Customs Enforcement (ICE), an agency responsible for identifying, apprehending and removing illegal aliens. Under the Supremacy Clause, states are precluded from regulating conduct in a field where Congress has expressly stated that the federal law preempts state law. Federal law will also preempt state law where Congress determined that the area to be governed is completely within the power of the Federal Government. State laws are also preempted where they conflict with federal law. 

The Court found that Section 3, which makes failure to comply with federal alien-registration requirements a state misdemeanor, was preempted by federal law. The Court reasoned that Section 3 intrudes on the field of alien registration, which Congress has determined is to be regulated entirely by the Federal Government and not the states. Section 5(C) of S.B. 1070 makes it a misdemeanor for an unauthorized alien to seek or engage in work in Arizona. The Court determined Section 5(C) also to be preempted, because the imposition of criminal penalties acts as an obstacle to the federal regulatory system in place under the Immigration Reform and Control Act (IRCA). IRCA is a comprehensive federal law that provides a framework for "combating the employment of illegal aliens." IRCA makes it unlawful for employers to knowingly hire, recruit, refer or continue to employ illegal aliens. The Court found that Congress decided that it would be inappropriate to impose criminal penalties on unauthorized employees. Thus, a state law to the contrary is an obstacle to the regulations put in place by Congress. The Court also held that Section 6 of the Arizona law was preempted. Section 6 authorizes state and local law enforcement officers to arrest without a warrant a person "the officer has probable cause to believe...has committed any public offense that makes the person removable from the United States." The Court found that Section 6 also created an obstacle to enforcement of federal law because it attempts to provide state officers with greater arrest authority, which they could exercise without instruction from the Federal Government. Congress did not intend for states to have this increased authority, where federal law specifies the limited circumstances in which state officers may perform an immigration official's functions. Lastly, the Court determined that it was improper for the lower courts to enjoin Section 2(B), because it is not clear at this point whether the provision conflicts with the federal scheme put in place by Congress. Section 2(B) requires officers making a stop, detention or arrest, in some circumstances, to verify the person's immigration status with the Federal Government. If the law only requires state officers to conduct a status check during the course of a lawful detention, the Court determined that the law is probably not preempted. However, because there is no interpretation from state courts at this point the Court refused to assume that the law conflicts with federal law. The Supreme Court's decision does not prevent future challenges to the law after further interpretation in the Arizona state courts. 

The DREAM Act: No Longer a Dream?

The Development, Relief and Education of Alien Minors Act (DREAM) is a bill introduced to Congress in 2001 and reintroduced in 2009. The bill was created to help youths brought to the United States by undocumented parents as children who are now graduating from high school find a path to citizenship and also be allowed to continue their education into college and beyond upon adhering to several strict guidelines. The DREAM Act has not been passed in Congress and remains a proposed law. In June, President Obama made a move to circumvent Congress. He issued an executive order that will prevent DREAM Act-eligible undocumented immigrants from being deported. The administration's plan will also grant DREAM Act-eligible immigrants authorization to obtain jobs legally in the United States without the fear of being deported. The executive order is temporary and will surely be up for reversal if Mitt Romney is elected to the White House in the 2012 presidential election.  

Section 530 Safe Harbor May Provide a Defense for Taxpayers Who Incorrectly Classify Employees as Independent Contractors -- Bo Loftis

Late last year, the Internal Revenue Service (IRS), the Department of Labor (DOL) and several states signed a joint memorandum aimed at reducing the number of workers that are misclassified as independent contractors. According to the press release announcing the initiative, the IRS intends "to end the business practice of misclassifying employees in order to avoid providing employment protections." Arkansas employers are sure to feel the effects of this initiative by the IRS and DOL as random audits will no doubt increase. 

The classification of an individual depends on the amount of control exercised over the individual by the employer. An individual is an independent contractor if the employer only controls the result of the work, not what work will be done and how it will be done. Whereas, an individual is an employee if the employer can control what will be done and how it will be done.   

An incorrect worker classification may subject a taxpayer to a challenge by the IRS. An IRS challenge can even result in a retroactive federal employment tax assessment, which comes with hefty penalties plus interest.   

In September of 2011, the IRS launched a voluntarily classification settlement program, offering reduced penalties for employers that correctly classify their workers going forward. The voluntary program is not the only avenue for relief, however. Section 530 of the Revenue Act of 1978 may provide relief to taxpayers who have incorrectly classified an employee as an independent contractor, thus failing to pay employment taxes, including Social Security and Medicare.   

For Section 530 to apply, a taxpayer must have had a reasonable basis for not classifying the individual as an employee. A reasonable basis may be found if the taxpayer reasonably relied on (1) judicial precedent, published rulings, technical advice with respect to the taxpayer or a letter ruling to the taxpayer; (2) a past IRS audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; (3) longstanding recognized practice of a significant segment of the industry in which the individual was engaged; or (4) any other reasonable basis for treating an individual as an independent contractor. The taxpayer has the initial burden of establishing "reasonableness." 

Even though the taxpayer has the initial burden of proving "reasonableness," the provisions of Section 530 are generally construed in the taxpayer's favor. In General Investment Corp., 823 F.2d 337 (9th Cir. 1987), the Ninth Circuit held that "nationwide practice" is not required to prove longstanding recognized practice of a significant segment of the industry in which the individual is engaged. Industry practice may also be shown if the IRS has previously approved of treating an individual as an independent contractor. In Marlar, Inc., 151 F.3d 962 (9th Cir. 1998), the classification of employees as independent contractors was upheld because the court found that the IRS had previously audited and approved a competitor's classification of similarly situated employees as independent contractors.   

Although liberally construed, a reasonable basis alone will not protect the taxpayer. The taxpayer must have treated the individual and all other individual workers performing the same tasks as non-employees for all periods. Additionally, the taxpayer must have filed all appropriate federal and informational tax returns. The appropriate returns include Form 1099-MISC, which specifically applies to non-employee compensation of $600 or more, and the transmittal Form 1096. If these two conditions can be met, in addition to a reasonable basis, the taxpayer most likely has an IRS defense.   

Employers can use the 530 Safe Harbor provision to overcome an IRS challenge and avoid tax penalties. The safe harbor should only be used if the qualifications can be met. Any taxpayer wishing to use the safe harbor must have had a reasonable basis, treated similarly situated workers the same, and filed all necessary and proper information and returns. 

Criminal Background Checks: What You Need to Know about the EEOC’s New Guidance 

On April 25, 2012, the Equal Employment Opportunity Commission issued new Enforcement Guidance regarding employer use of criminal records under Title VII of the Civil Rights Act of 1964. The EEOC issued this Guidance in response to two issues: (1) employers' purported increased access to and use of criminal history information and (2) data showing that criminal record exclusions may have a significantly greater impact on minority applicants and employees.  

The EEOC explains that records of arrests and convictions must be evaluated differently and a blanket ban on hiring an individual based solely on his/her arrest record violates Title VII because an arrest does not establish that criminal conduct occurred. By contrast, a conviction record will usually serve as sufficient evidence that a person engaged in particular conduct. However, the Guidance makes clear the EEOC's belief that a policy which bars hiring applicants who have criminal convictions of any kind would also violate Title VII. An employer may be in violation of Title VII if its neutral policy against hiring all individuals who have criminal arrests and/or convictions results in a disparate impact on employees or applicants of a particular race or national origin, unless the employer can demonstrate that its policy is "job-related and consistent with business necessity." It is also unlawful for an employer to treat individuals with similar criminal records differently based on factors such as race or color.   

The Guidance discusses two circumstances in which the EEOC believes employers can satisfy the "job related and consistent with business necessity" defense when using criminal records to make employment decisions: (1) the employer validates the criminal conduct ban or exclusion for the position in light of the Uniform Guidelines on Employee Selection Procedures (which is likely an impossible burden for most employers to meet); or (2) the employer develops a "targeted screen" considering the nature of the crime, the time elapsed and the nature of the job. The policy must also provide an opportunity for an individualized assessment for people excluded by the screen to determine whether the policy as applied is job-related and consistent with business necessity. The Guidance also discusses the four factors used to determine whether an employer's hiring and other employment decisions and policies relating to criminal background checks violate the law: (1) convictions as opposed to arrests; (2) nature and gravity of the offense or conduct; (3) time that has passed since the offense; and (4) the nature of the job held or sought. It also provides specific examples of criminal background policies which the EEOC believes violate Title VII. 

Perhaps the most significant aspect of the new Guidance is the EEOC's position that although Title VII does not require an "individualized assessment" of criminal history in all circumstances, the use of a criminal background screen that does not include such an assessment is more likely to violate the law. 

The EEOC's list of best practices for employers who consider criminal record information when making employment decisions includes eliminating policies and practices that exclude individuals from employment based on the mere existence of a criminal record; developing a narrowly tailored written policy and procedure for screening applicants and employees for criminal conduct; training managers and decisionmakers on how to implement hiring policies and procedures; and limiting inquiries regarding an individual's criminal background to situations in which such information is job-related for the position in question and consistent with business necessity as defined by the EEOC.

CGWG Case Corner

"Severe" Obesity Now Protected Under the ADA

In July, BAE Systems was ordered to pay $55,000 to settle a disability discrimination lawsuit filed by the U.S. Equal Employment Opportunity Commission (EEOC). The EEOC claims that BAE discriminated against an employee based on his actual or perceived disability - morbid obesity - by terminating his employment, denying him reasonable accommodation and otherwise denying him equal employment opportunities within BAE. The employee, Ronald Kratz, II, weighs more than 600 pounds, and was required to occasionally drive a fork lift. He asked for a seatbelt extender for the fork lift and was terminated two weeks later because, according to BAE, he could no longer do his job due to his weight. Employers should beware that employment decisions that are based on an employee's weight or detrimentally impact overweight employees may lead to trouble with the EEOC. Click here to read the full story. Click here to read the EEOC's complaint. 

Counseling Refused by Employee Considered "Medical Examination" Under the ADA

The 6th Circuit case Kroll v. White Lake Ambulance Auth. will certainly broaden the definition of a "medical examination" to include "psychological counseling," but not in every scenario. The Sixth Circuit Court held that if an employer asks an employee to agree to counseling, then the court must determine what purpose of the counseling is intended by the employer. IF the counseling is to uncover potential mental defects, such as bi-polarism or depression, then it would be construed as a medical exam under the ADA. If the purpose of the exam is intended to determine behavioral aspects of an employee, such as truthfulness, personality type, leadership skills, etc., then it would not be a medical exam as defined by the ADA. In the case of Kroll, the District court must now to determine whether the employer intended the testing to be for "medical purposes." Employers should beware that, sometimes, an employer's suggestion that an employee get psychological counseling could be grounds for an ADA claim. To read more, click here.