Laborsphere

What the Delay of the Employer Mandate Means for Plan Sponsors

Editor’s note: Our colleagues in the Employee Benefits & Executive Compensation Practice Group have put out an alert on the recent IRS guidance confirming the previously announced one-year transition rule for the employer “shared responsibility” mandate and related reporting obligations under the Affordable Care Act. The complete text of the alert appears below.

What the Delay of the Employer Mandate Means for Plan Sponsors

By Sarah Millar, Dawn Sellstrom and Summer Conley

Late on July 9, 2013, the IRS issued Notice 2013-45 confirming the previously announced one-year transition rule for the employer “shared responsibility” mandate (also known as the “play or pay” mandate) and the related reporting obligations under the Affordable Care Act (ACA).

The IRS expects to issue proposed rules describing the information reporting requirements this summer. During this transition year, the IRS is encouraging employers and other reporting entities to voluntarily comply with the information reporting requirements (once the rules have been issued). Voluntary compliance may help entities test their systems and ease the way for when reporting will be mandatory in 2015. Once the IRS issues the proposed (and eventually final) reporting rules, reporting entities will be in a better position to assess whether voluntary reporting in 2014 is feasible and prudent.

In addition to providing relief from the health care coverage reporting obligations for 2014, the IRS notice confirms that the IRS will not assess penalties related to the employer mandate for 2014. The employer mandate generally requires that applicable large employers offer substantially all full-time employees affordable health care coverage that provides a minimum level of benefits or pay a penalty. For more information about the employer mandate, please see our client alert, which can be found here. The related reporting obligations are intended to assist the IRS in identifying which individuals do/do not have the required minimum coverage, and in administering the employer shared responsibility mandate. Because compliance with the reporting obligation will be optional in 2014, the IRS will have no efficient mechanism for determining which employers may owe a penalty for a failure to offer affordable minimum essential coverage.

This transition relief appears to come with “no strings attached.” Although the IRS guidance encourages employers to voluntarily comply with the employer mandate and maintain or expand health care coverage in 2014, the IRS will not impose penalties for a failure to do so. Notably, the guidance issued on July 9th also does not require employers to make “good faith” efforts to comply.

It’s OK to Slow Down, but Don’t Slam on the Brakes. As a result of this transition year, employers will have the option of deciding to what extent (if any) they will continue efforts to comply with the employer mandate during 2014. The transition relief is welcome news in that it relieves the pressure associated with updating plan documents and administrative systems, as well as the costs associated with expanding coverage. It also provides the opportunity for the IRS to issue additional guidance on how to apply the rules for special types of situations (e.g., whether an employer who uses a safe harbor method for determining full-time employee status for some employment classifications must apply that safe harbor to all classifications and how to handle changes in employment classification, such as moving from a known full-time position into a variable hour position). But, many employers still have a lot to do to prepare for 2015 when penalties will be assessed. For example, if an employer intends to use a safe harbor method of determining whether employees who work a variable schedule are full-time employees, in order to avoid being assessed penalties assessed for coverage failures in 2015, full-time employee status will need to be based on average hours worked during a measurement period ending in 2014. Most employers who administer their group health plan on a calendar year basis and use the safe harbor intend to use a one-year measurement period that will run from October 3, 2013 to October 2, 2014. In other words, employers may still need to start tracking hours worked in just a few months.

Employers who intended to rely on one of the transition rules previously announced for 2014 should keep in mind that the latest IRS guidance does not provide special transition rules for 2015. For example, prior guidance provided special transition rules in 2014 for extending coverage to dependents, a shorter measurement period if an employer used the variable hour employee safe harbor, for offering coverage under non-calendar year plans, and for employers contributing to multiemployer plans. The July 9th notice does not specify the extent to which any of these prior transition rules will be extended into 2015.

Drinker Biddle Note: Although no penalties will be assessed for 2014, employers who wish to avoid the penalties in 2015 should evaluate what steps are still needed to offer affordable, minimum coverage to all full-time employees. Plans that operate on a fiscal year (rather than calendar year) basis should assess whether to implement any needed changes at the beginning of the plan year that begins in 2014, or delay such changes until January 1, 2015, and offer newly-eligible employees a mid-plan year enrollment opportunity.

Other Group Health Plan Requirements Still Apply in 2014. As a reminder, this special transition rule does not affect other parts of the ACA. In particular, the various insurance reforms and mandated benefits that apply to group health plans beginning in 2014 will still apply. This means that for plan years beginning on and after January 1, 2014, all group health plans must:

Eliminate all pre-existing condition exclusions (regardless of age);
Eliminate annual limits on the dollar amount of essential health benefits; and
Eliminate waiting periods of longer than 90 days.

In addition, for plan years beginning on and after January 1, 2014, non-grandfathered group health plans must:

Limit cost-sharing provisions as follows:
- Insured plans in the small-group market must limit the annual deductible to $2,000/individual ($4,000/family);
- All group health plans must limit in-network out-of-pocket maximums to $6,350/individual ($12,700/family);

Not discriminate against a health care provider who is acting within the scope of that provider’s license or certification; and
Provide certain, nondiscriminatory benefits for individuals who participate in clinical trials.

Individual Mandate Still Applies. In addition, individuals will still be required to obtain health care coverage or pay a penalty for each month they do not have coverage, beginning January 1, 2014 (this is the individual “shared responsibility” mandate). Employers considering whether to expand coverage in 2014 should evaluate whether expanding coverage is a necessary or effective recruiting and retention strategy for individuals who may not have coverage now.

Exchanges (Marketplaces) Open for Enrollment October 1, 2013. Nothing in the IRS notice changes the effective date of the state insurance exchanges (marketplaces). Beginning on October 1, 2013, individuals will be permitted to enroll in qualified health plan coverage (to be effective January 1, 2014 or later) made available through the marketplaces. The IRS notice makes it clear that individuals who enroll in coverage on the marketplaces will continue to be eligible for a premium tax credit if their household income is within a specified range and they are not eligible for other minimum essential coverage. (As a reminder, “minimum essential coverage” includes employer-sponsored coverage that is affordable and provides the required minimum value; so, if an employee is eligible for affordable employer coverage, that person is not eligible for a premium tax credit if he or she obtains coverage through the marketplaces.)

Employers Must Send Notice of Exchanges (Marketplaces) Before October 1, 2013. All employers subject to the Fair Labor Standards Act (FLSA) must send all current employees (not just employees who are benefit-eligible or plan participants) a notice informing them of their right to obtain coverage on the exchange (marketplace). These notices must be sent to current employees by October 1, 2013. Then, beginning October 1, 2013, employers must send this notice to new hires within 14 days of their start date. The Department of Labor (DOL) has issued a model notice, including instructions, which is available here (Information is linked under the heading “Notice to Employees of Coverage Options.”)

Drinker Biddle Note: Based on current DOL guidance, this notice must include information about whether the employer offers a group health plan that provides minimum value. Employers will need to evaluate how the exchange notice may be impacted by any decisions to delay extending coverage until 2015 – for example, if an employer does not offer affordable minimum coverage in 2014, but does so in 2015 (or does so for a larger class of employees), it may be appropriate to send an updated notice in the fall of 2014 even though the exchange notice is not required to be sent annually. Additional guidance from the DOL would be helpful.

New Fees Still Apply. Nothing changes in the requirement to pay the various new ACA fees in the coming year. For example, there is no extension of the July 31, 2013 due date for the first year’s fee required to fund the Patient Centered Outcomes Research Institute (PCORI). Similarly, the transitional reinsurance fee applicable to health insurance issuers and self-funded health plans and the annual fee imposed on health insurance issuers will still take effect in 2014. We will continue to monitor ACA developments and will provide you relevant updated information when available. In the meantime, if you have any questions, please contact a member of the Drinker Biddle Health Care Reform team or other Drinker Biddle lawyer.

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Supreme Court Applies Tougher “But For” Standard to Title VII Retaliation Claims

In University of Texas Southwestern Medical Center v. Nassar, decided June 24, 2013, the United States Supreme Court held that a plaintiff can no longer establish a retaliation claim under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e et seq. (“Title VII”), merely by demonstrating that retaliation was a “motivating factor” in the employer’s decision to fire, demote or otherwise take adverse action. Instead, plaintiffs must demonstrate that retaliation was the “but for” reason for the employer’s adverse action. In other words, plaintiffs must show that the adverse employment action would not have happened absent the employer’s unlawful retaliatory motive. This holding makes it more difficult for plaintiffs to prevail on Title VII retaliation claims.

Defendant University of Texas Southwestern Medical Center (the “University”) and Parkland Memorial Hospital (the “Hospital”) entered into an “affiliation agreement” requiring all Hospital staff physicians to be employed by the University. Plaintiff Naiel Nassar, a medical doctor, worked as a faculty member for the University and a staff physician for the Hospital. Dr. Beth Levine was a supervisor. During his employment, Nassar complained to Levine’s supervisor, Dr. Gregory Fitz, that Levine discriminated against Nassar on the basis of his ethnic heritage and religion.

Nassar ultimately resigned from the University and, in a letter to Fitz and others, accused Levine of harassing him because he was Arab and Muslim. Although the Hospital had offered to continue employing him as a staff physician, it withdrew the offer when Fitz – unhappy about Nassar’s accusations against Levine – objected that employing a physician who was not employed by the University was inconsistent with the affiliation agreement.

Nassar filed a lawsuit in federal court in Texas asserting Title VII claims for race and religious discrimination, and retaliation. After Nassar received a jury verdict in his favor on both counts, the University appealed. With regard to the retaliation claim, the U.S. Court of Appeals for the Fifth Circuit affirmed. In reaching its decision, the Fifth Circuit held that Nassar had established that retaliation was a “motivating factor” in Fitz’s objection to the Hospital hiring Nassar.

In a 5-4 decision, the Supreme Court reversed, rejecting the “motivating factor” standard. According to the Court, “proof that the defendant’s conduct did in fact cause the plaintiff’s injury … is a standard requirement of any tort claim.” Referring to this concept as a “default” rule, the Court explained that the rule applies “absent an indication to the contrary” in a statute.

Against this backdrop, the Court observed that Title VII prohibits employers from discriminating on the basis of two different categories: (1) “personal characteristics,” which are race, color, religion, sex and national origin; and (2) “protected employee conduct,” which is opposing or complaining about workplace discrimination. Title VII addresses these two different categories in two separate statutory sections, 42 U.S.C. § 2000e-2 (personal characteristics) and 42 U.S.C. § 2000e-3(a) (protected employee conduct).

According to the Court, in the personal characteristics section of Title VII, Congress clearly indicated that the motivating factor standard applies. Indeed, the statute includes the phrase “motivating factor” and states that discrimination is prohibited “even though other factors also motivated the practice.” Thus, the Court explained, Congress plainly indicated its intent that the motivating factor analysis applies to claims under this section.

In contrast, in the protected employee conduct section of Title VII, Congress did not use this language. Instead, the section prohibits an employer from retaliating “because of” protected employee activity – language that the Court, when analyzing other statutes, has interpreted as meaning that the “but for” standard applies.

In reaching its decision, the Court declined to give deference to the guidance manual published by the Equal Employment Opportunity Commission, which reflected the agency’s view that the “lessened causation standard” applies to Title VII retaliation claims. According to the Court, the EEOC’s reasoning “lack[ed] … persuasive force” and was “circular.”

The Court concluded that a plaintiff asserting a claim for retaliation under Title VII must present “proof that the unlawful retaliation would not have occurred in the absence of the alleged wrongful action or actions of the employer.” The Court vacated the Fifth Circuit’s judgment and remanded the case for further proceedings.

For employers, the Nassar decision is good news. As the Court noted, “claims of retaliation are being made with ever-increasing frequency” and applying the “motivating factor” standard advocated by Nassar could have “contribute[d] to the filing of frivolous claims.” However, this decision only applies to retaliation claims under Title VII. The decision does not alter the standard of proof for retaliation claims under other statutes – particularly state statutes – and employers should continue to exercise caution when taking action against an employer who has engaged in protected activity.

WHO IS A SUPERVISOR UNDER TITLE VII?

In its 1998 opinions in Faragher v. Boca Raton and Burlington Industries v. Ellerth, the Supreme Court held that harassment by a supervisor can result in liability against an employer, but that an employer would only be liable for harassment by a non-supervisory employee if it knew or should have known of the harassment and was negligent in failing to correct it. It has remained unclear, however, exactly who is a supervisor for purposes of vicarious harassment liability under Title VII. The First, Seventh and Eighth Circuits have held that an individual is a supervisor for purposes of harassment liability only if he/she has been given the authority to take tangible employment actions – to hire, fire, demote, transfer or discipline – against the victim of harassment. The Second, Fourth and Ninth Circuits have adopted the definition set forth by the EEOC in its Enforcement Guidance where it defines supervisory status by the ability to exercise significant direction of an employee’s work activities irrespective of the power to take substantial or tangible employment actions. The Supreme Court’s opinion this week in Vance v. Ball State University resolves that split by making clear that Title VII imposes vicarious liability on the employer only for the harassment by a member of management who has been given the power by the employer to significantly impact the employment of a subordinate victim.

In Vance, Plaintiff Maetta Vance complained on a number of occasions to the University that she had been subjected to racial harassment by Saundra Davis, who she claimed was her supervisor, as well as by a number of co-workers and other supervisors. The University investigated each complaint and imposed discipline when it found the complaint had merit. Nevertheless, Vance filed charges with the EEOC and ultimately initiated a Title VII action for race harassment and hostile environment discrimination in the United States District Court for the Southern District of Indiana. The district court granted the employer’s motion for summary judgment based on its finding that the University was not strictly liable for the alleged harassment by Davis because Davis was not Vance’s supervisor, and that the University was not liable under a negligence theory because it acted promptly to investigate and resolve the complaints filed by Vance.

The Seventh Circuit Court of Appeals affirmed. The Appeals Court determined that summary judgment was warranted in part because Vance had failed to establish a basis to impose liability against the employer. In this respect, the court found that Davis was not a supervisor under Title VII because she did not have the power to take tangible employment actions, i.e., Davis had no authority to hire, fire, promote, demote or discipline Vance. The court rejected the argument by Vance that Davis was a supervisor merely because she told Vance what to do and refused to adopt the definition of supervisor advanced by the EEOC that it was sufficient under Title VII if the supervisor directed the day-to-day activities of an employee even without authority to take significant or tangible employment actions.

In a 5-4 decision written by Justice Samuel Alito, the Supreme Court affirmed. The Court resolved the split among the circuits by refusing to defer to the expertise of the EEOC, and by rejecting the Agency’s vague and “nebulous” definition of supervisor in favor of a bright line standard which could easily be applied by the parties and courts to establish the status of an alleged harasser. The majority determined that it was appropriate to focus on the framework established in Faragher and Ellerth – that employers will be vicariously and strictly liable for harassment by a supervisor which results in a tangible adverse action such as a significant change in the victim’s employment status – in order to understand and determine the proper definition of a supervisor in the context of a claim for harassment under Title VII. Applying the Faragher and Ellerth analysis, the Court found that the defining characteristic of a supervisor in such a case is the power to cause “direct economic harm” by virtue of “the authority to effect a tangible change in a victim’s terms and conditions of employment.” Accordingly, the Court held that to be a supervisor for purposes of imposing vicarious liability in a Title VII harassment case, a person must have the power to make a “significant change” in the working status of the alleged victim, such as the ability to hire, fire, promote, demote, discipline or impose “significantly different responsibilities” on the employee.

The dissent, written by Justice Ruth Bader Ginsburg, argued that the majority opinion ignores the workplace reality where the power to control work assignments – no less than the power to fire or discipline – is used as an intimidating factor to aid in the harassment of a subordinate. Justice Ginsburg would have deferred to the informed expertise of the EEOC, and suggested that the majority opinion will allow employers to escape liability for the harassment of their employees and undermine the effort “to stamp out discrimination in the workplace.”

The Vance opinion will not only have a significant impact on how harassment cases are approached in litigation, but will also promote the use of internal complaint procedures by forcing employees to report incidents of harassment by co-workers, and by encouraging employers to investigate and resolve such complaints in order to avoid liability in court. Not surprisingly, the opinion has been lauded by defense counsel for bringing clarity to a significant issue of importance and as a victory for employers. The General Counsel of the EEOC, however, has expressed his disappointment in the ruling and in the Court’s failure to defer to the Agency’s long standing interpretation of the law, and employee organizations have parroted the concern expressed in the dissenting opinion that the standard adopted by the Court will make it harder for victims to hold their employers accountable for harassment in the workplace. However, as noted by Justice Alito, there has been no indication from any of the 14 states which comprise the First, Seventh and Eighth Circuits – which have long applied the test adopted by the Court – to support that fear.

Unpaid Interns Deemed Employees Under the FLSA

A federal district court in New York ruled last week that unpaid interns who worked on the production of films for Fox Searchlight Pictures Inc. and Fox Entertainment Group, Inc. were actually employees who should have been paid in accordance with the Fair Labor Standards Act (“FLSA”) and New York Labor Law (“NYLL”). Glatt v. Fox Searchlight Pictures Inc., Case No. 11-CV-06784 (S.D.N.Y. 2013). This decision comes just weeks after another Southern District of New York judge issued a favorable defense ruling by denying class certification for unpaid interns at various Hearst-owned magazines. See Wang v. The Hearst Corporation, Case No. 12-CV-00793 (S.D.N.Y. 2013).

In Glatt, the court applied the six-factor test set used by the Department of Labor (“DOL”) and determined that two unpaid interns who worked on production of Black Swan were improperly classified and did not come within the “trainee” exception to the FLSA’s coverage. Instead, the interns should have been classified as employees subject to the FLSA and NYLL. Specifically, in applying the DOL test, the court found that:

The internship was not similar to training in an educational environment because the interns did not receive any formal training or education, or acquire any new skills aside from those specific to the Black Swan back office during the internship;
The internship had only incidental benefit to the interns – resume value and references– which were not the result of the structure of the internship, and that Fox also benefitted from the unpaid work;
The interns displaced regular employees and performed tasks that would have otherwise been performed by regular employees, such as obtaining documents for personnel files, picking up paychecks for coworkers, tracking and reconciling purchase orders, making copies, and running errands, among other low-level tasks;
Fox received immediate advantages from the activities of the interns, and there is no evidence that the interns impeded work;
The interns were not entitled to a job at the conclusion of the internship; and
The parties understood that the interns were not entitled to wages for time spent in the internship, although the court noted that this factor was not determinative.

While the plaintiffs to whom the court’s ruling applied did not seek class certification, the court granted another plaintiff’s motion for class certification of her NYLL claims and conditional certification of the FLSA claims. In doing so, the court found that: (1) the class was sufficiently numerous because it included at least 40 plaintiffs whose information was not easily identifiable by plaintiffs; (2) there are common questions or law and fact relating to the DOL’s six-factor test; (3) the plaintiff’s claims are typical of the class because she participated in the same internship program administered by the same set of recruiters as all class members and was classified as an unpaid intern like all class members; (4) plaintiff’s interest are not antagonistic to those of the class; (5) common issues of liability predominate over any individual damages claims; and (6) class action is a more efficient mechanism than individual claims because of the relatively small recoveries available.

The court’s reference to the evidence presented in the case provides a good lesson for employers. The court noted an internal memo in which Fox stated that, in light of the DOL test, Fox would only provide paid internships unless a manager could comply with the six criteria provided by the DOL. The outcome in Glatt demonstrates employers must remain vigilant not only in maintaining proper policies on internships, but also in training and oversight of managers, to ensure compliance with the DOL’s six-factor test and the FLSA.

NLRB Rules That Policy Requiring Employees to Individually Arbitrate Employment Disputes Violates the National Labor Relations Act

On June 3, 2013 an National Labor Relations Board (NLRB) Administrative Law Judge (ALJ) reached a decision in which it found that MasTec Services’ Company’s policy that required employees to individually arbitrate employment disputes violated Section 8(a)(1) of the National Labor Relations Act (NLRA). In so holding, the ALJ radically expanded the NLRB’s previous decision in D. R. Horton, Inc. (1/3/12). As D.R. Horton itself has been rejected by almost all federal courts which have considered it, the MasTec decision is bound to create a firestorm of criticism.

In D.R. Horton, the NLRB ruled that requiring employees to sign a blanket waiver of rights to pursue their employment claims through class actions violated Section 8(a)(1) of the NLRA. The specific agreement at issue in D.R. Horton (1) contained a mandatory arbitration provision, and (2) required employees to bring all employment-related claims to an arbitrator on an individual basis, as opposed to as a potential class action. The D.R. Horton decision generated significant criticism, and many commentators noted that it appeared to conflict with U.S. Supreme Court precedent, specifically AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). Concepcion held that the Federal Arbitration Act preempts state laws that prohibit contracts from disallowing class-wide arbitration, and that companies can enforce contract provisions that require customers to arbitrate their disputes individually. Concepcion, which involved a consumer contract, was thought to make it much harder for individuals – not only consumers, but also employees who had signed arbitration agreements – to file class action lawsuits.

Although D.R. Horton initially caused great concern among employers, as it seemed to eliminate the possibility of preventing class suits through mandatory arbitration agreements, this concern has been tempered by the fact that an overwhelming number of federal courts that have considered the issue have refused to follow the decision, including the Eighth Circuit Court of Appeals. See e.g., Owen v. Bristol Care, Inc., 702 F.3d 1050 (8th Cir. 2013); Delock v. Securitas Security Servs. USA, Inc., 883 F. Supp. 2d 784 (E.D. Ark. 2012); Morvant v P F Chang’s China Bistro Inc., 2012 WL 1604851 (N.D. Cal. 2012); De Oliveira v. Citicorp North America, Inc. (M.D. Fla. 2012); Tenet Healthsystem Philadelphia, Inc. v. Rooney (E.D. Pa. 2012); Lavoice v. UBS Wealth Management Americas (S.D.N.Y. 2011); Johnmohammadi v. Bloomingdales, Inc. (C.D. Cal. 2012); Sanders v. Swift Transp. Co. of Ariz., 843 F Supp. 2d 1033, (N.D. Cal. 2012); Palmer v. Convergys Corp., 2012 WL 425256 (M.D. Ga. 2012).

MasTec is sure to be controversial because, despite the courts’ hostile reaction to D.R. Horton, MasTec expands its holding. The arbitration provision at issue in MasTech was less restrictive than that in D.R. Horton, in that it (1) permitted the employee to opt out within 30 days, and (2) explicitly authorized employees to bring claims to administrative agencies. Nonetheless, even with these safeguards in place, the ALJ found the provision to violate Section 8(a)(1). The ALJ gave three independent reasons for reaching this conclusion. First, given that the NLRA grants employees the right to engage in protected concerted activities without interference, an employer may not require its employees to affirmatively act (through the opt-out) in order to obtain or maintain those rights. Second, employees who opt out still would be unable to engage in and cooperate in concerted activities with those who did not opt out, disadvantaging them in their attempts at concerted action. Third, some employees may be reluctant to exercise the opt-out option for fear of angering their employers. Under the reasoning of the Mas Tec opinion, it would be virtually impossible for any employer to include a class action waiver in arbitration agreements with individual employees.

D.R. Horton itself is currently on appeal before the U.S. Court of Appeals for the Fifth Circuit. Should the NLRB and Federal Court decisions continue to diverge, the stage may be set for a reversal of D.R. Horton (or perhaps a Supreme Court decision). We will continue to monitor D.R. Horton and its progeny, given the case’s broad implications for employers potentially subject to employee class actions.

Drinker Biddle Labor & Employment Lawyers Ranked in Chambers USA 2013

Congratulations to the Labor & Employement group lawyers and practices who were recognized as leaders in their field in Chambers USA 2013. Those lawyers who were recognized include Labor & Employment group co-chair Tom Barton (Band 3) and Florham Park partners John Ridley (Band 1) and Lynne Anderson (Band 3).

Sources said about the New Jersey practice (Band 2), “They were eloquent and responsive to a tee. Everyone has been extremely helpful”. When asked about John Ridley, one client commented “He is a seasoned litigator and has been doing employment law for so long that he is a real asset”. Another interviewee praised Lynne Anderson for her ability to “remain calm amid the nastiness of litigation.”

When asked about Tom Barton, one client commented “Smart, creative and practical” and “tries to find a solution for his clients.” And when commenting on the Pennsylvania practice (Band 4), a client noted ” They’ve been great – their approach to litigation has been very reasonable and measured. They’re not overly aggressive – they’re very logical and pragmatic.”

The lawyers of the Labor & Employment group help make up the more than 60 lawyers from many of Drinker Biddle & Reath’s 16 practice groups that were recognized in the Chambers USA 2013 edition.