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Jul 2004
01
July 01, 2004

Human Resources Alert - Summer 2004

Topics included in this issue:




Supreme Court Reemphasizes Importance of
Having an Effective Antiharassment Policy

A recent sexual harassment decision by the United States Supreme Court underscores the need for an employer to have an antiharassment policy in place that contains an effective complaint mechanism and that is made known to all employees. The existence of such a policy can help the employer avoid liability in cases involving sexual harassment by a supervisor – even in some "constructive discharge" cases.

In Pennsylvania State Police v. Suders, the plaintiff alleged that she was subjected to sexual harassment by her supervisors, and that this harassment created a hostile working environment. The plaintiff eventually resigned because of the severity of the harassment, and later sued her employer, claiming that she was "constructively discharged," or essentially forced to quit. The Supreme Court held that an employee is constructively discharged if an abusive working environment becomes so intolerable that resignation qualifies as a fitting response. The issue in Suders was whether an employer can be held strictly liable for sexual harassment by a supervisor that leads to an employee's constructive discharge.

To understand the Supreme Court's analysis in Suders, it is important to recall two important sexual harassment cases that the Supreme Court decided in 1998: Faragher v. Boca Raton and Burlington Industries v. Ellerth. In Faragher and Ellerth, the court held that employers are strictly liable for supervisor harassment that culminates in a "tangible employment action" against the victim, such as a discharge, demotion or undesirable reassignment. When there is no such tangible employment action, however, an employer may raise an affirmative defense to liability by showing that (1) it exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and (2) the victim unreasonably failed to take advantage of any preventative or corrective opportunities provided by the employer or to avoid harm otherwise. The Supreme Court stated that an employer could most easily satisfy the first prong of this defense by publishing and disseminating to all employees a harassment policy designed to encourage victims of harassment to come forward without facing undue risk and without requiring the victim to complain to the offending supervisor. An employee's unreasonable failure to use such a complaint mechanism will normally satisfy the second prong of the defense.

Since the Faragher and Ellerth decisions, courts have struggled to determine if constructive discharge is a "tangible employment action." If constructive discharge is a tangible employment action, then the employer is strictly liable for the harassment that led to the constructive discharge, and does not have any defense. On the other hand, if constructive discharge is not a tangible employment action, then the employer is not strictly liable and may raise the affirmative defense described above.

The Supreme Court settled this question in Suders, holding that constructive discharge can be a tangible employment action, but only if a supervisor's official act – such as a demotion, extreme cut in pay or transfer to a position where the plaintiff would face unbearable working conditions – precipitates the constructive discharge. In such a case, the employer is strictly liable. However, if the constructive discharge does not result from such an official action by a supervisor, then it is not a tangible employment action and the employer can try to prove the affirmative defense in order to avoid liability for the supervisor's harassing behavior.

The moral of the story? First, just because an employee quits, it does not mean that the employer is off the hook. The employee can still claim that he or she was constructively discharged and seek to hold the employer liable. Therefore, employers should review the circumstances surrounding employee resignations to be sure that there is no suggestion that harassment or other improper behavior led to the resignation. Second, an employer must have appropriate antiharassment policies in place if it is to have any hope of avoiding liability in cases of supervisor harassment. There are still some situations where employers will be strictly liable for a supervisor's actions, but there are many cases where an employer can avoid liability if it has the appropriate policy and complaint mechanism in place.

If you are unsure whether your harassment policy is up-to-date, or if you need to develop a harassment policy, please contact one of our employment attorneys, who will be happy to assist you.


NLRB Reverses Course (Again) on Nonunion
Employees' Right to Assistance During Investigations

By Robert A. Dubault

Someone once said that the only constant in the world is change. That is certainly true at the National Labor Relations Board where, for the third time in the last 22 years, the Board has changed course on whether nonunion employees have so-called Weingarten rights to be assisted by a coworker during a workplace investigation. In IBM Corp., 341 NLRB No. 148 (2004), the Board reversed its decision from four years earlier in Epilepsy Foundation of Northeast Ohio, 331 NLRB 676 (2000), and held that nonunion employees do not have a right under the National Labor Relations Act to coworker assistance during an investigatory interview into alleged workplace misconduct. In Epilepsy Foundation, the Board had reversed 15 years of precedent and extended the right of coworker assistance to nonunion employees.

The Board acknowledged in its decision in IBM Corp. that while it was reasonable under the National Labor Relations Act to conclude that nonunion employees have the right to coworker assistance, the Act does not compel that conclusion. In holding that employees have no right to coworker assistance, the Board relied on several policy considerations underlying the Weingarten right itself, as well as those surrounding the modern workplace. First, Weingarten rights originally arose in the unionized workplace and gave an employee the right to have a union representative present during an investigatory interview which the employee reasonably believed might lead to discipline. Unlike union representatives, who have a legal duty to represent the interests of the entire workforce, and experience in dealing with workplace issues, a nonunion coworker has no such obligation or experience. Likewise, the presence of a coworker could compromise the confidentiality or integrity of the investigatory process. This is particularly important in today's workplace, where employers must promptly investigate and address issues of harassment and workplace violence. It is also a significant concern in that the coworker, himself, may be implicated in the alleged wrongdoing. The Board reasoned that this is less of an issue in a unionized workplace, where the union official has a fiduciary duty to the employee not to unreasonably disclose confidential information.

The Board's decision in IBM Corp. allows employers to return to their pre-Epilepsy Foundation way of doing business with their nonunion employees (at least until the Board changes its mind again). Employers should, however, keep in mind that while they do not have to grant an employee's request for coworker assistance during an investigatory interview, they cannot discipline the employee merely for making the request. An employee who makes such a request is engaged in protected activity under the National Labor Relations Act. Additional information about such protected activity can be found in Lou Rabaut’s article in the Winter 2004 issue of WN&J's Human Resources Alert.

 

Is Consumer-Driven Health Care in Your Company's Future?

By Sue O. Conway

Continued health care cost increases combined with some favorable news from Washington have catapulted consumer-driven health care into the headlines. What is consumer-driven health care and why is it such a hot topic? The term "consumer-driven health care" has no single meaning but in most cases refers to high deductible health insurance coupled with some type of personal health care spending account. The individual covered by the high deductible insurance can use the spending account, which may be carried over from year to year, to pay the deductible or other medical expenses not covered by the high deductible insurance. This is called “consumer-driven” because, at least in theory, the individual health care consumer is inclined to treat the account as his or her own money and, as a result, will spend health care dollars wisely and prudently to build up the account for the future.

HRAs Were First

In 2002, the IRS gave a green light to health reimbursement arrangements ("HRAs"). These are employer-funded accounts that may be used only for medical expenses, including the purchase of insurance. Unlike Section 125 health flexible spending accounts ("FSAs"), an HRA account balance can be carried over from year to year. Although HRAs are generally used in conjunction with high deductible health insurance plans, there is no legal requirement that an HRA be accompanied by a high deductible health plan.

HRAs are generally employer bookkeeping accounts, not money actually set aside in a trust. Employers have great flexibility in designing their HRAs. Some allow the HRA to pay for any qualified medical expense while others limit permissible expenditures to co-payments or deductibles under the high deductible insurance. While some HRAs allow all or at least some of the unused account balance to carry over until employment terminates, other plans go further and allow employees to continue to use the HRA for medical expenses following retirement.

Then Came HSAs

Last year's Medicare prescription drug law further spotlighted consumer-directed health plans by introducing health savings accounts ("HSAs"). Described by Secretary of Treasury Snow as "super-charged IRAs for health care," many believe that HSAs represent a significant improvement over HRAs. HSAs are not limited to employer funding. Anyone under age 65, not just employees, may put aside money tax free for health care expenses in an HSA. The key limitations are that the account owner cannot be claimed as a tax dependent by someone else and the account must be accompanied by a high-deductible health plan ("HDHP").

An HDHP is a plan with a minimum deductible of $1,000 or a family deductible of $2,000, indexed annually. The maximum out-of-pocket expense under the HDHP generally cannot exceed $5,000 for an individual and $10,000 for a family, and individuals cannot be enrolled in another health plan that is not an HDHP (except for certain permitted coverages and preventive care).

Contributions to an HSA may be made by individuals (on a pretax or fully deductible basis) or by their employers or both. Annual contributions can total 100% of the HDHP deductible or, if less, $2,600 a year for an individual and $5,150 for a family. People age 55 and older may make an additional annual catch-up contribution of $500 in 2004, an amount that will increase by $100 annually until it reaches $1,000 in 2009. Employer contributions must be comparable for all employees who are eligible for the HSA.

HSA contributions must be placed in a trust or custodial account with a bank or other approved financial institution. There are no limits on the amount that can accumulate in the account, and the HSA is completely portable. Once money is contributed to the HSA, it belongs to the account owner and is nonforfeitable.

While HSAs generally cannot be used to pay insurance premiums, there are some exceptions to this rule: premiums for COBRA coverage, health insurance for individuals receiving unemployment compensation, retiree health insurance for those over age 65 (including Medicare Part B, but not Medigap premiums), and long-term care insurance.

HSAs provide a triple tax break. First, money goes into the HSA account on a pretax or fully deductible basis; second, there is no tax on the buildup of earnings in the account; and finally, distributions to pay medical expenses are tax free. Distributions for nonmedical expenses are also permitted but are subject to regular income tax and a 10% penalty. However, the penalty does not apply after the individual’s death, disability or Medicare eligibility. At death, the amount in the HSA will be taxable to the beneficiary of the HSA unless the spouse is the beneficiary, in which case the spouse can continue to use the HSA tax free for medical expenses.

HRA or HSA?
Pros and Cons


While many believe that HSAs represent a significant improvement over HRAs, some employers prefer HRAs because there is more employer control and flexibility. HRA contributions do not need to be placed in trust and the HRA account balance must be used for medical expenses (which can include health insurance premiums); it cannot be cashed out. Moreover, the employer can limit its financial exposure by controlling the amount employees can carry over from year to year or by requiring the account to be forfeited upon termination of employment. On the other hand, an HRA must be fully paid for by the employer while an HSA can accept pretax employee contributions together with, or instead of, employer money. The HSA may also be attractive to an employee because the account is nonforfeitable and can be used for nonmedical expenses (subject, of course, to income tax and the 10% penalty, if it applies). This presents the potential for another tax-advantaged retirement benefit, since the 10% penalty does not apply after age 65.

There are clearly advantages and disadvantages to consumer-driven health care and to the choice between HSAs and HRAs. The following table shows some of the similarities and differences:

 

HRA

HSA

Pretax employee contributions allowed? 

No

Yes

Employer contributions?

Required

Optional

Funding required?

No

Yes

HDHP required?

No

Yes

Carryover permitted?

Yes

Yes

Portable?

No

Yes

Available to self-employed individuals?

No

Yes

Can funds be used for retirement?

Depends on plan design

Yes

Only employees are eligible?

Yes

No



A First Step?

The strategy of consumer-driven health care is built around the idea of helping individuals become better consumers of health care by allowing their health care dollars to be carried over for use in future years or even during retirement, depending on the type of account and the employer's plan design. Because consumer-driven health care is new, the experience to date is sketchy, although anecdotal evidence suggests that such plans can reduce health care cost increases. At this point, consumer-driven health plans represent a small slice of the total market share with many employers taking a "wait and see" attitude. While consumer-driven health care may not be a silver bullet for the nation’s health care crisis, it is perhaps a first step in an evolutionary change in how employees receive and fund their health care.


Michigan Supreme Court Clarifies Scope of
Harassment and Discrimination Laws

By Dean F. Pacific

In two recent cases, the Michigan Supreme Court clarified the employment discrimination and sexual harassment provisions of Michigan's Elliott Larsen Civil Rights Act. Consistent with the approach that this Court has been applying to this statute and others, the Supreme Court focused on the plain language of the Civil Rights Act.

In Lind v. City of Battle Creek, the Court dealt with the issue of "reverse discrimination." The plaintiff, Michael Lind, was a white police officer who claimed that the City of Battle Creek discriminated against him on the basis of his race when it promoted a black police officer to a supervisory position over him. The Michigan Court of Appeals had rejected Lind’s claim, relying on prior decisions that held that a nonminority plaintiff must not only meet all of the same standards of proof that a minority plaintiff would be held to, but must also present evidence of "background circumstances supporting the suspicion that the defendant is that unusual employer who discriminates against the majority."

The Supreme Court in Lind rejected this view of "reverse discrimination" claims, and held that the plain wording of the Civil Rights Act provides that an employer shall not discriminate against an "individual" with respect to employment because of race. "Individual" means "individual," the Supreme Court stated, and the Civil Rights Act draws no distinction between individuals of different races. Accordingly, the Court held, there is no basis under the Civil Rights Act to hold nonminority plaintiffs to a higher standard of proof in discrimination cases. The bottom line is that the Lind decision makes it easier for nonminority plaintiffs to bring a race discrimination lawsuit, and will likely lead to an increase in the filing of such claims.

A week after the Lind decision, the Supreme Court issued its opinion in the case of Corley v. Detroit Board of Education, which interpreted the sexual harassment provisions of the Civil Rights Act. The Act prohibits conduct or communications of a sexual nature in the workplace where the employee's submission to or rejection of the conduct or communication is used as a factor in decisions affecting the individual's employment (commonly referred to as "quid pro quo" sexual harassment), or where the conduct or communication creates an intimidating, hostile, or offensive employment environment (commonly referred to as a "hostile environment" claim).

The female plaintiff in Corley had been involved in a romantic relationship that lasted several years with a male coworker. Their relationship ended, and he began dating (and eventually married) another coworker. The plaintiff claimed that she was then subjected to quid pro quo harassment when her ex-boyfriend threatened her with adverse employment consequences if she said or did anything that interfered with his new relationship. She also claimed that she suffered hostile environment harassment when the new girlfriend "taunted, embarrassed, and humiliated her" by engaging in "catty" conversations about plaintiff with others in the office.

The Supreme Court rejected both claims, because they did not meet the threshold requirement that the conduct or communication involved be "of a sexual nature." The Court held that it was not sufficient that the comments were in some sense related to a romantic or even sexual relationship. Instead, the Court concluded that the Civil Rights Act provides a remedy for harassment only if it involves conduct or communication that inherently pertains to sex. As such, the ex-boyfriend's threats regarding interfering with his new relationship were not actionable because they were not inherently sexual in nature. Likewise, claims based upon the new girlfriend's "catty" conversations in the office were not actionable, because they conveyed nothing more than her personal animosity toward the plaintiff. The Court concluded that the Civil Rights Act "does not forbid the communication of enmity between romantic rivals, even if the predicate for the dislike is sexual competition, as long as the conduct or communication is not inherently sexual." Because "what may have been sexual in this case did not involve harassment, while what did involve harassment was not sexual," the Supreme Court ruled in favor of the employer.

Employers may, of course, want to enforce disciplinary policies where strained personal relationships between employees affect job performance or productivity, or otherwise violate established standards of conduct. But the Corley case makes clear that not all instances of "harassing" behavior between coworkers are actionable as sexual harassment under the Civil Rights Act.


401(k) + ESOP = KSOP -- A Winning Formula

By Vernon P. Saper

Many corporations have established a 401(k) plan for their employees. Others have adopted an Employee Stock Ownership Plan ("ESOP") as their retirement program. A few employers maintain both types of plans. This article will discuss how these plans can be used together to provide increased advantages for employers and larger benefits for employees.

A 401(k) plan allows an eligible employee to contribute part of his/her salary to a retirement plan on a tax-deductible basis. Many 401(k) plans also provide for a matching contribution by the employer equal to some percentage of what the employee has contributed. For example, a matching formula might be something like: 50% of the employee's 401(k) contribution, but not more than 3% of pay.

An ESOP is a retirement plan designed to invest primarily in stock of the employer. ESOPs have been granted many special tax advantages as an incentive for the employer to share company stock with employees. These advantages include a corporate tax deduction for repayment of loan principal, an optional waiver of capital gains tax by a selling shareholder, a corporate tax deduction for payment of dividends on stock owned by the ESOP, the ability to eliminate all or a part of income tax on business profits through an S corporation ESOP, and the opportunity for employees to accumulate capital ownership on a tax-deferred basis with no out-of-pocket expense on their part.

Under a typical ESOP, a loan will be used by the plan to purchase stock from a shareholder or directly from the employer itself. The loan is repaid from cash transferred to the ESOP by the employer. The cash may come from the employer in the form of tax-deductible retirement plan contributions, tax-deductible dividends paid on ESOP stock, or tax-free shareholder distributions from an S corporation employer. Stock purchased by the ESOP with the loan will be allocated to eligible employees as the loan is repaid. Usually this allocation is based on the compensation earned by each employee, or on a basis which considers both compensation and years of service with the employer.

A combined 401(k) and ESOP ("KSOP") produces a unique retirement plan design with special benefits to both employers and employees. Here’s how:

  1. Matching Contributions. The ESOP stock purchased with a loan can be allocated as a matching contribution under a 401(k) plan. For example, if an employee contributes $1,000 to a 401(k) plan with a 50% matching formula, $500 worth of stock would be allocated to that employee as the annual matching contribution. This has the advantage of allowing all employer cash contributed to a retirement plan to be used to repay the ESOP loan (resulting in earlier loan repayment). However, it also offers an incentive for employees to make 401(k) deferrals. With this plan design, all cash contributed by the employer will be used to repay the loan, with tax-deductible dollars, but the cash will also double as a 401(k) matching contribution.

     
  2. Safe Harbor Contributions. A 401(k) plan may be designed as a "safe harbor" plan, so that annual percentage testing ("ADP test") is not required for 401(k) contributions. Without the ADP test, the "highly compensated employees" ("HCEs") can contribute the maximum 401(k) contribution each year ($13,000 in 2004 indexed up to $15,000 in 2006) without regard to the amount of 401(k) contributions made by other employees. To be a safe harbor 401(k) plan, the employer must contribute either 3% of pay for all eligible employees or a 4% matching contribution for employees who make 401(k) contributions. Again, the employer will contribute cash to the ESOP to repay the loan. The stock can then be allocated as a safe harbor contribution. This design allows the contributed cash to repay the ESOP loan and also allows the 401(k) plan to avoid the administrative burden and expense of performing the ADP test each year (and the return of 401(k) contributions to HCEs). HCEs can then maximize their 401(k) contributions.

     
  3. Multiple ESOP Allocation Methods. The ESOP may provide that stock to be allocated to participants each year will be allocated using multiple methods. For example, the stock could first be allocated as a safe harbor contribution, allowing HCEs to maximum their 401(k) deferrals. Next, additional stock can be allocated as a matching contribution for employees who make 401(k) contributions. Finally, any remaining shares can be allocated based on compensation or years of service.

Even if the employer's ESOP has no loan in existence, the KSOP design can still be used. The employer could contribute newly issued shares each year to the ESOP equal to the matching contribution or the safe harbor contribution. This will improve corporate cash flow, since a tax deduction is available to the employer for the fair market value of contributed stock. Cash, which otherwise would have been used to make the employer contribution, can be retained by the corporation for other purposes.

If you would like to learn more about the KSOP concept, please contact Vern Saper or your employee benefits attorney at Warner Norcross & Judd.

Training Opportunities

In addition to our HR Law Update which will be scheduled in the Fall, 2005, we offer many training opportunities throughout the year. Watch our Web site, www.wnj.com, for a listing of upcoming programs. Also, if your group needs in-house training on a particular issue such as harassment policies, effective employee discipline, wage and hour or FMLA and ADA compliance, we can tailor a program to fit your company's needs. Contact Sharon Sprague at 616.752.2326 or ssprague@wnj.com.

* * * * *

Human Resources Alert is published by Warner Norcross & Judd to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the Firm's Human Resources Law Group
 

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