Topics included in this issue:
by John H. McKendry, Jr.
As 401(k) plans have swept the nation and are replacing traditional defined benefit plans, retirement policy makers have increasingly become concerned that participants "appropriately" invest their 401(k) accounts. The Pension Protection Act attempts to deal with two issues that arise with respect to 401(k) participant-directed investments.
Reluctant Investors - Qualified Default Investment Alternative
Some participants, out of bewilderment or apathy, fail to provide a direction regarding the investment of their accounts. Employers, who structure plans to permit participant investment direction and do not want to be responsible for participant selections, often structure their 401(k) investment arrangements to take advantage of ERISA Section 404(c), which relieves them of responsibility for participant investment directions after meeting several requirements, including the actual making of an election by the participant. Absent an election, the employer retained fiduciary responsibility for the investment and often chose conservative investment options for "defaulting participants" consisting of money market or stable value, fixed income funds.
Our advice continues to be that the employer obtain a participant investment direction and comply fully with ERISA 404(c) as the best course of action. However, the Pension Protection Act provides 404(c) protection for a qualified default investment alternative that meets the following criteria:
The participant must have had the opportunity to, but did not in fact, direct the investment of the participant's account.
The fund must not consist of employer securities, not restrict or impose penalties on transfer, be managed by an investment manager or be a registered mutual fund, and be diversified.
The fund itself must be a balance of equities and fixed income securities and be based on one of two models: 1) a participant's age, target retirement date or life expectancy; or 2) the demographics of the employer's entire participant group.
Thirty days' advance notice and annual notices of the default investment rules must be furnished to the participant.
Third-party disclosure materials (account statements, prospectuses, and proxy voting material) relating to the default alternative must be provided to participants.
Participants must be able to transfer investments as frequently as permitted for other participant investment directions.
The plan must offer a broad range of investment alternatives (at least three funds or investment options with materially different risk and return characteristics).
The current regulations are in proposed form. Controversy regarding the regulations is centering on the ability of employers to use stable value funds (favored by the insurance industry) and balanced funds not based on participant risk preferences and tolerances (favored by many investment advisers and managers).
Participant Investment Advice
Currently U.S. Department of Labor guidelines limit investment education to general plan information, financial and investment information, asset allocation models and interactive investment materials. Employers are concerned that they do not become investment fiduciaries. Investment professionals are concerned that, by collecting fees for advice while at the same time receiving compensation from investment providers, they will be engaged in a prohibited transaction resulting in substantial excise taxes.
The Pension Protection Act addresses the investment professionals' prohibited transaction concerns by allowing investment advisers to structure an "eligible investment advice arrangement." The arrangement must meet the following conditions:
The advice must be provided by a qualified fiduciary adviser (registered under securities law, a bank, an insurance company, a broker-dealer or their affiliates or agents and representatives).
The arrangement either must be fee neutral to the adviser, meaning that the adviser's compensation will not vary based on the actual investments selected by the participant, or must be based on a computer model that takes into account generally accepted investment theories and participant-specific information and does not favor investments affiliated with the adviser.
Detailed notices must be furnished to the participant and include the adviser's affiliations, investment performance of the options, fees and compensation relating to the investment vehicle, the adviser's status as a fiduciary and the ability of the participant to select other advisers.
Employers, however, retain fiduciary responsibility for appropriately selecting and monitoring the investment adviser, securing audit of the advice arrangement and assuring compliance of the adviser with the conditions for rendering advice. Employers are well-advised to negotiate written agreements with advisers that document the adviser's fiduciary status, require full compliance with all legal requirements, and indemnify the employer against liabilities for the adviser's noncompliance with legal requirements and against liability for the adviser's specific recommendations to the participant.
by George L. Whitfield
As 401(k) plans have become the dominant source of employer-sponsored retirement savings, there has been a growing number of concerns. Chief among those are the high percentage of eligible employees who do not participate and the administrative costs, including the cost of nondiscrimination testing.
Lately, the trend is toward more automated plans in terms of enrollment, contribution increases and investments. Automatic enrollment is one means of attempting to increase participation among eligible employees, while a safe harbor plan avoids those nondiscrimination testing requirements.
Neither automatic enrollment in 401(k) plans nor safe harbor 401(k) contributions are new under the Pension Protection Act of 2006 (PPA). Both are enhanced directly by PPA provisions, however, and the PPA offers a new "qualified automatic contribution arrangement" (QACA) beginning in 2008 that combines both automatic enrollment and safe harbor contributions that differ from those currently available.
Automatic enrollment attempts to take advantage of inertia in human behavior by reversing the enrollment structure of a 401(k) plan. Instead of being offered enrollment, prospective participants are automatically enrolled at a specified contribution level and advised that they can opt out of the enrollment or change it.
Why do employers elect automatic enrollment? A host of studies show that automatic enrollment dramatically increases 401(k) plan participation, with the largest increases among younger and lower-paid employees. The downside? More administration in the form of initial and ongoing notices and the management of small residual accounts when employees elect out shortly after payroll deduction contributions begin. Also, there are potential conflicts with state wage withholding laws and risks of fiduciary responsibility for default investment elections.
Effective August 17, 2006, the PPA made clear that any state law adversely impacting automatic enrollment is preempted by ERISA. The PPA also provides protection for qualifying default investment funds. Beginning in 2008, the PPA allows a plan to unwind automatic enrollment without penalties and refund contributions for any employee who elects out within 90 days after the first deferral. These changes should make existing automatic enrollment much more popular with plan sponsors.
Safe Harbor Plans
The goal of safe harbor 401(k) plans is to enable the sponsoring employer to avoid the sometimes aggravating and costly ADP (relating to employee payroll deduction contributions) and ACP (relating to employer matching contributions) nondiscrimination tests otherwise required each year. To avoid these tests, and to enable its highly compensated employees to make and receive maximum contributions, an employer must make a safe harbor matching or nonelective contribution. The matching contribution must be 100 percent (dollar for dollar) of the first 3 percent of compensation contributed by each participant and 50 percent (50 cents per dollar) of the next 2 percent of compensation contributed by participants, for a total matching contribution of up to 4 percent per participant. The alternative nonelective safe harbor contribution must be 3 percent of compensation for each participant.
Safe harbor contributions must be made for all non-highly compensated employees who participate in the plan at any time during the plan year. They must be fully vested and they cannot be subject to any conditions such as completion of at least 1,000 hours of service or employment on the last day of the plan year. The employer also must provide appropriate initial and continuing notices to participants.
Some employers, particularly those with high turnover, have shied away from safe harbor plans, believing the net cost to be too high, considering the requirement that nonelective safe harbor contributions must be made for all participants and that all safe harbor contributions must be immediately vested.
New Kid on the Block: QACA
The QACA combines both automatic enrollment and safe harbor features effective for plan years beginning in 2008.
Automatic enrollment under the QACA must apply to all eligible employees except those who previously elected to participate or not participate in the plan. Therefore, it will apply primarily to new employees. The initial payroll deduction contribution rate must be at least 3 percent of compensation and must increase 1 percent annually to a total of 6 percent for the fourth and subsequent years. Those rates may be higher at the employer's election but not more than 10 percent. Obviously, any individual participant can elect out or elect a different percentage.
Safe harbor contributions under a QACA either must be a matching contribution of 100 percent of the first 1 percent of pay contributed by each participant plus 50 percent of the next 5 percent, for a total possible matching amount of 3.5 percent per participant, or must be the same nonelective contribution of 3 percent of pay.
Since the 100 percent matching contribution rate applies only to the first 1 percent of pay contributed by participants, it is believed that the safe harbor matching contribution costs under a QACA will be lower than under the current safe harbor matching contribution rules. In addition, the employer may impose a two-year vesting schedule on either type of safe harbor contributions in contrast to immediate vesting required by the existing safe harbor rules.
As with the existing automatic enrollment and safe harbor arrangements, the QACA rules require initial and ongoing notices to participants and impose content requirements on those notices.
Something Old or Something New?
If your current 401(k) plan includes either automatic enrollment or safe harbor contributions or both under the existing rules, it is an appropriate time to consider whether you should change to the new QACA alternative beginning in 2008. If you haven't considered or have rejected one or both of these features in the past, now may be a good time to determine whether one or both or the new QACA is right for your plan. For further information contact any of the attorneys in our practice group.
by Dean F. Pacific
Last June, the U.S. Supreme Court issued an important decision interpreting the anti-retaliation provision of Title VII of the Civil Rights Act of 1964. Like all major state and federal antidiscrimination statutes, Title VII prohibits retaliation against anyone who complains of discrimination based upon race, color, sex, religion, or national origin; anyone who cooperates in the investigation or prosecution of someone else's complaint; and anyone who opposes in any other reasonable manner an alleged violation of the statute.
Lower courts had generally held that to succeed on such a claim, plaintiffs had to prove that they engaged in one of these protected activities, and that because of that protected activity, they suffered an "adverse employment action." This adverse employment action was generally defined as some material change in the terms and conditions of employment, such as a termination, demotion, reduction in pay or benefits, or similar ultimate employment decision.
The Supreme Court in Burlington Northern v White eliminated the "adverse employment action" requirement, lowering the bar for plaintiffs who make retaliation claims. Instead, the Supreme Court held that a retaliation claim could be supported if the employer engaged in any act that might dissuade a reasonable worker from making or supporting a discrimination complaint. The court emphasized that the act was not concerned with "trivial harms," and that therefore "normally petty slights, minor annoyances, and simple lack of good manners will not create such deterrents."
The court used lunch invitations as an example. Ordinarily, a manager who stops extending lunch invitations to a subordinate who has complained of discrimination would not be engaging in unlawful retaliation, the court said. But the court also qualified this example, indicating that even this could constitute retaliation if, for example, the lunches had included some training that was beneficial to the employee.
The Sixth Circuit Court of Appeals, the federal appellate court whose decisions govern in Michigan, has recently had the opportunity to consider how to apply this standard. In Halfacre v Home Depot USA, the Sixth Circuit considered the case of Jonathan Halfacre, a Home Depot employee who also held a job with a fire department.
Halfacre had filed a charge of race discrimination with the Equal Employment Opportunity Commission based on Home Depot's failure to promote him. The court rejected this discrimination claim, concluding that the company legitimately questioned his flexibility and availability because of the demands of his fire department job.
The trial court had dismissed this claim, and the Court of Appeals affirmed that ruling. But Halfacre had also asserted a retaliation claim. He alleged that after he complained, the company "significantly" lowered his evaluation scores, which were in the past "generally stellar."
The trial court had also dismissed this claim, but the Court of Appeals reversed that ruling. Under Burlington Northern, the court concluded, such an evaluation could dissuade a reasonable worker from making or supporting a charge of discrimination. The Sixth Circuit specifically noted that if the Supreme Court views excluding an employee from a training lunch as materially adverse conduct that can support a retaliation claim, then markedly lower performance evaluation scores could also meet that standard.
The Sixth Circuit's decision in Halfacre confirms that the bar has been lowered for retaliation plaintiffs. Prior to Burlington Northern, a retaliation claim based upon lower evaluation scores would generally have been dismissed as a matter of law for failure to meet the "adverse employment action" requirement.
But this case is also a reminder that there is still much that employers can do to avoid retaliation claims. The Halfacre court also emphasized that on remand, the trial court should consider whether the plaintiff met the causation element of a retaliation claim. It is not enough for a retaliation plaintiff to simply show that he or she engaged in a protected activity and that later some adverse action occurred. The plaintiff has the burden of showing a causal connection between the two; that is, he or she must prove that the adverse action happened because of the protected activity. If an employer can prove that it took action for legitimate, non-retaliatory reasons, a retaliation claim can be defeated.
There is still much that an employer can do to avoid retaliation claims and place itself in a position to successfully defend these claims if they are asserted. The first step for any employer is to have written antiharassment and antidiscrimination policies. These policies must not only clearly prohibit harassment and discrimination but also make clear that retaliation against anyone who complains of harassment or discrimination and others who participate in the investigation of such complaints, is prohibited. Managers and supervisors should be properly trained to handle complaints promptly and appropriately, and to avoid taking action that may appear to be retaliatory. This training should include an education in the types of actions that can constitute retaliation under the Supreme Court's decision in Burlington Northern. Employers should document this training.
In addition, these cases highlight the importance of consistently and accurately assessing and documenting employee performance problems. An employee who complains of harassment or discrimination is not immune from discipline or discharge, but his or her file should contain proper documentation of performance issues. Moreover, as the Halfacre decision demonstrates, this documentation should not begin only after the employee complains, or the employee may assert that the documentation itself is retaliatory. It can be helpful for supervisors to involve a neutral third party, such as a human resources manager, in the performance, counseling and documentation process. Qualified legal counsel can also help you with all of these things, and can help address a retaliation claim if one is asserted.
by Steven A. Palazzolo
As most of you know, we recently completed our annual Human Resources Seminar at the Amway Grand Plaza Hotel. First, let me take a moment to thank all of you who attended and provided us with such valuable feedback for future seminars. A couple of things became apparent. Many of you want as much information as we can provide on the FMLA. Obviously, that particular statute continues to vex even the most seasoned Human Resources professionals. You will find an article on the FMLA in this edition of the newsletter and we are considering other ways to get you more information on this very important topic.
Also, there seems to be a lot of interest among you regarding how to deal with workplace violence. We got a lot of questions during the HR Theatre presentation on that topic and many of you attended the breakout session on Crisis Management. This shouldn't surprise us, given the amount of very high profile incidents of violence over the past few years and, in fact, just the past few months. Somewhat surprising are the number of incidents in the workplace every day that don't make the news.
On October 27, 2006, the Bureau of Labor Statistics of the Department of Labor issued its "Survey of Workplace Violence Prevention, 2005." The BLS reported that 346,420 establishments in private industry had experienced a workplace violence incident in 2005. When you add in government establishments, that number goes up to 389,380. According to the OSHA Fact Sheet on Workplace Violence, some 2 million American workers are victims of workplace violence each year. BLS also reported that there were 5,702 workplace fatalities in 2005, 14 percent of which were a result of violent acts in the workplace.
Step one for employers in dealing with this disturbingly prevalent problem is to develop a plan to confront issues as they arise. The OSHA fact sheet states: "The best protection employers can offer is to establish a zero-tolerance policy toward workplace violence against or by their employees." The FBI Critical Incident Response Group agrees. In March 2004, the CIRG, which was comprised of representatives from law enforcement, private industry, government, labor, the military and academia, published "Workplace Violence, Issues in Response." According to the CIRG, an employer's important role in violence prevention includes "adopting a workplace violence policy and prevention program and communicating the policy and program to employees."
So what should a workplace violence policy include? Any policy you develop must of course take into consideration the culture and unique features of your workplace. One size does not fit all when it comes to workplace violence prevention. There are, however, some common elements to a good workplace violence prevention policy.
Your policy at a minimum should include:
A statement of your policy against threats and violence. This statement can be a complement to existing antiharassment policies, antidiscrimination policies and drug and alcohol policies.
Procedures for addressing threats and threatening behavior.
Designation and training of an incident response team.
Training of the management team and employees.
Consistent enforcement of behavioral standards and effective disciplinary standards and procedures.
In addition, you might want to consider a policy provision that allows you to search handbags, briefcases, desks, lockers and even your employees' cars.
Let's for a moment talk about another hot topic among HR people: zero-tolerance.
Generally, I am not a fan of zero tolerance policies in the way the term often is used today. You have all heard the stories of the 5th grader who was expelled because she took a paring knife to school to slice her apple or the 2nd grader who was suspended for taking a nail file to school.
When you take the discretion out of the hands of a decision maker, sometimes ridiculous results occur. You may adopt a zero tolerance policy for your company that stipulates someone violating the policy will be terminated, no questions asked. But it doesn't necessarily have to be that way.
Instead, you may want zero tolerance to mean that you won't tolerate violence or threats of violence in your workplace and discipline will result if the policy is violated, not necessarily that every violation of the policy will automatically result in termination. When we are discussing developing a policy for your workplace, we should keep that in mind.
Equally important as the policy itself is training for management and employees. Not only should you train management and employees in the policy and what it contains, but you also should consider training your management in spotting the signs of workplace violence. In addition, you will want to train your incident response team in how to investigate and deal with reports of workplace violence. A good workplace violence program will have a good training program that goes along with it.
Finally, don't take any threat lightly. After one of these incidents occurs, we often look back and say, "I should have seen that coming." Usually, there is some sign that violence will occur. In today's day and age, we can't ignore any hint. The consequences are just too costly.
I know some of you are saying that you already have a workplace rule that mandates termination for an employee who gets in a fight or threatens another employee. And that's good. But is it enough? Don't forget, OSHA's general duty clause requires employers to provide a safe and healthy workplace for all covered employees. According to OSHA, "employers who do not take reasonable steps to prevent or abate a recognized violence hazard in the workplace can be cited." And while getting an OSHA citation is nothing to be happy about, if there is a serious workplace violence issue, it will be the least of your worries.
If you would like help developing a workplace violence policy, please contact any member of the WNJ HR Practice Group.
Congratulations are in order for partner Vern Saper. Recently, Vern was recognized nationally at the ESOP Association conference in Washington, D.C., for his efforts in recruiting Employee Stock Ownership Plan companies into the ESOP Association. Grand Rapids has the highest per capita number of ESOPs in the country that participate in the ESOP Association and more in total numbers than many major metropolitan areas, largely due to Vern's efforts over the past 30 years. If you have questions about ESOPs and whether your company might benefit from such a tax-saving arrangement, contact Vern directly at email@example.com or 616.752.2116.
More than 300 people attended our recent HR Seminar at the Amway Grand Plaza Hotel. Based on the evaluations we received, the group clearly enjoyed the new format, including HR Theatre. The lunch program on "Generational Differences in the Workplace" also was a hit.
We appreciate all the feedback we received and will take the comments and suggestions into consideration for our next program, which is slated for the fall of 2008. Congratulations to Lauren Smith of Manatron, the winner of the Amway Grand Getaway Package.
If you have not attended our HR Seminar, see what this year's attendees had to say:
"This is my third WN&J HR Seminar and as before, this is by far the most informational, relevant and timely HR seminar available."
"Great presentations. Very informative and useful. Nice variety of topics."
"I really enjoyed and appreciated the setup of the seminar. Being allowed to change rooms, have reasonable break periods and listen to several different speakers was key to helping me stay engaged all day. Thank you!"
"WN&J does a great job at keeping things interesting while staying informative."
To be sure you receive notice of the HR Seminar and our other upcoming training programs, send an e-mail to Gloria Rogers at firstname.lastname@example.org.
by Gregory M. Kilby
Keeping abreast of developments with regard to the Family and Medical Leave Act (FMLA) can be daunting for employers. To ease that burden, let's take a look at some "real life" issues that employers must navigate when administering FMLA policies.
The U.S. Department of Labor (DOL), in Opinion Letter 2004-2-A, finally clarified the conditions under which an employer may require recertification of an employee's own serious health condition.
It is now clear that for pregnancy and chronic or permanent/long-term conditions, the employer can require recertification from an employee relating to an absence that is more than 30 days after the most recent certification or recertification unless the employee's health care provider specifies the length of the period of absence. For example, where an employee submits a medical certification that states the employee will be absent continuously for the next six months to recover from surgery, the employer may not require recertification. On the other hand, if the employee's medical certification merely notes that the employee may be absent on an intermittent basis due to a chronic condition during the coming 12 months, the employer may insist that the employee provide a recertification of the condition from the employee's health care provider every 30 days in connection with an absence related to the chronic condition.
An employer may also require recertification more often than once every 30 days in connection with an absence if information received casts doubt on the employee's stated need for leave or if the circumstances have changed significantly (e.g., pattern absences or a material change in the frequency of absences).
Getting a Second Opinion
In the same opinion letter, the DOL also clarified when an employer may require an employee to get a second or third opinion with regard to an employee's recertification. The DOL regulations state that an employer may not require a second or third opinion upon "recertification." This stance left employers in a difficult position. If the employer did not insist on a second opinion the first time an employee took leave for a chronic condition, the employer was arguably barred from ever seeking a second or third opinion even though it could require recertification from the employee.
Going hand in hand with its opinion on recertification, the DOL stated that an employer is entitled to require a second opinion on an employee's serious health condition following the employee's first related absence in each one-year period. For example, if an employee provides medical certification that he or she will need to take intermittent leave over the next 18 months due to "migraine headaches," the employer may require a second or third opinion in connection with an absence that occurs more than 12 months after the last certification or recertification, whether or not the employer has previously sought a second or third opinion.
When Do My Employees Qualify?
Under the FMLA, an employee is entitled to leave if, among other factors, that employee has worked for the employer for at least 1,250 hours of service during the 12-month period immediately preceding the commencement of the leave. Where an employee requests intermittent leave for a chronic condition, the DOL has stated that an employer may apply this 1,250-hour test only once per year (Opinion Letter FMLA-112).
This is best illustrated by an example:
An employee is diagnosed with a chronic condition, such as back pain, which results in that employee's needing intermittent leave. The employee takes a week of leave in April, and another week in May. The same employee then needs leave again in July and October. The employee would be entitled to FMLA leave without having to re-qualify under the 1,250-hour test so long as the absences occurred within the same 12-month period and the employee had not exhausted the 12-week leave entitlement for this or any other FMLA-qualifying reason.
Continuing Health Coverage
The FMLA requires an employer to continue to provide group health insurance coverage to employees on leave. However, in Opinion Letter 2006-4-A, the DOL noted that this requirement extends only to group health insurance benefits accrued prior to the date on which the employee's leave began. In other words, an employee may be eligible for FMLA leave, but ineligible for an employer's group health insurance.
In such a circumstance, the employer need not provide health coverage for the employee during his or her FMLA leave. For example, if the employer's group health insurance requires 1,500 hours of service in a calendar year in order to qualify the employee for health care coverage in the next year, and the employee worked only 1,400 hours during 2006, the employer is not required to provide group health coverage during that employee's FMLA leave(s) in 2007. This is true even if the employee failed to meet the 1,500-hour requirement because the employee was out on FMLA leave.
If an employee is eligible for FMLA leave and currently receiving group health benefits under a collective bargaining agreement or other employer policy, however, the employee is entitled to continuation of those benefits at the employer's expense even if the collective bargaining agreement would permit the employer to refuse such a continuation.