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A Better Partnership


Jul 2005
July 05, 2005

Human Resources Alert - Summer 2005

Topics included in this issue:


Proposed Law Would Require Employers to
"Butt Out" of Employees' Nonwork Activities

By Matthew T. Nelson

A few months ago, Weyco Inc. and other Michigan businesses made headlines throughout the country for adopting and enforcing policies to terminate employees who smoked or used tobacco products, even if they did so away from work or on nonworking time. Even more recently, a brewing company made national news by terminating an employee for consuming a competitor's product in public while wearing a uniform provided by his employer. Some Michigan senators have responded by proposing legislation which would prohibit employers from taking employment action against employees for smoking, or any other legal activity outside of work.

Senate Bill 381, titled the "Employee Privacy Protection Act," is currently pending in committee. If enacted, the Bill will prohibit employers from refusing to hire, discharging or otherwise discriminating against any employee "because the employee engages in . . . a lawful activity that is both off of the employer's premises and during nonwork hours." The Bill would allow aggrieved employees to sue employers and, if successful, obtain injunctive relief (such as reinstatement), money damages, and court costs and attorneys' fees. Employers who prevailed in their lawsuits would not be entitled to costs and attorneys’ fees. The Bill also includes language which would prevent employers from obtaining waivers from employees of any rights conferred by the Bill.

The Bill contains four vaguely worded exceptions to the general prohibition on making employment decisions based upon out-of-work employee activities. First, the Bill gives way to any state or federal law that regulates particular types of employment. This would include, for example, most professionals who have ethical codes that govern behavior in all circumstances. Second, the Bill permits employers to make employment decisions based upon an "activity that directly impairs an established bona fide occupational requirement." Accordingly, employers would still be permitted to discipline and discharge employees who consumed alcohol immediately before going to work. Third, the Bill permits employers to enact and enforce policies concerning the use of employers' property by employees outside of work. So, for example, an employer who permits an employee to use the computer system during nonwork time from home would still be able to prevent employees from viewing pornographic or other unacceptable material as long as the employer has a company policy that prohibits such use. Finally, the Bill permits employers to take employment actions to prevent "activit[ies] that create a substantial conflict of interest with the core mission of the employer," provided that the employer has a written conflict-of-interest policy that has been disseminated to employees. This final category may be sufficiently broad to encompass most out-of-work activities about which employers are typically concerned. Nevertheless, the courts could interpret it very narrowly to include only clear conflicts of interest.

The Bill raises a number of questions regarding long-established employment policies governing out-of-work activities of employees. It is unclear, for example, what effect the Bill would have on policies against moonlighting. Working is, after all, a lawful activity. Likewise, by its language, the Bill could prevent an employer from discharging or refusing to hire an individual whose spouse is an employee of a chief competitor. Policies regarding loyalty to the employer's products outside the workplace would also seemingly run afoul of the Bill. This would include, for example, policies established by some soft drink companies that prohibit employees from ever consuming a competitor's soft drinks.

In addition to the practical impact it would have on employer policies and the day-to-day operation of your business, the Bill, if enacted, will create a completely new cause of action for applicants who are not hired and employees who have been disciplined or terminated. We will continue to monitor developments related to this proposed legislation and report promptly if it becomes law.

New Grace Period Exception to
Use-It-or-Lose-It Rule

By Sue O. Conway

Anyone who sponsors or participates in a Section 125 Flexible Spending Arrangement ("FSA") knows of the "use-it-or-lose-it" rule that requires employees to use FSA funds by the end of the year or else forfeit unspent funds. In late May, the IRS issued guidance allowing employers to change that long-standing rule. Under Notice 2005-42, employers may permit workers who participate in Section 125 plans a 2 1/2-month grace period to spend pretax amounts set aside in FSAs during the prior plan year.

If the employer adopts this rule, participants may have up to 14 1/2 months (rather than 12) to use amounts contributed to an FSA for a plan year. This means if a participant elected to put $1,200 into a calendar-year health FSA and there is $200 left unspent at the end of December, that amount can be used for medical care expenses incurred through March 15 of the following year. The Notice confirms, however, that amounts set aside for one purpose may be used only for that same purpose. For example, unused health FSA amounts may not be shifted to a dependent care FSA for use during the grace period.

Employers who wish to adopt the new grace period extension must amend their cafeteria plans. The new grace period may apply to the current plan year if the amendment is made before the end of the year. This means that cafeteria plans that operate on a calendar year can be amended prior to December 31, 2005, in order to allow a grace period extension to March 15, 2006. Please contact us if you would like to discuss whether to adopt the new grace period rule or for assistance in amending your plan.

Michigan's New Social Security
Number Privacy Law

By Robert A. Dubault

In an effort to address the growing concern over identity theft, the Michigan legislature recently enacted a new law that regulates how Social Security Numbers ("SSNs") are gathered, used, and disseminated by businesses, schools, governmental agencies and individuals. Many of the Act's provisions took effect on March 1, 2005, but compliance with certain requirements is waived until January 1, 2006. Violators are subject to criminal and civil penalties. This article does not attempt to describe every nuance of the law, but instead focuses on those areas that are likely to affect most businesses.

Common Permitted Uses

In many cases you may continue using SSNs as you have in the past. For example:

  • You may obtain a copy of a Social Security card in order to verify eligibility for employment in accordance with the Immigration Reform and Control Act.

  • You may request a SSN from an employee for tax reporting purposes (e.g., IRS Form W-4), for new-hire reporting, or for purposes of enrollment in an employee benefit plan.

  • You may request a SSN for purposes of investigating an individual's credit, claim, criminal or driving history.

  • You may obtain a SSN from a contractor or a vendor for tax-reporting purposes.

  • You may ask a customer to provide a SSN for tax reporting purposes or for the purpose of establishing or administering a customer or patient account.

Account Numbers

Many businesses use SSNs as account numbers for employees or customers. The Act generally prohibits this practice, but there are several broad exceptions. Most significantly, you may use four or less consecutive digits of a SSN as an account number. You may also continue to use the entire SSN or more than four digits as a primary account number under any of the following circumstances:

  • To verify an individual's identity or to perform a similar administrative purpose related to an account, transaction, product, service or employment.

  • To investigate an individual's claim, credit, criminal or driving history.

  • To lawfully pursue legal rights, including for such things as an audit, collection or investigation or to transfer an employee benefit, debt, claim, receivable or account or an interest in a receivable or account.

  • To provide or administer an employee benefit or retirement plan in the ordinary course of business.

  • If the use began before March 1, 2005, and the use is ongoing, continuous and in the ordinary course of business. This exception will no longer apply, however, if the use stops for any reason.

ID Badges

You may not visibly print more than four sequential digits of a SSN on an identification badge or card, membership card, or permit or license, unless state or federal law or a court order or court rule authorizes you to do so. You must comply with this requirement by March 1, 2005, unless you implement a plan or schedule for compliance, in which case you may delay compliance until January 1, 2006.

Computer Access

You may not require an individual to use or transmit more than four consecutive digits of his or her SSN over, or to gain access to, the Internet, an Internet Web site or a computer system or network, unless the connection is secure or encrypted or you use password or other similar protection.


You may not mail a document if more than four sequential digits of a SSN are visible from the outside of the envelope without manipulation.

Beginning January 1, 2006, it is unlawful to mail a document that contains more than four sequential digits of a SSN. There are also many exceptions to this general rule. For example, it is permissible to mail a document containing more than four sequential digits of a SSN for any of the reasons listed above under "Account Numbers." Other exceptions allow the mailing of a document with a SSN in any of the following circumstances:

  • As part of an application or enrollment process that the individual initiates.

  • To establish, confirm the status of, service, amend, or terminate an account, contract, policy or employee benefit or to confirm the SSN of an individual who has an account, contract, policy, or employee benefit.

  • In connection with the administration of employee benefits or stock ownership or other investments.

  • When the document is mailed by or at the request of the individual to whom the number is assigned or his or her parent or legal guardian.

  • When the document is mailed in a manner and for a purpose consistent with Subtitle A of Title V of the Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act or the Michigan Insurance Code.

Privacy Policy

If you regularly obtain SSNs, then you must develop, publish and enforce a privacy policy by January 1, 2006, unless you qualify for the exemption described in the next paragraph. The policy must ensure the confidentiality of SSNs, prohibit unlawful disclosures of SSNs, limit access to documents that contain SSNs, establish procedures for disposing of documents that contain SSNs and establish penalties for violating the policy. You must publish the privacy policy in an employee handbook, procedures manual or similar document, which may be published electronically.

The new statute says that the privacy policy requirement "does not apply to a person who possesses social security numbers in the ordinary course of business and in compliance with the fair credit reporting act . . . or subtitle A of title V of the Gramm-Leach-Bliley Act . . . ." However, the extent to which this exemption applies to SSNs of employees is not clear. The Gramm-Leach-Bliley Act does not apply to information regarding employees who are not also customers. The Fair Credit Reporting Act applies to information in a consumer report. But even if an employer does not obtain a consumer report on an employee, the employer will have the employee's SSN for tax reporting purposes. Because the meaning of this exemption is not clear, employers should not rely upon it without the advice of counsel.


You need to be sure that you are using SSNs only for permitted business reasons and that you are properly safeguarding those SSNs. If you obtain SSNs, then you should conduct an audit of how the SSNs are obtained, used and disseminated within your organization. From the audit results, you can develop specific controls. Competent legal counsel can help you develop a privacy policy and specific procedures for gathering, using and disseminating SSNs.

"Danger, Will Robinson!" Massive Changes in
Deferred Compensation Rules Require Immediate Action

By Anthony J. Kolenic, Jr.

If you are old enough (like me), you probably remember the 1960s TV series Lost in Space. Every week, whenever little Will Robinson was about to be surprised by some horrible fate, the family robot would appear on the scene flailing his arms and repeatedly calling out "Danger, Will Robinson! Danger!"

In the next three or four months, the IRS is going to issue several hundred pages of regulations dealing with executive "deferred compensation." What could be dangerous about that, you ask? Well, enough to make the old robot (me) flail around until his arms fall off! Here's what’s going on:

  • The IRS has disliked executive deferred compensation for at least 40 years. We don’t really know why, but it has.

  • Unfortunately, some of the excesses of the Enron situation involved Enron's executive deferred compensation plans, giving Congress and the IRS a perfect opportunity to go after deferred compensation. Seizing upon this opportunity, the IRS and Congress have teamed up to completely rewrite the law of executive deferred compensation in a way that is not very favorable to employers and executives.

  • Further, Congress and the IRS have defined "deferred compensation" so broadly that many things you would not think of as deferred compensation will be, including things like common provisions in individual executive employment agreements.

  • The penalties for the executives who are on the receiving end of any arrangement that is now considered "deferred compensation" and that does not comply with the 200 pages of new regulations are severe and personal to the executive.

  • In a nutshell, the adverse consequences involve immediate taxation of vested benefits, an additional 20% tax, and interest penalties at the Tax Code's underpayment rate plus one percentage point on underpayments that would have occurred had the compensation been properly reported as taxable when first deferred (or if later, when vested or otherwise no longer subject to a substantial risk of forfeiture).

Now do you see why my arms are flailing?

Because of some guidance that has already come out prior to the expected regulations, we know enough about what the 200 pages of regulations will say to know that virtually every executive employment agreement in place today and any plan or program that even remotely looks like deferred compensation is going to flunk these new rules unless it is amended. So, here is what you need to do:

  • Between now and the end of August, you need to inventory all of your organization's individual employment contracts and all other plans and programs that might provide for deferred compensation. In larger companies, by the way, it is possible that no single person will be aware of all these contracts, plans and programs. So simply identifying these documents can be more than a one-person job.

  • Fortunately, you need not be concerned with things like your 401(k) plan. "Qualified plans" are exempt from these rules. And, in most cases, you also won’t need to review standard bonus programs where payment is required to be made within 2 1/2 months after the end of the year. But any other contract, plan or arrangement that has the potential to result in income earned in one year being paid in a later year – no matter what it is called ("deferred compensation," "bonus," "severance," or something else) – is probably "deferred compensation" and needs to be examined.

  • Until the arrangement has been reviewed by competent legal counsel, do not amend them in any way. Many preexisting contracts, plans and arrangements will be grandfathered under prior law (a very desirable result), but amending an existing arrangement that might otherwise be grandfathered can cause you to lose this benefit. We recognize that this may make life difficult with respect to some employment agreements, but this "hands-off" approach is a precautionary step that should be taken if at all possible.

  • After the regulations come out and after your various plans and arrangements have been reviewed, you may have to make amendments. The chance that you have some sort of arrangement that constitutes deferred compensation under this new definition is high. The chance that any existing arrangement already complies with the new law is nearly zero.

Unfortunately, we don't know how much time we will have to amend your contracts and plans, but the amendment period will probably run into early next year. In the meantime, please inventory anything that might be deferred compensation, including any contract, plan or program that has the potential to result in income earned in one year being paid in a later year. Given the extreme tax penalties involved here, you and the executives at your company will be glad you did.

Please contact any member of our Employee Benefits Practice Group if you have questions about these new regulations or how they might impact your organization.

"Kind of a Drag" - Federal Court
Expands Protection From Sex Discrimination

By Dean F. Pacific

Everyone understands that Title VII of the 1964 Civil Rights Act forbids discrimination on the basis of sex. Thus, it is clear that you cannot refuse to hire someone because he is a man or she is a woman. Almost everyone also knows that federal law does not protect employees from discrimination because of their sexual orientation. But what happens when you have an employee—male or female—who does not quite fit the expectations you have for a person of that employee's particular gender? Two recent cases from the Sixth Circuit Court of Appeals show just how risky these situations can be.

In Philecia Barnes v. City of Cincinnati, the Court of Appeals affirmed a jury verdict of more than $850,000 in favor of a transsexual police officer who claimed that he was discriminated against because of his feminine appearance and behavior on the job. The Cincinnati Police Department had hired Philip Barnes as a police officer in 1981, and he rose to the rank of sergeant in 1998. At around that time, however, it became known within the Department that Barnes was a male-to-female transsexual preparing to undergo a sex change operation. He changed his name from Philip to Philecia, and was living as a woman while off duty. Barnes also began reporting for duty sporting a French manicure, arched eyebrows, and makeup or lipstick on his face on some occasions. Barnes was demoted from his position as sergeant at the end of a probationary period, on the basis that he lacked command presence and did not have the respect of his subordinates. Supervisors cited his lack of a masculine appearance as one reason behind the decision.

Barnes sued, claiming that the City intentionally discriminated against him because of his failure to conform to sex stereotypes. A jury ruled in Barnes’ favor, and awarded him damages, attorneys’ fees and court costs. The Sixth Circuit affirmed this judgment in its entirety. The Court held – for the second time in the past year – that discriminating against someone for "failure to conform to sex stereotypes concerning how a man should look and behave" violated Title VII. In 2004, in Smith v. City of Salem, Ohio, the Court had likewise ruled in favor of a transsexual firefighter who alleged that he was a victim of discrimination because of his feminine appearance and mannerisms.

The Barnes and Smith decisions relied upon a 1989 United States Supreme Court decision in which the Court ruled in favor of a female accounting firm manager who was denied partnership because she was considered too "macho." She had been advised that she could improve her chances for partnership if she would walk, talk, and dress more femininely; wear makeup and jewelry; and have a more feminine hairstyle. The Smith Court concluded that just as an employer cannot discriminate against a woman because she doesn't wear dresses or makeup, it followed that an employer likewise could not discriminate against a man because he does.

While just a decade ago this sort of claim would have been dismissed out of hand by the courts, these two decisions from the Sixth Circuit strongly suggest that they are here to stay. The Sixth Circuit has jurisdiction over Michigan cases (as well as those in Ohio, Kentucky and Tennessee), and except in the very rare case that makes it all the way to the United States Supreme Court, it has the final word on legal matters governing businesses and individuals within its borders. Accordingly, if you encounter a similar situation, you should proceed with caution. These decisions make clear that traditional approaches to this sort of situation can now subject an employer to significant potential liability.

Affirmative Action Plan Reminder

If you need an affirmative action plan, we can help. We offer complete plan preparation and updates at a fixed cost, including all elements required by Office of Federal Contract Compliance Programs regulations. For more information, call Bob Chovanec at 616.752.2120.

Executive Order 11246 and the OFCCP's implementing regulations require annual affirmative action plans for each federal government contractor and subcontractor who:

  • has a contract or subcontract under which $50,000 or more of goods or services will be furnished to the U.S. government; or
  • serves as a depository for U.S. government funds; or
  • is a financial institution which is an issuing and paying agent for U.S. savings bonds and savings notes; or
  • has U.S. government bills of lading which total or can reasonably be expected to total $50,000 or more in any 12-month period.


Is Your Health Plan Ready For
Medicare Part D? Urgent 9/30/05
Deadline Approaching!

If you provide prescription drug benefits as part of your health plan, you have an obligation to notify participants who are Medicare beneficiaries (e.g., retirees, active employees who have reached age 65, COBRA beneficiaries, and disabled individuals enrolled in Medicare benefits) by November 15, 2005, whether their prescription drug benefits are actuarially equivalent to those provided by Medicare Part D.

WN&J is offering a program that will give you an overview of the Medicare Part D prescription drug program, explain your notice obligations, and help you evaluate whether you should modify your existing prescription drug benefit to take advantage of the federal subsidy available to employers that provide actuarially equivalent prescription drug benefits.

The program will be held at the University Club, 111 Lyon Street, N.W., 10th floor, on July 27, from 8 a.m. until 9:30 a.m. To register please contact Sharon Sprague at or (616) 752-2326.

Mark Your Calendar -
Human Resources Seminar

Human Resources Seminar
Wednesday, October 5, 2005
8:30 a.m. - 4:30 p.m.
Amway Grand Plaza Hotel
Grand Rapids, Michigan

  • Employee Benefits Program in the morning
  • Employment & Labor Program in the afternoon 

Keynote lunch speaker:
Linda Parker,
Director of Michigan Department of Civil Rights

Program information and registration forms will be available in early August. Watch our Web site for updated information.

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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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