Category Archives: Employment Law

Supreme Court: Severance Pay is Subject to FICA Tax

supctLast week, the Supreme Court decided a case about how severance pay must be treated for tax purposes. The employer in the case (United States v. Quality Stores) had declared Chapter 11 bankruptcy. The employer provided severance pay in two programs: One paid employees who were terminated immediately, and the other paid employees who stayed with the company through its bankruptcy reorganization, until an agreed-upon termination date. Like most severance plans, the company’s program was based on length of employment and job grade.

The employer and the IRS agreed that the severance pay should be treated as income for purposes of income tax withholding. What they disagreed about was FICA taxes: the payroll taxes, split between employer and employee, that fund Social Security and Medicare. Although the employer initially paid it share of these taxes and withheld the employees’ share from their severance, it later asked the IRS for this money back, to the tune of more than a million dollars. The employer’s claim was that the severance payments didn’t count as “wages” under IRS rules.

The Supreme Court disagreed. In a unanimous decision, the Court found that severance pay is subject not only to income tax withholding, but to FICA tax withholding as well. (And, employers must pay their half of these taxes on severance.) The Court found that severance pay falls squarely within the definition of wages as “remuneration for employment,” especially where, as here, they are based on the employee’s tenure and role at the company. Not a big surprise, but at least employers can now blame the Supreme Court when terminated employees complain that their severance pay is less than they thought it would be.

Will Congress Change the Tip Credit?

waiterThe federal minimum wage law has a special exception for servers, bartenders, and other employees who receive tips: These tipped employees can be paid much less than the minimum wage per hour (in most states), as long as they earn enough in tips to bring their hourly total up to at least the full minimum. Right now, the federal minimum wage is $7.25 an hour. But federal law allows employers to pay tipped employees as little as $2.13 an hour!

This practice of paying tipped employees less is called taking a “tip credit,” meaning the employer gets to credit part of the employee’s tips against its minimum wage obligation. Not all states allow a tip credit: California, for example, requires employers to pay tipped employees the full state minimum wage. And some states allow a lower tip credit, requiring employers to pay more per hour than federal law would mandate. (The more protective law governs in wage and hour matters.)

That measly $2.13 took effect back when the minimum wage was $4.25 an hour. In other words, the tip credit was supposed to be half of the minimum wage. But as the minimum wage increased, the wage for tipped employees stayed the same, part of a compromise to get the wage hikes passed. Now, Congress is contemplating raising both the minimum wage and the amount tipped employees must be paid. According to an article in today’s New York Times (“Proposal to Raise Tip Wages Resisted“), Senator Tom Harkin has introduced a bill that would raise the minimum wage to $10.10 and the tipped employee wage by 95 cents per year until it reaches $7.10. Further increases would be tied to inflation.

As is perhaps evident from the title of the article, this proposal is facing plenty of pushback, primarily from restaurant owners. And of course, it’s unclear how Congress would agree on a minimum wage and tipped employees wage increase when they can’t pass a farm bill or extend unemployment benefits. But at least this problem has hit the radar of the U.S. Senate and the nation’s paper of record.

Want to know more about your state’s law on tips, including tip credits, tip pooling, and who gets to keep those mandatory service charges the house tacks on to the bill? We’ve got a set of articles — one for each state and the District of Columbia — on this very topic; select your state from the list at State Laws for Tipped Employees.

It’s Evaluation Season! Don’t Forget the Maternity Projection Chart

storkManagers, do you enjoy giving employee evaluations? Many managers  don’t: They find it difficult to give constructive criticism, fit employee accomplishments and areas for improvements into their company’s evaluation form, or make time to sort back through their documentation for the year, complete the form, and meet with employees about it. But imagine how you would feel if the company’s evaluation form also included questions about the employee’s “maternity plans.” And then you had to use that information to help generate a “maternity projection chart,” purporting to calculate the likelihood that a particular female employee would have a child soon based on her age, marital status, and maternal status.

According to a complaint filed in a federal district court in New York, that’s what happened at the Institute for Integrative Nutrition. (Hat tip to the Employment Law Daily; they have also posted a copy of the court’s decision in favor of the employees.) The employees alleged not only that the chart was created, and that it included information only on female employees, but also that the employer used it in making employment decisions.

This is one of the stranger allegations in the case, but by no means the only allegations the employees made about discrimination, retaliation, and violation of FMLA rights at the Institute. Each of the named plaintiffs (they are bringing a class action) had quite a tale to tell, including comments by the company’s owner that “women’s priorities shift when they become mothers,” that one expecting employee should speak to her partner about whether it was “worth it,” because he “had never met a new mom that didn’t underestimate the sleep, time, exhaustion from a new baby,” and that he wouldn’t consider another woman for a promotion because she was “getting married, and her head was in another place.” Once they revealed their pregnancies or went out on leave, the women claimed that they faced different treatment, demotion, and ultimately discharge.

No judge or jury has determined whether these allegations are correct, because the case came up on a motion to dismiss. In other words, the employer was arguing that some of the employees’ claims were so weak that it should not even have to respond to them, right out of the gates. In fairness, the court tossed one allegation by one employee. (Her retaliation claim was thrown out because she didn’t allege that she had complained of discrimination before being mistreated.)  Otherwise, though, the employees won. Based on the allegations, it’s no surprise. What surprised me is that the employer found it worth arguing about, given the strength of the allegations.

 

Senate May Finally Pass ENDA

prideflagToday, the Senate is expected to take up the Employment Nondiscrimination Act, known informally as ENDA. This bill would outlaw workplace discrimination on the basis of sexual orientation and gender identity, by adding those protected traits to Title VII.

Wikipedia tells us that the first Congressional effort to prohibit job discrimination against gay men and lesbians happened in 1974; In many Congressional sessions since, some version of ENDA has been introduced and gone nowhere. The House of Representatives managed to pass a version of the law in 2007, but the cost of passage was high for some: The version that finally passed had no protections based on gender identity. And no version of ENDA has ever passed the Senate.

This week, vote counters believe that will all change. According to New York Times reporting on the Senate vote, all 55 democratic senators are expected to vote for the bill, four more Republicans are on board, and only one more vote is required to invoke cloture (end the debate) and hold an up-or-down vote. When you consider that one of the official undecideds is Rob Portman, who announced his support for gay marriage because his son is gay, chances for passage look pretty good. (And in the nontraditional marriage department, Cindy McCain apparently sent her husband, Senator John McCain, a postcard urging him to vote for the bill; this prompted a strained formal response from the Senator’s office that he “enjoys and appreciates having discussions on the important issues of the day with all the members of his family.”)

What will happen in the House is anybody’s guess. But there are signs of trouble for opponents of the bill, who are having to reach deep into their bag of tricks to articulate reasons to oppose the law. Members of Congress told the Times that they are having to respond to arguments that the law would unfairly force Christian bookstores to hire drag performers and require schools to allow male teachers to wear dresses in the classroom. (A brief aside: What kid would not love this?) When the counterarguments reach this level, you know momentum in favor of the bill has reached critical mass.

 

Lost in the Congressional Debate: The Self-Employed and Obamacare

pillsIn case you haven’t heard (!), many members of Congress seem to believe that every single member of “the American People” stands vehemently opposed to the Affordable Care Act. Various Republican politicians have compared Obamacare to a disaster, a train wreck, and yes, slavery. But here’s an interesting dilemma for the GOP: The group with whom the Republicans want to identify so often — entrepreneurs and independent business people — will benefit significantly from the law.

According to a study on the Affordable Care Act and entrepreneurship conducted by several nonpartisan groups (including the Center on Health Insurance Reforms), Obamacare is expected to swell the ranks of the unemployed. The study predicts that more than 1.5 million people will go into business for themselves as a result of the law, a more than 10% increase. Why? Because they will no longer be stuck in jobs they would prefer to leave just to get health insurance.

There are legitimate debates as to whether the coverage offered through the new health care exchanges is truly affordable, and even the law’s most fervent supporters agree that the initial rollout of the online marketplaces has been a parade of technical glitches. However, no one can dispute that Obamacare makes it possible for many people to purchase health care who were previously priced out of the market or couldn’t even find a plan that would take them at any cost. Those who stayed in unsatisfying jobs to keep their benefits (a phenomenon known as “job lock”) will now be free to move on, purchase their own benefits on the exchange, and take the plunge to start their own businesses.

Employers who are planning to cut back on employee benefits might also see a lesson here. For companies that are planning to cut employee hours to less than 30 (to avoid having to provide benefits under Obamacare) or otherwise try to get around the law, there may well be an initial cost savings. But these strategies will also remove one of the strongest incentives for employees to stay at their jobs. And, the employees most likely to leave and start their own businesses are often the very employees the company would most like to keep: the self-motivated, self-directed, business-minded cohort.

 

 

California Law Affirms that Sexual Harassment Doesn’t Have to Be Sexy

In August, California amended its sexual harassment laws to add this sentence to the state’s Fair Employment and Housing Act:

“Sexually harassing conduct need not be motivated by sexual desire.”

The legislature was responding to a decision by a California appeals court in a same-sex harassment case. The plaintiff employee in that case, Patrick Kelley, alleged that his male supervisor called him a bitch and a punk, made crude comments about having sex with him, and laughed when another employee did the same. This behavior followed Kelley to other worksites after he asked to be transferred, as the story spread among his coworkers. The Court tossed Kelley’s claim because he couldn’t prove that his supervisor acted out of genuine sexual desire or interest. In other words, the case turned on whether Kelley’s supervisor actually, in his heart, wanted to have sex with Kelley (in ways he graphically described), or just said so in front of others in order to demean him.

If all sexual harassment cases turned on the question of sexual interest, you can imagine the problems of proof. How do you show that a harasser “really” felt desire toward his victim? Would the harasser’s sexual orientation be an issue in the case? Setting that aside, sexual interest shouldn’t matter. It’s just as illegal for a supervisor to make demeaning, sexist comments as to make unwanted sexual propositions (whether or not the harasser “genuinely” wanted to follow through on them). The reason why sexual harassment is illegal is that it limits job opportunities. When all is said and done, sexual harassment is about power, not desire.

In the context of opposite-sex harassment, there are certainly some ugly cases involving sexual come-ons, groping, and even assault. But some of the ugliest situations arise when women enter traditionally male fields. In these cases, there are no expressions of “desire” or “sexual interest.” Instead, women are threatened (with rape, assault, and more), endangered, and frightened. Their tools and vehicles are sabotaged; they are called horrible names; they are stranded without support. Although some courts had trouble seeing the harassment when it was so decidedly unsexy, most have now come around.

At least in opposite-sex cases. That the California case issued its decision in a same-sex case isn’t surprising. Courts have not known what to do with homophobic behavior on male-dominated worksites. Is it okay if none of the employees are actually gay? Or if the supervisor threatens to have sex with all the guys, not just those who are ridiculed in gendered ways? If there are no women present, is this behavior really “sex-based”? But the answer seems pretty simple. In this case, Kelley’s work environment was poisoned by a supervisor’s crude sexual comments and behavior. Those comments were sex-based, in that they were about Kelley’s masculinity and sexual orientation. The case shouldn’t have turned on whether the supervisor was sincere when he said he want to have sex with him.

State Minimum Wage Increases for 2014

Last week, California Governor Jerry Brown signed a bill that will increase the state’s minimum wage to $9 on July 1, 2014, and $10 at the beginning of 2016. (The state’s current minimum wage is $8.) So far, three other states have passed minimum wage increases that will take effect in 2014: Connecticut’s wage will increase to $8.70 for 2014, then $9 for 2015; New York’s wage will increase to $8 at the end of this year, then $8.75 at the end of 2014, then $9 at the end of 2015; and Rhode Island’s minimum will hit $8 at the beginning of 2014. (Nolo has minimum wage information for all 50 states and the District of Columbia at our Wage & Hour page.)

The federal minimum wage, currently $7.25 an hour, is now lower than the minimum wage in more than a third of the states. About half of the states have the same minimum wage as the federal government, and a handful of states either have a lower minimum wage or have no minimum wage at all. As a practical matter, this final group of states also uses the federal minimum wage. The federal wage rate is a floor, not a ceiling. States are free to adopt a higher minimum wage, and employers within the state must pay the higher rate. But in states with a lower minimum wage, employers must generally comply with the federal law unless they are so small and local as to not be subject to the Fair Labor Standards Act.

States generally adopt higher minimum wage rates to try to bring wages into line with the cost of living. But, according to the Center for Poverty Research at U.C. Davis, the federal minimum wage is not cutting the mustard. A full-time employee who works 40 hours a week for a full year, without taking a single unpaid day off, earns about $15,000 annually, just a few thousand dollars above the poverty level for a single person (and well below the poverty level for a family with one or more children).

President Obama has called for an increase in the federal minimum wage to $9; he also appointed a Secretary of Labor, Thomas Perez, who supports raising the minimum wage. However, based on the current climate in Congress (which today is on the verge of shutting the government down), it doesn’t seem likely that a federal wage increase will happen any time soon. And that means the real action will remain at the state and local level.

Wage and Hour Violations at Restaurants

A couple of days ago, the New York Times published an article about wage and hour violations at Urasawa, a very trendy — and expensive — sushi restaurant in Beverly Hills. According to the article, workers were not paid overtime and not allowed to take legally required breaks. An employee interviewed for the article also noted that he was required to buy his own $700 set of knives, at a time when he was earning between $9 and $11 an hour. (Although the article didn’t mention it, this is a separate violation of California law, which requires employers to bear the cost of uniforms, tools, and other items necessary for employees to do their jobs.)

Restaurants are too frequently in violation of wage and hour laws, from overtime and break rules to minimum wage, uniform, and tip requirements. If the violator is extremely upscale, like the restaurant cited in the Times article, employees are often willing to put up with substandard conditions in exchange for the opportunity to gain the experience and cachet that stem from working at a trendy spot. (Apparently, diners are also willing to put up with a lot to eat there, from a $1,000 price tag for dinner for two to rules about how the food must be treated that would make Sienfeld’s Soup Nazi blush.) At the other end of the spectrum, employees working at fast-food franchises and low-budget eateries often don’t know their rights and work for an owner who is operating on a financial shoestring.

In recent years, the Department of Labor has taken steps to remedy this situation, from revising the regulations on tip credits to partnering with the Subway restaurant chain to make sure that employees know their rights. Let’s hope it works! Because I don’t know about you, but for my own selfish reasons, I’d prefer to have my food prepared by workers who are allowed to go to the bathroom when they need to.

Big Win for Employers in Supreme Court Harassment Case

supctDo you have more than one supervisor? If so, you’re not alone. Plenty of people work for companies in which the power to hire, fire, promote, and discipline employees is vested in only a few employees, but many more employees are authorized to direct the work of others and actually keep the trains running on time. Well, the Supreme Court has news for the many lower-level employees who schedule, oversee, train, and direct the work of other employees: You’re not supervisors under Title VII.

In a racial harassment case (Vance v. Ball State University), the Supreme Court decided that employees count as supervisors under Title VII only if they are authorized to take tangible employment actions against an employee. A tangible employment action is a significant change in employment status, such as hiring, firing, promotion, or reassignment to a job with substantially different duties. In making this decision, the Court rejected the Equal Employment Opportunity Commission’s interpretation that employees who don’t have this authority might also be supervisors if they have the authority to direct an employee’s daily work activities.

The distinction between supervisors and regular employees is hugely important in determining an employer’s liability for harassment. An employee who is harassed by a coworker can hold the employer legally liable for the harassment only if the employer was negligent. This means that the employee has to show that the employer knew, or should have known, about the harassment and failed to take appropriate corrective action.

An employee who is harassed by a supervisor has an easier burden. If the supervisor’s harassment results in a tangible employment action (as defined above), the employer is strictly liable, period. If the supervisor’s harassment doesn’t result in a tangible employment action, the employer is liable unless it can prove that (1) it exercised reasonable care to prevent and promptly correct harassment (by, for example, training employees, adopting a policy prohibiting harassment, creating an appropriate complaint procedure, and investigating harassment complaints quickly and fairly), and (2) the employee unreasonably failed to take advantage of opportunities the employer offered to prevent or correct harassment (for example, by failing to make a complaint).

The distinction between supervisor harassment and coworker harassment takes into account the power an employer gives its supervisors. The employer’s decision to delegate authority to the supervisor is what makes this type of harassment possible, so it’s only fair to hold the company responsible for the actions of those who have this responsibility.

The practical effect of the Court’s decision is that fewer employees will qualify as supervisors and, therefore, that more victims of harassment will have to meet the more difficult negligence standard to win their cases. In other words, this case is a clear win for employers, who will have an easier time avoiding liability for harassment.

Interestingly, it’s much easier for an employee to qualify as a supervisor when that result benefits employers. For example, an employee is an exempt “executive” employee under the Fair Labor Standards Act – and, therefore, not entitled to earn overtime – if the employee directs the work of at least two other employees (among other things). The employee need not have the authority to hire and fire, as long as the employee’s suggestions or recommendations about personnel decisions like these are given “particular weight.” Similarly, under the National Labor Relations Act, an employee is a supervisor if he or she has the authority to perform one of 12 responsibilities, including assigning work and responsibly directing employees. If you’re a supervisor under the NLRA, you are not protected by the law and may not join a union.

Take This Internship and . . . Pay For It

blackswaneditLast week, two unpaid interns who worked on the film “Black Swan” won a lawsuit against Fox Searchlight Pictures. The interns claimed that they should have been paid for their work, which included such important cinematic tasks as taking out the garbage, ordering lunch, booking flights for their bosses, and assembling office furniture. The judge for the federal District Court in Manhattan agreed, finding that the two interns were treated as employees and were, therefore, entitled to compensation for their time.

These days, internships are an increasingly popular option, especially for students and recent graduates who can’t find paid work in their fields. CNN Money recently reported an 8.8% unemployment rate — and an almost 19% “underemployment” rate — among recent college grads, both rates still higher than before the economic downturn began. Many young people are willing (or desperate enough) to work without pay to get their foot in the door of their chosen profession. Of course, they’d rather get paid. But if the only way to break into a field is by doing grunt work day and night without pay, some people will take that deal.

This is where the law steps in to set some boundaries. Employment law pushes back against the metric of “whatever the market will bear” to require employers to pay at least the minimum wage, to protect employees from unsafe working conditions, and to prohibit harassment, for example — even if plenty of employees might tolerate mistreatment and subsistence wages just to get and keep a job. That desperate job seekers are willing to put up with almost anything in exchange for work doesn’t mean it’s legal.

That’s what Fox learned last week, and what employers in other popular industries are starting to understand. According to an article about the case in the New York Times, similar lawsuits have been filed against television, modeling, and fashion magazine employers, claiming interns should have been paid. Employers in these sexy fields have been some of the worst offenders in not paying interns, presumably because so many people are desperate to work in film and fashion.

There’s nothing shocking about desperate job seekers or employers willing to exploit them, sadly. There’s nothing surprising about the outcome of the case, either. The law about unpaid internships is very clear. Employers may hire people to work without pay only if the job meets a strict six-part test, including that the job must benefit the intern, must not provide the employer with an immediate advantage, must be closely supervised, and must not be a required stepping stone to a paid position. (You can find details on the six factors in Am I really an intern or just an employee who isn’t getting paid?) But Fox argued that the judge should forget the factors and instead simply weigh whether the intern or the employer gained more from the arrangement. If the intern benefitted more, then it’s a legal internship. The judge was not impressed by this argument, nor by the college credits offered for some internships, nor by the fact that the interns who sued undoubtedly did learn some things about the film industry during their unpaid time at Fox.

All beside the point, as the judge made clear. The six-part test is strict for a reason: Internships are a somewhat disruptive exception to the usual workplace exchange of labor for money. As such, they are intended to be rare.