Category Archives: Supreme Court

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.

Employer Mandate: Headed to the Supreme Court?

supctThe past month has been chock full of developments on the employer mandate front, and there may be more to come. Last month, the federal Court of Appeals for the Fourth Circuit upheld the mandate, which requires larger employers to provide affordable healthcare coverage to full-time employees or pay a fine. (The opinion is Liberty University v. Jacob Lew et al.; there’s a nice explanatory piece about it over on SCOTUSBLOG.) The Fourth Circuit’s opinion upheld the employer mandate as a valid exercise of Congress’s powers to tax and to regulate interstate commerce.

Just a few days later, the Obama administration announced that it was postponing the employer mandate for a year, until the beginning of 2015.

Then yesterday, the Fourth Circuit issued a stay in the mandate case, to give Liberty University time to file a petition for certiorari asking the Supreme Court to hear the dispute. No tea leaves yet on whether the Court will agree to hear the case or how they will decide it if they take it up. Still, what a difference a month makes in the life of a new government program.

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.

Supreme Court’s FLSA Decision on Collective Actions

Last week, the Supreme Court decided a case about collective actions under the Fair Labor Standards Act (FLSA). Collective actions are similar to class actions, in that they give an employee the right to file a lawsuit on behalf of a group of employees who have the same basic claim against the employer. The Court’s decision took a strange turn, resulting in a victory for the employer that skirted a primary issue in the case.

Here’s what happened: Laura Symczyk filed a collective action against her employer, Genesis Healthcare, claiming that it had an unfair policy of docking employees for a 30-minute meal break every shift, whether or not the employee had to work during that time. (If an employee must work through a meal, the employee is entitled to be paid; nobody disputes this basic assertion underlying the employee’s case.) Symczyk was the only named employee in the case, but anticipated that others would join in once the collective action was conditionally certified: that is, once the court found that the group of employees were similarly situated to Symczyk because they were subject to the same policy or practice.

Before Symczyk tried to certify the collective action, Genesis offered to settle her claim. Genesis said it would pay her $7,500, plus fees and costs. Symczyk didn’t respond, and Genesis withdrew the offer.

This settlement offer was made under Rule 68 of the Federal Rules of Civil Procedure. Under Rule 68, if one party doesn’t accept a settlement offer, that party will be responsible for all of its lawsuit costs after the date the offer was made, unless that party gets a judgment that’s better than the settlement offer. The purpose of this Rule is to give both sides a strong incentive to settle: The defendant has good reason to offer a generous settlement, both to get out of the lawsuit and to make it more likely that the plaintiff won’t do better at trial. The plaintiff has a good reason to accept, both because the offer is likely to be generous and because the plaintiff may have to foot a large litigation bill if the judgment isn’t better than the settlement.

With me so far? Because here’s where things get weird. The trial court threw out the lawsuit, finding that Symczyk no longer had an active dispute against the company because she had been offered all of the relief to which she was entitled. Because Symczyk no longer had a claim, she couldn’t represent other employees, and so the whole case got tossed.

The problem is that Symczyk didn’t accept the settlement offer; she turned it down. She didn’t get any money in settlement and, because the court tossed her case, she won’t get any money at trial. This should not be possible: Plaintiffs who turn down a Rule 64 settlement offer have a right to take their chances in court. The plaintiffs may win or they may lose, but they buy the opportunity to take their best shot by forgoing the settlement. It isn’t fair to throw a case out when the plaintiffs have neither settlement nor judgment in hand. Nonetheless, one federal judiciary circuit has interpreted Rule 64 to allow this type of penalty, presumably in an effort to put a stop to unnecessary litigation.

But the Court skipped right past this issue to decide that, if Symczyk’s case was properly dismissed, then she can no longer represent the group. Employee attorneys take issue with this, arguing that employees should have a chance to replace the named plaintiff-employee when this happens and continue with the lawsuit. Otherwise, defendant-employers could “pick off” the named employee (by making a Rule 68 offer) and get any collective action filed against it thrown out of court.

This is an interesting argument, but not the one the Court should have decided. In almost any federal court, Symczyk’s case would not have been dismissed and she would still be capable of representing the group. By leaving this fundamental issue undecided, the Court hasn’t clarified things very much for those on either side of an FLSA collective action.

Supreme Court Wants to Hear More About Health Care Reform

Seems like only a few months ago that the Supreme Court narrowly upheld President Obama’s health care reform law. That decision, combined with the President’s reelection and Democratic gains in both the House and Senate, appeared to spell the end of the fighting over whether the law would go into effect. Although there are still plenty of disputes over how the law will be implemented, what the final regulations will say, and so on, the core question of the law’s validity seemed to be settled.

Until last week, when the Court once again entered the Obamacare fray. The Court had previously dismissed a lawsuit brought by Liberty University challenging the health care law, based on its holding last summer that the individual mandate to purchase insurance was constitutional. Liberty University asked the court to reconsider, and last week it did. The Court vacated its decision not to hear the case, granted Liberty’s petition for rehearing, and sent the case back to the Fourth Circuit Court of Appeals. Once that Court issues a decision, the case could once more find its way back to the Supreme Court, as early as next year.

There are two issues in the Liberty case. The school is challenging the law’s employer mandate: the requirement that employers with more than 50 employees either provide health insurance for employees that meets certain financial and coverage requirements or pay a fine. The school is also challenging the law’s requirement that health care plans (whether purchased by an employer or an individual) must include contraceptive coverage, without a copay.

For more information on what the health care law requires, see Health Care Reform: What Employers and Employees Need to Know.

Supreme Court: Pharmaceutical Reps Not Entitled to Overtime

In a 5-4 split, the Supreme Court decided yesterday that pharmaceutical detailers qualify as outside salespeople and are therefore not entitled to overtime pay. This case was closely watched in the pharmaceutical industry, which estimated that a change in industry practice to require overtime to these employees would cost billions of dollars.

The job of a detailer is to visit doctors in a particular sales territory and explain the uses, benefits, and risks of a particular set of the company’s prescription drugs. In the heavily regulated field of pharmaceuticals, the detailer’s goal is to obtain a “nonbinding commitment” from the doctor to prescribe the company’s drugs when appropriate. A portion of the detailer’s pay is incentive-based, determined by sales of the featured drugs in the detailer’s territory.

In this case, everyone agreed that the detailers routinely worked more than 40 hours a week and did not receive overtime pay. Their employer, GlaxoSmithKline, classified them as “outside salespeople,” a job category that is exempt from the overtime requirements. The issue before the court is whether what they do can really be called selling.

For the majority, Justice Alito found that it could. He determined that the regulations interpreting the outside salesperson exemption were intended to be broad enough to cover various industry practices, including the use of detailers. Although there is no sales contract (other than that oxymoronic “nonbinding commitment”), no money changes hands, and no orders are placed, the detailers were doing all that’s legally allowed in this heavily regulated field to sell the company’s products. Ultimately, doctors must be free to prescribe the medications appropriate to a patient’s condition, and patients may ultimately decide not to follow that advice, or to purchase a generic equivalent. The company can’t control this part of the transaction, but it can promote its products to those who write the prescriptions.

For the dissent, Justice Breyer pointed out that, unlike representatives who sell drugs to doctors for their own use (such as vaccines and medications to be administered in the doctor’s office), the detailers do not make any sales. Rather, their work looks more like promotional work, a category which the regulations treat as separate when the person performing it does not also make sales. The only sale is made at the pharmacy counter, not in the doctor’s office.

Interestingly, all of the Justices agreed that the Department of Labor’s recent efforts to interpret the outside salesperson exception more strictly (to entitle more employees to overtime) had failed. In opinion letters and in amicus briefs, the DOL stated that detailers didn’t qualify as outside salespeople because they did not transfer title to the property in question. (This is the most recent interpretation; the DOL had previously said that the employee would have to be involved in a “consummated transaction” in order to have made a sale.) Both the majority opinion and the dissent disregarded this recent reinterpretation and focused on the language of the statute and regulations, finding that the DOL’s opinion had been too much of a moving target to warrant deference to the agency.

FMLA and State Employers

Last week, the Supreme Court decided a case involving a state employee who sued for violation of the Family and Medical Leave Act (FMLA), Coleman v. Court of Appeals of Maryland. The arguments in the case were about federalism: how far one sovereign (the federal government, acting through Congress) can go in imposing liability on another (a state government). However, in reaching its decision — against the employee — the Court missed the entire point of the FMLA.

The facts are pretty basic: Daniel Coleman asked his employer, the Maryland Court of Appeals, for sick leave. His employer denied his request and told him he would be fired if he didn’t resign. Coleman sued for violation of the FMLA, charing that his employer failed to grant him time off for his own serious health condition as required by the law. His employer defended itself by saying that it was immune from suit because Congress didn’t have the right to subject it to money damages for violating the FMLA.

In our federal system of government, there are limits on the obligations Congress can impose on the states. At issue in this case was Congress’s right to enforce the guarantees of the Equal Protection Clause of the Constitution, which the federal government has used to remedy discrimination by the states (originally, race discrimination against the newly freed slaves). To subject a state to monetary damages under a federal law, that law must clearly indicate that intent; must be tailored to remedy or prevent Equal Protection violations; and must impose remedies that are proportional to that goal. In this case, what everyone disagreed about was whether or not the provisions allowing leave for an employee’s own serious health condition was intended to address sex discrimination, which violates the Equal Protection Clause.

The Supreme Court decided years ago that the FMLA’s provision allowing leave to care for family members was intended to remedy sex discrimination, and so could properly be enforced against the states for money damages. Because women are still the primary care providers in our society, the Court had no trouble finding that the caregiver provision was aimed at sex discrimination. In the Coleman case, however, the Court found that the self-care provision — the allowance of time off for the employee’s own serious health care condition — addressed discrimination based on illness, not discrimination based on gender. Therefore, the Court found that Congress didn’t have the right to require states to pay money damages for violating this section of the law.

Unfortunately, in parsing the case so finely, the Court ignored the history and purpose of the FMLA. The FMLA was born of disputes over pregnancy leave. Women’s rights advocates were divided as to how to address this fundamental difference between the sexes in the workplace. Fighting for pregnancy leave and time off to recover from childbirth seemed necessary to safeguard women’s right to workplace equality; yet it also created a fundamental difference in the way employers were to treat men and women, with the possible outcome that employers would discriminate against women to avoid having to provide this benefit. The FMLA — and specifically, the right to time off for one’s own serious health condition, the category of leave that includes pregnancy and childbirth — was the eventual solution. By making the right to leave gender-neutral, advocates hoped to frame pregnancy as just one of the many reasons why an employee might need time off, and thereby diminish the likelihood of sex discrimination among employers while also protecting the right to leave. By allowing parental and caregiving leave for men and women equally, the FMLA also sought to break the sex-based stereotype of women as primary caregivers. The whole law as a package, and particularly the provision allowing leave for one’s own serious health condition, was intended precisely to combat sex discrimination. Justice Ginsberg’s dissent explains this history and intent clearly, as does the amicus brief of the National Partnership for Women & Families, the group that was instrumental in drafting and advocating for the law decades ago.

Supreme Court Gives Religious Employers a Big Defense in Discrimination Cases

Last week, the Supreme Court decided an employment discrimination case against a Lutheran school, Hosanna-Tabor v. EEOC. The case involved a teacher who claimed she was fired in retaliation for asserting her rights under the Americans with Disabilities Act. (The teacher, Cheryl Perich, had taken a leave of absence after being diagnosed with narcolepsy, and was asked to resign when she tried to return to work.) The school argued that it had to be free to choose the employees who acted in a ministerial role, and that its decision to fire Perich was therefore beyond the reach of the civil court system. The Supreme Court agreed, for the first time explicitly recognizing a “ministerial exception” to the ADA and other federal civil rights laws.

The parties agreed on the facts of the case. Perich was what the school refers to as a “called” teacher, which means she had completed a course of instruction on the Church’s beliefs and was asked to teach under the formal title “Minister of Religion, Commissioned.” This position gave Perich certain advantages over the school’s lay teachers, including more job security and some tax breaks. Perich’s duties were largely the same as those of the lay teachers.

Perich was diagnosed with narcolepsy and was out on disability leave at the start of the 2004-2005 school year. In January of 2005, she told the school she was ready to return soon; the school had already hired a lay teacher to replace her for the rest of the year. The congregation of the Church voted to give her a “peaceful release” from her call, by which it would pay a portion of her health insurance premiums if she resigned. Her response was not to peaceful: She refused to resign, told the school her doctor had released her to return to work on February 22, and showed up at the school on that day. She refused to leave until she was provided with a written acknowledgment that she had showed up. The school informed her that she would be fired, to which she responded that she had spoken to a lawyer and intended to assert her rights. She was fired and filed a lawsuit for retaliation under the ADA.

The Supreme Court found that Perich’s lawsuit was barred by the ministerial exception. Although lower courts had recognized this exception to federal laws prohibiting discrimination, this is the first time the Supreme Court has done so. Pursuant to this exception, grounded in the Establishment Clause and Free Exercise Clause of the First Amendment, religious bodies must be free to decide who will “preach their beliefs, teach their faith, and carry out their mission.” A discrimination lawsuit infringes that right by dictating whom the religious institution must hire or retain.

A couple of things interested me about this case. First of all, the Court refused to set clear guidelines on who qualifies as a “minister,” saying it was reluctant to adopt a “rigid formula” in its first case on the issue. The Court said that the facts in this case, including the effort required to be a called teacher, Perich’s use of the term for herself (and willingness to take advantage of the tax benefits), and her religious responsibilities, all added up to ministerial status. The concurring opinions took up this issue, with Justice Thomas proposing that courts should defer to the religious body’s good faith statement that someone is a minister. Justice Alito also wrote separately to emphasize that all religions should be entitled to this exception, not just those that have “ministers,” ordain certain members, or otherwise utilize the nomenclature and rites of the Protestant Church. This leaves a lot of leeway for future courts to decide how much analysis and probing is allowed of a religious institution’s assertion that a person qualifies as a minister under the exception.

Second, the school’s stated reason for firing Perich was that her threat to sue violated Lutheran doctrine that disputes should be resolved internally rather than through resort to the courts. But according to the facts, this threat came only after the school had told her she would be fired, so it’s hard to see how the internal dispute resolution process was still available to her. And, the Court’s unanimous opinion didn’t take up this part of the case at all. Essentially, the school is saying that this doctrinal belief essentially required it to retaliate against Perich, just as Catholic doctrine precluding ordination of women would require that Church to discriminate on the basis of sex. It’s not clear what evidence was presented to the lower courts based on the Court’s opinion, but it seems to me that religious employers relying on a defense this extreme should have to show that the belief is in fact held, and in good faith. For a court to analyze whether that belief is “valid” or correct in some ultimate sense would of course violate the First Amendment. But there should at least be some requirement that the belief is genuine and not a pretext for discrimination. A similar standard applies to employees who want a religious accommodation: Courts don’t examine the ultimate rectitude or logic of their beliefs, but do require that they be genuinely held and be religious in nature. To the extent religious organizations are claiming an exemption from laws so fundamental to our society, it seems they should be subjected to the same requirement. This wouldn’t give courts the right to say what a Church’s doctrine should be, but only what the Church’s doctrine actually is.

 

Wal-Mart Wins Class Action Case in Supreme Court

Yesterday, the Supreme Court gave employers a huge win in the case of Wal-Mart Stores v. Dukes. The case was a class action lawsuit that alleged the giant retailer discriminated against female employees when making decisions on pay and promotions. There were three named plaintiff-employees, who sought to bring the lawsuit on behalf of more than a million female employees nationwide.

The Supreme Court wasn’t asked to rule on whether any employees had been discriminated against. Instead, the Court looked only at the class action issue: whether it was appropriate for the employees to bring these claims as a group. The Court concluded that it was not — and the ruling will likely result in fewer class actions over all kinds of issues, from civil rights cases to product liability claims.

The employees claimed that Wal-Mart engaged in a pattern and practice of discrimination against women by allowing its (mostly male) managers to exercise nearly unfettered discretion in making pay and promotion decisions, within a corporate culture that relied on gender-based stereotypes. The effect of this combination, the plaintiffs claimed, were significant disparities in pay and promotions to management between women and men. The employees presented anecdotal evidence from employees and statistical evidence of the disparities, in their effort to get a class action certified.

In a class action, a representative group brings a lawsuit on behalf of everyone who’s in the same position. The class action framework is intended to promote efficiency and fairness by allowing everyone’s claims to be decided at the same time, according to the same standards, rather than through a number of separate lawsuits that could result in contradictory outcomes. But to bring a class action, the plaintiffs have to meet certain requirements, intended to make sure that it’s fair both to other class members — whose rights will be determined by the lawsuit, even if they don’t participate — and to the defendant, who will have to defend against time-consuming and costly large-scale allegations.

The Supreme Court decided that the case couldn’t proceed as a class action because the plaintiffs hadn’t met one of these threshold requirements: that there be at least one common issue of law or fact among the class members (“commonality”). Because the women worked at stores across the 50 states, reporting to different managers, and bringing their own skills, performance history, and other attributes into play, the Court found that they didn’t have commonality. The Court was especially dismissive of the plaintiffs’ claim that allowing managers to make subjective, discretionary decisions could provide the necessary common ground for the class action.

Four Justices dissented from this part of the ruling. Justice Ginsburg, writing for the minority, identified the key common question for the class as “whether Wal-Mart’s discretionary pay and promotion policies are discriminatory.” In addition to reviewing the plaintiffs’ statistical and anecdotal evidence, she pointed to other facets of Wal-Mart’s nationwide practice, such as requiring that all employees promoted to management be willing to relocate and allowing managers to set pay within a two dollar range, which left room for the operation of gender bias.

The majority’s opinion in the Wal-Mart case is likely to have a significant impact on future class actions because it sets a stricter standard for getting these cases off the ground. As Justice Ginsburg points out, the commonality standard had previously been interpreted more leniently. The key question wasn’t whether there were dissimilarities among the class members, but whether there was at least one crucial similarity, a question that could be answered for the entire group. We’ll have to see what the ultimate effect of this case will be, as lower federal courts apply it going forward. For now, though, advocates for business groups and employees alike agree that it will limit the number and size of class actions in the future.

 

 

 

 

Supreme Court Upholds Arizona Immigration Law

This morning, the Supreme Court announced its decision in Chamber of Commerce v. Whiting, a case challenging Arizona’s immigration law. The law imposes strict sanctions —  the suspension or revocation of business licenses — on employers who intentionally or knowingly hire unauthorized workers. It also requires Arizona businesses to use the federal government’s electronic system for verifying work authorization, E-Verify.

A group of business and civl rights organizations challenged the law, claiming that it was preempted by the federal Immigration Reform and Control Act (IRCA). The Supreme Court disagreed. Although IRCA does preempt many types of state laws that attempt to control illegal immigration, it includes an exception that allows states to pass and enforce licensing and similar laws. Because the Arizona law imposes its sanctions through the suspension and revocation of business licenses, it falls into this exception and can coexist with IRCA. The Court also noted that Arizona took pains to bring its sanctions scheme into harmony with IRCA by, for example, using the federal definition of “unauthorized alien” and deferring to the federal government’s determination of an employee’s authorization to work in the U.S.

The Court also upheld the requirement that Arizona employers use E-Verify to check on work authorization. Although the statute authorizing the E-Verify program prohibits the Secretary of Homeland Security from requiring any employer outside the federal government to use E-Verify (unless the employer has already violated the law), it doesn’t impose any limits on state laws mandating use of E-Verify.

Several other states have passed laws similar to Arizona’s, and others are likely to follow on the heels of the Court’s opinion today.