Monthly Archives: July 2015
Wednesday, July 29, 2015

Risk ShiftingLast week, at the Western Benefits Conference, IRS Commissioner of the Tax Exempt and Government Entities Division, Sunita B. Lough, addressed the conference minutes after the IRS released Ann. 2015-19, 2015-32 IRB.  This is the announcement reforming the determination letter process primarily for individually designed plans.

Commissioner Lough explained the rationale for elimination of the determination letter process for individually designed plans other than on plan adoption and termination.  She stated that the average time a reviewer takes to determine that a plan is compliant is three hours.  This limited time results from the significant number of applications and the shortage of qualified IRS personnel due to budget limitations.  Based on a three hour review, the IRS has been issuing, in her view, an opinion letter that would take a law firm tens of hours to review and re-review before a partner’s signature was applied.  She finds it to be inappropriate for the IRS to be on the absolute risk when it is hamstrung in this fashion.  In other words, the demise of the determination letter program results from a cost/benefit analysis where the Service has determined that it is best to shift the risk of having a compliant plan document to the plan sponsor.

To lessen the risk for the plan sponsor, Commissioner Lough stated that the Service will promulgate model language for all needed qualification amendments.  The IRS will also consider amendment by reference as a risk-diminisher for plan sponsors.    This latter point is potentially very significant.  The IRS has historically taken the position that a plan can only incorporate a provision by reference if the regulations or other guidance specifically allows for it, and the number of provisions that allow for this has been very small.  Of course, incorporation by reference only goes so far.  If a regulation or other guidance has optional provisions, those will still need to be specified.

Lastly, EPCRS will be available for corrections, but the Commissioner warned that plan sponsors will not be permitted to end-run the lack of a determination letter process by using EPCRS.  Since the use of VCP today requires a determination letter, the Commissioner anticipates complying amendments to the Revenue Procedure.

When questioned about the long-standing concerns over interim amendments and how to address those, the Commissioner admitted she was unfamiliar with the issue and promised to look into it.

What does this mean for sponsors of individually designed plans?  It means the burden is on them to make sure that plan documents are compliant.  The risk of having a non-compliant document will probably be greater than before although it is difficult to anticipate the consequences should a plan fail.  Apparently, a good faith effort to comply will go a long way to avoiding disqualification.  This will be especially important with interim amendments.

It also probably means that IRS audits will be longer, more expensive, affairs.  Auditors will now likely spend significant time reviewing a document for legal compliance since they can no longer rely on their colleagues in the determination letter division to have done that for them.  The debates that used to happen on determination letter reviews will now occur on audit, which will only increase the potential stakes of the audit itself.  It will also make it more difficult for the auditors to distinguish between the compliance-minded sponsors (who made efforts to obtain determination letters) and those who were not.

What does this mean for drafters of individually designed plans?  Without the benefit of a determination letter, the law firms that draft plans are likely litigation targets should the IRS penalize a plan sponsor or, worse yet, disqualify a plan that is not properly drafted.  We would expect to see the cost of drafting and restating an individually designed plan to go up to cover the risk that has been shifted from the IRS to the plan sponsors and their law firms.

All in all, this is a bad deal for sponsors of individually designed plans and their document providers.  It will likely tend to shift toward greater use of prototype and volume submitter plans which could limit flexibility in plan design.  It will increase compliance costs and lead to greater scrutiny on plan audits.


Tuesday, July 28, 2015

Today’s economy presents numerous challenges to community bank profitability—compressed net interest margins, increased regulation, and management teams fatigued by the crisis. In response to these obstacles, many boards of directors are exploring new ways to reduce expenses, retain qualified management teams, and offer opportunities for liquidity to current shareholders short of a sale or merger of the institution.

For many family-owned banks, their deep roots in the community and a desire to see their banks thrive under continued family ownership into future generations can cause these challenges to be felt even more acutely. In particular, recruiting and retaining the “next generation” of management can be difficult. Cash compensation is often not competitive with the compensatory packages offered by publicly-traded institutions, and equity awards for management officials are unattractive given the limited liquidity of the underlying stock. All the while, these institutions should ensure that their owners have reasonable assurances of liquidity as needs arise or as investment preferences change. In combination, these challenges can often overwhelm a family-owned bank’s desire to remain independent.

Depending on the condition of the institution, implementing an employee stock ownership plan, or ESOP, may help a board address many of these challenges. While the ESOP is first a means of extending stock ownership to the institution’s employees, an ESOP can have other applications for family-owned banks.

Recruitment and Retention
An obvious benefit of an ESOP is to provide management and employees the ability to participate in an increase in the value of the bank, aligning their interests with those of shareholders. An equity interest provides economic incentives to join or stay with the bank and the ownership interest provided by ESOPs to employees has been shown to improve workforce productivity and morale.

Source of Liquidity for Shareholders
Without significant trading activity in their stock, shareholders of a closely-held institution may seek a liquidity event, which can include the sale of their shares to a third party or a merger with another bank. For these institutions, using the ESOP as part of a stock repurchase plan or to buy out selected shareholders can provide a buyer for large blocks of stock at a reasonable price.

For family-owned institutions, the tax benefits associated with a sale of a family’s interest in the institution to management via an ESOP are considerable. Most individual sellers of stock to an ESOP (and some trusts) qualify for a tax-free rollover of the proceeds of that sale into domestic stocks and bonds of U.S. corporations which meet certain limits on passive income. Under certain circumstances, this tax-free rollover opportunity avoids all federal income and capital gain taxes on the sale of shares to an ESOP.

In order to fund large purchases, the ESOP can take on a limited amount of leverage in order to acquire more shares in a particular year than can otherwise be allocated to plan participants. Before taking on this leverage, the bank should carefully consider how much leverage it can actually handle relative to the contributions that are expected to be made to the ESOP.

Special Benefits for S Corporations
ESOPs can also reduce shareholder numbers to facilitate a company’s conversion to an S corporation, which can help significant shareholders avoid the double taxation of dividends that apply to C corporations. Under the Internal Revenue Code, an ESOP counts as only a single shareholder for purposes of S corporation limitations, no matter how many employees have shares allocated to their accounts in the ESOP. Upon a plan participant’s separation from service from the institution, the participant may be entitled to only the cash value of the shares, rather than the shares themselves.

ESOPs also benefit from the S corporation status given their exemption from federal and most state income taxes. Since ESOPs are tax-exempt entities, they do not pay income taxes on their share of the institutions’ income like other shareholders do. When S corporations make distributions to their shareholders, ESOPs can retain that distribution, giving a better return to the ESOP participants. Additionally the cash reserves held in the ESOP from these distributions can be used to pay down ESOP debt incurred to buy shares for the ESOP, fund additional stock purchases by the ESOP, or to fund employee withdrawals from the ESOP.

For a variety of reasons, ESOPs can help family-owned financial institutions better manage the challenges of today’s market by providing a more liquid market for the institution’s shares and an exit strategy for some significant investors short of a sale or merger. ESOPs can also improve employee and senior management engagement and retention at a relatively low cost, which can improve the institution’s bottom line. With careful implementation and board oversight of compliance efforts, ESOPs can be a powerful tool for many community banks.

This post is a reprint of an article that originally appeared here on

Monday, July 20, 2015

While pension plans as a whole are heading toward extinction, many employers haven’t been able to terminate their plans for a variety of reasons – including collective bargaining mandates and underfunding status which precludes termination.  Employers in this situation are left confronting the pressure to move the risk from the corporation’s balance sheet to the individuals covered by the plan.  This risk mitigation concept is generally referred to in the industry as pension “de-risking”.  One common de-risking strategy has been to offer a limited time period during which individuals in pay status can elect to forego future annuity payments and receive an accelerated lump sum payment that is the actuarial equivalent of their remaining annuity payments (sometimes referred to as a “lump sum risk transferring program”).

De-risking has been met with resistance from Congress and the agencies tasked with overseeing pension matters – PBGC, IRS, Treasury and DOL; these governmental entities express concern that shifting risk (both longevity and investment risk) from the employer sponsoring pension plans to the participants covered under those plans might not afford those individuals with enough “protection” in their retirement years.  Attempting to assert additional protections over pension payment streams, last week, the IRS and Treasury issued a notice cracking down on lump sum risk transferring programs.  In Notice 2015-49, Treasury and the IRS announced that they intend to amend the required minimum distribution (“RMD”) regulations under § 401(a)(9) of the Code for this purpose.   This announcement represents a complete “about face” from the position that the IRS has taken in a series of private letter rules (PLRs) granted to pension plan sponsors in the past few years.Regulations and Rules

The notice indicates that, in effect, that a plan amendment allowing participants already in pay status to elect a lump sum distribution is an increase in benefits which will violate the amended RMD regulations.  Thus, pension plans generally will not be allowed to replace (or offer to replace) any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution.   While we need to wait to see what the regulations will actually say, this may not be as significant as it first appears.  Since the amendment is to the RMD regulations, it most likely will not impact offering lump sums to terminated vested participants who are not retirement eligible or even to retirees who are not receiving RMDs.

Once these revised RMD regulations are issued, they will apply retroactively back to the date of the notice – July 9, 2015.  Only those employers grant a PLR before July 9, 2015 and other lump sum risk transferring programs either in effect (or approved by corporate action and/or collective bargaining efforts) or communicated in writing before that date will be “grandfathered” for purposes of this change.  To rely on the employee communication, it has to state an “explicit and definite intent” to adopt the de-risking program.  Therefore, plan sponsors will need to review their communications carefully to make sure they are sufficiently clear to qualify for this rule.


Monday, July 13, 2015

Grooms Wedding RingTwo years after recognizing same-sex marriages for purposes of federal law, the U.S. Supreme Court has gone a step further, requiring that all states recognize same-sex marriages as valid if they were valid in the jurisdiction where they were performed.  Further, states are required to license same-sex marriages no differently than opposite sex marriages.  In short, the Supreme Court struck down existing state bans on same-sex marriage.

Effect on 401(k) Plans and Other Qualified Plans: 401(k) and other qualified retirement plans are not impacted by Obergefell, since the previous Windsor decision, along with guidance issued by the IRS following Windsor, already required qualified retirement plans to recognize same-sex spouses.  Following Windsor, same-sex marriages were to be treated no differently than opposite-sex marriages for all purposes, including automatic survivor benefits (spousal annuities), determining hardship withdrawals, and qualified domestic relations orders (QDROs)).

Effect on Medical Plans:  Sponsors of insured medical plans are bound by the terms of the insurance contract – and therefore have little discretion on the matter of same-sex coverage.  The providers must write their policies to comply with applicable state law and the plan sponsor buys the policy subject to those terms.

On the other hand, self-funded medical plans may define their own terms.  They are governed by ERISA, and as such, state law is largely preempted.  Accordingly, any state requirement that the plan cover same-sex spouses may be preempted.  Moreover, there is no federal law which mandates coverage of spouses (although if it did, “spouse” would include a same-sex spouse).  In the absence of a federal law requiring coverage for spouses, a plan sponsor may still choose whether or not to cover some or all spouses — although treating same-sex spouses differently than opposite-sex spouses is not without risk.  There have been a number of challenges asserted with respect to plans which do not provide same-sex coverage and those challenges are likely to escalate.  In short, while the Obergefell decision does not on its face compel same-sex spousal coverage under self-funded medical plans, the decision coupled with the trend of legal developments in this area creates an increased level of exposure for employers who offer spousal coverage for opposite-sex spouses but not for same-sex spouses.

In a previous blog we discussed ramifications of the Obergefell decision on domestic partner benefits.  See HERE.

Thursday, July 9, 2015

Guy GrabbingLast week the Securities and Exchange Commission (SEC) proposed a new Rule 10D-1 that would direct national securities exchanges and associations to establish listing standards requiring companies to adopt, enforce and disclose policies to clawback excess incentive-based compensation from executive officers.

  • Covered Securities Issuers. With limited exceptions for issuers of certain securities and unit investment trusts (UITs), the Proposed Rule 10D-1 would apply to all listed companies, including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies. Registered management investment companies would be subject to the requirements of the Proposed Rule only to the extent they had awarded incentive-based compensation to executive officers in any of the last three fiscal years.
  • Covered Officers.   The Proposed Rule would apply to current and former Section 16 officers, which includes a company’s president, principal financial officer, principal accounting officer (or if none, the controller), any vice-president in charge of a principal business unit, division or function, and any other officer or person who performs policy-making functions for the company. Executive officers of a company’s parent or subsidiary would be covered officers to the extent they perform policy making functions for the company.
  • Triggering Event. Under the Proposed Rule, the clawback policies would be triggered each time the company is required to prepare a restatement to correct one or more errors that are material to previously issued financial statements and would be applied to covered officers even in the absence of any misconduct. Changes to a company’s financial statements that arise for reasons other than to correct an error (g., change in accounting principles, revision for stock splits and adjustments to provisional amounts related to a prior business combination) would not trigger any required recovery action.
  • Three-Year Lookback. A company would be required to recover excess incentive-based compensation received by covered officers within the three completed fiscal years prior to the date the company is required to prepare the accounting restatement. Under the Proposed Rule 10D-1, an accounting restatement would be treated as required on the earlier of: (1) the date the company concludes or reasonably should have concluded that its previously issued financial statements contain a material error; or (2) the date a court, regulator or other authorized body directs the company to restate a previously issued financial statement to correct a material error. For example, if a company that operates on a calendar year determines in November 2018 that a previously issued financial statement contains a material error and files the restated financial statements in January 2019, the recovery policy would apply to all excess incentive-based compensation received by covered officers in 2015, 2016 and 2017.
  • Incentive-Based Compensation. Under the Proposed Rule, incentive-based compensation is any compensation that is granted, earned or becomes vested (in whole or in part) due to the achievement of any financial reporting measure (g., revenue, operating income and EBITDA) or performance measures based on stock price and total shareholder return. Incentive-based compensation generally would not include salary, discretionary bonus payments, time-based equity awards, non-equity awards based on achievement of a strategic measure (e.g., consummation of a merger) or operational measures (e.g., completion of a project) or bonus pool awards where the size of the pool is not based on satisfaction of a financial reporting measure performance goal. However, if a covered officer earns a salary increase based (in whole or in part) on the attainment of a financial reporting measure, the increase could be considered a non-equity incentive plan award and subject to recovery under the Proposed Rule 10D-1.

For purposes of applying the three-year lookback period, incentive-based compensation would be deemed received in the fiscal period during which the financial reporting measure specified in the incentive-based compensation award is attained, even if the payment or grant occurs after the end of that period. Consequently, the date of receipt would depend upon the terms of the award. For example, if an award is granted based on satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when that measure was satisfied. However, if an equity award vests upon satisfaction of a financial reporting measure, the award would be deemed received in the fiscal period when it vests. Any ministerial acts or other conditions necessary to effect issuance or payment (e.g., calculating earned amounts or obtaining board of approval) would not be determinative of the date the incentive-based compensation is received by the covered officer.

  • Determining Recoverable Amount.    The amount subject to recovery would be the amount of incentive-based compensation received by a covered officer that exceeds the amount the officer would have received had the incentive-based compensation been determined based on the accounting restatement. Although the Proposed Rule does not specify a means of recovery, it does offer guidelines for determining the recoverable amount under different types of incentive-based compensation arrangements.
    •  Cash Bonus Pool Awards. The company would reduce the size of the aggregate bonus pool based on the restated financial reporting measure and if the reduced bonus pool is less than the aggregate amount of individual bonuses received from it, the excess amount of an individual bonus would be the pro rata portion of the deficiency. If the aggregate reduced bonus pool would have been sufficient to cover the individual bonuses received from it, then no recovery would be required.
    • Equity Awards. The method of recovering equity awards would depend on the status of the award. With respect to shares, options or SARs still held by the covered officer at the time of recovery, the recoverable amount would be the number received in excess of the number that should have been received applying the restated financial reporting measure.   If the options or SARs have been exercised but the covered officer still holds the underlying shares, the recoverable amount would be the number of shares underlying the excess options or SARs applying the restated financial measure. However, if the shares have been sold, the recoverable amount would be the sale proceeds received by the covered officer on the excess number of shares. In all situations, the covered officer’s payment of any applicable exercise price would be taken into account.
    • Nonqualified Deferred Compensation. The covered officer’s account balance or distributions would be reduced by the excess incentive-based compensation contributed to the nonqualified deferred compensation plan and any interest or earnings accrued thereon. In addition, for retirement benefits under pension plans, the excess incentive-based compensation would be deducted from the benefit formula, and any related distributions would be recoverable.
  • Exceptions to Recovery. Proposed Rule 10D-1 provides for two limited exceptions to recovery.
    • Impracticable Recovery. Recovery would not be required if determined by the company’s committee of independent directors (or in the absence of such a committee by a majority of the independent board members) to be impracticable because the direct costs of recovery would exceed the amount subject to recovery. However, before concluding that recovery would be impracticable, the company must make a reasonable attempt at recovery and furnish the exchange with documentation of its efforts. This and all other determinations made by a company under Proposed Rule would be subject to review by the listing exchange.
    • Violation of Home Country Law. Recovery also would not be required if it would violate the company’s home country law; however, the company would be required to obtain an opinion of home country counsel (acceptable to the applicable national securities exchange or association) that recovery would result in such a violation. In an effort to deter countries from changing their laws in response to this exception, the Proposed Rule would limit application of this exception only to laws adopted prior to the date of publication of the Proposed Rule in the Federal Register.

Under either exception, a company would be required to disclose why it decided not to pursue recovery of the excess incentive-based compensation.

  • Prohibited Indemnification or Reimbursement. A company would be prohibited from mitigating or otherwise entering into an arrangement designed to avoid or nullify the effect of any required recovery, including indemnifying a covered officer against the loss of excess incentive-based compensation or paying or reimbursing the officer for the purchase of an individual third-party insurance policy to fund potential recovery obligations.
  • Disclosure Obligations. The recovery policies would be a required exhibit to the company’s annual report on Form 10-K. Additional disclosures would be required in the company’s annual report and any proxy and consent solicitation materials requiring executive compensation disclosure if at any time during its last completed fiscal year the company either prepared an accounting restatement that required recovery action or had an outstanding balance of excess incentive-based compensation. The SEC also proposes requiring a company to make the appropriate amendment to the Summary Compensation Table for the fiscal year in which the amount recovered was initially reported and be identified by footnote.
  • What’s Next. The Proposed Rule is subject to a 60-day comment period following its publication in the Federal Register. The SEC is soliciting comments on virtually every aspect of the Proposed Rule so the final version of the rule could possibly reflect significant changes. Exchanges will have 90 days after the adopted version of Rule 10D-1 is published in the Federal Register to file its proposed listing rules, which must be effective no later than one year following that publication date.

Listed companies must adopt recovery policies within 60 days after the exchanges’ rules become effective and begin enforcing such policies on all incentive-based compensation received by covered officers (current and former) as a result of satisfaction of a financial reporting measure based on financial information for any fiscal period ending on or after the effective date of Rule 10D-1.   Failure to adopt and enforce the required recovery policies would subject a company to delisting.


See also this client alert Securities group posted on

Wednesday, July 8, 2015

Hand Over the MoneyThe IRS has clarified its correction guidance recently to say that errors made in overpaying participants for their benefits can be cured by employer make-up contributions, rather than by pursuing participants and beneficiaries for the overpayments they have received. In issuing this clarification, the IRS has aligned itself with the views of the Department of Labor, which has issued advisory opinions that date back to the 1970s that essentially take the same position.

This avenue of correction is particularly welcome given the apparent reluctance of at least some courts to require repayments by overpaid participants. A federal district court recently allowed a participant to use equitable estoppel as a basis to prevent a pension plan from recovering overpayments and to prevent the plan from reducing future benefit payments. In Paul v. Detroit Edison Co., Case No. 13-14256 (March 30, 2015), the United States District Court for the Eastern District of Michigan found in favor of the plaintiff-participant on the strength of statements by the participant that he questioned a company representative about the accuracy of his benefit computation during his retirement interview and received assurances from the company representative that the calculation was correct. As it turns out, the company representative was mistaken in the assurances he provided to the participant. In reaching its decision, the fact that seemed most relevant to the district court was the failure of the company representative to investigate further after the participant had questioned the original calculation. Prior Sixth Circuit precedent suggests that an estoppel claim needs to be supported by gross negligence amounting to constructive fraud. In the Paul case, the district court found that the company representative’s assurances regarding the accuracy of the original benefit calculation made without further investigating its accuracy following the concern raised by the participant, was conduct sufficiently negligent to amount to a constructive fraud.

The court reached its conclusion favoring the plaintiff despite the fact that the benefit calculation contradicted the governing plan documentation and despite a written disclaimer signed by the participant and his spouse disclaiming any guaranty concerning the accuracy of the benefit calculation provided to him. The court also reached this determination even though the plan administrator, during the administrative claims stage, had agreed to forgo recovery of an excess $14,000 paid as part of a partial lump sum payout and sought only to prospectively adjust the participant’s monthly annuity payment by $54.42 from an original monthly amount of $772.17 to $717.75. The court concluded that the plan could not reduce the plaintiff’s benefits and had to return the plaintiff “to the same position he would have been in had the representations been true.”

The moral of this story for plan administrators and employers alike is to exercise care in its less formal communications with participants about the nature of benefit calculations. From a policy perspective, this is arguably a poor decision because it could have the impact of discouraging plan administrators and employers from engaging in less formal discussions with participants who have questions about their benefit calculations.

Monday, July 6, 2015

ACAIn Roger Miller’s 1964 hit by the above name, he tells the tale of “a man of means by no means,” a man just scraping to get by. While he may not have a phone, a pool, pets, or cigarettes (and really, what does he need that last item for anyway?), after the Supreme Court’s 6-3 decision on June 25, however, such a man might be able to secure a premium tax credit to help pay for health insurance (yes, we realize he’d probably be Medicaid eligible, but just work with us here).

But what does the ruling mean for employers? At first, it might appear that it doesn’t mean very much; life under the Affordable Care Act will continue to move along much as it has for the last few years. That’s basically true, but there are some points to consider:

  1. This solidifies that the employer “play or pay” mandate is now effective nationwide. Because an employee must receive a premium tax credit to trigger the penalty, a decision the other way would have rendered the mandate ineffective in states with federal exchanges.
  2. For employers perhaps continuing to adopt a “wait and see” (or “ostrich,” depending on your point of view) approach to ACA implementation, the truth is that you’re already late. But given this decision, now is the time to start, if you haven’t already, getting your offers of coverage and reporting requirements in a row.
  3. This isn’t changing without legislation from Congress (and, really, what’s the likelihood of that in this political climate?). The Supreme Court’s decision basically said that Congress clearly intended for subsidies to be available for policies purchased through federal exchanges (more on that below). The Supreme Court could have followed the reasoning of one of the lower courts and said that the statute was ambiguous and the IRS’s interpretation was reasonable so it would be upheld. However, had they followed that analysis, it could have theoretically left the door open for the next administration to change the rule and say that subsidies were only available through State-run exchanges (the likelihood of that is another matter). By ruling the way they did, the Court basically left it up to Congress to change the law, if they want it changed.

That last piece of the analysis is interesting because, despite ruling for the government, the Chief Justice, in the majority opinion, took Congress to task on how the law was written. Specifically, the opinion says, “The Affordable Care Act contains more than a few examples of inartful drafting” and, “the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.” For those of us who deal with this law frequently, neither of those statements is a surprise. And yet, despite this apparent lack of artful, thoughtful drafting, the Court nevertheless was able to discern a clear enough Congressional intent to reach its result. To us, it seems like an argument only a lawyer could love.

Thursday, July 2, 2015

The calculation of the minimum wage causes much uncertainty for companies. Now, the first court decisions have been published that provide for a certain legal security on this matter. In its judgment of 13 May 2015 – 10 AZR 191/14, the Federal Labor Court decided that the minimum wage is to be observed for holidays and in the calculation of the continued payment of wages during sickness. According to a decision of the Labor Court of Düsseldorf (judgment of 20 April 2015 – 5 Ca 1675/15, not yet legally-binding), a performance bonus may also form a component of the statutory minimum wage.

For the first time ever, Germany now has introduced a statutory minimum wage at a gross amount of currently € 8.50 per hour, pursuant to the new Minimum Wage Act (Mindestlohngesetz, MiLoG), effective as of 1 January 2015. Lower wages are still possible until 31 December 2017, inter alia, on the basis of collective bargaining agreements, while generally binding collective agreements may stipulate higher hourly wages. The minimum wage must be granted every month and not on an annual average. The aforementioned decisions answer the question of how a company must calculate minimum wages. Whether or not supplements, variable compensation and special payments are to be included in the wage and, thus, cause the monthly base salary to be exceptionally lower, seems to depend on whether the wages – other than, for example, contributions to capital formation – have a “direct relation to the work performance.” Even if an employee does not actually perform work, such as on holidays or during illnesses or while on vacation, the minimum wage must be observed.

Thus, if the minimum wage is only reached when other compensation components are added to the monthly base salary, employers must still ensure that the specifications of the Minimum Wage Act are observed. If the (continued payment of) compensation must be granted due to provisions other than the Minimum Wage Act, the minimum amount is determined in accordance with such other payments. If subcontractors are commissioned, companies should consider to protect themselves as contracting bodies by using warranties and indemnity declarations in order to ensure that the Minimum Wage Act is observed by such contractors. This effectively limits liability risks for the observance of the Minimum Wage Act by service and work contractors.

The calculation of the minimum wage remains difficult and further case law should be awaited. Companies that modify their compensation systems from case to case, should observe documentation duties and obtain warranties and indemnity declarations from their contractors in order to reduce their risks.

Wednesday, July 1, 2015

Gavel and RingsAs has now been widely reported, the Supreme Court ruled on June 26 (the second anniversary of the Windsor decision) that same-sex couples have a right to marry in any part of the United States. Despite being hailed as a victory for marriage equality, as this New York Times article points out, it may not be such happy news for currently unwed domestic partners. Specifically, there is a concern, as the article points out, that employers who previously extended coverage to domestic partners out of a sense of equity may now decide not to since both opposite-sex and same-sex couples can now marry.

As the article mentions, there was a concern at one time that domestic partnership rules would be used by some employees to cover individuals with whom they are not really in a committed relationship. Given that not all states have registration requirements or clear standards, it was largely up to employers to set the standards for what constituted enough of a commitment for a domestic partner to warrant coverage. The difficulty was that employers had to balance not covering individuals who really were not in committed relationships with setting a standard low enough that those who really were in such relationships could qualify. The article says that it does not appear that this was really a problem, but of course, the validity of such relationships are more difficult to verify than a marriage.

What the article also fails to point out is that there are some valid reasons why employers may want to eliminate coverage for unmarried domestic partners. Health coverage provided to a spouse is generally nontaxable under federal and state laws. However, domestic partnerships, by contrast, are subject to a patchwork of various rules ranging from essentially marriage equivalence in some states to complete non-recognition in others. This means that, in many cases, domestic partner health coverage results in imputed (that is, non-cash) income to employees for federal and some state purposes. The calculation of that imputed income is not 100% clear and the administration of those benefits can be complex.

Many employers who saw extending coverage to same-sex couples as important were willing to suffer those difficulties and take on that risk of the IRS or state agencies second-guessing their calculations when marriage was not uniformly available to those couples. Now that it is, those employers have to engage in a cost-benefit analysis to determine if the complexity and risk are worth it on a going-forward basis.

Additionally, it is unclear what the effect of state domestic partner and civil union laws will be after the Obergefell decision. Even though marriage is now available to same-sex couples, the decision did not remove those laws from the states’ books. What movement, if any, states make in this regard will likely influence what employers do going forward as well.

The talent recruitment marketplace will eventually sort this out, but in the interim, employers should at least consider evaluating whether offering unmarried domestic partner benefits continues to be important as part of their recruitment and retention strategy.