Archive for the 'COBRA' Category

Department of Labor Releases New Model COBRA Subsidy Extension Notices

January 14th, 2010

The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) COBRA page has the model notices updated for the extension provisions of the 2010 Department of Defense Appropriations Act now available.

The notices can be found here:

http://www.dol.gov/ebsa/COBRAmodelnotice.html

Model Notices for New COBRA Subsidy Released

March 23rd, 2009

The American Recovery and Reinvestment Act of 2009 (ARRA) contains provisions which update COBRA and mini-COBRA laws.  ARRA requires employers to offer a subsidy to offset the cost of COBRA continuation.  Under ARRA, employers must notify COBRA qualified beneficiaries of the new subsidy.

As required by ARRA, the Department of Labor has created four model notices to assist employers, plan sponsors and administrators in complying with the new notice requirements.  Each of the model notices is applicable to a particular group of COBRA qualified beneficiaries.  The model notices and additional information about satisfying the notice provisions of ARRA can be found at:

http://www.dol.gov/ebsa/COBRAmodelnotice.html

The notices must be provided to COBRA qualified beneficiaries by April 18, 2009.

Please contact our office for more information or to speak directly with a benefits attorney about your individual situation.

The American Recovery and Reinvestment Act of 2009 Increases Requirements under the Health Insurance Portability and Accountability Act (HIPAA)

March 3rd, 2009

The American Recovery and Reinvestment Act of 2009 (ARRA) approved by Congress on February 13, 2009 and signed into law by the President on February, 2009, makes a number of modifications to the Health Insurance Portability and Accountability Act (HIPAA).  Title XIII of ARRA is entitled the Health Information Technology for Economic and Clinical Health Act (HITECH) and contains both the HIPAA provisions and provisions providing appropriations for health information technology (HIT) and requirements for the government and businesses that have government contracts.

The legislative changes that affect HIPAA create many new requirements, enforcement provisions and penalties for covered entities, business associates, vendors and others.  Many changes are focused on HIPAA’s privacy and security requirements and will require businesses to change the way they currently do business.  There are significant changes to all Covered Entities (defined under HIPAA as health care providers that conduct certain electronic transactions, health care clearinghouses, and health plans), but are most challenging for Business Associates (individuals or corporate persons that perform ANY function or activity involving the use of Protected Health Information (PHI), who now face a host of new requirements.

Business Associates Required to Comply with HIPAA Privacy and Security Rules

Under HIPAA, Business Associates were not directly regulated and were not subject to HIPAA’s penalty provisions.  Because HIPAA only required a contract between the Business Associate and the HIPAA-covered entity, the only sanctions Business Associates faced for failure to protect health information was a breach of contract claim.  However, ARRA makes significant changes to the way Business Associates are treated under HIPAA.

ARRA specifies that any entity that engages in health information exchanges or provides data transmission of PHI (including Personal Health Record (PHR) vendors and health information exchanges) is considered a Business Associate.  As such, these entities must enter into a business associate contract with the covered entity and will be subject to ARRA’s civil and criminal penalty provisions.

Additionally, ARRA requires that the administrative, physical and technical safeguards and the policy, procedure and documentation requirements of HIPAA’s security rule apply to Business Associates of a covered entity in the same manner as they apply to the covered entity.  These additional requirements must be incorporated into Business Associate contracts and agreements and include notification provisions for a breach and the application of ARRA’s criminal and civil penalties.   With regard to HIPAA’s privacy rules, Business Associates are prohibited from using or disclosing any PHI in a manner which is not in compliance with the Business Associate contract or agreement required terms under HIPAA.  These changes become effective February 17, 2010 (one year after the enactment of ARRA).

Notice to Individuals of Privacy and Security Breaches

ARRA also imposes certain notification requirements on covered entities and Business Associates in the event of a breach of “unsecured protected health information.”  A breach is defined as “the unauthorized acquisition, access, use, or disclosure of protected health information which comprises the security or privacy of such information, except where an authorized person to whom such information is disclosed would not reasonably have been able to retain such information”.  Unsecured protected health information is defined as protected health information that the covered entity or Business Associate has not secured via standards approved by the Secretary of Health and Human Services (Secretary). 

Generally, the notification of a breach must be provided “without unreasonable delay”, but in no case later than 60 days after the discovery of the breach or when the breach should reasonably have been discovered.  Since the 60 days is the outer limit for notification, if the full 60 day window is used, the covered entity or Business Associate involved in the breach must be prepared to justify their reasons for not providing notification of the breach sooner.  However, notice of a breach may be delayed provided that notification would hinder a criminal investigation and/or injure national security (as determined by a law enforcement official).

For Business Associates that discover a breach, the Business Associate must notify the covered entity of the breach or potential breach and the identify of all individuals affected or potentially affected.  For covered entities, notification must be made to individuals whose unsecured protected health information has been accessed, acquired or disclosed or is reasonably believed to have been accessed, acquired or disclosed as a result of a security or privacy breach.  In general, notification to affected individuals must be sent via first class mail.  However, where a breach involves 10 or more individuals whose contact information is out-of-date or deficient, notification must be posted to the covered entity’s website or published in major print or broadcast media. For a breach that involves 500 or more individuals, the covered entity involved in the breach must also give notice to prominent media outlets in the applicable jurisdiction or state.

Notice of all breaches must be provided to the Secretary.  If the breach affects 500 or more individuals, the covered entity involved in the breach must immediately notify the Secretary.  For breaches that affect less than 500 individuals, the covered entity involved in the breach may notify the Secretary of any breaches on an annual basis.

To the extent possible, all notices must contain:

A brief description of what happened, including the date of the breach and the date of the discovery of the breach (if known);

  • A description of the types of unsecured protected health information involved in the breach (e.g., social security number, date of birth);
  •  The steps individuals should take to protect themselves from potential harm as a result of the breach;
  •  A brief description of what the entity involved is doing to investigate the breach, to mitigate losses and to protect against further breaches; and
  •  Contact procedures for individuals to ask questions or receive additional information, including a toll-free telephone number and an e-mail address, web site or postal address.

Expansion of Accounting of Disclosures

ARRA changes the existing limitations on accounting for disclosures of health information to individuals who request the disclosure.  If a covered entity uses or maintains an Electronic Health Record (EHR), then individuals will be allowed to receive an accounting of the disclosures of PHI for treatment, payment and health care operations made from the EHR.  The period of mandated disclosure is limited to the 3 year period prior to the individual’s request.  A reasonable fee may be charged to the requesting individual, provided the fee is not greater than the labor costs involved in complying with the request.

The Secretary is required to adopted regulations that specify the information to be contained in the accountings within 6 months of ARRA’s enactment.  Covered entities that began using EHR prior to January 1, 2009 will be required to provide the accounting upon request effective January 1, 2014.  Covered entities that begin using EHR after January 1, 2009 will be required to provide the accounting upon request effective January 1, 2011.

Clarification of and Limits on Marketing and Fundraising

ARRA clarifies that marketing communications are not health care operations unless the communications:

  • Describes a health-related product or service that is provided by, or included in a plan of benefits of, the communicating covered entity;
  •  Is made for the treatment of the individual; or
  •  Is made for case management or care coordination for the individual, or to direct or recommend alternative treatments, therapies, health care providers or settings of care to the individual.

ARRA also limits the ability of a covered entity to receive remuneration for making non-marketing communications except for communications describing only a drug or biologic that is currently being prescribed for the individual receiving the communication, and any payment received by the covered entity in exchange for making the communication is reasonable (as defined by the Secretary), provided that:

  • The communication is made by the covered entity and the covered entity has a valid authorization from the individual receiving the communication, or
  • The communication is made by a Business Associate on behalf of the covered entity and the communication is consistent with the Business Associate contract or agreement between the covered entity and the Business Associate.

Individuals must be allowed to elect not to receive any fundraising communications, and must be allowed to “opt out” of having their information used by a covered entity for the purpose of fundraising.

Sale of Protected Health Information

Under ARRA, a covered entity or Business Associate is prohibited from directly or indirectly receiving payment in exchange for any protected health information unless the covered entity or Business Associate acquired a valid authorization from the individual.  The authorization must include the specification that the PHI may be sold or exchanged for remuneration.  Exceptions to this provision are made for:

  • Public health activities;
  • Research activities (provided the price reflects the reasonable costs related to the preparation and transmittal of data for such purposes);
  • Treatment of an individual;
  • The sale, transfer, merger or consolidation of a covered entity;
  • Certain Business Associate agreements where a covered entity provides remuneration to a Business Associate;
  • A request by an individual for a copy of that individual’s PHI; and
  • As otherwise allowed by the Secretary.

The Secretary must issue final regulations within 18 months of ARRA’s final enactment date and the prohibitions are effective 6 months after the issuance of the final regulations.

Notification Provisions Apply to Other Personal Health Record Vendors

ARRA extends its notification provisions to vendors of PHRs and their service providers should the vendor or service provider experience a breach of security or privacy, regardless of whether the vendor or service provider is considered a covered entity.  In the instance of a breach of privacy or security of PHI, PHR vendors and their service providers are required to notify each affected individual who is a U.S. Citizen or resident of the U.S. as well as the Federal Trade Commission.  Failure to provide the required notice will be deemed as an unfair and deceptive trade practice or act under the Federal Trade Commissions Act.

Because PHR vendors are not covered by HIPAA, ARRA requires that the Federal Trade Commission issue interim final regulations which will provide guidance for PHR vendors on the requirements for breaches of PHI.

Mandatory Restrictions on Disclosure of PHI when Requested by Individuals

Under ARRA, individuals are given the right to restrict the disclosure of PHI related to treatment, payment and health care operations provided:

  • The restriction relates to disclosure for purposes of payment or health care operations;
  • The restriction does not relate to disclosure for purposes of treatment; and
  •  The PHI relates only to an item or service for which the provider has already received payment in full.

Right of Individuals to Receive Electronic Records

If a covered entity maintains EHRs that contain PHI, ARRA provides individuals with the right to obtain a copy of their records in an electronic format or to request that the record be transmitted to a third party.  The covered entity may not charge the individual requesting the copies more than the total cost of labor incurred by the entity in transmitting the copies.

Clarification of the Minimum Necessary Standard

Pending additional guidance from the Secretary, a covered entity will be considered to be in compliance with the minimum necessary standard if, to the extent possible, the covered entity limits the disclosure to a limited data set or to the minimum data necessary to accomplish the intended purpose of the disclosure or use of the information.  The Secretary is required to issue guidance within 18 months of ARRA’s enactment.

Increase Use of De-Identifed Information

ARRA requires the Secretary to issue guidance on how covered entities can comply with requirements related to the use of de-identified PHI.  Such guidance must be issued within 1 year of ARRA’s enactment.

Enforcement and Penalties

ARRA authorizes the Secretary to conduct periodic audits of covered entities and Business Associates to ensure compliance with HIPAA and ARRA requirement.  The Secretary is also authorized to utilize civil enforcement provisions even if the action in question violated the criminal provisions, provided no criminal conviction is associated with the conduct.

The Secretary is required to impose civil penalties if a violation is due to willful neglect and to formally investigate any complaint if a preliminary investigation indicates the potential of violation due to willful neglect.  For cases involving violations where the individual did not know of the violation or where the individual would not have known of the violation by exercising reasonable diligence, corrective action rather than penalty may still be used.

Under ARRA, criminal enforcement for certain HIPAA violations is not limited to covered entities.  For purposes of criminal enforcement provisions, ARRA provides that “a person (including an employee or other individual)” is considered to have obtained or disclosed individually identifiable health information in violation of HIPAA if such information is maintained by a covered entity and the individual obtained or disclosed such information without authorization.

The Office for Civil Rights will receive any civil monetary penalties (CMPs) or settlements related to HIPAA security-related offenses.  Such funds will be used to fund the further enforcement of ARRA and HIPAA rules and requirements.

States’ Attorney General may bring a civil action under ARRA on behalf of state residents who have been or are threatened to be harmed by a violation to obtain injunctive relief or damages, as well as attorney fees.  Notice must be given to the Secretary and the Secretary is permitted to intervene.  The States’ Attorney General may not bring an action if a federal action by the Secretary is already pending.  These provisions only apply to violations that occur after February 17, 2009 (the date of enactment).

The Comptroller General must submit a report to the Secretary within 18 months of ARRA’s enactment that provides recommendations for determining a reasonable methodology for calculating an appropriate percentage of CMPs or settlements for individuals who have been harmed by a violation of HIPAA or ARRA.  The Secretary is required to issue regulations based on the Comptroller General’s recommendations within 3 years of ARRA’s enactment.

ARRA expands existing civil penalties into tiers and provides that the determination of the penalty amount must be based on the nature and extent of the violation and the harm caused by the violation:

  • Tier 1 applies where the violator did not know of the violation, and would not have known even with reasonable diligence of the violation. In such circumstances, the penalty is $100 per violation, not to exceed $25,000 for all such violations of identical requirement during the calendar year.
  • Tier 2 applies where the violation was due to reasonable cause rather than willful neglect. In such circumstances, the penalty is $1,000 per violation, not to exceed $100,000 for all such violations of identical requirement during the calendar year.
  • Tier 3 applies where the violation was due to willful neglect but the violation was corrected within 30 days of the violation. The penalty is $10,000 per violation, not to exceed $250,000 for all such violations of identical requirement during the calendar year.
  • Tier 4 applies where the violation was due to willful neglect and the violation was not corrected within 30 days of the violation. The penalty is $50,000 per violation, not to exceed $1,500,000 for all such violations of identical requirement during the calendar year.

Additional Guidance and Technical Standards

Within 60 days of the enactment of ARRA, the Secretary is required to issue guidance on what constitutes “unsecured” PHI and which specifies the technologies and methodologies that will render PHI unusable, unreadable or indecipherable to unauthorized individuals.  Guidance on such technologies and methodologies will be updated annually by the Secretary.

Within 180 days of enactment, the Secretary is required to issue interim final regulations which govern ARRA’s notification provisions and must designate an individual in each of the Department’s regional offices who will offer guidance and education on rights and responsibilities of covered entities, Business Associates and individuals with regard to PHI.

Effective Date of Changes

Unless otherwise specified in ARRA, the general effective date for the changes under ARRA is February 17, 2010, one year after the enactment of the law.  While the increased penalty provisions take effect immediately, many of the provisions have other effective dates and some do not have a clear date specified.  Additionally, some provisions will require regulations to be implemented, so these provisions may take two years or longer to take effect.

COBRA Premium Subsidy Provisions of The American Recovery and Reinvestment Act of 2009

February 23rd, 2009

On February 13, 2009, Congress passed The American Recovery and Reinvestment Act of 2009 (the “Act”).  The Act was signed into law by President Obama on February 17, 2008.  Included in the Act are provisions that make significant changes to COBRA continuation premium payment requirements.  These provisions will be effective for most plans effective March 1, 2009.

Provisions of the Act

The Act provides a federal government subsidy of COBRA continuation premiums for a maximum of 9 months for certain individuals who are COBRA qualified beneficiaries because of a covered employee’s involuntary termination of employment.  The federal government will subsidize 65% of the COBRA premium actually charged to an “assistance eligible individual” (AEI) for up to 9 months.  The subsidy applies to coverage under both the federal COBRA law and any state “mini-COBRA” laws (i.e., state continuation laws applicable to employers with fewer than 20 employees).

Under the Act’s provisions, a group health plan may only require an AEI to pay 35% of the COBRA premium that the AEI would otherwise be required to pay.  The federal government will reimburse an employer for the remaining 65% of the COBRA premium by allowing the employer to take a credit against the employer’s liability to deposit payroll taxes and federal income taxes withheld from employees’ compensation.  The credit is applied as though the employer or insurer had submitted an equivalent amount of payroll tax on the date the qualified beneficiary’s payment is received.

Assistance Eligible Individual

An “assistance eligible individual” is defined by the act as a COBRA qualified beneficiary who:

  • Is eligible for COBRA coverage at any time on or after September 1, 2008 and on or before December 31, 2009;
  • Elects COBRA coverage either during the original COBRA election period or during the special election period provided by the Act; and
  • Is a COBRA qualified beneficiary because of an involuntary termination of a covered employee’s employment (other than for gross misconduct) that occurs on or after September 1, 2008 and on or before December 31, 2009.

An AEI may be a covered employee or a covered employee’s covered spouse or dependent child who became a qualified beneficiary because of the involuntary termination of the covered employee’s employment.

Period of Coverage

The subsidy applies to periods of COBRA continuation coverage beginning after the enactment of the Act.  A “period of coverage” is the monthly (or shorter) period for which COBRA premiums are charged.  For group health plans using calendar months as the period of coverage, the subsidy applies beginning March 1, 2009.  The subsidy ceases to apply (and a plan administrator may again charge the full COBRA premium) as of the earliest of:

  • The date the AEI becomes eligible for coverage (not actually covered) under another group health care plan (other than plans providing only dental, vision, counseling, or referral services, a health care flexible spending plan, or a health reimbursement arrangement) or Medicare coverage; or
  • 9 months after the first day of the first month to which the subsidy applies; or
  • The end of the maximum COBRA coverage period required by law (including permissible early terminations); or
  • For an AEI who elects COBRA during the special enrollment period provided under the Act, the end of the maximum COBRA coverage period that would have applied if the AEI had elected COBRA coverage when first entitled to do so.

An AEI who becomes eligible for coverage under another group health plan is required to notify the plan providing COBRA coverage in writing.   An AEI who fails to provide the required written notice is subject to a penalty of 110% of the subsidy provided for the AEI after the date the AEI became eligible for the other coverage.

Subsidy Reimbursement

The subsidy does NOT apply to COBRA premiums for health care flexible spending accounts.  In situations where a group health plan charges less than the maximum permissible COBRA premium, 35% of the premium must be paid by the AEI or on the AEI’s behalf by someone other than the AEI’s employer or that employer cannot claim a subsidy credit until the group health plan has actually received the 35% of the COBRA premium as required by the Act.  An employer is only permitted to claim a subsidy credit of 65% of what the total COBRA premium would be if the amount actually paid by the AEI was 35% of the total COBRA premium.

High-Income Individuals

Although all AEIs are technically eligible for the subsidy, any AEI who is a “high-income individual” or the spouse or dependent of a high-income individual will be required to repay the subsidy as an additional tax (“recapture tax”) on the high-income individual’s individual tax return for the year in which the subsidy was provided.  A “high-income individual” is defined as a single taxpayer with modified adjusted gross income in excess of $145,000 or a married taxpayer filing jointly with federal modified adjusted gross income in excess of $290,000.  The modified adjusted gross income for this purpose is adjusted gross income determined without regard to Code §911 (relating to U.S. citizens or residents living abroad), Code §931 (income from sources in Guam, American Samoa, or the Northern Mariana Islands), or Code §933 (income from sources in Puerto Rico).

The subsidy recapture tax begins to phase in for a single taxpayer with federal modified adjusted gross income in excess of $125,000 or a married taxpayer filing jointly with modified adjusted gross income in excess of $250,000.  However, qualified beneficiaries may make a one-time election to waive the COBRA subsidy.  Details regarding the form and manner of this election are to be provided by the Treasury Department following enactment of this new law.

Special Election Period for AEIs

The Act also provides for a special election period for AEIs.  An individual who would be an AEI except that the individual does not have a COBRA coverage election in effect on the date of enactment of the Act must be given a second chance to elect COBRA coverage.  This special election period begins on the date of enactment of the Act and ends 60 days after the plan administrator provides the required notice to the individual.

COBRA coverage for an AEI who elects COBRA during the special election period begins on the first day of the first COBRA coverage period beginning after the date of enactment of the Act (March 1, 2009 for group health plans using calendar months as COBRA coverage periods).  COBRA coverage is NOT retroactive to the date the AEI originally lost coverage.  The COBRA coverage period for an AEI who elects COBRA during the special election period ends when COBRA coverage would otherwise have ended if the AEI had elected COBRA when initially eligible to do so after the qualifying event.  The period beginning on the original qualifying event date and ending on the first day of the first COBRA coverage period beginning after the date of enactment of the Act is disregarded when determining if the AEI had a 63-day significant break in coverage for purposes of applying pre-existing condition exclusions.

Generally, a COBRA qualified beneficiary is only permitted to elect COBRA continuation coverage that is the same as the coverage the qualified beneficiary had as of the date of the COBRA qualifying event.  The Act permits (but does not require) an employer to allow AEIs (including AEIs that have COBRA coverage without the special election) to elect a health care coverage option different from the health care coverage originally offered to the AEI under COBRA.  The COBRA premium for the different coverage cannot exceed the COBRA premium for the coverage in which the AEI was enrolled when the COBRA qualifying event occurred.  The different coverage must be coverage the employer is offering to its active employees at the time the AEI elects the different coverage.  Additionally, the different coverage cannot provide only dental, vision, counseling or referral services (singly or in any combination) and cannot be a health care flexible spending account or an on-site facility primarily providing first aid, prevention, or wellness care.  If an employer decides to offer the different coverage option to an AEI, the employer must provide the AEI an election notice and allow an election period of not less than 90 days.

Extension of Coverage for Certain Individuals

The Act also extends COBRA continuation coverage periods for certain individuals receiving Trade Adjustment Assistance benefits or pension benefits from the Pension Benefit Guaranty Corporation (PBGC).  The initial COBRA coverage period is extended for these two groups of COBRA qualified beneficiaries following a termination of employment or reduction in hours of a covered employee COBRA qualifying event:

  • If the covered employee has (as of the qualifying event date) a nonforfeitable right to receive any pension benefits directly from the Pension Benefit Guaranty Corporation, the maximum COBRA coverage period for the covered employee ends on the covered employee’s date of death;
  • If the maximum COBRA coverage period for the covered employee’s surviving spouse or dependent children ends 24 months after the covered employee’s date of death; or
  • If the covered employee is a Trade Adjustment Assistance-eligible individual (as of the date COBRA coverage would otherwise end because of the regular 18-month or 36-month COBRA coverage periods), the maximum COBRA coverage period ends on the date the covered employee ceases to be a Trade Adjustment Assistance-eligible individual.

Actions Required of Plan Sponsors

For most plan sponsors, beginning March 1, 2009, group health plan administrators must take all necessary actions to provide the 65% subsidy to AEIs.  Generally, this means ensuring that an AEI is only required to pay the reduced COBRA premiums for periods of coverage beginning on or after March 1, 2009.

If an AEI pays the full COBRA premium for the first or second period of coverage beginning after the date of enactment of the Act (i.e., periods of coverage for March and April 2009), the plan administrator must either:

  • Credit the subsidized portion of the premium against future COBRA premiums (if the plan administrator reasonably expects the overpayment to be fully applied to future COBRA premiums within 180 days); or
  • Refund the subsidized portion within 60 days.

For any individual who becomes a COBRA qualified beneficiary after the enactment of the Act, the group health plan administrator must include with all other required COBRA election notices and forms specific information about the availability of the subsidy.  A group health plan administrator must also provide notices to two groups of AEIs within 60 days after the enactment of the Act:

  • The first notice must go to all AEIs who currently have COBRA continuation coverage to advise them of the availability of the subsidy and the requirements to qualify for the subsidy; and
  • The second notice must go to any individual who is entitled to the special enrollment period (this includes an individual who previously made a COBRA coverage election but whose COBRA coverage ended before the enactment date because of non-payment of premiums).

The notice to these individuals must advise them of:

  • The availability of the subsidy;
  • The requirements to qualify for the subsidy; and
  • Additional information required by the Act, as well as providing the forms necessary for electing COBRA during the special election period.

Employers (or insurers, if applicable) will be required to file reports relating to the subsidy.  The specific types of reports and applicable deadlines will be determined in the future by the Treasury Department.  However, three types of reports are currently specified.  The employer (or insurer) must:

  • Attest that each employee receiving the subsidy was involuntarily terminated;
  • File an accounting to report the payroll tax credit taken for the reporting period and the estimated credits to be taken during the following reporting period; and
  • File a report of all covered employees, the amount of subsidy treated as a payroll tax credit for each employee and a designation as to whether the subsidy is for coverage of one individual or two or more individuals.

Conclusion

The Act, while very beneficial for COBRA eligible individuals, creates an additional administrative burden for plan sponsors when complying with COBRA requirements.  Additionally, the time period between the Act’s enactment and the date most employers are required to comply with the Act is very short.  Plan sponsors are encouraged to contact their benefits counsel immediately to ensure compliance prior to the Act’s effective date.  Please contact our office for more information.

Employment and ERISA Law Considerations When Reducing or Laying Off Employees

January 7th, 2009

According to the Administrative Office of the U.S. Courts, for the 12-month period ending June 2007, there were a total of 23,889 business bankruptcy filings.  For the same period ending June 2008, business bankruptcy filings had increased by more than 40% (33,822 filed for the 12-month period ending June 2008).  With the downturn of the U.S. economy, many companies are struggling to reduce costs in order to remain in business.

Unfortunately, during tough times, companies are forced to make hard decisions in order to survive.  One of the largest expenses for most companies is human capital and the associated costs, such as salaries and employee benefits programs.  As companies analyze whether to use terminations and/or layoffs as a means to control or reduce costs, they need to ensure that the analysis includes consideration of legal risks involved and ensure that the ultimate course of action complies with any applicable laws.  Some of the laws that should be taken into consideration include the Family Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), the Uniformed Services Employment and Reemployment Rights Act (USERRA), the Older Workers Benefit Protection Act (OWBPA), the Employee Retirement Income Security Act (ERISA), Equal Employment Opportunity (EEO) laws and the Consolidated Omnibus .Budget Reconciliation Act (COBRA).

For example, when determining which employees will be terminated and/or laid off, companies need to ensure that the criteria used is objective and does not create a disparate impact on a protected class.  One of the most common mistakes companies make is to use compensation as criteria for determining which employees will be reduced.  In many cases, employees with the highest wage rates in positions generally tend to be older because their salaries have increased with their work experience and time in a position.  Employers should ensure that they are using objective, legitimate business criteria to make their selections, so they do not leave themselves open to an age discrimination claim.

Additionally, depending on the size of the employer and the number of employees being laid off, companies may need to comply with The Worker Adjustment and Retraining Notification Act (WARN).  WARN is a federal law that requires that employers with greater than 100 employees (excluding part-time employees) provide 60 calendar days advance notice of mass layoffs.  A mass layoff is defined as a layoff that either (1) involves at least 50 employees who make up at least 33% of the employer’s work force, or (2) involves at least 500 employees.  Additionally, some states have enacted their own versions of the WARN Act that have lower thresholds which trigger a notice period.  This analysis can be complex for employers to determine whether these laws will apply to them, especially if there have been intermittent lay-offs of some workers during periods of slow downs.

Making the decision to reduce headcount in order to help a company survive is probably one of the toughest decisions an employer can make.  Frequently, an employer is focused on its financial situation and can overlook potential legal pitfalls associated with the decision. 

Companies should consult with legal counsel when they face these difficult situations so that they ensure they comply with all applicable laws and that they have as much legal protection as possible.  Please contact our office with any questions you have or for additional information.

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