Archive for the 'General' Category

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.

Mergers and Acquisitions – Don’t Ignore ERISA Employee Benefit Plans

November 18th, 2008

Generally, there are two different ways that companies can grow their existing businesses – 1) obtaining new customers (organic growth) or 2) merging with or acquiring another company.  Many companies attempt to grow through mergers and acquisitions (“M&A”) as it can allow for the rapid growth of a company’s client base and/or business capabilities.  However, M&As can pose numerous legal challenges to businesses.  One of the most often overlooked area in any M&A deal is employee benefits plans.

During a M&A deal, companies generally perform due diligence across all areas of the target company to identify issues that need to be addressed during the negotiation phase of the deal.  If employee benefits plans are not included in this due diligence, an acquiring company can discover that it has inadvertently become the owner of significant employee benefits plan problems.  While problems that arise in the area of employee benefits plans do not generally become “deal breakers”, ensuring that any and all benefits issues are identified and addressed before the final agreement is signed can avoid major headaches in the future.

Benefit plan issues can vary depending on the type of deal that is being contemplated – either an asset purchase or a stock purchase.  In an asset purchase, the due diligence required for employee benefits plans could be reduced if the agreement does not include the buyer assuming liability for employee benefit plans.  However, even in that situation, due diligence on the benefit plans should still be conducted to ensure that the buyer has a complete picture of the seller’s business.

In a stock purchase deal, or in an asset purchase deal where the buyer is assuming liability for benefit plans, the buyer needs to ensure that significant due diligence is conducted on the existing benefit plans.  Generally, this due diligence should include:

  • Identifying all employee benefit plans, programs and practices currently in existence – both formal written plans and informal, unwritten plans.
  • Obtaining all pertinent documents for each plan identified (e.g., plan documents, summary plan descriptions, Form 5500s, annual nondiscrimination testing and audits, determination letters, third party administrator contracts).
  • Reviewing all documentation to ensure the plans are currently compliant with applicable laws and looking for potential problem areas (e.g., accelerated vesting on change of control, unfunded liabilities, funding arrangements for nonqualified deferred compensation plans).
  • Requesting disclosure on currently pending or threatened claims based on benefit plans and on whether any governmental audits have been commenced or are pending.
  • Identifying potential problems to be addressed during negotiation of the deal.

As stated earlier, issues identified during the due diligence process for employee benefits plans are generally not severe enough to stop a deal from closing.  However, if properly addressed during the negotiation phase, they can be factored in with all the other components in the decision making process.  Where these issues are not properly addressed, they can become a significant concern for the buyer after the deal has completed. 

Benefits counsel can assist in completing comprehensive due diligence of a target company’s benefit plans to ensure that the acquiring company does not get blind-sided by benefit issues in the future.  Please contact our office for additional information or to talk to an attorney about your particular situation.

Periodic Audits of ERISA Plans and Employment Policies and Practices Can Prevent Costly Mistakes

June 10th, 2008

In today’s competitive business environment, employers and HR personnel are all too often put in the position of having to pay insufficient attention to employment and employee benefits legal compliance until problems arise – resulting in dire and costly consequences.  Failure to comply with the complex and ever-changing laws in these areas often results in one or a combination of: substantial penalties, steep fines, governmental agency audits, and / or litigation.  Unfortunately, all of these options usually have a very expensive price tag attached.

Consider the following:

Employment Practices

  • 67% of all employment cases that litigate result in a judgment for the plaintiff
  • 1/3 of employment case verdicts award punitive damages
  • 75% or more of the total judgment amount awarded in an employment case is usually for punitive damages
  • Based on 2000 data, median compensatory awards for employment cases were:
    • $268, 926 for age discrimination
    • $120,951 for race discrimination
    • $100,000 for gender discrimination
  • Median compensatory awards rose from $78,592 to $218,000 between 1994 and 2000

Employee Benefits Plans

  • From 2000 to 2001 the number of ERISA civil suits filed increased from 9,124 to 10,292 (almost 13%)
  • In 2001, the Department of Labor investigated 4,862 businesses and recovered $648 million in penalties and damages
  • In 2000, the average defense cost of a fiduciary liability claim was $124,000
  • In 2000, 47% of fiduciary liability claims were based on benefits disputes (including denial of benefits)

How can an employer protect itself:

Self-Audits are reviews that companies usually undertake with the assistance of benefits counsel to identify legal compliance gaps in their plans, policies and/or operational procedures.  The audit focuses on areas that could place the company at risk for governmental fines and penalties, as well as expose the company to an increased risk of lawsuits.  These audits can be done for either or both a company’s employment practices and employee benefits plans. 

The scope of an audit can vary from a basic overview of plans, policies and procedures with identification of possible compliance gaps, to a comprehensive assessment and analysis with specific recommendations for methods of correction of any identified gaps and drafting and/or updating any needed plans, policies and procedures.  By conducting these voluntary self-audits, a company can significantly reduce the costs of future problems – costs that can have a huge impact on the company’s bottom line.

Employers should consider performing self-audits at least annually.  Additionally, when there are major changes to the law or major changes to the business, a self-audit should be done.  Employers should work with professionals with experience conducting these audits.  Employment and benefits lawyers can assist employers in auditing their policies, practices and plans.  Proactively identifying and addressing issues can be the best protection from legal action for an employer.

Record Retention Policies — An Essential for Employers

April 2nd, 2008

These days with more and more type of records that a business creates and which are recognized by courts, businesses need an effective records retention policy as part of their overall policy and procedure strategy.  Companies need to ensure compliance with both state and federal laws that govern a company’s records.

For instance, the Sarbanes-Oxley Act of 2002 created record retention requirements that apply to all companies, both publicly traded and privately held.  Section 802 which provides that it is a crime for someone to intentionally destroy, alter, mutilate, conceal, cover up or falsify any records, documents or tangible objects that are involved in (or could be involved in) a U.S. government investigation or prosecution of any matter or in a Chapter 11 bankruptcy filing.

A records retention program can protect businesses in litigation and disputes that arise during the course of business.  These programs help ensure compliance with federal and state laws and regulations.  Additionally, evidence of a clear and consistently enforced records retention program, provided it is enacted for valid purposes, will go a long way to convince courts that the destruction was reasonable and will generally provide a “safe harbor” under current rules of civil procedure.

However, while it is important to keep clutter to a minimum, a company can get into difficulties by tossing the wrong paper or deleting an important e-mail.  It is important to have all relevant documents during a lawsuit.  Not having a document can mean the difference between winning and losing in a lawsuit.  A judge or jury may be permitted to conclude that the document contained information detrimental a business should they not be able to product it.

Any policy a company creates should cover both hard copy documents and electronic documents.  Now that electronic discovery has been recognized in law suits, companies need to ensure they review their electronic records with the same careful attention as other documents.  Electronic records include records stored in email; on employee’s voicemail, computers, PDAs, cell phones, external drives, CDs, and DVDs; and on company networks and backup systems.

A comprehensive policy should cover how long to keep a document, when and how to store the document, and how to dispose of the document, will depend on the type of document.  It should also include details on how the destruction of documents should be handled.  Things to consider in this should include how electronic records will be destroyed as well how confidential information will be destroyed.  Additionally, the policy should include a procedure that preserves all records once a company is reasonably anticipates litigation. 

It is important for the success of the policy that employees be trained and be held accountable for compliance.  Additionally, a periodic audit should be held to ensure that the appropriate records are being destroyed. 

Due to the magnitude of legal requirements, as well as the specific needs of each company, it is advisable to consult legal counsel before implementing a tailored records retention policy.  In addition, businesses should consider any industry standards that may affect the holding period of records due to unusual legal circumstances.

Succession Planning – It’s Not Just for CEOs

March 14th, 2008

The 79 million Baby Boomers in the U.S. continue to charge full-speed toward retirement age.  The oldest of the Boomers will turn 65 in 2011, and from that point on, it is likely that more workers will be leaving the workforce than will be entering it.  Companies need to face the reality that there will soon be a significant gap in the workforce, assess how it will impact their organization, and implement a company-wide succession planning project.  According to a recent report released by the Aberdeen Group, succession planning is underutilized by most small and mid-sized businesses.  Only 35% of small and mid-sized businesses have a succession plan in place.

Although succession planning is most frequently used for presidents, CEOs, or other senior management personnel, it can be a useful tool for virtually all levels of an organization, regardless of the organization’s size.  Many businesses have positions that require specialized knowledge, skills and/or abilities.  If the employee that filled such a position retired or left the company, the company needs to ensure that there is someone immediately available with the same specific skill set to take over.  This is especially crucial for small to mid-sized businesses, where there is little-to-no employee redundancy, and everyone’s job is vital to conducting ongoing business activities.

A company’s first step in succession planning should be to conduct a risk evaluation.  This can be accomplished by examining every position in the company and assessing (1) possible retirement plans of the individual working in the position, (2) importance of the position in relation to the overall functioning of the company, and (3) current status of possible replacements for the individual working in the position.

Once the risk evaluation is complete, the company should develop a strategy for minimizing the potential impact of retirements by various HR tools, including succession planning and updating recruitment and training policies.  Some potential avenues to explore include:

  • Create consulting agreements with senior managers that would provide access to their knowledge and experience after retirement
  • Create policies and procedures allowing for part-time return to work after retirement
  • Update existing training policies and procedures to allow for accelerated training opportunities for key positions

Keep in mind that employment and employee benefits issues could arise as a result of the succession planning.  For example, re-hiring retirees can have an impact on benefits eligibility.  Consulting with your benefits attorney during the risk evaluation and strategy development can identify and correct employment and benefit issues before the employer implements policies and procedures that can create problems in these other areas.

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