Archive for February, 2008

Do You Have A FLSA Claim Just Waiting To Happen?

February 14th, 2008

The Fair Labor Standard Act (“FLSA”) is an extremely complex law, and, as such, it can be very difficult to ensure that your company’s overtime policies are in compliance with its requirements.  Even minor violations of the FLSA can be costly to companies as the statute contains a penalty provision that can allow for employee-plaintiffs to recover twice the actual back wages, as well as automatically awarding successful employee-plaintiffs their attorneys’ fees.

There are several common errors that a large number of employers are guilty of making, but which should be avoided (or corrected quickly) at all costs:

  • Automatically exempting salaried employees from overtime pay – Numerous employers make the incorrect assumption that if an employee is “salaried” rather than “hourly”, s/he is not eligible for overtime, but not all “salaried” employees are exempt.  In order to be exempt from overtime pay under FLSA, each individual must be evaluated to determine whether one of the statutorily allowed exemptions is applicable.
  • Incorrectly applying the executive exemption to assistant manager positions – In order to qualify for the executive exemption allowed under FLSA, an employee: must be paid a minimum salary amount, must regularly and routinely direct the work of at least 2 full-time employees, must either have the authority for or have input into the hiring, firing and promoting of other employees, and must have the primary duty of management of the department.  Just having a “manager” title and being salaried rather than hourly isn’t enough; the job description must meet the statute’s requirements for the exemption to apply.
  • Making automatic deductions from hourly employees for meal breaks – While this practice is not illegal, it can create problems for employers.  In both lawsuits brought by employees and in Department of Labor audits, an employer has the burden of proving the actual hours worked by hourly employees.  Employers will most likely have a very difficult time in proving that an employee took a full meal break each and every workday if the deduction was made pursuant to an automatic deduction policy.
  • Refusing to pay overtime that was not “pre-approved” per the company’s internal procedures – An extremely large amount of employer’s have a policy that overtime must be pre-approved by the employee’s manager.  The problems with such a policy begin when employers refuse to compensate an employee for overtime worked without that approval.  Under the FLSA, employers are required to pay for overtime worked with or without prior approval.  Any violation of this policy would need to be handled through an employer’s usual disciplinary process.
  • Accepting an employee’s waiver of overtime pay and/or allowing an employee to “bank” hours –  employers cannot agree to let employees earn extra money by working additional hours at regular pay, even if the employee requests the hours and agrees not to get overtime for those hours.  On the reverse side of this situation, employees cannot work overtime hours (e.g. over 40 hours in 1 week) and have those “extra” hours credited to a subsequent pay period in which s/he will not work their full 40 hours.  Although the FLSA doesn’t use this phrase, “nice guys finish last”, and an employer cannot use the employee’s request and agreement as a defense against an FLSA claim.

These VERY common mistakes can be potentially devastating to employers as these types of overtime actions have the potential to become class actions, depending on the number of affected employees.  To limit their potential exposure, employers should have their legal counsel review their pay and overtime policies and procedures to ensure that those policies and procedures fully comply with FLSA’s requirements.

Am I A Fiduciary Of Our Employer-Sponsored Retirement Plan?

February 12th, 2008

At the end of 2006, a number of class-action lawsuits were brought against plan sponsors and other plan fiduciaries of several Fortune 500 companies, alleging breach of fiduciary duties for subjecting plan participants to non-disclosed, excessive fees and expenses.  During 2007, some of these suits were dismissed, but the filing of the suits has raised the public’s awareness of the duties of a fiduciary, and heightened the scrutiny of a plan fiduciary’s actions.

In general, an individual becomes a fiduciary either by title or by action.  Under ERISA, plans are usually required to name a specific person, organization or association who will act as fiduciary.  Additionally, ERISA contains a definition of a fiduciary that can create the duties by action:  a fiduciary is a person or entity which takes any of the following actions with regard to a retirement plan –

  • Exercises control or influence over the management of the plan or it’s assets
  • Provides investment advice on plan assets for compensation
  • Has discretionary authority over the plan’s administration

Because of this broad definition, plan sponsors are almost always considered fiduciaries of their retirement plans, even if they have assigned other fiduciaries to manage the plan.

Fiduciaries are required to act with prudence and in the best interests of the plan and its participants and beneficiaries.  Under ERISA, if a fiduciary relies on the outside service providers/organizations in performing his/her duties, the original fiduciary must establish guidelines with which to monitor and ensure that the service provider/organization is acting within the requirements of a fiduciary – that is, prudently and in the best interests of the plan and its participants and beneficiaries.  Additionally, ERISA specifically addresses prohibited transactions that constitute a breach of fiduciary duty.  A plan fiduciary breaches his/her fiduciary duties by engaging in or allowing certain transactions between the plan and a “party-in-interest”, including lending of money, furnishing goods and services, and the using of plan assets for personal benefit. 

All fiduciaries to retirement plans (including plan sponsors) must take their fiduciary responsibilities very seriously.  It is a fiduciary’s duty to fully understand their duties to the plan, as well as the duties owed by all other plan fiduciaries.  A few areas that plan sponsors commonly neglect, which can leave a plan sponsor exposed to fiduciary risk are:

  • Ensuring that actual plan operations are in compliance with all governing plan documents and established procedures
  • Appointing a policy committee/individual to be responsible for the oversight of the retirement plan’s policies without providing the advice or training on the required duties and responsibilities of a fiduciary
  • Appointing an investment committee/individual to be responsible for the oversight of the retirement plan’s investment strategy without providing the advise and training on the required duties and responsibilities of a fiduciary

Employers who sponsor retirement plans are usually considered to be plan fiduciaries under ERISA, and are therefore exposed to the possibility of suits by plan participants for a breach of that fiduciary duty.  Employers should consult with an employee benefits attorney to either develop policies and procedures for their sponsored retirement plan, or review and amend the existing processes.  This advice and assistance can be invaluable in limiting a plan fiduciaries’ exposure to risk.

Recent FMLA Amendment — Leave for Servicemember’s Families

February 10th, 2008

On January 28, 2008, President Bush signed into law the National Defense Authorization Act of 2008 (NDAA), which amends the Family Medical Leave Act of 1993 (FMLA).  The NDAA includes provisions which provide families of servicemembers the right to unpaid leave of absence under certain circumstances.

First, the NDAA creates a new category of unpaid leave for eligible employees to take up to 12 weeks of leave “because of any qualifying exigency….arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the Armed Forces in support of a contingency operation.”  The NDAA does not include a definition of “qualifying exigency”, but it does call for the DOL to promulgate final regulations that will contain the definition.  Since there is no definitive answer yet what circumstances will qualify to trigger this right to leave, this provision is not yet effective.  It will not become effective until the DOL releases its final regulations.  However, employers are being encouraged to provide “qualified exigency” leave in the interim before the final regulations are available.

Second, the NDAA provisions extend the unpaid leave period for eligible employees from the FMLA’s 12 weeks to “a total of 26 workweeks of leave during a 12-month period to care for” a covered servicemember.  “Covered servicemember” is defined as a member of the “Armed Forces, including a member of the National Guard or Reserves, who is undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list, for a serious injury or illness.”  A “serious injury or illness” is defined as “an injury or illness incurred by the member in the line of duty on active duty in the Armed Forces that may render the member medically unfit to perform the duties of the member’s office, grade, rank, or rating.”  Unlike the “qualifying exigency” leave, this extended leave provision is effective as of January 28, 2008.

The NDAA limits the total amount of leave available under the FMLA to a combined total of 26 weeks in any 12 month period, provided that those 26 weeks include a leave to care for a covered servicemember due to serious injury or illness.  For example, if an eligible employee takes 12 weeks of leave under FMLA, then for the remainder of that 12-month period, only 14 weeks of leave would remain available under the NDAA amendments.  As with FMLA leave, the servicemember leave provided by the NDAA may be taken on an intermittent basis.

Employers need to immediately have their existing FMLA policies and procedures reviewed and amended to accommodate the NDAA changes.  Additionally, until the DOL issues final regulations which clarify some of the open issues left by the NDAA, employers need to tread very carefully when approached by employees with requests for military-related leaves.  Any concerns and questions should be reviewed with an employee benefits attorney to ensure the employer is compliant with the new amendments.

Related Video

LaRue v. DeWolff – Caution for Employers

February 5th, 2008

Recently, the Supreme Court heard oral arguments in LaRue v. DeWolff (450 F.3d 570 (4th Cir 2006)) on appeal from the Fourth Circuit.  This case focuses on 2 key issues with respect to remedies under ERISA – specifically, when, if ever, individuals or sub-categories of plan participants can recover Section 502(a)(2) damages and what equitable relief is available to participants under Section 502(a)(3).  Depending on the Supreme Court’s decision, employers may have reason to fear as this decision could expand the remedies available to plan participants under ERISA.

The Facts:  James LaRue, participant in his employer’s qualified 401(k) plan, issued instructions to the plan’s administrator (DeWolff) regarding changes to his 401(k) investment selections.  DeWolff did not carry out LaRue’s instructions, resulting in “losses” of approximately $150,000 to LaRue’s 401(k) plan.  LaRue brought suit against DeWolff alleging a breach of fiduciary duty under ERISA, seeking restitutionary relief under 502(a)(3).  The district court dismissed and LaRue appealed to the Fourth Circuit.  During this appeal, LaRue raised the issue of a claim against DeWolff under 502(a)(2), as well as the 502(a)(3) action.

The Fourth Circuit’s Decision:  The Fourth Circuit affirmed the district court’s dismissal.  With regard to the 502(a)(2) claim, the Court followed holding in Massachusetts Mutual Life Insurance Co. v. Russell (43 U.S. 134 (1985)) that rejects recovery under 502(a)(2) unless the recovery is “to the benefit of the plan as a whole”, not just for a participant or a subset of participants of the plan.  With regard to the 502(a)(3) claim, the court rejected LaRue’s equitable relief argument, deciding that “appropriate equitable relief” as used in 502(a)(3) should be interpreted as restitution at equity, which would require the defendant be wrongfully holding assets.  The court reasoned that LaRue’s claim alleged a failure to generate wealth against DeWolff, not wrongfully withheld assets; therefore, equitable restitution does not apply.  LaRue petitioned for and received a rehearing by the Fourth Circuit on the 502(a)(2) claim, and the Fourth Circuit re-confirmed its original decision that LaRue could not properly pursue a 502(a)(2) claim.  LaRue appealed the decisions to the Supreme Court.

The Future?:  The Supreme Court decision is not expected until late spring/summer of 2008, but employers and plan sponsors should keep watch.  Depending on their decision and the wording used in the opinion, this case could lead to an expansion under ERISA of the individuals who are allowed to bring a cause of action and whether the “equitable” relief available under ERISA allows for monetary damages to be paid to participants.

Another Nail in the Defined Benefit Coffin?

February 1st, 2008

Already this year, there is bad news for pension funds. According to Mercer during the first month of 2008 pension funds for American companies have lost $110 billion, which equates to about 8 percent of their value. That is a pretty heave hit for plans that have already been struggling. In effect, this hit wipes out these fund’s gains from 2007.

With the changes that DB plans must make to comply with the PPA and the declining equity markets, companies will continue to struggle to fund their plans and look at ways to decrease their obligations.

Everyone seems to have read or heard about the retirement crisis that the U.S. faces. The traditional DB pension plan has been in trouble for some time. As an illustration, in 2006 IBM announced that as of January 1, 2008, participants in their DB plan would not accumulate any more benefits. When IBM made this announcement their plan was fully funded and IBM was strong. Other companies such as UAL had already ended their plan prior to the IBM announcement.  

With a potential recession on the horizon and pension funds continuing to struggle, what does this mean for the traditional defined benefit (DB) pension plan? The bottom line is that the traditional DB plan from large employers is on the downturn. Employers and employees will need to look at other creative ways to fund their retirement dreams.

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