Washington Workplace Law

Employers with severance, change in control or other deferred compensation obligations that permit employees to determine the timing of the payment by deciding when to execute releases or other documents should determine whether those agreements or arrangements violate the Internal Revenue Code (the “Code”). If so, there is an opportunity to correct the problem, but it is important to act before the end of the year.

The Potential Tax Problem

Internal Revenue Code section 409A governs non-qualified deferred compensation arrangements, including many change in control, severance and employment arrangements (generally, “arrangements”). Failure to comply with section 409A results in negative tax consequences to employees covered by the arrangements.

Under many of these arrangements, payments are available only if the employee signs an additional agreement, often a release of claims or a noncompetition agreement. For example, some employment agreements provide for payment of severance after termination of employment, but only if the employee signs a separate release of claims. Depending on the wording of the employment agreement, payment might be scheduled on a date certain (such as 60 days after termination), while other agreements set payment based on when the employee chooses to sign the document.

In 2010, the IRS announced that some arrangements that schedule severance payments based on when the employee signs the document may violate section 409A. The IRS reasoned that an employee should not be able to choose the year in which payment would be made and therefore reduce taxes.

We note that this problem does not affect many arrangements. A severance arrangement will not be subject to challenge under section 409A if:

• Severance is paid only upon involuntary separation from service or resignation due to "good reason" as defined by section 409A; and
• The total amount of severance is less than the lower of (i) twice the employee’s annual compensation, or (ii) $500,000.

In addition, section 409A will continue to have no application to payments that are only briefly deferred (i.e., “short term deferral”).

The IRS will permit employers to amend potentially noncompliant arrangements in effect before January 1, 2011 by adopting a correction provision approved by the IRS. However, the amendment must be adopted by December 31, 2012.

What Employers Should Do

Employers can avoid section 409A problems due to these severance issues by taking the following steps before the end of the year for all arrangements that first came into effect in 2011 and 2012:

1. Review each arrangement to determine whether it is subject to section 409A and, if so, whether its terms may create a concern under the IRS announcement.
2. If there is any question whether the severance arrangement poses problems under section 409A, consult with employment or benefits counsel.
3. If there is a concern under section 409A, prepare an amendment to the arrangement. The amendment would schedule severance payments on a fixed date or during a fixed period after termination of employment. Note that the amendment need not eliminate the usual requirement of a release of claims; it only would prevent the employee from having the opportunity to time the tax year of payment.
4. If necessary, obtain written consent from affected employees.
5. Include a statement of these steps as part of the employer’s 2012 income tax return.

If you would like assistance in determining whether any arrangements require amendments prior to December 31, 2012, please contact Scott Galloway (206.447.8919; gallj@foster.com) or Steve Peltin (206.447.6215; pelts@foster.com).

EEOC Releases Charge And Litigation Statistics: The EEOC has released its final statistics for fiscal years 2009-2011. Among other things, the agency released state-by-state statistics detailing the number and types of discrimination charges filed by individuals.

Beat The Heat: As summer heat bears down on much of the country, it’s a good time for employers to review state and federal heat exposure rules. OSHA’s Campaign To Prevent Heat Illness raises awareness about the hazards of working outdoors in hot weather. OSHA’s educational resources provide valuable information to employers on heat illnesses and related prevention measures. At the state level, the Outdoor Heat Exposure Rule applies to Washington employers from May 1 to September 30 each year. Employers with employees who work outdoors and are exposed to high temperatures must provide training for workers and actively encourage workers to stay hydrated. The Department of Labor and Industries' website provides training modules and related background information.

Washington Weekends: School is out and summer is almost here, which means it’s time to plan your summer weekends. From scenic natural beauty, wine tasting, shopping, and more, check out the Experience Washington website. And for those of you in the Seattle area, it’s never too early to plan your Seafair activities.

According to a recent report by the National Consumer Law Center, criminal background checks often contain inaccurate information, with unfortunate consequences to job seekers.  The report asserts that despite the requirements of the Fair Credit Reporting Act, criminal background checks too often mismatch the applicant with another person, reveal sealed or expunged information, or contain misleading information about how the case was resolved or the seriousness of the offense.

Apparently concurring that criminal background checks are harming job applicants, the Equal Employment Opportunity Commission just released a detailed Enforcement Guidance, addressing how the improper use of arrest and conviction records may violate Title VII of the Civil Rights Act of 1964.  Watch this blog for more about the Enforcement Guidance.

EEOC receives more discrimination claims.  The Equal Employment Opportunity Commission accepted a record number of discrimination charges in the last fiscal year, with retaliation claims leading the way.  The Commission also released its strategic plan for the next five years.

US DOL expands FMLA.  The US Department of Labor released new rules to expand FMLA “military caregiver leave” for up to five years after family members leave the military; to extend “military exigency leave” to employees whose family members serve in the regular armed forces; and to make FMLA benefits more accessible to airline flight crew employees.

Seattle updates its discrimination laws.  The City Council approved amendments to Seattle's civil rights ordinances that clarify several definitions and make the City's code consistent with state and federal law. Claimants most often file employment claims with the Seattle Office for Civil Rights if they work for employers with fewer than eight employees.

More jobs available: The labor market is expected to continue to improve in the first half of 2012.

Unemployed workers to take longer to find a job: The Brookings Institute predicts that workers will take longer to secure employment than they did after earlier recessions.

Political pressure on those receiving unemployment benefits: Meanwhile, some in Congress would require recipients of unemployment benefits to have a high school diploma or enroll in a GED class. And South Carolina is considering a requirement that workers receiving benefits volunteer 16 hours each week and pass a drug test.

Employers Face Higher Unemployment Tax Rates: As the economy struggles, employers will face higher unemployment tax rates based on rising state interest charges. Although Washington is not mentioned in the CNN report, Washington employers with nationwide workforces should be aware of the increasing employer contribution rates.

EEOC May Furlough 1,800 Workers: Facing a proposed budget cut of $5.5 million, the EEOC could be forced to furlough 1,800 employees during 2012.

Social Media Check-Up On Job Candidates Now Standard Practice: Based on a recent survey, roughly 95% of employers have used social media sites to screen prospective job candidates. The result? More than two thirds of employers have rejected a candidate based on information revealed during a social media search. If your organization is using social media during the hiring process (or considering doing so), please take a moment to review our recommended best practices.

Are Smartphone Spies All Around? Is Bob recording his performance review? Is Kelly using her Blackberry to tape performance-related conversations with her boss? Here's an enlightening article on the increasing use of smartphones as portable recording devices. Inflammatory digital recordings can be problematic for employers, despite the fact that Washington requires both parties to consent to the recording.

Is Your Workplace Killing You? Are toxic co-workers hazardous to your health? A new study attempts to prove that your job may, indeed, be killing you.

Are You Ready For A Second Skin? Engineers announced the discovery of electronic circuits that can be integrated with your skin, i.e. a "second skin." While the technology advance may be paranoia-inducing to some, researchers believe it will have a wide array of potential uses, including helping patients with neurological and muscular disorders.

Take a Hike, Get a Bigger Brain:  Medical studies report that that hiking or walking can increase the size of the brain, and even thinking about exercising can increase the strength of specific muscles.  No word yet on the health effects of thinking about hiking.

Drive Fast, Get a Bigger Ticket:  For those who prefer to drive (and drive fast), beware of the police. Here's a list, with pictures, of the 10 most ticketed cars in America.

Read the NY Times, Get Better Sleep:  But if you can’t stand the cars whizzing past your home at night, the New York Times reviewed various devices designed to help those bothered by noise to get a good night’s sleep.

Boeing-NLRB Showdown Gets Underway: The Puget Sound Business Journal looks at the likely timeline in the contentious Boeing-NLRB hearing, which kicked off in Seattle earlier this week. Per NLRB Spokeswoman Nancy Cleeland, the unfair labor practice hearing is likely to take at least a month to complete.

Wal-Mart Workers Try the Nonunion Route: The New York Times profiles a  group of Wal-Mart employees advocating for better worker pay and benefits.  The grassroots effort - funded in part by the UFCW union - has organized worker gatherings around the country, including in Seattle.

As Lockout Continues, NFL Training Camp Sites Begin To Sweat: The Wall Street Journal examines the impact of the NFL lockout on the businesses nearby training camps.

The NBA Finals Are Over. Will There Be A Next Season?: ESPN Page 2 Columnist Bill Simmons examines the background of the potential labor unrest in the National Basketball Association. (Warning: Sports analysis and pop culture references abound.)

The Show Goes On At The Tony Awards: The stagehands’ union and producers of the Tony Awards settled their labor dispute less than 48 hours before the start of Broadway’s biggest night.

Rise of the Hired Gun C-Suite: Fortune reports that more companies are turning to interim executives to fill gaps in leadership and expertise. Just don’t call them temps.

Seattle Tops in the West For Small Business: The Puget Sound Business Journal reports that Seattle ranks among the strongest cities in the country when it comes to small business.

Be Polite and Write: A reminder about the importance of job interview thank you notes.

Night Owl Hits The Road: An interesting article from Waste & Recycling News covering a day in the life of a driver on the 2 a.m. garbage route.

401(k) Contribution Rates Continue To Rise: American workers continue to focus on building their retirement savings. Fidelity reports that only 8% of employers reduced or eliminated matching contributions during the height of the recession.

Mommy Track Without Shame: The Wall Street Journal notes that while many women will trade money for family time, it is no longer taboo to say so.

How To Succeed In Business Writing: David Silverstein reviews basic business writing lessons, with bonus points awarded to the authors of the ShamWow website.

Best Washington Workplace: Nominations are open for the Puget Sound Business Journal’s Best Washington Workplace competition.