On April, 24, 2017, the New York State Department of Labor (“NYSDOL”) has filed an appeal to the February 16, 2017 decision by the New York State Industrial Board of Appeals (“Board”). The Board’s ruling held that the NYSDOL’s regulations regarding employer payments via payroll debit cards and direct deposit were invalid, thereby revoking the regulations, which were set to become effective on March 7, 2017. While the regulations remain ineffective, we will continue to provide updates on New York’s payroll debit card and direct deposit rules.
In the latest HR headline from the start-up world, the offending executive doesn’t fit the typical mold, but the lesson remains the same: don’t ignore human resources.
Miki Agrawal, the self-proclaimed “SHE-eo” of THINX, and her “boundary pushing” workplace demeanor are the focus of a New York City Commission on Human Rights complaint by the former head of public relations, Chelsea Leibow. Leibow alleges that Agrawal created a hostile work environment through her constant discussion of sex, nudity around employees, and inappropriate touching of employees’ breasts.
THINX, the “period underwear” company that seeks to disrupt the menstrual products world, intentionally pushes boundaries with its marketing strategies. In her role, Leibow was responsible for PR emails, which were the subject of media attention highlighting the emails’ casual, “millennial-speak.” According to Leibow in an interview with New York Magazine, the company also pushed internal boundaries of professionalism. Leibow alleges that, just a few months after she joined THINX Agrawal, “helped herself” to Leibow’s breasts and engaged in a variety of other sexualized conduct. Leibow asserts that Agrawal drove a casual culture, and that many employees engaged in more casual (and often sexually-inappropriate) conversations out of fear of losing their jobs.
Leibow alleges that she made multiple internal complaints, including to the CFO and CCO, about Agrawal’s behavior, but those complaints were ignored. Rather than establish a formal HR function, Agrawal introduced “Culture Queens” to manage internal disputes. Neither of these individuals had HR experience, and the reporting line brought all complaints back to Agrawal – even those complaints about her. In fact, Leibow alleged that it was ingrained into the culture that the employees and the executive team “operated on different planes.”
In response to Leibow’s complaint and subsequent publicity, Agrawal published a blog acknowledging that THINX failed to appropriately establish a human resources function early enough in the formation of the company. Like many start-ups, when THINX had only 15 employees, Agrawal did not make hiring an HR professional a priority. She acknowledges that the failure to address human resources was a “problem area,” but “to sit down and get an HR person and think about [health insurance, vacation days, benefits, and maternity leave] were left to the bottom of the pile of things to get done.” THINX has commissioned an employment law firm to investigate these claims, along with several other allegations being anonymously reported to various news outlets.
Following the complaint, Agrawal has stepped down as CEO, and THINX is hiring a new CEO and a HR manager. Our attorneys have seen a continuing pattern of successful start-up companies ignoring human resources functions in favor other responsibilities to launch the business. But as this example teaches, start-ups and other small businesses should not leave HR-planning to the end. Although managing the HR function early on seems less important than getting the business off the ground, failing to establish basic workplace rules, including a harassment complaint procedure, can lead to major problems.
Our colleagues Judah L. Rosenblatt, Jeffrey H. Ruzal, and Susan Gross Sholinsky, at Epstein Becker Green, have a post on the Hospitality Labor and Employment Law Blog that will be of interest to many of our readers in the technology industry: “Where Federal Expectations Are Low Governor Cuomo Introduces Employee Protective Mandates in New York.”
Following is an excerpt:
Earlier this week New York Governor Andrew D. Cuomo (D) signed two executive orders and announced a series of legislative proposals specifically aimed at eliminating the wage gap in gender, among other workers and strengthening equal pay protection in New York State. The Governor’s actions are seen by many as an alternative to employer-focused federal policies anticipated once President-elect Donald J. Trump (R) takes office. …
According to the Governor’s Press Release, the Governor will seek to amend State law to hold the top 10 members of out-of-state limited liability companies (“LLC”) personally financially liable for unsatisfied judgments for unpaid wages. This law already exists with respect to in-state and out-of-state corporations, as well as in-state LLCs. The Governor is also seeking to empower the Labor Commissioner to pursue judgments against the top 10 owners of any corporations or domestic or foreign LLCs for wage liabilities on behalf of workers with unpaid wage claims. …
Gene Zaino, a nationally recognized expert in the contract workforce market, launched MBO Partners to re-invent the way independent consultants and organizations work together. MBO Partners provides technology solutions and personal service that both simplify and expedite business processes for self-employed professionals including: incorporation, contract setup, billing, financial management, payroll, tax compliance, and health and retirement benefit programs. MBO Partners also provides access to the largest network of “engagement ready” enterprise companies, as well as portable benefits to independent workers. Zaino is a major force in the independent workforce movement, committed to making it easier for self-employed professionals and their clients to work together.
The meaning of the “workplace” continues to evolve in the Digital (also referred to as the “gig,” sharing or on-demand) Economy. From shared workspaces, to the introduction of machines, artificial intelligence and robots into the workplace, traditional employer-employee relationships that we have known in our lifetimes are being reconfigured at a rapid pace. I caught up with Gene Zaino to explore some of his thoughts in response to the following questions regarding a growing segment of the workforce-the self-directed or independent worker.
How do you define independent or contingent workers, and are they one broad category or would you classify them into different segments?
MBO Partners defines independent workers as adult Americans aged 21 and over of all skill, education, and income levels who turn to consulting, freelancing, contract work, temporary assignments, or on-call work regularly each week for income, opportunity, and satisfaction.
The entire contingent workforce is a broad category. Anyone working in a nontraditional job – that is, outside a 9 to 5 desk job – could be considered a contingent, temporary, or “gig” worker. But the ride-share driver you frequently see on the road faces different challenges than the independent consultant working for a major accounting firm, so it’s important to make distinctions between these groups when discussing issues like providing portable benefits and meeting their business needs.
How much of the American workforce is currently comprised of independent workers, and how do you think that will change in the next 5 years?
There are just under 40 million independents in the American workforce, which includes 16.9 million in full-time positions, 12.4 million who work part-time, and 10.5 million in occasional independent roles. Based on our latest State of Independence report – the longest running annual survey of the independent workforce in the nation – we expect the number of independents to grow to an impressive 48.9 million by 2021. By this time, nearly one in two people will work independently, or will have done independent work at some point in their careers. Suffice it to say, the independent workforce is rapidly growing and the workforce we knew even five years ago will look vastly different in another five years.
What do you see as the main drivers behind the rise of the independent worker?
The numbers and testimony from our annual survey show that independents overwhelmingly find independent work is a satisfying, and self-determined, choice. Both full and part-time independents say their career choices stem from a desire to have greater flexibility, freedom, control, and purpose. In terms of flexibility, 63 percent of independents cite control of their schedule as a top reason to work independently, and 59 percent say their top motivator is the increased flexibility independent work provided not only in their careers but across all aspects of their lives.
Forty-seven percent of full-time independent workers report making more money on their own than they would in a traditional employment setting. Specifically, three million independents earned more than $100,000 last year, a 50 percent increase from the two million who earned the same just five years ago.
Generationally, Baby Boomers now constitute 31 percent of the independent population, driven in part by the desire to supplement retirement benefits that are facing sharp declines over the next decade. But the independent workforce is also growing younger, millennials accounting for 40 percent which is higher than their makeup among the labor force at large. In contrast to Baby Boomers, Millennials see independence as an opportunity to get a toehold in the labor force and as a resume-builder.
What are the main needs of independent workers?
One of the major needs of independent workers is the ability to maintain a robust network of clientele for future work. MBO ConnectTM, considered the industry’s leading preferred talent network and direct sourcing product for engaging independent workers, is just one platform through which independents might find future projects and connections.
Like all workers, independents also need benefits to support themselves and their family, including retirement/401(k) and health insurance. Since those benefits are often employer-provided, it can be difficult for independents to find security working on their own. MBO Partners helps by providing access to group plans for its qualifying associates as well as by educating independents on how to acquire portable benefits.
Do you find that independent work is more appropriate for experienced workers in their field of expertise, or can those new to the working world successfully embark upon independent work arrangements?
The independent workforce is diverse – it includes Americans of all ages, skill, and income levels who turn to independence for income, opportunity and satisfaction. We’ve seen a growth in the experience level thanks to the continuing commitment of more seasoned workers primarily from the Baby Boomer generation. Many independents report getting work assignments because they offer a specialized skill that requires certification, special training, or education. This often means added experience in the form of years on the job.
However, millennials just entering the workforce also represent a growing percentage of the independent workforce – up to 6.76 million last year from 1.9 million in 2011.
Are employers in particular industries more inclined to engage independent workers currently and will this change in the next 5 years?
As the workforce continues to change, employers across nearly every industry are engaging and hiring independent workers, and we see the flow between traditional and alternative work arrangements increasing in numbers and growing in momentum over the next five years. By 2021, almost half of the private workforce is forecast to have spent time as independent workers at some point in their work lives. As a result, savvy companies are already competing to become a Client of Choice for top independent talent. Forward-thinking companies are already thinking of the best ways to engage independent workers compliantly and efficiently, often using a company such as MBO Partners to do so.
Does the proliferation of the independent worker erode the promise of the so-called social compact or “model social safety net” or do you see ways that these workers can obtain retirement savings security, and other necessary employee benefits?
The growth of the independent workforce has changed the way we think about providing employee benefits, and companies like ours have adapted to that change. MBO Partners has provided portable benefits to independents for over a decade, giving our associates access to the power of their group purchasing to access healthcare, disability and business insurance, as well as 401(k) options for retirement savings.
Moving forward, the government will need to take steps to help the independent workforce. This may involve further discussion of portable benefits, the creation of a new classification of worker to help independents work compliantly with clients, or something else entirely. MBO Partners is proud to work closely with top leaders in Washington and on Capitol Hill to remain a part of these vital ongoing conversations, now and in the new administration.
Editor’s note: As the workplace continues to change, employment arrangements will evolve. It will become increasingly important for employers to monitor changing employment -related laws and regulations and to ensure that adherence is given to current laws, especially with regard to worker classifications, overall workplace management, employee benefits and immigration issues. As the nature of the very workers retained to perform services changes in unprecedented ways, new ways of thinking about these issues and regulating them will surely come to pass.
As employers prepare the Affordable Care Act information reporting filings for the 2016 year that will be due in 2017 (notably the 1094/1095 B&C), the good faith standard of compliance, and the potential for inaccuracies, is no longer available. In order to seek a waiver of penalties for the 2016 filings made in 2017, an employer will need to meet a standard of reasonable cause and no willful neglect. With this standard, an employer must show that there are significant mitigating factors or the failure was due to certain events outside their control and the filer acted responsibly. While “responsibly” remains subjective, the employer must be able to demonstrate that the same level of quality assurance and audit rigor that is applied to other governmental reporting must be applied to the 1095 and 1094 IRS reporting processes. Also, at this time, anticipate that the filings will need to be made with the government, and to the employees (and other recipients), under the regular schedule without extensions: (i.e., the disclosures to employees will be due the last day of January following the calendar year in which coverage was provided; forms must be filed with the IRS by the last day of February if filing on paper or March if filing electronically (which is required for employers with 250 plus returns)).
Failure to timely file the Forms with the IRS and provide them to employees can lead to significant penalties (for example, currently large businesses are subject to a penalty of $260 per return up to a maximum of $3,178,500, as adjusting in successive years); this is not tax deductible.
The following is a checklist of issues that employers should consider when getting ready for 2017 ACA information reporting:
- Understand the Big Data Environment. Using Big Data algorithms, the IRS has the ability, as it increasingly works in conjunction with other Federal agencies, to identify contradictory data submitted on both individual employee forms and across multiple employees, which can lead to audits, as well as enforcement of the individual and employer mandate For example, in the March 2016 Congressional Budget Office Report concerning the federal subsidies for health insurance coverage for people under the age of 65, the government has already estimated that 3 million people will pay the individual mandate penalty in 2016. In 2014, 7.9 million taxpayers paid approximately $1.6 billion in individual mandate penalties.
Moreover, from 2017-2026-the government projects employer mandate penalties of $228 billion. Thus, there is clear anticipation that revenue will be generated and violations will be ascertained through the information reporting filings. As carriers continue to withdraw from key markets and continue to incur material losses (billions of dollars are owed to carriers by the Federal government) the need to quickly enforce the employer penalties is even greater so the government can reimburse payors and providers the billions that are owed.
Given 1) the multi-billion dollar employer penalty budget and 2) the billions of dollars that have been/will be paid vis-à-vis the individual mandate, employers should thoroughly review their 2015 1095-C forms data and provide on-going QA of their 2016 data to mitigate risk.
It is imperative that employers confirm the integrity, accuracy and completeness of their employee data including: collection and verification of social security numbers of employees and dependents (as applicable), waiver information, eligibility determinations, offers of coverage (1095-C, line 14) and employee status/safe harbor codes (1095-C, line 16)
Employers should also know where the data resides, how to extract it, and confirm that it is consistent with unique employee identifiers (e.g. SSN). In addition, ensure that the responses on the forms do not contain conflicting codes (e.g., an employee would not be made a qualifying offer (Code 1A on Line 14 of Form 1095-C) while being in their respective limited assessment period (Code 2D on Line 16 of Form 1095-C). These are the types of inconsistencies that can trigger a red flag with the government. Clearly the applicable data should be reviewed early and often.
In order to ensure that 2015 reporting was accurate, employers should audit last year’s forms data. This way, errors as well as the underlying root cause can be identified and remedied to mitigate future risk. Employers should also adequately plan for and execute internal controls. For example, employers should perform a Data Diagnostic to calculate the expected number of offers (either 1A or 1E on line 14). The same should be done for Series 2 codes on Line 16. This way the actual results can be compared to the expected results.
- Ensure Proper Worker Classifications. Misclassified workers raise many issues not only from an employment law standpoint but also an employee benefit plan standpoint. For group health plans, a key requirement is properly defining full time employees and equivalents to determine if an employer is an applicable larger employer under the employer mandate and that the requisite number of full time employees and their dependents are offered qualifying coverage. We are now in an environment where applicable large employers must cover the requisite 95% of full time employees or risk exposure to penalties (it was 70% last year). Properly identifying which workers are actually the employer’s employees, in addition to their hours of work, is a critical step. This gets even more complicated when the employer has workers through alternative arrangements such as relationships with staffing firms. It should be noted that a service contract does not override the common law test for making a determination regarding employer status. An employer should consider a self audit of worker classifications.
- Monitor changes in the applicable guidance.
Draft Forms. The new draft information reporting forms include changes such as: (a) the eliminated from form 1095-C the transition relief codes for 2015 regarding 70% coverage of employees as opposed to 95% and the exemption from penalties if the employer had less than 100 employees–code 1l and Code 2I (for noncalendar year plans); (b) Line 14 has a new Code IJ—used if minimum essential coverage providing minimum value is offered to an employee and conditionally offered to a spouse but not dependents. A common conditional offer occurs when coverage is offered to a spouse only if the spouse certifies he or she is not eligible for coverage under a plan sponsored by his or her own employer or not eligible for Medicare. If this code is used it can lead to a penalty because coverage is not offered to dependents. Code I K is used if qualifying coverage is offered to the employee, dependents and conditionally to a spouse. If either new code IJ or IK is used-line 15 of the 1095-C must be completed, (c) Offers of COBRA following a termination of employment should be coded with 1H (line 14) and 2 A (line 16) whether or not COBRA is elected. For COBRA offers after a reduction in hours, treat as an offer of coverage on Line 14 1095-C, (d) Line 15 instructions clarify that the employee required contribution for Line 15 of Form 1095-C is the employee’s share of monthly cost for the lowest cost self only minimum essential coverage with minimum value offered.
a) Note that under proposed regulations issued July 6, 2016 regarding the premium tax credit, if an employee opts out of coverage and does not substantiate other coverage, this increases the costs of coverage for the employee when making an affordability determination and can mean that the employee was not offered affordable coverage. This opt out payment must be added to the employee’s premium contribution and reported on the Form 1095-C. If there is a conditional opt-out where the employee provides substantiation of other minimum essential coverage for the employee and their tax family (for example through a spouse’s plan but not individual coverage through the Marketplace) at least annually, this will not increase the cost for the affordability determination. The comment period on these regulations has just ended so it will be important to monitor any changes in final rules. Under transition rules, these rules will be effective with the 2017 plan year for opt out programs in effect prior to 2016.
b) In Proposed Regulations issued July 29, 2016 under Code Section 6055 and relating to the Form 1095-B and 1095 C part III, it is worth noting that if the employee is covered by multiple plans providing minimum essential coverage by the same sponsor, reporting is only required by one of the plans. These rules apply month by month per individual. Therefore, if for a month an employee is enrolled in a self-insured health plan and HRA by the same employer, the employer only reports one type of coverage but, if the employee drops coverage under the health plan, the employer reports coverage for the HRA for the remaining months. Also reporting is not required for supplemental coverage where the employee is already covered by minimum essential coverage for which reporting is required or through Medicare, TRICARE or Medicaid.
- Ensure Accurate Names and Social Security Numbers.
- Employers should remind employees to report any name changes due to life events such as marriage or divorce to both the Social Security Administration and the employer.
- Employers should establish procedures for securing Forms W-4 and using that information to prepare forms W-2.
- An initial solicitation must be made for a correct SSN when completing the information reporting requirements unless the employer has the employee’s SSN and uses it for all transactions with the employee. When an employee begins work, it is usually considered an initial solicitation with completion of a Form W-2, W-4 and I-9.
- When the employee’s SSN is missing or incorrect after the initial solicitation, the employer will generally need to conduct annual solicitations for a correct SSN and there should be a process for re-solicitation of required information. SSN solicitations are also made at time of an open enrollment.
The July 29, 2016 proposed regulations noted above provide that an employer acts responsibly if it engages in proper solicitation of SSNs which includes an initial and 2 subsequent annual solicitations (i.e, the first annual solicitation being within 75 days after open enrollment and the second by the December 31st of the following year). Employers should retain employee responses in employer records and note that solicitations were made.
- Corrected Returns. It’s worth commenting that in addition to getting ready for 2017 filings, there may be some clean up required for the 2015 forms that were just filed earlier this year.
- Errors could be identified by an IRS error message, internal audit or by an employee.
- A corrected return corrects an inaccurate return (such as Form 1095 B/C) or transmittal (1094-C) that was previously filed and accepted (with or without errors) by the IRS.
- If a transmission or submission was REJECTED by the IRS-then a rejection requires a replacement -it is necessary to replace all records in the transmission or submission that was rejected.
- Correcting errors is part of the good faith effort to file accurate and complete information returns.
- Employers should have an internal review process to ensure correction of forms will not be necessary.
- Record Retention. It is important to document and retain proof to substantiate responses on the ACA information reporting forms, and, record retention policies should be updated to include ACA information reporting records. Among the records employers should retain are (i) records of employees who were provided with an offer of coverage and corresponding dates, (ii) eligibility methodology and determinations, (iii) signed waivers or opt out forms, (iv) SSN solicitation records, (iv) controlled group determinations, (v) participant communications, (vi) affordability calculations.
- Marketplace Notice and IRS Penalty Notice. For the Marketplace Notices which some employers started to receive in early July, note that these are not the IRS Penalty Notices for employer mandate penalties which may start to be issued later this year. The Marketplace Notice can be issued to large and small employers. It is a notification that the particular employee purchased coverage in the current year and received a subsidy. An employer has 90 days after the date of the notice to appeal and claim that the employee should not receive the premium tax credit.It is especially important for large employers to check records to determine if this employee was offered qualifying coverage, that the employee was properly classified and then to determine if it is necessary to challenge the employee’s receipt of the subsidy because this could be a trigger for later receipt of an IRS penalty notice.Therefore, thought should be given to setting the record straight and preparing defenses to a potential IRS penalty notice. If the employer wins the Marketplace Notice appeal, the employee must pay back the subsidy received or offset any tax refunds. The Marketplace appeals center will issue the decision. An IRS penalty notice will indicate that the IRS believes the employer did not offer qualifying coverage during the prior year. Employers will have a chance to respond and appeal the IRS penalty notices. It is important to establish an approach for reviewing and responding to these notices.
- Corporate Transactions. In the merger and acquisition context, be mindful of representations and warranties regarding ACA compliance and information reporting requirements. Diligence could include review of a sample of the forms that were filed by the target to assess whether they appear to have been completed properly, looking for incomplete or inconsistent codes on the forms, and anticipating potential liabilities. Consideration should be given to factoring in potential penalties to purchase prices and escrow arrangements. A best practice is to perform a 1095-C and 1094-C audit during the due diligence process.
- Fiduciary Responsibility and Governance. Health and welfare plans are subject to ERISA and the plan fiduciaries should ensure that they are maintaining these plans in compliance with applicable law, meeting the applicable reporting and disclosure requirements, and prudently selecting and monitoring those that assist in meeting these responsibilities. Consideration should be given to enhancing fiduciary governance procedures, such as benefit committee guidelines and health plan administrative procedures to include ACA information reporting duties, if not done so already.
- Establish an ACA Information Reporting Team. ACA compliance has many facets, and information reporting is a complex requirement. Consideration should be given to designating a specific individual or team to address these disclosures. It is important for these individuals to examine data collection and integrity issues so that any mistakes from last year are not repeated. Quality control and data privacy issues should also be addressed. As part of their mission, the ACA Information Reporting Team should make on-going QA an embedded part of their process.
The ACA Information Reporting Team should also perform a 1095-C audit (and 1094-C audit) to make sure information was accurately reported. Employers should audit last year’s forms data. This way, errors as well as the underlying root cause can be identified and remedied to mitigate future risk. Employers should also adequately plan for and execute internal controls. For example, employers should perform a Data Diagnostic to calculate the expected number of offers (either 1A or 1E on line 14). The same should be done for Series 2 codes on Line 16. This way the actual results can be compared to the expected results.
Consideration of these best practices and implementation of same will make a difference when completing the Forms and defending the responses in an audit or an appeal. For more information regarding IRS reporting best practices and how to mitigate penalty and public relations risk, please visit www.ACAIRSbestpractices.com.
As the employer-employee relationship and the meaning of a “workplace” continue to evolve in the “gig” (or “sharing” or “on-demand”) economy, a model of portable employee benefits, which are managed by mobile workers themselves, is gaining appeal. This employee benefits approach is not currently intended to replace employer-provided benefits for all workers but rather to fill a gap for those who may work independently as contractors or as temporary employees, do not have access to workplace benefits, or move from employer to employer quite frequently. Development of such a model, however, calls into question the future of the employer-provided system of employee benefits, which has been under attack in recent years.
As a result of the demise of the employer-provided pension plan and the rise of participant-directed savings plans, workers have already felt the movement away from the paternalistic approach to retirement benefits. This development has not been without controversy, as exemplified by the debates regarding participant savings rates, education regarding investments and fee transparency, and the U.S. Department of Labor’s (“DOL’s”) fiduciary rule regarding investment advice.
Also, on the health care front, the Affordable Care Act has provided a platform for workers to obtain their own individual health insurance in the Marketplace, either through choice or necessity, and the tax benefits of employer-provided health benefits are being threatened in tax reform initiatives. With the implementation of consumer-driven designs, employees are also managing their health spending and insurance choices.
These changes in benefits design and access to employer-provided programs, as well as the rise of the mobile workforce, have provided a foundation for further movement toward portable benefits. This movement continues to manifest itself in several ways, including through:
- President Obama’s call for portable benefits programs. In his fiscal year 2017 budget, President Obama called for the development of programs to provide grants to states and nonprofits to design ways to provide retirement and other employee benefits that can be portable and accommodate contributions from multiple employers. In addition, he called for legislation regarding open multiple employer plans (“MEPs”) among unaffiliated employers to allow for pooled plans and continued contributions when employees move between employers participating in the same MEP. He also proposed requirements to allow part-time workers to participate in plans and measures for easier rollovers to plans. These initiatives would build upon earlier proposals for automatic payroll individual retirement accounts (“IRAs”) and other tax credit initiatives to small businesses.
- Automatic payroll IRA programs and other alternatives. For employers that do not sponsor any retirement savings plans, there is increased momentum for automatic payroll IRAs. To date, at least five states (California, Connecticut, Illinois, Maryland, and Oregon) have enacted legislation that will require certain employers that do not sponsor a retirement plan to enroll employees automatically in a state-run IRA program. New Jersey and Washington have approved retirement marketplaces for eligible employers to shop for retirement savings programs, and many more states are considering alternatives, including state-run IRAs and MEPs. These initiatives follow guidance from the DOL facilitating such efforts (including parameters for state-run IRAs to avoid being subject to ERISA) and complement the U.S. Department of the Treasury’s guidance regarding myRA accounts, as well as President Obama’s agenda. Other legislative proposals include mandates for contributions to plans run by third parties or the federal government. Laws in this area will continue to evolve.
- Portability policy advocates. In “Common Ground for Independent Workers,” an array of businesses, labor organizations, venture capitalists, and other stakeholders in the gig economy have called for policies to ensure a social safety net for all workers. This past May, Uber was among the first employers in the gig economy to come to agreement with the Independent Driver’s Guild, which is working on ways to offer its members a range of portable benefits. Retirement Clearinghouse (“RC”) has advocated for auto-portability plans that move retirement savings assets automatically with workers as they switch jobs. RC has requested an advisory opinion from the DOL to permit negative consent, which would allow plan account balances to roll automatically into a new employer’s plan.
What Employers Should Do Now
In the race for talent, it is important for employers to consider their own philosophy concerning employee benefits and the types of programs that they desire to offer their workers, whether full time, part time, contingent, or otherwise. It is also necessary to assess compliance with any programs that may be mandated by changing laws. In this evolving landscape, an employer should:
- examine its organization’s workforce and determine which benefits programs are desirable to attract, motivate, and retain these workers in a competitive marketplace;
- identify any gaps in benefits offerings and consider how to fill those gaps;
- monitor legislation affecting employee benefits and applicable compliance requirements; and
- determine whether its organization is subject to laws that will require it to comply with certain government-mandated programs when no applicable benefit program is otherwise offered by the employer, and decide whether it is instead desirable to establish, or expand coverage under, an employer-sponsored plan.
A version of this article originally appeared in the Take 5 newsletter “Five Trending Challenges Facing Employers in the Technology, Media, and Telecommunications Industry.”
As with most aspects of the workplace, employee benefits are going digital. From online enrollments and administration for all types of benefits, to electronic educational tools, employers are increasingly seeking ways to use new technologies to enhance their benefits programs, increase efficiencies and employee engagement. Among these innovations is the proliferation of computer-driven, digitally-based investment advisers, or so-called “robo advisers.” The market for robo-advisers is growing fast with many new companies entering the space with increasing frequency. Well-established companies are also developing and offering their own automated investment services which can be available to assist individual investors or participants in an employer-sponsored savings plan. Plan sponsors will increasingly be presented with robo-adviser services for their participant-directed retirement plans, and they must be prudently selected.
Robo-advisers are not without their critics. There is an ongoing debate whether robo-advisers can meet the fiduciary standards of a trained professional who provides investment advice to investors in their best interest. For example:
- On March 15, 2016, the Financial Industry Regulatory Authority (FINRA) released a report regarding digital investment advice which raised questions concerning the standard of care that applies to broker-dealers and investment advisers under federal securities laws with regard to investment advice that they provide and the application of same to digital services used either in conjunction with a financial professional or on its own. The FINRA report recognizes that digital investment advice tools will play a significant role in wealth management and that investor protections must be paramount and should include a foundation for understanding customer needs, with sound methodological groundings and recognition of the tools’ limitations.
- On April 1, 2016, the Massachusetts Securities Division issued a policy statement and declared that robo-advisers may be inherently unable to act as fiduciaries and perform the functions of a state-registered investment adviser without the necessary due diligence and personalization to act in the best interest of their clients.
- On April 6, 2016, The Department of Labor also released its final rule regarding investment advice fiduciaries (the “Rule”). The Rule itself continues to come under attack and on June 1, 2016, eight industry and trade groups filed a lawsuit in Texas federal court challenging the Rule and asserting that the DOL overstepped its authority in issuing the Rule, the Rule will increase costs and litigation, and that the Rule will not help investors. (See Chamber of Commerce of the United States of America et al. v. Thomas E. Perez et al., case number 3:16-cv-01476, in the U.S. District Court for the Northern District of Dallas.) Whether the Rule survives pending challenges remains to be seen. In the meantime, robo-advisers that make investment recommendations are fiduciaries under the Rule which provides that fiduciary communications such as recommendations can be initiated by a computer software program.
It is also important to note that while the DOL also released a Best Interest Contract (BIC) exemption from its prohibited transaction rules to allow investment advisers to continue to provide advice and earn compensation such as commissions, sales loads, 12b-1 fees and revenue sharing payments without running afoul of conflicts of interest standards so long as certain requirements are met, this BIC exemption does not apply to the provision of investment advice solely through digital means unless the robo-adviser charges level-fees and is a “level-fee fiduciary.” It appears that the pre-existing rules for “eligible investment advice arrangements” under Section 408(g) of ERISA provide an alternative path for robo-advisers to follow in order to avoid running afoul of the prohibited transaction rules.
For plan sponsors that desire to incorporate digital investment advice services into their retirement program in the near future, several issues, at a minimum, should be considered, including:
- Assess the need for investment advice services versus provision of non-fiduciary educational tools, or determine an approach that incorporates both services
- Ensure that the plan fiduciaries follow an objective process to elicit information necessary to assess the robo-adviser’s qualifications and credentials, quality of services offered and reasonableness of fees and costs charged for the services
- Evaluate the robo-adviser’s investment approach embodied in the design of the tool
- Assess whether the digital investment advice tool is paired with access to a human investment professional who is able to assess the plan participant’s needs in a manner that goes beyond the limitations of the digital tool, and, who is trained to utilize the tool effectively
- Review any conflicts of interests
- Determine if the robo-adviser charges level fees and meets the requirements of the BIC exemption or whether it meets the requirements of an “eligible investment advice arrangement” under ERISA which either charges level-fees or uses a compliant computer-model
- Review service agreements including fiduciary, indemnification, audit, record retention and data privacy and security provisions
- Confirm that the robo-adviser acknowledges fiduciary status and that the participants are provided with any required disclosures
- Establish a procedure for prudent ongoing monitoring of the robo-adviser service
For plan sponsors who already offer robo-adviser services to their plan participants, now is the time to review the arrangement under the evolving guidance and implement prudent changes.
In this environment, the fate of the Rule, and the standards for robo-advisers, will continue to evolve and new developments must be monitored. Whether the robots know best is a question yet to be answered.
If an employer is found to have misclassified an employee as an independent contractor or other contingent worker, then liability can be substantial under applicable federal and state labor, employment, tax and withholding laws including laws regarding payment of wages, overtime and unemployment compensation, workers’ compensation, discrimination and rights of workers and unions. It is equally important to understand that compliance of employee benefit plans with requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986, (the “Code”) can also be at risk. Employers must be mindful of the effects misclassification of employees can have on their employee benefit plans.
Improper exclusion of workers from participation in employee benefit plans governed by ERISA can jeopardize a plan’s tax-qualified status as determined under the Code and can also provide these workers with a cause of action under ERISA. Retirement plans can lose their tax-qualified status for a variety of reasons, including as a result of “demographic failures” (where the plan does not pass coverage and nondiscrimination tests) or “operational failures” (where an employer impermissibly excludes a common law employee from plan participation believing that the worker is an independent contractor). Worker misclassification can also expose employers to penalties under the Patient Protection and Affordable Care Act for failure to properly account for the number of its employees to determine applicable large employer status as well as its failure to offer any health coverage or to offer adequate or affordable coverage to full-time employees (and their dependents). Further, the employer may be subject to penalties for violating the Code’s annual informational return and statement requirements. Workers who are improperly excluded from ERISA plan participation may be able to bring a lawsuit for benefits due, to enforce rights under a plan or to clarify rights to future benefits, or raise breach of fiduciary duty claims.
Leased employees, as defined under Section 414(n) of the Code, also present additional challenges for plan administration and can place the qualified status of the plan at risk. Leased employees must be counted in the nondiscrimination tests of qualified retirement plans unless a safe harbor exception is met. Leased employees are also counted when conducting nondiscrimination tests for other benefit plans under various provisions of the Code (such as Section 79 (group-term life insurance), Section 106 (contributions by an employer to accident and health plans), Section 125 (cafeteria plans) and Section 132 (certain fringe benefits)). Generally, where these plans do not pass applicable nondiscrimination tests, the benefits that are otherwise provided on a tax-free basis are includible in the income of the key and/or highly compensated employees benefiting under the plan. Furthermore, in the case where a leased employee converts his or her status to that of a regular employee, he or she must be credited with any periods of service previously performed for the employer for purposes of retirement plan eligibility and vesting. Prior service as a leased employee is not required to be credited for determining eligibility under a self-insured medical plan.
Employers must also be careful when engaging in joint-employer relationships, especially if they have not evaluated whether they are party to such relationships or whether they are the employer of the employees. It is imperative to define in all relevant agreements and documentation which party is responsible for providing the workers with their benefits.
Plan sponsors may generally exclude from participation in employee benefit plans any leased employees or independent contractors. However, there have been situations where such individuals have challenged their non-employee classifications and their exclusion from plans. For example, in Vizcaino v. Microsoft (120 F.3d 1006 (9th Cir. 1997)), a class of freelancers sued Microsoft for participation in various employee benefit plans after the Internal Revenue Service determined, upon audit, that these workers were common law employees since they performed the same work as regular employees, under the same conditions and often under the same supervision. As a result of this case, many plans include a provision which provides that if a leased employee or independent contractor is reclassified as an employee by a government agency or a court, then such worker shall not become eligible to become a participant in the plan by reason of such reclassification. These types of plan provisions may be drafted to exclude participation on a retroactive basis or on both a retroactive and prospective basis, provided applicable plan coverage and nondiscrimination tests can be met. Such a provision is meant to evidence the clear intent of the plan sponsor. Furthermore, many plans also include certain “Bruch” language (Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989)) which gives the plan administrator discretionary powers to interpret the plan itself and make determinations of fact with respect to such issues as eligibility for benefits, which can only be overturned by a court if the decision is deemed arbitrary and capricious.
It is important for employers to self-audit their worker classifications and to review benefits issues as part of any analysis, such as:
- Benefit plan eligibility terms and distinctions between definition of employees, independent contractors, temporary employees and leased employees to ensure proper inclusion/exclusion of workers
- Plan nondiscrimination tests and inclusion of leased employees
- Proper crediting of service for workers who have converted to employee status
- Plan language regarding treatment of workers following reclassification and plan administrator discretion
- Consistency of provisions in all plan related documents, policies, procedures, communications and agreements regarding eligibility for benefits and excluded workers
Once an initial assessment is completed, decisions should be made as to any plan and related document revisions, or any corrective plan action, which may be required.
 A leased employee is a person who provides services to a service recipient if (i) such services are provided pursuant to an agreement between the recipient and a leasing organization, (ii) such person has performed such services for the recipient on a substantially full-time basis for a period of at least one year, and (iii) such services are performed under the primary direction or control by the recipient.
 The safe harbor exception which allows the exclusion of leased employees from nondiscrimination testing requires that the (i) leased employees comprise not more than 20% of the service recipient’s non-highly compensated workforce, (ii) leased employee is covered under the leasing organization’s qualified pension plan, and (iii) the leasing organization’s qualified pension plan is a money purchase pension plan that provides for immediate participation and vesting and employer contributions of at least 10% of compensation for each participant.
 Self-insured medical plans also undergo nondiscrimination tests under Section 105(h) of the Code and must cover at least 70% of a company’s employees. If too many workers are misclassified as independent contractors, for example, a self-insured medical plan might not pass its nondiscrimination tests which could cause benefits to become taxable to highly compensated employees.
My colleagues Nancy L. Gunzenhauser and Barry A. Guryan published a Health Employment And Labor Law blog post that will be of interest to many of our readers: “Massachusetts AGO Provides Safe Harbor on New Sick Leave Law.”
Following is an excerpt:
On May 1, 2015, we reported on proposed regulations to the Massachusetts paid sick leave law, which becomes effective on July 1, 2015. The regulations have not yet been adopted, and in light of the uncertainty about many provisions of the law, the Massachusetts Attorney General’s Office has issued a “Safe Harbor for Employers with Existing Paid Time Off Policies.” Under the safe harbor, any employer with a paid time off policy in existence as of May 1, 2015, which provides employees with the right to use at least 30 hours of paid time off per year, will be deemed in compliance with the new sick leave law. The safe harbor will expire on December 31 of this year, and as of January 1, 2016, all covered employers will be required to comply with the provisions of the new law. Our November 10, 2014 Advisory summarizes the law’s provisions and requirements.
Read the full blog post here.
Today, Law360 published our article “Considering Best Data Practices for ERISA Fiduciaries.” (Download the full article in PDF format.)
In this article, we outline steps that ERISA plan fiduciaries can take to develop a policy concerning protection of plan data and prudent selection and monitoring of plan service providers who handle PII. Benefit plan service providers, including technology-based outsourcing companies, should also consider these important guidelines and implement the appropriate safeguards to protect against infringement of plan and participant data. These issues must be addressed in service arrangements and will continue to evolve.
Following is an excerpt:
Employee benefit plan fiduciaries are charged with meeting a prudence standard when discharging their duties solely in the interest of plan participants and beneficiaries. With increasing regulation of benefit plans, these duties and associated responsibilities are mounting. With advancements in technology, online enrollment and access to account information, as well as benefit plan transaction processing, participant identifiable information and data have become increasingly more vulnerable to attack as it travels through employer and third-party systems.
Earlier this year, the attack on Anthem Inc.’s information technology system, which compromised the personal information of individuals under numerous health plans (including personally identifiable information, bank account and income data, and Social Security numbers), raised questions of privacy and security under the Health Insurance Portability and Accountability Act and Health Information Technology for Economic and Clinical Health Act, and there have been other similar attacks.
These cases remind us that in today’s world, plan participant information, whether it be protected health information, personally identifiable information or retirement savings account information, is vulnerable to theft. Employee Retirement Income Security Act plan fiduciaries must not only act prudently in responding to a breach of their plan participants’ PHI, but should also consider developing prudent policies and procedures with respect to the handling and transmission of all PII and participant data in the regular course.
In 2011, the Advisory Council on Employee Welfare and Pension Benefit Plans studied the importance of addressing privacy and security issues with respect to employee benefit plan administration. The council examined issues and concerns about potential breaches of the technological systems used in the employee benefit industry, the misuse of benefit data and PII and the impact on all parties, including plan sponsors, service providers, participants and beneficiaries. The council recognized several potential causes of breaches relating to benefit plan information, including hacking into retirement plan financial data, and recommended that the U.S. Department of Labor provide guidance on the obligation of plan fiduciaries to secure PII and develop educational materials. To date, the the Department of Labor has issued no such guidance.