Category: Client Alerts

The U.S. Supreme Court, in an 8-0 decision, recently ruled that severance payments made to employees who are involuntarily terminated are taxable wages under the Federal Insurance Contributions Act (FICA).  Quality Stores, Inc., et al., 12-1408.  The Court reversed the Sixth Circuit Court of Appeals ruling in favor of Quality Stores, which was seeking a $1 million tax refund based on its argument that severance payments were not covered by FICA and were excluded from taxation based on the Internal Revenue Code.  The Court’s ruling resolved a split between the Sixth Circuit and the Federal Circuit.

Quality argued that its severance payments to terminated employees were actually supplemental unemployment compensation benefits, which are not considered “wages” under the Internal Revenue Code. The Court noted that the severance payments were made only to employees and were based on employment-driven criteria including the position held, the employee’s length of service with the company and salary at the time of termination. Relying on the “broad definition of wages under FICA,” the Court ruled that severance payments to employees who are terminated involuntarily are taxable under FICA.

However, in its decision the Court noted IRS revenue rulings that severance payments tied to the receipt of unemployment compensation benefits “are exempt not only from income tax withholding but also FICA taxation.” Thus, employers appear to continue to be able to make severance payments not taxable through a carefully crafted structure linking the severance payments to the employee’s receipt of unemployment compensation benefits.

If you have any questions about the impact of this decision, please contact the business attorneys at Schneiders & Associates, L.L.P.

Effective January 1, 2014, any entity with an Employer Identification Number (EIN), including a nonprofit organization, must use Form 8822-B to notify the IRS of a change of (i) a mailing address, (ii) a business location or (iii) the identity of a “responsible party”.  An organization’s original “responsible party” was the individual or entity named on the Form SS-4 application that was filed to obtain its EIN. The instructions to  Form 8822-B define a responsible party as “the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.” If the person originally designated as the responsible party at the time of filing the EIN is no longer affiliated with the organization or no longer fits that definition, then the organization should use Form 8822-B to let the IRS know. 

Form 8822-B must be filed within 60 days of the change. If such a change occurred before January 1, 2014, and the entity has not previously notified the IRS in some other manner, Form 8822-B must be filed before March 1, 2014.

Governor Brown recently signed Senate Bill 292, amending the Fair Employment and Housing Act to allow an employee claiming sexual harassment to prevail without having to show that the allegedly harassing conduct was motivated by the harasser’s “sexual desire.” S.B. 292 was authored by Senate majority leader Ellen M. Corbett and principally sponsored by the California Employment Lawyers Association, an organization of attorneys that represent workers in employment cases.

The bill set out to eviscerate a June 2011 California Court of Appeal decision which rejected a male ironworker’s sexual harassment claim despite evidence that he was subjected to a “barrage of sexually demeaning comments and gestures by his male supervisor.” The bill’s supporters felt that Kelley v. The Conco Cos., 196 Cal. App. 4th 191 (2011), “confused sexual harassment law” and weakened workers’ protections under the FEHA.

In Kelley, the court acknowledged that the supervisor’s comments were “graphic, vulgar, and sexually explicit” and, when interpreted literally, “expressed sexual interest and solicited sexual activity.” Nonetheless, the court affirmed dismissal of the sexual harassment claim because the plaintiff could not present evidence that “the harasser was homosexual” or “motivated by sexual desire.”

Effective January 1, 2014, SB 292 overrules Kelley by adding one sentence to the FEHA, stating that “sexually harassing conduct need not be motivated by sexual desire.” So, in future sexual harassment cases, an employee who is subjected to vulgar sexual comments or actions need not prove that the conduct was motivated by the harasser’s “sexual desire.”

In light of the new legislation, California employers should consider updating their sexual harassment policies and training materials. The employment lawyers at Schneiders & Associates, L.L.P. will be pleased to review your policies with you and assist you in the necessary training. Please contact us for more information

Assembly Bill (AB) 10, signed into law by Governor Brown, raises the current state minimum wage of $8 per hour to $10.  Employers will be required to raise wages to $9 per hour by July 1, 2014, and $10 per hour by January 1, 2016. This would be the first minimum wage increase in California in five years. Some Bay Area cities and counties have already raised their minimum wages this year. San Francisco’s minimum wage is $10.55, and San Jose’s is $10.

Not only will the state minimum wage increase, but the minimum salary requirement for exempt employees under California law also will increase. To qualify as exempt under the executive, administrative, or professional exemptions, an employee must earn a monthly salary of at least twice the state minimum wage for full-time employment. Currently, exempt employees must earn at least $2,773.34 per month. If AB 10 becomes law, the minimum monthly salary for exempt employees would increase to $3,120 on July 1, 2014, and $3,466.67 on January 1, 2016.

Medical certifications may just be the most effective tool in your arsenal for combating abuse of leave rights under the Family and Medical Leave Act and its California counterpart, the California Family Rights Act. They provide valuable insight into whether a claimed condition qualifies as a serious health condition.

Surprisingly, many employers don’t take advantage of this powerful weapon for combating abuse. As a result, they’re left second-guessing whether an employee’s ailment qualifies them for protected leave.

Additionally, if an employee presents you with a doctor’s note for an absence, it’s in your best interest to request a medical certification. Otherwise, if you accept a note stating that an employee can’t work and you later terminate that employee — for excessive absenteeism, for example — it’s quite likely that a court will find that you forfeited the right to challenge an assertion that she was covered under FMLA/CFRA in the first place.

Keep in mind, too, that as the result of the U.S. Supreme Court overturning laws restricting same-sex marriages, employers will need to afford FMLA and CFRA benefits to employees with same-sex spouses. In addition to enforcing the FMLA and CFRA, more and more, the Equal Employment Opportunity Commission and California’s Department of Fair Employment and Housing are looking at leaves of absence as something that is a reasonable accommodation for those with disabilities. As such, managing the leave process up front is increasingly important to stay in compliance with the law.

In order to stay in compliance, it’s crucial for California employers to get the information needed to properly designate absences, as well as practical, legally sound strategies for obtaining it. 

If your business is suffering from excessive employee absenteeism or if you wish to learn more about how to use medical certifications, please contact the employment lawyers at Schneiders & Associates, L.L.P.

The U.S. Court of Appeals for the Second Circuit recently sent a chilling reminder to business owners, executives, and other high-ranking employees that they may be held personally liable for their company’s violations of the Fair Labor Standards Act (FLSA). In Irizarry v. Catsimatidis, 2013 U.S. App. LEXIS 13796 (2d Cir. 2013), the court held that the CEO of a grocery chain—and a New York City mayoral candidate—was individually responsible for paying a $3.5 million settlement, which represented alleged unpaid overtime wages.

“Employers” may be personally liable for FLSA violations. But whether an individual is an “employer” under the FLSA is determined under a four-part “economic realities” test, which examines whether the alleged employer: 1) had the power to hire and fire the employees, 2) supervised and controlled employee work schedules or conditions of employment, 3) determined the rate and method of payment, and 4) maintained employment records. Ultimately, courts make these determinations on a case-by-case basis, examining the totality of the circumstances.

In Irizarry, the court concluded that the CEO exercised “operational control” of the company, making him an “employer” under the FLSA, and thus personally liable for the wage and hour settlement. In its decision, the court emphasized that the CEO worked in the corporate headquarters almost every day; handled the banking, real estate and financial matters for the business; was involved with product merchandising; responded to consumer complaints; made employment decisions, such as hiring and firing managerial employees; and visited the company stores to evaluate operations. The CEO’s arguments that he made general corporate decisions and was not involved in the day-to-day operations of the business were rejected by the court.

The Bottom Line for Employers

Irizarry does not establish any new law, but it highlights the importance of proactively assessing and reviewing a company’s wage and hour compliance. The case serves as an important reminder that corporate form does not preclude individual liability for FLSA violations.

If you own a business and are concerned about your potential personal liability for wage and hour violations, please contact the employment lawyers at Schneiders & Associates, L.L.P.

Commercial and Industrial Common Interest Developments (“Commercial CIDs”) in California have historically been governed by the same provisions that apply to planned residential developments and condominiums: the Davis-Stirling Common Interest Development Act (“Davis-Stirling”). However, some of those provisions have resulted in unnecessary burdens and requirements for Commercial CIDs that were really tailored to provide consumer protections for homeowners in residential settings (i.e., open meeting, election and disclosure requirements).

In light of this issue, on September 6, 2013, the California Legislature passed SB752: the Commercial and Industrial Common Interest Development Act. SB752 mirrors many of the provisions contained in Davis-Stirling, but omits some of requirements that were geared toward residential homeowners. For example, SB752 contains provisions governing Commercial CID formation, governing documents, assessments and construction defect litigation, but omits certain Davis-Stirling provisions governing association elections and disclosure requirements.

Although Davis-Stirling wouldn’t apply to commercial or industrial associations, the new Commercial and Industrial Common Interest Development Act would incorporate a good deal of reorganized Davis-Stirling. It repeats, almost verbatim, the provisions defining common interest developments, and the limits on use restrictions – like the limits on an association’s right to restrict displaying the flag. The bill also includes basic maintenance and assessment collection provisions.

It does not include the disclosure requirements that Davis-Stirling imposes on residential developments, or the election or open meeting provisions. The CLRC omitted these consumer-oriented provisions because business owners are usually less in need of their protections.

Commercial and industrial associations are an increasingly significant part of the community association industry, and range from small office condos to sprawling projects that include retail, industrial and office use. The new Act, if it becomes law, will simplify management of these projects. It may also provide a platform for new legislation in future years, which could benefit these associations and further distinguish them from residential associations. 

If you are an owner of a unit in a Commercial CID or are a property manager or one, it is important that you become familiar with the new law and have your governing documents reviewed to make sure they comport with the new legislation and do not contain burdensome provisions which may have been applicable before January 1 2014. The common interest development attorneys at Schneiders & Associates, L.L.P. can provide you with the assistance you need and are willing to meet with you or your board to discuss the effects of SB 752 on your CID. 

SB752 was officially signed into law by Governor Brown on October 5, 2013 and will take effect January 1, 2014.

Schneiders & Associates, L.L.P. is a multi-service law firm located in Oxnard, California with a focus in homeowners’ association matters.  For more information on our firm and services, visit our website at www.rstlegal.com.

On June 26, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional (E.S. Windsor, SCt., June 26, 2013), which brings up an important question: what are the major tax planning implications of this ruling? Immediately after the decision, President Obama directed all federal agencies, including the IRS, to revise their regulations to reflect the Court’s order. How the IRS will revise its tax regulations – and when – remains to be seen; but in the meantime, the Court’s decision opens a number of planning tax opportunities for same-sex couples.

Background

The Supreme Court agreed in 2012 to hear an appeal of a federal estate tax case.  Due to DOMA, the surviving spouse of a same-sex married couple was ineligible for the federal unlimited marital deduction under Code Sec. 2056(a). The survivor sued for a refund of estate taxes. A federal district court and the Second Circuit Court of Appeals found unconstitutional Section 3 of DOMA, which defines marriage for federal purposes as only a legal union between one man and one woman as husband and wife.

Supreme Court’s Decision

In a 5 to 4 decision, the Supreme Court held that Section 3 of DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.  Writing for the five-justice majority, Justice Anthony Kennedy said that “DOMA rejects the long-established precept that the incidents, benefits, and obligations of marriage are uniform for all married couples within each State, though they may vary, subject to constitutional guarantees, from one State to the next.” Kennedy explained that “by creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect.”

Chief Justice John Roberts, who would have upheld DOMA, cautioned that “the Supreme Court did not decide if states could continue to utilize the traditional definition of marriage.” Roberts noted that the majority held that the decision and its holding “are confined to those lawful marriages-referring to same-sex marriages that a State has already recognized.”

Tax Planning

The Supreme Court’s decision impacts countless provisions in the Tax Code, covering all life events, such as marriage, employment, retirement and estate planning. The effect on the Tax Code cannot be overstated. It is expected that the IRS will move quickly to clarify how the decision impacts many of the more far-reaching provisions, such as filing status and employee benefits. Other provisions, especially the complex estate and gift tax provisions, will likely require more time from the IRS to issue guidance.

For federal tax purposes, only married individuals can file their returns as married filing jointly or married filing separately. Because of DOMA, the IRS limited these married filing statuses to opposite-sex married couples. The IRS is expected to issue guidance. Same-sex couples who filed separate returns may want to explore the benefits of filing amended returns (as married filing jointly), if applicable. Our office will keep you posted of developments.

Among the other provisions in the Tax Code affected by the Supreme Court’s decision are:

• Adoption benefits
• Child tax credit
• Education tax credits and deductions
• Estate tax marital deduction
• Estate tax portability between spouses
• Gifts made by spouses
• Retirement plans

Looking Ahead

Will the federal government look to where the same-sex couple was married (state of celebration) or where the same-sex couple reside (state of residence) for purposes of federal benefits? The Supreme Court did not rule on Section 2 of DOMA, which provides that no state is required to recognize a same-sex marriage performed in another state. At the time of the Supreme Court’s decision, 12 states and the District of Columbia recognize same-sex marriage.

In some cases, the rules for marital status are determined by federal regulations, which can be changed without action by Congress. In other cases, the rules are set by statute, which would require Congressional action. Sometimes, a federal agency follows one rule for some purposes but another rule for other purposes. Generally, the IRS has used place of domicile for determining marital status.

If you have any questions about the Supreme Court’s decision and its impact on estate and tax planning, please contact our office.

As part of the Patient Protection and Affordable Care Act (ACA), employers are required to provide a notice to workers on or before October 1, 2013, informing them about the new Health Insurance Marketplace. All full- and part-time employees must receive the notice. Employees hired after October 1 must receive the notice within 14 days of their start date.

What must the notice say?

The notice needs to inform employees about the following:

• A new Health Insurance Marketplace (referred to in the ACA as the “Exchange”) exists to help them acquire health insurance. The notice must also include a brief description of the Marketplace and instructions about how to contact it.
• If their employer offers coverage that does not meet certain requirements (i.e., it covers less than 60% of the total allowed cost of their health benefits), employees may be eligible for a credit to help defray the cost of purchasing a policy through the Marketplace.
• If they choose to purchase a policy through the Marketplace, employees may be risking any employer contribution that would have otherwise helped pay for employer-sponsored insurance, and this contribution may have been partially or fully excluded from taxes.

The notice must be written in a manner designed to be easily understood by employees, and should be delivered via first-class mail. Alternatively, the notice can be provided electronically if the Department of Labor’s safe harbor requirements for electronic disclosure are met.

The Department of Labor has released model language that may be used in the notice. Employers can access it at www.dol.gov/ebsa/healthreform. Two different versions are available, one for employers that currently offer health insurance benefits and one for those that do not.

Which employers are required to send the notice?

According to the Department of Labor, employers that are subject to the Fair Labor Standards Act (FLSA) must send out the notice. These include employers with one or more employees who are engaged in, or produce goods for, interstate commerce, and generate at least $500,000 in annual dollar volume of business.

What happens if employers do not comply?

Although the Department of Labor has stated that FLSA employers must send out the notice by October 1, 2013, no penalties will be assessed for employers that fail to do so. So don’t fret if you have not yet delivered the notice. If you need assistance with this, please let us know. Plan on providing all new hires with the required Notice.