Category: Compensation

Tax Reform Affects Sexual Harassment and Employee Benefits

Tax Reform Affects Sexual Harassment Settlements and Employee Benefits

On December 22, 2017, President Donald Trump signed sweeping tax reform legislation. The controversial tax bill includes many changes that directly affect the employment relationship. These range from sexual harassment settlements and paid family and medical leave to reimbursed employee expenses and retirement plans.

Although I am neither a tax lawyer, nor an accountant, I offer a synopsis of these changes here.

Tax Deductions for Sexual Harassment Settlements

In response to the ongoing #MeToo movement, Senator Bob Menendez (D-NJ) introduced a new provision to the Internal Revenue Code’s section on tax deductions for ordinary trade or business expenses. The provision prohibits deductions for:

  • any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
  • attorney’s fees related to such a settlement or payment.

The tax reform bill doesn’t expand on the meanings of the terms used in this new provision. That leaves its application open for debate, at least until the IRS issues guidance and begins to apply the restriction to actual returns.

Clearly, this new tax code provision will affect settlements of employment claims. This may include both cases of an asserted claim involving sexual harassment or sexual abuse and those where the employer seeks a general release to cover all employment-related claims. In the latter scenario, the employee may not have specifically alleged sexual harassment/abuse. But a broad release would typically reference Title VII and similar state laws that could encompass sexual harassment claims. Employers (and employees) will need to weigh the trade-off between release coverage, confidentiality, and tax deductibility.

Employer Credit for Paid Family & Medical Leave

Employers can now claim a tax credit starting at 12.5% of wages paid to qualifying employees on family and medical leave. Wages paid must be at least 50% of the employee’s normal wages. The credit increases by 0.25% for each full percentage point by which the employer’s wage payment exceeds 50% of the employee’s normal wages, up to a maximum 25% credit.

To be eligible to take the credit, the employer must provide all qualifying full-time employees at least two weeks of paid family and medical leave each year under a written policy. The employer must also provide part-time employees leave on a pro-rata basis.

Qualifying employees are only those who have been employed for one year or more and whose wages do not exceed $72,000 (in 2018, indexed for inflation).

The credit is limited to 12 weeks of paid leave per employee in a tax year. It is only in place for 2018 and 2019 and does not apply to paid leave mandated by state or local law.

Certain Reimbursed Expenses No Longer Excluded from Employee Income

The 2017 tax reform bill repeals certain exclusions from employees’ taxable income. One such exclusion previously applied for certain moving expenses reimbursed by their employer. Another permitted employees to exclude up to $20 per month of qualified bicycle commuting expenses reimbursed by their employer. Under the new tax law, neither of these exclusions apply between January 1, 2018 and December 31, 2025. Subject to future Congressional action, these exclusions are scheduled to return in 2026.

The reforms also indefinitely eliminated employer deductions for certain transportation benefits provided to employees. Specifically, these deductions applied to up to $255 per month for employee mass transit commuting and parking and up to $20 per month in bicycle costs.

There are also changes to tax treatment of qualified equity grants to employees, employee achievement awards, and length of service award plans.

Retirement Plans

The tax changes also affect employer-sponsored defined contribution plans. It gives employees more time to roll over loan balances to an IRA following plan termination or separation from employment. Under the old rules, employees had 60 days to avoid having the loan treated as a distribution. They now have until the due date for filing that year’s tax return.

Other earlier drafts included additional changes that were ultimately dropped. These included reducing the age for beginning in-service distributions from defined benefit and state and local governmental plans to 59 1/2 and changing rules regarding hardship distributions.

Health Care

The new tax bill eliminates the penalty connected to the Affordable Care Act’s individual mandate as of 2019. The penalty still applies to individuals who haven’t maintained sufficient health insurance coverage in 2017 and 2018.

It also reduces the threshold for claiming itemized deductions for qualified medical expenses from 10% to 7.5% of income in 2017 and 2018. The 10% threshold returns in 2019.

Response to Employment-Related Tax Reform Issues

Most of these issues do not require employers to take action (other than paying taxes differently). However, because they will affect taxation of both the employing organization and the employees, questions are likely to arise. Proactive employers should consider the tax impacts and plan accordingly.

Businesses should seek further guidance from appropriate professionals in considering their approach in response to these developments. Often that will mean accounting or tax law professionals. But it will also include attorneys involved in settling disputes with employees, especially (but not only) those involving sexual harassment allegations. An experienced employment lawyer can also assist in preparing a credit-qualifying paid family and medical leave policy.

The IRS indicates that it will provide updates and resources about the new tax reforms here.

New York Pay Frequency

New York Pay Frequency Laws

Do you know how often you must pay your employees? Federal law does not directly address this issue for most employers. But state laws often do. This post describes the most prevalent New York pay frequency requirements for private employers.

New York’s payday laws do not apply to most public (governmental) employers. Many public employees are in unions and have collective bargaining agreements that dictate their pay frequency. While private-sector collective bargaining agreements often also address wage payment issues, they rarely trump state law.

When New York employers must pay employees depends on the nature of the employee’s work. Let’s look at each of the categories.

Manual Workers

New York’s labor law says that employers must pay “manual workers” weekly. More specifically, not later than seven calendar days after the end of the week in which the employee earned the wages.

The law defines “manual worker” to mean “a mechanic, workingman, or laborer.”

There is an exception for all non-profit organizations, who must pay manual workers at least semi-monthly. The New York Commissioner of Labor can also authorize an exception in the case of for-profit companies with at least 1,000 employees in the state, permitting them to pay manual workers no less frequently than semi-monthly.

Commissioned Salespersons

Employers must have a written compensation plan for all “commissioned salesmen” in New York. Then an employer must pay each commissioned salesperson at least once per month, usually by the last day of the month following the month in which they were earned. If there are substantial recurring monthly wages, then the employer need not pay all forms of compensation on a monthly basis. Certain additional compensation can be paid less frequently than monthly, as set forth in the compensation plan.

The law defines “commission salesman” to mean “any employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based in whole or in part on commissions.” This does not include employees whose principal activity is supervisory, managerial, executive, or administrative in nature.

Other Workers

The labor law requires employers to pay “clerical and other workers” not less frequently than semi-monthly. The employer must pay these employees “in accordance with the agreed terms of employment.” It must also designate regular paydays in advance.

The law defines “clerical and other worker” to mean all employees not included as manual workers, commissioned salespersons, or railroad workers. It also does not include employees who work in an qualified executive, administrative or professional capacity who earn more than $900 per week.

There are also special rules for payment of “railroad workers”.

Final Pay Check

When an employee’s employment ends, the employer must pay all wages earned by the next regular payday for the pay period during which the employment ended.

Sometimes the employer cannot determine the final compensation by that time period. For example, commissions or bonuses may depend on ongoing projects. In these cases, the employer must determine when the compensation will be earned and then pay by the applicable payday.

Review Your Pay Practices

Now is a good time to make sure your company is complying with the New York pay frequency rules. While you’re at it, you should also review these related topics especially for New York employers:

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Workforce Design

Workforce Design Meets Employment Law

Let’s say you are an entrepreneur. You have a product or service worth buying, and maybe you’re already selling it. But now you need to build a team to help your business really take off. What legal issues do you need to keep in mind when you consider your workforce design?

Yes, I’m an employment lawyer. No, I’m not suggesting that employment laws should be the primary factor in how you organize the people in your company. But once you have employees, complying with employment laws enters the equation.

Why Should You Design Your Workforce?

What are we talking about anyway? Maybe one day you could actually design the people in your workforce, if you wanted to. They could all be robots. You could order exactly the models and styles you want.

I don’t know if employment laws will eventually apply to robots. I kind of doubt it, and hope not, I think. (Then again, that would help keep people like me relevant despite a robot revolution . . . but I digress.)

If you want you business to work and grow, you want the right people involved. And even if you have the right people, they need some direction and scope of responsibilities. We’re not going to get into titles and job descriptions here. Those really aren’t all that critical to the employment law issues I have in mind. Still, if your employees don’t have some direction, then you’ll have chaos.

Okay, perhaps chaos works for you. But it doesn’t work for most businesses. And it doesn’t avoid the obligation to comply with employment laws. (If you’re interested in the type of chaos that includes disregard of employment laws, then what can I say? Good luck. But here’s a list of government websites you ought to at least know about.)

So, I assume those who are still reading want some structure. Each person reports to someone else. People will have some physical space to work in (though it may not be on company premises). There have to be some rules about what employees can and can’t do. (You’re not going to give everyone access to the bank accounts, right?) You’ll need to address compensation, including guarantees, expectations, and logistics.

That’s probably just the tip of the iceberg in most cases. But it’s enough to get us started here.

How Do You Design Your Workforce?

WARNING: This isn’t intended to be a blueprint. Any good workforce design needs to focus specifically on your business. We can’t tackle that in the abstract. But I think some examples will be helpful.

How much can you spend?

Suppose you’ve spent six months working by yourself to launch your business. Good news: It’s working! You decide that you can afford to spend $150,000 on a staff over the next year. You’ll re-evaluate after that (or, more likely, earlier, but let’s keep this relatively simple!).

Well, now you have to decide how to spend that $150,000.

First, remember that not all of the $150,000 will end up the hands of your employees. Most likely you will at least have to get a workers’ compensation insurance policy. In New York, and a few others states, you’ll also have to have disability benefits insurance. And there’s unemployment insurance. Plus, of course, taxes: FICA, FUTA, income tax withholdings. Oh, and did you want to offer your employees health insurance, life insurance, etc.?

You could try to avoid some of those items by hiring independent contractors, but then you’re taking a risk of misclassification. Many workers treated as independent contractors are really employees under relevant laws. That means you may expose yourself to additional penalties for not providing/deducting all the items in the previous paragraph. That’s not to say you should never use independent contractors–I don’t assume you’ll have a full-time plumber/electrician on staff–but for now we’ll stick with direct employees.

How many employees do you want?

Just to keep the numbers round, we’ll say you’ll end up with $100,000 in real after tax cash (which you’ll pay by check or direct deposit, but you get the point) to offer workers over the next year. How do you want to spread that around? Give it all to one person? Rotate through 10 low-paid part-timers?

Believe it or not, employment laws may have a significant role in this key workforce design decision. Minimum wage and overtime are obvious factors. There’s also the fact that some legal obligations depend on the number of employees you have.

To move things along, let’s go with an initial workforce of 3 employees. We’ll have one full-time employee and two part-timers.

There are still many workforce design questions to answer, such as:

What do full- and part-time mean? How will they be paid? When will they work? Where will they work? What will they do? What will they use?

Workforce Design Meets Employment Law

Let’s take each of the specific questions above and look at how employment law may influence your workforce design decisions.

1. What do full- and part-time mean?

The law doesn’t directly dictate this. Typically, full-time is 40+ hours. But sometimes it’s 35 or 37.5 hours, depending on the length of an unpaid lunch period. And those are only some possibilities.

However, there are laws that apply differently depending on whether an employee is full- or part-time, as defined by the law in question.

The federal workforce reduction law (the WARN Act), for example, uses 20 hours per week as the cutoff for part-time workers. So does the New York Paid Family Leave Benefits Law.

Under the Affordable Care Act (ACA), a worker is full-time if they work 30+ hours per week.

Just looking at those examples, the WARN Act and ACA generally don’t apply to businesses with only 3 employees (referencing our scenario above). But the New York Paid Family Leave Benefits Law does, even if only 1 of the 3 employees works in New York! If you’re trying to structure your New York workforce such that employees won’t be eligible to take paid family leave, then you would need to considerably limit their days and hours worked.

2. How will they be paid?

What if you don’t want to have to pay overtime? Then you basically have two options. One is not to let anyone work over 40 hours per week. The other is to qualify your employees for an exemption to overtime requirements.

Not everyone can be properly classified as exempt. It depends, in part, on what someone actually does in their job. But for most exemptions, the employee also has to be paid on a salary basis. The federal salary threshold is in flux. So, let’s look at state law.

In 2018, an employer with less than 10 or fewer employees, will have to pay a New York City-based employee at least $900/week to satisfy the most typical exemptions. If you’re going to pay that much so you don’t have to pay overtime when they work 50 hours in a week, are you willing to let them have weeks where they only work 30 hours? Or do you need 50 hours of work each week to justify the salary.

And look. If you have around $100,000 to pay 3 people. You can’t afford to have all 3 of them be exempt if they work in New York City. But if they work somewhere with a lower exemption salary requirement, then maybe you could, if their job duties qualify.

3. When will they work?

This ties back into the last problem. You can’t just say work whenever. Sure, you might have employees that don’t work enough. But the bigger problem, especially if you hired hard workers, is that they’ll work too much. Then you’ll be stuck paying overtime you can’t afford.

Some states have laws about working on Sundays, ranging from prohibiting it in certain industries to requiring premium pay. States also have laws that require meal periods. They may prohibit you from having an employee work when you otherwise would like them to. (See, for example, my Primer on the New York Meal Period Requirements.)

In some industries, such as truck driving, there are also specific requirements for how long an employee can work.

4. Where will they work?

Do you have space for them in your office or facility? Can they work at home? Will they need to travel? Who will pay for that?

Remember, especially for non-exempt employees, you have to track time worked. The traditional time clock may be a helpful tool.

Time can be harder to track for employees who are offsite. But there are plenty of technology-based solutions to monitor time. This could range from an email where the employee self-reports time worked on a periodic basis to software that records when the employee logs into and out of their computer. Which methods will you use?

There are also overtime rules that apply in determining whether you have to pay employees for time spent travelling related to work.

And don’t forget access issues. If employees will be working in your facility when you aren’t there, how will they get in? Do they need to lock up when they leave?

5. What will they do?

Sure, job descriptions are nice. You can write those up front, before you hire. Or you can bring on the right people and figure out how they fit best.  Whether written down or not, the scope of an employee’s job matters for employment law purposes.

First, there are the overtime exemptions mentioned above. They almost always depend, in part, on what the employee does. It’s not enough to call someone the Vice President of Sales and assume they’re exempt. If this employee really only enters customer data into a spreadsheet, they’re probably not going to qualify for an exemption.

Next, if you have enough employees to be subject to disability discrimination laws (15 or more under the ADA, often less under state laws), you may end up having to determine the “essential functions” of a person’s job. The ADA protects employees who can perform the essential functions of their job with or without reasonable accommodations.

What if an employee’s disability prevents him from driving? Suppose you want your employees to be able to drive to visit customers, run errands, etc. If that’s only incidental to their primary responsibilities, however, you couldn’t just get rid of the employee who can’t drive due to disability.

There can even be union-related considerations in workforce design. Maybe you don’t want a union (read here). But what if your new employees do. Even at just 3 employees, they could try to unionize. However, if you’re a private employee subject to the National Labor Relations Act, a bona fide “supervisor” isn’t eligible to be in a union. NLRA’s other protections don’t apply to supervisors either. But, again, just calling someone a supervisor doesn’t make it so in the eyes of the law. It will depend on what they actually do in the course of their job.

6. What will they use?

Maybe you have a residential lawn care company. If so, you may only entrust employees to use a push mower and hedge clippers. No big deal.

But, if you’re in a technology field, medicine, or consulting, the stakes may be higher. Are you providing a computer? Access to proprietary databases?

In these situations, you’ll want to consider how to protect your assets, and those of your clients, even from your own employees. Confidentiality agreements and even non-competes may be appropriate.

And you have to keep employees safe too. If you run a factory, for example, you’ll need to implement safety measures consistent with OSHA requirements.

No Shortcuts to Workforce Design

Most entrepreneurs won’t sit down and think through every possible legal issue related to bringing on a workforce. There are plenty of limitations on time and resources when confronting workforce design. But, employment law compliance shouldn’t be an afterthought either.

Larger, more established companies may have more resources and experience with having employees. But that’s not a complete advantage. That means they also have inertia going against them. In many ways its easier to design your workforce from scratch rather than reorganizing an existing staff.

Nevertheless, it’s unlikely that any business will get workforce design exactly right the first time, or any time. You will learn from what works and what doesn’t and adjust accordingly. For better or worse, you will also gain more and more experience with how the various employment laws may affect you. Learn from that too.

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