Employer Law Report : Employment and Labor Relations Lawyer & Attorney : Porter Wright's Employer Law Report : Employment Litigation, Non-Compete, Trade Secrets

So, what's the catch? Though this program may help taxpayers avoid federal employment tax obligations, it potentially opens them up to a wide range of liability in cases that almost certainly will be brought against them by the DOL and the newly classified employees themselves. In fact, on September 19th, the IRS and DOL entered into a memorandum of understanding according to which they agreed to an information sharing initiative to fight worker misclassification. Therefore, while the federal government offers its one hand in friendship, it smacks – and smacks hard – with the other.

One would hope that any taxpayer agreement with the IRS to participate in the VCSP would include a non-admissions clause. Nevertheless, every worker that is re-classified as an employee will be alerted to the potential past misclassification and undoubtedly will pursue every avenue available to them to obtain whatever back wages and benefits they think they may be entitled to.

It is this fear of the potential liability looking backwards that has always kept good businesses from adjusting potentially questionable classifications in the past. Making these adjustments can be tricky and very fact specific, so it is best to contact your employment attorney before agreeing to participate in the VCSP.
 

Employers may ask new qualified employees to fill out IRS Form W-11 or a similar statement that contains the same information and is signed under penalty of perjury. Completed forms must be kept by the employer in case the IRS ever questions whether the employer was entitled to the tax exemptions or credit.

The tax exemptions and tax credit could save real money for employers. Because the IRS has not offered particularly specific guidance on this program, however, it is best to err on the conservative side. Make sure that employees are offered the opportunity to fill out a W-11 upon hiring, but make sure those who are doing the hiring do not “oversell” the forms and do not tell every new hire to sign them. Although the terms of the program are pretty broad—allowing employers to take advantage of the tax benefits unless an employee is hired specifically to replace another—it is not clear what the IRS will ask an employer to show to prove that is the case.

Finally, there is no credit or refund available under the HIRE Act when filing the first quarter Form 941 or Employers Quarterly Tax Return. The IRS will issue a revised Form 941 next month, and any first quarter exempt wage amounts accumulated for March 19 through March 31 should be reported as a credit on the revised second quarter Form 941.

This opens the door for some interesting possible disputes. Consider an employee who claims to have quit because of sex harassment. In some cases, an employee who resigns in response to severe harassment can sue the employer just as if she or he was terminated. It is called “constructive discharge.” The employer might argue either that the harassment did not occur or that what did occur was not sufficiently severe to support a “constructive discharge” claim. This sort of dispute sometimes is the subject of litigation that lasts for months or even years. Yet, under the COBRA subsidy provisions, the Department of Labor may end up making a decision on the dispute within the 15-day period set up to appeal disputes over what is an “involuntary termination.” The IRS guidance states that determinations of involuntary termination for purposes of ARRA are “not for any other purposes under the Code or any other law.” Nevertheless, employers should use a great deal of caution in characterizing any termination as “involuntary” unless the employer is convinced that it is an actual termination as a result of employer-initiated actions.

Here are a few other examples of involuntary termination issues:

1.         An employee with performance problems is confronted by the employer with an option: either quit or we will terminate you. 

• The IRS guidance says this is considered an involuntary termination, regardless of whether it is called “resignation.” The same is true even if the resignation comes with a severance agreement.

2.         An employee fails to report to work for three or more consecutive days. The company’s policy states that, in that circumstance, the employee will be considered to have voluntarily resigned. Is this an involuntary termination?

• This specific example is not addressed in the guidance. The best advice to an employer in this circumstance is to characterize the separation as a voluntary quit. However, if the employee appeals that characterization to the Department of Labor claiming he did not intend to quit, the Department of Labor might rule that the termination was instituted by the employer for violation of the work rule and was, therefore, involuntary.

3.         The employer has a policy to terminate employees after six months absence, regardless of the reason. The employer terminates an employee after six months on medical leave. (Of course, after properly considering whether the person is “disabled” under federal and state law and whether additional leave is necessary as a reasonable accommodation).

• Under the IRS guidance, this would be considered an involuntary termination. Involuntary termination is said to occur whenever an employer terminates an employee due to ongoing absence for illness or disability.

4.         An employer institutes a voluntary retirement incentive program. 

• The guidance states that an involuntary termination includes a resignation in return for a severance package (a “buy-out”) where the employer indicates that after the offer period for the severance package a certain number of persons will be terminated.

5.         For economic reasons, an employer reduces an employee’s hours so that he becomes part-time and loses medical coverage. Is this an “involuntary termination” triggering the premium subsidy?

• In a somewhat ironic result, the guidance makes clear that a reduction in hours that does not take an employee to zero hours is not an involuntary termination, even if it results in loss of coverage. Therefore, the employee in this example will have a COBRA-qualifying event, but will not be entitled to the subsidy. In another twist, if the employee quits because of having been reduced to part-time, that might be considered a sufficient “negative material change” in employment conditions that the resignation will be treated as an involuntary termination.

Here are a few other specific examples characterized in the guidance as involuntary terminations: 

• a lay-off for economic reasons, regardless of whether a right-to-recall is stated;
• a retirement, if the employer would have terminated the employee if he had not retired and the employee was aware of that fact;
• a termination for cause, so long as it does not arise to the level of gross misconduct; and
• a lock-out initiated by a company, but not a strike by employees.

One issue that was not addressed in the guidance is the obligation under ARRA that employers or plan administrators seeking reimbursement of the 65 percent premium share maintain records of involuntary terminations, referred to in the statutory language as an “attestation” of involuntary termination. Absent further guidance as to what will suffice for this record-keeping, employers and plan administrators should be certain to maintain copies of the form with the model COBRA notices called “Request for Treatment As An Assistance-Eligible Individual,” because that form requires the person electing the subsidy to indicate his/her belief that the termination was involuntary and requires the employer to indicate its position as to whether the termination was involuntary. Maintaining a log reflecting how each termination was characterized by the employer, whether an appeal was filed, and the ultimate determination is another good idea.