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The recent U.S. Supreme Court's decision in United States v. Quality Stores, Inc. resolved a disagreement among the U.S. Courts of Appeal about whether severance payments are subject to taxes required under the Federal Insurance Contributions Act (FICA).  The Court held that severance payments are taxable "wages" for FICA tax purposes. This decision means that an employer who pays severance to a terminated employee must withhold and pay the employee's share of the FICA taxes and must pay the employer's share of the FICA taxes on the severance pay.

The Court, however, did not rule on whether the requirement for FICA tax withholding applied to severance payments which are part of a supplemental unemployment benefits ("SUB") plan. A SUB plan provides additional payments to employees who are receiving unemployment benefits because of an employee's involuntary separation from employment (whether or not such separation is temporary) due to a reduction in force, the discontinuance of a plant or operation, or other similar conditions. SUB plans have been around for many years and have been common in the automotive industry. Years ago the IRS ruled that severance payments made in connection with SUB plans are not "wages". Based on this IRS ruling, severance payments from a SUB plan have not been subject to FICA and income tax withholding. Because an employee might be subject to a big income tax bill for the tax year, Congress passed a law that required income tax withholding, but Congress did not address FICA tax withholding.

In summary, it appears that employers have the option of using a SUB plan to eliminate FICA tax obligations and thereby reduce severance program costs, at least until the IRS changes its position on this issue.


It looks like announcements are steadily coming from the Administration setting forth additional requirements on federal contractors. On July 21, 2014, President Obama signed an executive order banning job discrimination against gay and lesbian American workers of federal contractors. In making the announcement, the President stated that Congress has debated such legislation for decades without agreeing to it, and so he indicated he was going to exercise executive authority to take the step for federal contractors. The executive order also protects workers based not just on sexual orientation, but also gender identity, meaning transgender employees. There are no exemptions for religious groups in the executive order. However, the Obama executive order leaves in place exemptions that religious contractors enjoy regarding ministerial positions. It appears that the sexual orientation and gender identity discrimination bans, like the general prohibitions on race, sex, religion and national origin bias, will apply to all contractors with ten (10) or more employees. Affected employers will get a chance to comment on regulations implementing this new order before they become final.

The President noted that 18 states and more than 200 cities have already banned discrimination based on sexual orientation. Currently, Title VII bars employers from discriminating against workers based on sex, but does not expressly prohibit sexual orientation or gender identity bias in the workplace.

In addition, on July 31, 2014, the President signed an executive order requiring prospective contractors to disclose to agencies violations of 14 federal wage and hour, discrimination, health and safety, family and medical leave, labor and other workplace laws. Known as the "Fair Pay and Safe Workplaces Executive Order," it applies to new federal contracts of more than $500,000.00 starting in 2016. It will require companies to reveal all such workplace violations in the past three years before becoming eligible for a contract. The Administration intends to deny contracts to firms with the most egregious track records. Each agency will appoint a labor compliance advisor who, under Department of Labor guidance, will review disclosures and consult with contracting officers to disqualify the worst violators from contract consideration.

The executive order also requires contractors to provide their employees with accurate pay documents showing hours worked, overtime hours, pay and any additions or deductions made from pay. If the contractor is treating an individual performing work under a contract as an independent contractor, rather than an employee, the contractor must provide a document informing the individual of that status.

Further, employers with contracts of $1 million may not require workers who are not covered by a collective bargaining agreement with the union to arbitrate claims under Title VII or any tort related to or arising out of sexual assault or harassment.

The current executive orders follow a February executive order, which currently is in rule-making process, to raise the minimum wage of federal contractors' employees to $10.10 per hour.

National employer organizations immediately announced concern about this form of "black listing" companies from federal contracts possibly due to minor infractions of complex labor laws. However, government officials said that minor offenses would not disqualify a company, and that the agencies would provide guidance to companies that have been identified as having a history of labor law violations. Such firms would have an opportunity to remedy their legal practices, which the contracting officer would take into account in awarding contracts. President Clinton tried a similar approach with an executive order barring the government from giving federal contracts to companies that hired permanent replacements of striking workers. However, the D.C. Circuit Court of Appeals rejected that effort in Chamber of Commerce v. Reich, (C.A.D.C. 1996), when the court struck the order down on grounds that it violated the National Labor Relations Act.

There is good news to contractors in that a number of items were left out of the new executive order, items pertaining to the adoption of a fair compensation preference to employers that pay a "living wage" and/or creation of a contracting preference for employers that "respect collective bargaining rights."


There has been some confusion about when the new requirements pertaining to individuals with disabilities and protected veterans apply to affirmative action plans. The additional requirements only apply when specific contract value and employee thresholds are met.

Employers with federal contracts worth more than $10,000.00 are subject to the general non-discrimination provisions. However, similar non-discrimination obligations regarding protected veterans apply only to employers with federal contracts valued at $100,000.00 or more. The larger threshold of $100,000.00 also applies to the additional written affirmative action plan obligations relating to veterans.

In contrast, the new disability requirements apply when employers have federal contracts worth more than $50,000.00. These disability requirements require a nation-wide seven percent (7%) utilization goal for disabled individuals in each job group of a federal contractor's workforce. If a contractor has less than 100 employees, the final rule requires the seven percent (7%) goal to be applied to the entire workforce.

In all cases, the employer must have 50 or more employees to meet the threshold requirements. In case the contract value thresholds are met, the requirements for the federal contractor is to invite job applicants to voluntarily self-identify either as protected veterans or as individuals with disabilities, or both, at the pre-offer and the post-offer phases of the employment process.

On June 18, the Labor Department's Office of Federal Contract Compliance Programs issued additional guidance. Among other things, the guidance indicates that federal contractors are not required to hire a disabled individual who is not the best qualified candidate for a position in order to meet the affirmative action rules. However, contractors would not violate the rules by selecting a disabled applicant over an equally or better qualified candidate, "so long as that selection was not based on a prohibited factor such as race, gender or ethnicity."

With respect to a contractor's obligation to invite current employees to voluntarily self-identify as disabled, the guidance clarified that employers "have the flexibility to choose any method or methods that are reasonably and likely to be effective, given its particular circumstances." These methods could include email notices or employee portals on the company Intranet, or bulletin board notices posted in an employee break room. If the contractor receives "non-responses" to the invitation to voluntarily self-identify, the OFCCP indicates that the contractor should count those responses "solely in the job group total" when conducting a utilization analysis to determine the percentage of disabled individuals within a job group. However, if a contractor has actual knowledge that a particular non-responsive individual has a disability, it may count that person as an individual with a disability for utilization analysis purposes whether or not the individual voluntarily self-identified.

Regarding the self-identification provisions for veterans, the OFCCP guidance indicates that if an individual self-identifies as a protected veteran at the pre-offer stage of the employment process but then doesn't positively self-identify at the post-offer stage, a contractor may still identify that new hire as a "protected veteran."


Obamacare prohibits an employer from imposing a waiting period of more than 90 days before an otherwise eligible full-time employee can begin participating in the employer's health plan. Recent regulations, however, create two safe harbors that an employer, particularly an employer with high turnover, may wish to consider.

Regulations issued in February (26 CFR § 54.9815-2708(c)(3)(ii)) allow a health plan to impose up to a 1,200 hour of service requirement before starting the waiting period.  The employer would need to track the hours precisely and start the waiting period on the first day after the employee completes the 1,200 hour of service requirement.

Regulations issued in June (26 CFR § 54. 9815-2708(c)(3)(iii)) allow an employer to impose an orientation period of not more than one month minus one day before the waiting period begins. The orientation period must begin on the employee's start date.

An employer should consult with legal counsel to make sure that these or other methods for minimizing the impact of the 90-day limit on waiting periods do not create legal problems. For example, large employers may find that adopting either method would result in employer taxes.


Obamacare and the related regulations have generated much litigation, including two U.S. Supreme Court decisions. The Supreme Court ruled in a case brought by 26 states and others that requiring individuals to pay a penalty for not having health insurance is constitutional as a tax. The Supreme Court also ruled in the Hobby Lobby case that the federal government could not require a closely-held corporation to provide drugs that cause abortions as a health benefit if the employer has religious objections to doing so. It now appears that another issue may be decided by the Supreme Court.

Federal law provides that certain individuals who purchase health insurance coverage in an Exchange established by the State may claim a tax credit. According to this language, the tax credit is not available for those individuals who purchase health insurance coverage through any other source, including an Exchange established by the federal government. The legal consequence of this interpretation is that many employers in States who do not establish Exchanges will not be subject to employer penalties, even if they do not offer minimum essential coverage that is affordable and that provides minimum value.

Because many States (approximately 34) chose not to establish Exchanges, the IRS issued a regulation that expanded the availability of the tax credit to those individuals who purchase health insurance coverage in an Exchange established by the federal government. The effect of the IRS regulation is that the tax credit is available without regard to whether the Exchange was established by a State or by the federal government.  As a result, the IRS appears to contemplate that all employers with more than 50 full-time equivalent employees will be subject to employer penalties, even if the States in which the employers operate do not establish Exchanges.

On Monday, July 22, 2014, a three judge panel of the Court of Appeals for the District of Columbia Circuit (which decides many challenges to agency rulings and regulations) and a three judge panel of the Court of Appeals for the Fourth Circuit (which covers Maryland, North Carolina, South Carolina, Virginia and West Virginia) issued conflicting decisions about whether the IRS regulation is a valid interpretation of the law. In Halbig v. Burwell, the D.C. Circuit invalidated the IRS regulation because the plain language of the law limited the availability of the tax credit to those individuals who purchase health insurance coverage in an Exchange established by a State. In contrast, the Fourth Circuit upheld the IRS regulation in King v. Burwell by concluding that the IRS regulation was a permissible interpretation of an ambiguous law.

There is speculation that the losing party in each Circuit will ask for a decision by all the judges in that court. For example, the federal government might ask all of the judges assigned to the D.C. Circuit to review the decision issued by the three judge panel. Given the U.S. Senate's recent action to reduce the number of votes needed to approve a judicial appointment, given the addition of three Obama appointees to the D.C. Circuit because of the Senate's action, given that the D.C. Circuit now has seven members appointed by Democrat presidents and four appointed by Republican presidents, and assuming that the D.C. Circuit agrees to review by all of the judges, it is likely that the entire panel will uphold the IRS regulation. Given the appointments to the Fourth Circuit in the last five years and the current composition of the Fourth Circuit, it also is likely that the entire panel will uphold the IRS regulation.

Ordinarily, the U.S. Supreme Court will not decide an issue unless there is a conflict among the Courts of Appeal. Accordingly, if the D.C. Circuit and the Fourth Circuit reach the same conclusion, it is unlikely that either case will be accepted by the Supreme Court. However, the same issue is being considered by district courts in other circuits, which means that a conflict among the circuits is possible in the future, even if the D.C. Circuit and the Fourth Circuit ultimately agree.

What should employers do in response to these conflicting decisions? For the time being, employers should continue with their plans for complying with Obamacare and the related regulations recognizing that Obamacare and the related regulations will be the subject of litigation for the next few years.

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