Cypen & Cypen
JULY 3, 2008
Stephen H. Cypen, Esq., Editor
HAPPY 4TH OF JULY
In June, the Washington Post published an article entitled “Growing Deficits Threaten Pensions -- Accounting Tactics Conceal a Crisis for Public Workers.” Elizabeth Kellar, Executive Director of Center for State and Local Government Excellence, has now responded to that piece. She says there is more to the pension funding story than what was conveyed in the front-page article. Studies conducted this year for the Center for State and Local Government Excellence by the Center for Retirement Research of Boston College, have found that:
It is important to separate analysis of pension funding from that of retiree health-care funding. While pensions are in relatively good shape, retiree health care is less well funded, primarily because the tradition was “pay as you go.” Governments are changing that approach, now that they have begun to account for the unfunded liability they face. Way to go, Liz.
Most people are familiar with the Second Amendment to the U.S. Constitution: “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.” District of Columbia law bans handgun possession by making it a crime to carry an unregistered firearm and prohibiting registration of handguns; provides separately that no person may carry an unlicensed handgun, but authorizes the police chief to issue one-year licenses; and requires residents to keep lawfully owned firearms unloaded and disassembled or bound by a trigger lock or similar device. A police officer applied to register a handgun he wished to keep at home, but the District refused. He filed suit, seeking, on Second Amendment grounds, to enjoin the District from enforcing the bar on handgun registration, the licensing requirement insofar as it prohibits carrying an unlicensed firearm in the home and the trigger-lock requirement insofar as it prohibits use of functional firearms in the home. The trial court dismissed the suit, but the Circuit Court of Appeals reversed, holding that the Second Amendment protects an individual’s right to possess firearms and that the District’s total ban on handguns, as well as its requirement that firearms in the home be kept nonfunctional even when necessary for self-defense, violated that right. On certiorari review, the United States Supreme Court affirmed. The Second Amendment protects an individual’s right to possess a firearm unconnected with service in a militia, and to use that arm for traditionally lawful purposes, such as self-defense within the home. The Amendment’s prefatory clause announces a purpose, but does not limit or expand scope of the second part, the operative clause. However, the Court’s opinion should not be taken to cast doubt on longstanding prohibitions on possession of firearms by felons and the mentally ill, or laws forbidding carrying of firearms in sensitive places such as schools and government buildings or laws imposing conditions and qualifications on commercial sale of arms. The District of Columbia v. Heller, Case No. 07-290 (U.S., June 26, 2008).
Rosen was employed by SmithBarney, and participated in its Capital Accumulation Plan. He voluntarily executed an agreement that allowed SmithBarney to use a percentage of his compensation to purchase parent company stock after an initial six-month deferral period. The CAP afforded him shareholding voting rights and dividends, as well as other benefits, and ownership in plan stock fully vested after a period of two years. The CAP enrollment form provided, however, that all invested funds would be forfeited if a participant resigned or was terminated before expiration of the two-year vesting period. The forfeiture provisions were consistent with Internal Revenue Code provisions permitting tax deferral. When Rosen voluntarily resigned from employment prior to two years, SmithBarney invoked CAP’s forfeiture clause and retained Rosen’s unvested plan stock. Rosen filed suit, alleging the CAP violated New Jersey’s Wage and Hour Law because its terms required forfeiture of earned wages. The trial court granted Rosen’s motion for summary judgment, declaring the CAP null and void. The Appellate Division reversed, concluding that the CAP violated neither the Wage and Hour Law nor the state’s public policy. Now, the Supreme Court of New Jersey has affirmed the Appellate Division. Incentive compensation plans in general, and the CAP in particular, find their authorization within the terms and provisions of the Wage and Hour Law itself. Neither the fact that there was a vesting period attached to full and complete ownership of the interest, nor the fact that the CAP included a forfeiture provision, violates any of the provisions of that statute. There were two significant benefits of the CAP that made it attractive to plaintiffs, namely, the ability to purchase securities at a deep discount and the tax benefits accorded as a deferred compensation plan. The very features of the CAP about which plaintiffs complain were part and parcel of the latter. Moreover, the court rejected the assertion that the CAP’s inclusion of, and SmithBarney’s potential invocation of, a forfeiture provision, operated as a penalty that therefore violated public policy in some fashion. The court discerned nothing to support the conclusion that the forfeiture provisions, which were an integral part of SmithBarney’s CAP deferred incentive compensation program and to which Rosen voluntarily participated, violated the Wage and Hour Law or the public policy that it represents and embodies. Rosen v. SmithBarney, Inc., Case No. A-49-07 (N.J., June 25, 2008). [Editor’s Note to Dave F.: you definitely did not coin the term “Golden Handcuffs.”]
CCH reports on recent Internal Revenue Service advice regarding IRS’s attempt to levy assets in a retirement fund account of a taxpayer who has not yet reached retirement age. The taxpayer had an account with a state retirement fund from her previous employment, but was neither employed by the state nor retired. The facts get a little sticky here, because the fund allowed members to “suspend” membership in the fund and receive a distribution of assets, but the member/taxpayer had not elected to do so. According to IRS Chief Counsel, IRS cannot “elect,” on behalf of the taxpayer, to suspend her membership in the retirement fund in order to secure the immediate release of assets in that account. Upon service of a notice of levy, IRS steps in the shoes of the levied taxpayer and acquires the same property rights as the taxpayer has at time of levy. In this case, the levy reached the taxpayer’s future rights to retirement benefits upon reaching retirement age, since taxpayer had that right at time of levy. However, levying on the present right to future payment would not require immediate distribution by the retirement fund; the levy would only have to be honored when benefits became payable to the taxpayer under terms of the retirement fund. IRS could not exercise the taxpayer’s right to suspend membership in the retirement fund in order to obtain assets in that fund prior to her retirement date. It goes without saying, then, that IRS could not “elect,” on behalf of a taxpayer, to retire, in order to levy upon the retirement account.
Last year, the U.S. Department of Labor responded to a letter from the U.S. Chamber of Commerce expressing concern about use of pension plan assets by plan fiduciaries to further public policy debates and political activities through proxy resolutions that may have no connection to enhancing the value of the plan’s investment in a company. ERISA Advisory Opinion No. 2007-07A (December 21, 2007; see C&C Newsletter for January 17, 2008, Item 2). Now, DOL has responded to another letter from the U.S. Chamber of Commerce, requesting guidance on whether the fiduciary rules of ERISA prohibit use of plan assets to promote union organizing in campaigns and union goals in collective bargaining negotiations. (The inquiry was apparently in addition to issues DOL addressed in Advisory Opinion No. 2007-07A.) By way of background, ERISA requires each plan fiduciary to discharge his duties prudently and solely for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expense of administering the plan. DOL has long construed the requirement that a fiduciary act solely in the interest of, and for the exclusive purpose of providing benefits to, participants and beneficiaries as prohibiting a fiduciary from subordinating interests of participants and beneficiaries in their retirement income to unrelated objectives. DOL has also consistently rejected a construction of ERISA that would render its tight limits on use of plan assets illusory and that would permit plan fiduciaries to expend trust assets to promote myriad public policy preferences. Rather, DOL has reiterated its view that plan fiduciaries may not increase expenses, sacrifice investment returns or reduce security of plan benefits in order to promote collateral goals. Among other things, DOL has explained that the mere fact that plans are important participants in the national economy, and are generally affected by actions and events that affect the economy as a whole, does not convert policy proposals concerning the economy into a rationale for using plan assets on debates surrounding such proposals. (See C&C Newsletter for May 26,. 2005, Item 3.) ERISA, as well as all subsequent guidance issued by DOL, makes it clear that in deciding whether and to what extent to make, or refrain from making, a particular investment, a fiduciary may only consider factors relating to the interests of the plan participants and beneficiaries in their retirement income. A decision to make or refrain from making an investment may not be influenced by a desire to promote a particular industry or industry member, or to generate employment within that industry or industry member, unless the investment, when judged solely on the basis of its economic value to the plan, would clearly be equal or superior to alternative investments available to the plan. (Well, folks, that statement just about kills any type of socially responsible investing.) Similarly, DOL has made clear that the expenditure of plan assets to pay costs or expenses that should be borne by a plan sponsor or other entity in the ordinary course of its business or operation violates ERISA’s prudence and exclusive purpose requirements. DOL believes the use, or threat of use, of pension plan assets or plan management to achieve a particular collective bargaining objective is activity that subordinates the interests of participants and beneficiaries in their retirement income to unrelated objectives. Although union representation of plan participants and benefit related provisions of collective bargaining agreements may in some sense affect the plan, the fiduciaries may not, consistent with ERISA, increase its expenses, sacrifice investment returns or reduce security of plan benefits in order to promote or oppose union organizing goals or collective bargaining objectives. In addition, expenditures of plan assets to urge union representation of employees in the collective bargaining process or to promote a particular collective bargaining demand may constitute a prohibited transfer of plan assets for the benefit of a party in interest, and potentially an act of self-dealing under ERISA. The U.S. Chamber of Commerce is surely a very powerful organization. And as we have previously stated, although the letter deals with ERISA (which does not apply to public plans), it may be applicable to public plans by extension.
When the federal government ordered Knolls, one of its contractors, to reduce its work force, Knolls had its managers score their subordinates on “performance,” “flexibility” and “critical skills;” these scores, along with points for years of service, were used to determine who would be laid off. Of the 31 employees let go, 30 were at least 40 years old. Meacham was among those laid off, and he filed suit asserting, inter alia, a disparate-impact claim under Age Discrimination in Employment Act of 1967. To show such an impact, Meacham relied on a statistical expert’s testimony that results so skewed according to age could rarely occur by chance, and that the scores for “flexibility” and “criticality,” over which managers had the most discretionary judgment, had the firmest statistical ties to the outcomes. A jury found for Meacham on the disparate-impact claim, and the U.S. Second Circuit Court of Appeals affirmed. The United States Supreme Court vacated the judgment and remanded in light of an intervening 2005 decision. On remand, the Second Circuit held for Knolls, finding its prior ruling untenable because it had applied a “business necessity” standard rather than a “reasonableness” test in assessing the employer’s reliance on factors other than age in the layoff decisions, and because Meacham had not carried the burden of persuasion as reasonableness of Knolls’s non-age factors. In vacating and remanding, the United States Supreme Court held that an employer defending a disparate-impact claim under ADEA bears both the burden of production and the burden of persuasion for the “reasonable factors other than age” (RFOA) defense. Given that the statute lays out its exemptions in a provision separate from the general prohibitions, and expressly refers to the prohibited conduct as such, it is no surprise that the Supreme Court has spoken of the RFOA as being among ADEA’s five affirmative defenses. Of course, when a proviso carves an exception out of the body of a statute or contract, those who set up such exception must prove it. Meacham v. Knolls Atomic Power Laboratory, 21 Fla. L. Weekly Fed. S400 (U.S., June 19, 2008).
Metropolitan Life Insurance Company was an administrator and insurer of Sears’s long-term disability insurance plan, which was governed by Employee Retirement Income Security Act of 1974. The plan gave MetLife, as administrator, discretionary authority to determine validity of an employee’s benefits claim, and provided that MetLife, as insurer, would pay the claims. Glenn, a Sears employee, was granted an initial 24 months of benefits under the plan following a diagnosis of a heart disorder. MetLife encouraged her to apply for, and she began receiving, Social Security disability benefits based on an agency determination that she could do no work. But when MetLife itself had to determine whether she could work, in order to establish eligibility for extended plan benefits, it found her capable of doing sedentary work, and denied her benefits. Glenn sought federal court review under ERISA, but the District Court denied relief. In reversing, the U.S. Sixth Circuit Court of Appeals used the deferential standard of review, and considered it a conflict of interest that MetLife both determined an employee’s eligibility for benefits and paid benefits out of its own pocket. Based on a combination of this conflict and other circumstances, the appellate court set aside MetLife’s benefits denial. In affirming, the U.S. Supreme Court said that the significance of the conflict of interest factor will depend upon the circumstances of the particular case. The conflict of interest must be weighed as a factor in determining whether there is an abuse of discretion. Here, the Sixth Circuit gave the conflict some weight, but focused more heavily on other factors: that MetLife had encouraged Glenn to argue to the Social Security Administration that she could do no work, received the bulk of the benefits of her success in doing so (being entitled to receive an offset from her retroactive Social Security award) and then ignored the agency’s finding in concluding that Glenn could do no sedentary work; and that MetLife had emphasized one medical report favoring denial of benefits, had de-emphasized other reports suggesting a contrary conclusion and had failed to provide its independent vocational and medical experts with all relevant evidence. [Not even close.] Metropolitan Life Insurance Company v. Glenn, 21 Fla. L. Weekly Fed. S393 (U.S., June 19, 2008).
About two years ago, a federal court was required to decide whether AT&T Corporation, in making retirement benefits determinations, discriminated against women who took pregnancy-related leaves before 1979 (see C&C Newsletter for March 16, 2006, Item 1). The Pregnancy Discrimination Act of 1978, an amendment to Title VII, became effective April 29, 1979. Prior to the PDA, an AT&T employee on pregnancy leave was not awarded service credit for the entire period of her absence, whereas employees on other temporary disability leaves received full service credit for that time period. Although AT&T today awards full credit for pregnancy leaves, plaintiffs in the instant case, four female employees, complained that the company’s failure to give employees full service credit for their pre-PDA leaves affected their eligibility for and computation of retirement benefits, a present violation of the PDA. The district court granted summary judgment in plaintiffs’ favor on their Title VII claims, concluding that AT&T’s post-PDA benefits determinations violated the PDA. Because the result reached by the district court gave the PDA impermissible retroactive effect under controlling law, the federal court of appeals reversed. The presumption against statutory retroactivity is founded upon sound considerations of general policy and practice, and accords with long held and widely shared expectations about the usual operation of legislation. In the absence of a clear expression of intent by Congress that a particular legislative enactment is to apply to events that occurred before the effective date of the legislation, the default rule is no retroactive application. There is nothing in the text of the PDA to indicate a clear congressional intent that the provisions of the statute are to be applied in such a way as to change the legal consequence of conduct that occurred prior to the statute’s enactment. Relevant conduct is the employer’s practice, pre-PDA, of giving only limited service credit for pregnancy leaves, and the acceptance of that practice by the affected employees. Hulteen v. AT&T Corporation, Case No. 04-16087 (U.S. 9th Cir., March 8, 2006). Now, the United States Supreme Court has granted AT&T’s petition for certiorari. AT&T Corporation v. Hulteen, Case No. 07-543 (U.S., June 19, 2008). Note, the United States filed an amicus curiae brief, recommending grant of certiorari.
Waybright died from accidental heat stroke while training to join the Frederick County Fire Department. His parents brought suit on state constitutional and tort law grounds, but also, with the same conduct in view, under 42 USC §1983 and substantive due process. The §1983 claims overreached; nothing defendants did rose to a level of a due process violation, and accidents, for the most part, are a matter of state law. As to state constitutional and tort law claims, the U.S. Fourth Circuit Court of Appeals remanded them to state court, where the case began and where it still belonged. The United States Supreme Court has, for half a century now, marked out executive conduct wrong enough to register on a due process scale as conduct that “shocks the conscience,” and nothing less. The shocks-the-conscience test turns on degree of fault. For a due process challenge to executive action to succeed, the general rule is that the action must have been “intended to injure in some way unjustifiable by any government interest.” As to “negligibly inflicted, harm” it is “categorically beneath the threshold of constitutional due process.” Waybright v. Frederick County, Maryland, Case No. 07-1289 (U.S. 4th Cir., June 2, 2008).
Lawrence and other fire service paramedics employed by the City of Philadelphia Fire Department filed suit in federal court, alleging that the city had violated overtime payment requirements of the Fair Labor Standards Act, specifically requiring employer to pay overtime for any employee working more than 40 hours in a work week. It is generally known that by law an employer must pay time-and-a-half for overtime. It is less well-known that certain employment is exempt. The trial court entered summary judgment in favor of the city and against the paramedics, thereby determining the issue of liability. The paramedics appealed, arguing that the district court erred in determining they were trained in and had a responsibility to engage in fire suppression activities as required by FLSA. In a case of first impression in the circuit, the appellate court had to determine whether paramedics employed by the city fire department have legal authority and responsibility for fire suppression activities within the meaning of FLSA, thereby bringing them among the exemptions. FLSA sets forth three statutory requirements that an individual must meet in order to be engaged in fire protection activities. The individual: (1) must be trained in fire suppression; (2) must have legal authority and responsibility to engage in fire suppression and (3) must be employed by a fire department. In reversing, the appellate court decided that the paramedics were not responsible for fire protection activities as a matter of law. It was the city’s burden to demonstrate that it met all three requirements necessary to qualify for the exemption. It is not necessary to reach the question of whether the paramedics were ”trained” in fire suppression, because the city failed to meet one of the requirements. The court concluded that the paramedics were not exempted from the overtime provision of FLSA. Lawrence v. The City of Philadelphia, Pennsylvania, Case No. 06-4564 (U.S. 3rd Cir., May 28, 2008). [But see, Huff v. DeKalb County, Georgia, Case No. 07-10862 (U.S. 11th Cir., February 15, 2008), C&C Newsletter for February 21, 2008, Item 4, for a case, on different facts, that went the other way.]
This report from law.com is apropos of nothing but happened to catch our eye. The New York Court of Appeals has upheld dismissal of claims brought by a woman who had sued her rabbi for abusing his position by allegedly persuading her to have sex with him to help her find a husband. The Court ruled that she had failed to meet a vigorous pleading standard required to pursue damage claims against the rabbi. This upstanding man of the cloth told the woman that “he was as close to God as anyone could get” and having sex with him would be “her only hope.” According to the complaint, the woman engaged in a 3 1/2 year consensual affair after going to the rabbi for counseling on a range of personal affairs, including her problems finding a husband. Is this a great country, or what?
With her marriage she got a new name and a dress.
“Things may come to those who wait, but only the things left by those who hustle.” Abraham Lincoln
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