Federal Overtime Revisions Moving Forward

In late November, opponents of the proposed federal rules that would change overtime pay provisions abandoned their attempts to block the rules from going forward. The proposed changes had faced strong opposition from labor unions and had divided Democrats and Republicans along party lines. It is now likely that the revisions will go into effect in 2004.

Although the Department of Labor has touted the proposed changes as providing overtime pay for 1.3 million "low-wage" workers not previously eligible for the pay, for the most part the revisions seem to benefit employers. More employees may be eligible for overtime pay because the salary threshold would increase from $155 a week to $425 a week. However, under the proposed changes, workers earning $65,000 a year or more and performing non-manual tasks would likely be ineligible for overtime.

Determining whether someone is exempt under the administrative exemption may become an easier task under the proposed changes, as well. Most notably, the requirement that such an employee exercise "discretion and independent judgment" would be replaced with a requirement that he/she have a "position of responsibility." While still not a precise standard, there appears to be a consensus that more workers would now fall within the exemption. The professional exemption is also arguably broadened under the proposed changes. Rather than requiring the exercise of advanced knowledge acquired by a prolonged course of specialized study, the new test would allow employees to qualify for the exemption by showing a combination of schooling and work experience.

Employers would also be granted greater freedom to impose unpaid disciplinary suspensions on exempt workers. Currently, employers may only deduct from pay for suspensions of less than a full week if they are the result of a violation of a major safety rule. Suspensions for sexually harassing conduct, for example, do not fall within this provision. Under the proposed changes, employers would be able to impose unpaid disciplinary suspensions of one or more full days for violations of written policies, unrelated to safety.

What, if anything, these changes would mean to Connecticut employers is unclear. While the proposed changes would impact interpretation of federal law, there are no similar changes pending at the state level. It is likely, at least initially, that the Connecticut Department of Labor (DOL) would continue to interpret and apply state law as it has in the past.

It is imperative, then, that when and if the federal revisions are finalized, Connecticut employers remain cautious. A wholesale change in exempt/non-exempt classifications would be unwise until the Connecticut DOL provides better guidance on what, if any, impact these changes will have on Connecticut employers.

On December 2, 2003, the United States Supreme Court decided Raytheon Co. v. Hernandez, No. 02-749, an Americans with Disabilities (ADA) case that had been watched for its potential impact on the ability to uniformly enforce employer policies. Unfortunately, the decision left many questions unanswered.

Joel Hernandez had worked for Hughes Missile Systems for 25 years at the time he was terminated for being under the influence of illegal drugs and alcohol. Two years after his termination, he reapplied for a position and attached two reference letters to his application, one from his pastor and one from an Alcoholics Anonymous counselor that stated he was in recovery. The Human Resources employee who reviewed Mr. Hernandez' application claimed that when examining the application she noted that Mr. Hernandez had previously worked for the company. Upon investigation, she discovered he had been terminated for workplace misconduct, and rejected his application pursuant to a company policy against rehiring such employees. Mr. Hernandez filed a claim against the company, alleging he had been discriminated against in violation of the ADA.

The Supreme Court held that the Ninth Circuit Court of Appeals applied the wrong analysis to the case, and remanded it for further proceedings. The Court reiterated the distinction it has historically made between disparate treatment and disparate impact cases. In disparate treatment cases, the employer treats individuals less favorably because of their protected class status (e.g., the employer discriminates against individuals on the basis of their race, religion, etc.). Since Mr. Hernandez claimed he was treated differently because of his disability, the question was whether the employer's offer of its policy as justification for the failure to rehire him was simply a pretext for a different, discriminatory reason. The Ninth Circuit's finding that the blanket policy against hiring former employees terminated for workplace misconduct screened out persons with a record of addiction and thus violated the ADA was, the Court found, an analysis of the law as relates to disparate impact, rather than disparate treatment, cases.

The Court unequivocally stated that a rehire policy such as the one at issue in this case, "is a quintessential legitimate, nondiscriminatory reason for refusing to rehire an employee . . . " The use of one thus can be evidence that the decision not to rehire a former employee had a legitimate, nondiscriminatory basis. In addition, the Court suggested in footnotes to the case both that employers may discipline employees for behavior arising out of their disability and that an employer cannot violate the ADA if it is unaware of the disability in question.

The question left unanswered by the Court in Hernandez, however, is whether the application of a policy not allowing the rehire of anyone involuntarily terminated can be uniformly applied, or whether exceptions may need to be made.

Any employer with a policy that makes employees who have been involuntarily terminated for workplace misconduct ineligible for hire should consider whether it is appropriate to have a procedure in place for determining whether exceptions may need to be made. An employee who was terminated for behavior arising out of his/her disability may have a claim under the ADA if he/she is not considered for rehire. More generally, employers should consider, on a case-by-case basis, whether any rule or policy should be waived as a reasonable accommodation when it impacts the ability of an employee to perform the essential functions of his/her job.

OSHA's National Emphasis Program (NEP), under which it inspected over 800 nursing homes since July 2002, expired on September 30, 2003. OSHA will not renew the program. Instead, in an OSHA directive released on October 20, 2003, it added nursing homes and personal care facilities to its 2003 Site Specific Targeting Program (SST). This change is expected to reduce by half the number of yearly OSHA nursing home inspections.

The SST program selects for inspection individual worksites as identified through the 2002 Data Initiative. The 2002 Data Initiative is a nationwide collection of injury and illness data. Under the SST, OSHA will place a nursing home on its SST primary inspection list if the nursing home's days away from work injury and illness case rate (DAFWII) is at or above 9.0 or its lost workday injury and illness rate (LWDII) is at or above 14.0. A DAFWII of 9 or higher means a worksite has nine or more cases involving days away from work per 100 full-time employees. The LDWII rate is the num-ber of lost work day injuries and illnesses divided by the total number of hours worked by all workers during the calendar year multiplied by 200,000 (the base for 100 full-time equivalent workers.) OSHA estimates that pursuant to the SST pro-gram it will inspect about 400 nursing homes in fiscal 2004.

In an important case of first impression in the U.S. District Court for the District of Connecticut, the court, in Parmanand v. Capewell Components, LLC, held in September that contingent attorneys' fees paid directly by the defendant to the plaintiff's attorney constitutes gross income to the plaintiff (as well as to the attorney). The Second Circuit has not yet decided this issue, although a Vermont district court recently held that contingent attorneys' fees are not includable in a plaintiff's gross income. Additionally, there is a split among the Courts of Appeals that have considered this issue, with the Third, Fourth, Seventh, Ninth, Tenth and Federal Circuits including contingent attorneys' fees paid directly to a plaintiff's attorney in the plaintiff's gross income and the Fifth, Sixth and Eleventh Circuits holding that such contingent attorneys' fees do not constitute gross income to the plaintiff. The Supreme Court has denied certiorari on this issue four times.

In the settlement agreement reached by the parties in Parmanand, the defendant was required to make a separate payment directly to the plaintiff's attorney for contingent attorneys' fees that the plaintiff incurred in pursing his legal claims. The plaintiff took the position that the attorneys' fees paid did not constitute gross income to the plaintiff, but only to the attorney, as Connecticut's lien law gives an attorney a property interest in contingent attorneys' fees superior to that of a plaintiff. The defendant contended that the contingent attorney's fees did constitute gross income to the plaintiff and, as such, the defendant was required to report the contingent attorneys' fees to the plaintiff (and to the attorney) on Form 1099- Misc.

In rebuking the plaintiff's lien argument, the court found that because a property interest in a legal case belongs primarily to the client and not to an attorney, the client is the primary owner of any amounts received, including any contingent attorneys' fees. In coming to this conclusion, the court found an attorney's right to the contingent fee portion of a settlement award as akin to a charging lien or an encumbrance, which is not superior to the ownership interest of the client under Connecticut law. Thus, the court held that the entire amount of the settlement proceeds, including the contingency attorneys' fees portion, constituted gross income to the plaintiff.

The Parmanand case is a troubling decision for Connecticut plaintiffs who receive contingent attorneys' fees as part of a settlement agreement or who are awarded contingent attorneys' fees pursuant to a judgment against the defendant. While these fees should be and are taxable to the attorney, the plaintiff may also pay federal income tax on all or some portion of the fees, notwithstanding that the fees may be paid directly to the attorney and never seen by the plaintiff, and will definitely pay Connecticut income tax on such fees. This is the case because the attorneys' fees, which according to the Parmanand case can only be claimed as a miscellaneous itemized deduction for federal income tax purposes, are deductible by a plaintiff only to the extent that that such fees, combined with the plaintiff's other miscellaneous itemized deductions (if any), exceed two percent of the plaintiff's adjusted gross income including the attorneys' fees. The attorneys' fees are also not deductible in determining the alternative minimum tax liability of the plaintiff (if any). In addition, a plaintiff may find herself or himself ineligible for certain deductions or tax credits based on adjusted gross income, such as the child tax credit, the adoption tax credit and the student loan interest deduction. For Connecticut income tax purposes, the plaintiff will have to pay tax on the full amount of the attorneys' fees as Connecticut tax law does not allow miscellaneous itemized deductions. Parties need, therefore, to take the court's holding in Parmanand into account when negotiating settlement agreements with a contingent attorneys' fees component.

On October 1, 2003 revisions to Connecticut's Family and Medical Leave Act (FMLA) went into effect. Connecticut employers must now allow employees to take up to two weeks of accumulated sick leave to attend to a seri-ous health condition of a covered family member or for the birth or adoption of a child. In addition, employers may now count the twenty-four month period dur-ing which the FMLA leave may be taken in one of four different ways.

Below are some answers to commonly asked questions about these revisions.

Q: Are short term disability benefits impacted by these revisions?

A: No. The law specifically states that the paid time off provision applies only to an employer's written policies providing compensation for loss of wages occasioned by illness and does not apply to compen-sation that is provided through an employer's plan, including short or long term disability plans.

Q: What does this mean for policies that specifically state that sick time is intended to cover absences for the employee's own sickness, and not for the sickness of family members?

A: Such policies must be revised. An employer may still have such a restriction for absences related to a family member's illness that does not rise to the level of a serious health condition under Connecticut law. For medical conditions that meet the definition of a serious health condition, however, employees must be allowed to use accumulated sick time if the leave is for a child, spouse, parent or parent-in-law.

©2004 Wiggin and Dana LLP