ProView Standard: COBRA Subsidy, Wall Street Reform, Holiday Parties and Compensation Audits

COBRA Subsidy Reminder
Wall Street Reform and Consumer Protection Act
Holiday Parties — Simple Precautions to Prevent Post-Holiday Problems
Best Practices for Compensation Audits
Doctor’s Orders: Prescription for a Healthy New Year

December 2009

COBRA Subsidy Reminder

Individuals who become eligible for COBRA or state continuation coverage after December 31, 2009, will not qualify for the subsidy.

The American Recovery and Reinvestment Act provision that provided eligible COBRA and state continuation participants with nine months of subsidized premiums will end December 31, 2009. Therefore, an individual who becomes eligible for COBRA or state continuation coverage after December 31, 2009, will not be eligible for the 65 percent subsidy.

This means that if an employee is terminated on December 31, 2009, that employee may be eligible for COBRA or state continuation, but will not be eligible for the subsidy.

For more information on the COBRA subsidy, go to the U.S. Department of Labor website at http://www.dol.gov/ebsa/cobra.html or contact your Precept Account Manager.

Wall Street Reform and Consumer Protection Act

House Passes Financial Reform Legislation

On December 11, 2009, the House of Representatives approved The Wall Street Reform and Consumer Protection Act (H.R. 4173). The bill, passed by a vote of 223-202, seeks to address many of the financial practices believed to have caused the crisis in financial markets in September of 2008. This alert briefly summarizes the provisions of the bill.

Financial Stability

Financial Stability Council. The bill establishes the Financial Stability Council made up of a council of regulators to identify financial firms that pose a systemic risk to the entire financial system. The Financial Stability Council would subject such companies to stricter standards and regulation, including higher capital requirements, leverage limits, and limits on concentrations of risk.

Congressional Oversight of the Federal Reserve. The bill would grant the Government Accountability Office the authority to examine the decisions of the Federal Reserve and require greater transparency with respect to the Federal Reserve’s programs and facilities. The bill also imposes new restrictions on the ability of the Federal Reserve to invoke its authority under Section 13(3) of the Federal Reserve Act to extend credit to certain entities under unusual and exigent circumstances. If enacted, the Federal Reserve could invoke its Section 13(3) authority only if 1) such action is approved by two-thirds of the members of the Financial Stability Council, 2) the Treasury Secretary consents to the proposed action, and 3) the President has certified that an emergency exists. The bill would prohibit assistance to individual companies, and enables Congress to disapprove further use of the authority.

Consolidated Regulation. The bill consolidates the Office of Thrift Supervision with the Office of the Comptroller of the Currency and subjects thrift holding companies to supervision by the Federal Reserve, but preserves the thrift charter for thrifts dedicated to mortgage lending. The bill would subject previously exempted non-bank banks, such as industrial loan corporations, to the consolidated regulatory framework; going forward, no commercial companies could own ILCs, but existing ILC owners are grandfathered.

Risk Retention Requirements. The bill would require all lenders/creditors to retain a minimum of 5 percent of the credit risk associated with any loans that are transferred, sold, or securitized.

Prohibits Taxpayer Bailouts; Establishes Dissolution Process. In addition to the restrictions of the Federal Reserve Section 13(3) authority, the bill would restrict the ability of the FDIC or Federal Reserve to bail out failing financial institutions. The FDIC would be permitted to extend Emergency Financial Stabilization loan guarantees only to solvent banks and predominantly financial companies and only in a liquidity crisis. The bill replaces these bailout mechanisms with a mechanism for the orderly dissolution of failing firms. Financial regulators will be authorized to dissolve large, highly complex financial companies in a manner that allocates losses to both shareholders and creditors.

Upon the dissolution of a financial institution, dissolution costs will be borne first from the assets of the failed firm. The bill establishes a Systemic Dissolution Fund (SDF) to pay the costs of dissolution to the extent such costs exceed the assets held by the failed firm. The SDF will be pre-funded by assessments on financial companies with assets in excess of $50 billion and hedge funds with assets in excess of $10 billion.

Executive Compensation

The bill imposes the following restrictions on executive compensation practices.

Say-on-Pay (applicable to all public companies)

Requires annual shareholder advisory vote on compensation
Requires shareholder advisory vote on golden parachutes
Requires at least annual reporting of annual say-on-pay and golden parachutes votes by all institutional investors not otherwise required to report to the SEC
Exempts compensation approved by a majority say-on-pay vote from clawback (subject to certain exceptions such as fraud or contractual provisions)

Independent Compensation Committee Requirement (applicable to all public companies)

Requires compensation committees to be made up entirely of independent directors
Requires that compensation consultants satisfy independence criteria established by the SEC

The bill permits the SEC to exempt certain categories of public companies from these requirements.

Incentive Based Compensation Standards and Disclosure Requirements (applicable to all “financial institutions” with assets of more than $1 billion)

Requires federal regulators to establish standards to proscribe inappropriate or imprudently risky compensation practices
Requires all “financial institutions” to disclose compensation structures that include any incentive-based elements

Derivatives Regulation

The bill would subject over-the-counter (OTC) derivatives markets to the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC would have jurisdiction over swaps based on underlying securities, such as credit-default swaps. The CFTC would have jurisdiction over all other swaps.

The bill would also require:

All standardized swap transactions between dealers and “major swap participants” (persons that maintain a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring) to be cleared and traded on an exchange or electronic platform.
Clearing organizations to seek approval from the CFTC or SEC, as appropriate, before a swap or class of swaps could be accepted for clearing.
Registration by swap dealers and major swap participants with the appropriate regulator, including dual registration if applicable.
Imposition of capital requirements for swap dealers' and major swap participants' positions in cleared swaps.
Imposition of margin levels for counterparties in transactions that are not cleared.

Consumer Financial Protection Agency

The bill would establish the Consumer Financial Protection Agency (CFPA) to protect the public from unfair and abusive financial products and services. The CFPA will have jurisdiction over all financial providers, including banks, thrifts, credit unions, and non-bank financial institutions and will implement rules under existing consumer finance laws to stop unfair, deceptive, and abusive consumer financial products and services.

The bill provides an exemption for banks and thrifts with assets under $10 billion and credit unions with assets under $1.5 billion. These institutions will continue to have consumer protection examinations done by existing regulators.

The bill also provides an exemption for merchants, retailers, and other nonfinancial businesses that extend credit directly to consumers for the purchase of goods or services, provided that such businesses do not resell the credit.

Increased Regulation of Capital Markets

Mandatory Registration of Investment Advisers. The bill requires all advisers to private pools of capital with more than $150 million in assets to register with the SEC. The bill eliminates the private adviser exemption and limits other exemptions for foreign private fund advisers. The bill exempts venture capital companies and Small Business Investment Companies.

Expanded SIPC Protection for investors. The bill provides expanded protection to investors by the Securities Investor Protection Corporation (SIPC). The bill increases SIPC cash advance limits, provides coverage for futures contracts held in margin accounts and expands SIPC’s borrowing authority. The bill also increases the minimum assessments paid by SIPC members.

Credit Rating Agency Reform. The bill amends Rule 436(g) of the Securities Act of 1933 to remove the “expert” exemption for credit ratings included in a registration statement and grants investors a private right of action against ratings agencies for knowing or reckless violations of securities laws. The bill also increases investor access to the internal operations and procedures of ratings agencies, including their methodologies, ratings performance, and compensation structure. The bill also calls for the implementation of a “standard of credit-worthiness” to replace agency ratings in rules and regulations.

Small Company Exemption from External Audit Requirements. The bill exempts public companies with a market capitalization of less than $75 million from the external audit of internal control requirements of the Sarbanes-Oxley Act.

Expanded SEC Authority. The bill also expands the SEC’s rule-making authority to cover municipal financial advisors, illiquid investments by mutual funds, information collection, and anti-fraud with respect to short sales. The SEC would be authorized to restrict the use of mandatory arbitration clauses in contracts with broker-dealers. In addition, the SEC would be granted rulemaking authority with respect to the lending and borrowing of securities, but the bill expressly states that such rulemaking shall not limit the authority of federal banking regulators to regulate the securities lending and borrowing activity of a financial institution on safety and soundness grounds or to protect the financial system from systemic risk.

Office of Insurance

The bill creates a Federal Insurance Office that will monitor all aspects of the insurance industry and identify regulatory issues that could contribute to a systemic crisis and undermine the financial system as a whole.

Note : The information in this Alert was provided to Precept by Proskauer Rose LLP. Proskauer is an international full-service law firm with over 60 employee benefits attorneys located in offices across the United States. The information in this article is not intended as legal advice nor is it intended to provide a comprehensive review of the legal matters discussed. For more information about Proskauer, please contact Peter Marathas at (617) 526-9704 or pmarathas@proskauer.com. ©2009 Proskauer Rose LLP. All rights reserved. Used with permission.

Holiday Parties — Simple Precautions to Prevent Post-Holiday Problems

As 2009 comes to an end, employers are preparing for holiday parties and events. Holiday parties are one way many businesses thank employees for their contributions over the year. They also provide an opportunity for employees to socialize and build esprit de corps. Nonetheless, there are certain risks associated with these events, particularly if alcohol is served. This article describes simple steps that employers can implement in advance of a holiday party to limit the potential for liability.

The Risks
There are two principal risks associated with holiday parties: (1) potential liability for employee misconduct (especially harassment) toward other employees that occurs at or after the party (with or without the influence of alcohol), (2) potential liability for employee conduct that injures other persons or their property.

Due to alcohol, dancing, and relaxed interactions that take place at a holiday party, some managers, supervisors, and employees mistakenly believe that workplace policies are suspended or inapplicable to the party. Other employees, particularly those under the influence of alcohol, may simply disregard workplace policies. This can result in an employee making an unwanted sexual request or advance toward another employee, or engaging in unwanted sexual banter or other lewd or offensive conduct in violation of the employer’s anti-harassment policy. Such unwanted behavior invariably leads to complaints of sexual or other types of harassment, which must be investigated and addressed through appropriate remedial action. If not proactively addressed, some employers, to their chagrin, have been entangled in expensive litigation – even criminal law allegations – arising from inappropriate conduct, particularly when such parties take place in hotels or motels.

Employees who drink excessively at a holiday party also can create liability for their employer if they injure someone while driving home from a party or if they damage someone’s property through a respondeat superior theory of liability.

In addition to the above, employers who require attendance at a holiday party may unwittingly create additional liability under the wage and hour laws or under nondiscrimination laws to the extent they do not make exceptions for employees who object to attending on religious grounds.

Strategies for Minimizing Risk
Before playing defense, employers should go on the offensive, before a holiday party, to minimize the risk that their employees will engage in the kind of conduct that could create liability. The following simple steps can go a long way in minimizing liability:

Make attendance at the event voluntary. Mandating attendance may create an appearance that work is being performed “for the benefit of” the company and could obligate an employer to pay employees for their attendance. Employers also should be mindful that some employees, due to their religious beliefs, may not celebrate the holidays and may not attend a party for that reason.
Include employees in the planning and be mindful of diverse views and beliefs concerning holidays. Events and associated decorations should be religion-neutral. Plan to have food options that accommodate employees with food restrictions due to religious beliefs or medical conditions. This could include vegetarian, kosher, gluten-free, and nut-free foods.
Remind employees in advance about responsible use of alcohol at the event.
Remind employees of existing standards of conduct and anti-harassment policies before the party. Reaffirm that company policies remain in full force and effect at company social events.
Provide transportation if alcohol is served, or have alternate transportation services available for employees who overindulge. Providing transportation may appear costly; however, it is not as costly as defending a personal injury or harassment lawsuit.
Act appropriately and swiftly if a complaint is made. A prompt and thorough investigation and appropriate remedial action are key to preserving the company’s defenses and affirmative defenses against claims of harassment.

Best Practices for Compensation Audits

Recent changes in the legal and economic landscape have significantly heightened the risk that employers’ compensation systems will come under attack. Congress has passed the Lilly Ledbetter Fair Pay Act (“Ledbetter”), which effectively waives the statute of limitations for compensation discrimination claims under the majority of federal employment statutes. The law increases a plaintiff’s ability to recover for compensation discrimination, by placing into issue each and every decision impacting pay, starting from the date of initial hire, rather than just those decisions that occurred within statutory filing period. The law has made the issue of pay equity a hot button issue. Plaintiffs’ attorneys and government regulators are primed for attack.¹

The Obama administration also has brought the specter of increased EEOC and OFCCP enforcement activity, as well as the possibility of additional pro-employee legislation in the pay discrimination arena. Of note is the Paycheck Fairness Act (“PFA”), which, if passed in its current form, would substantially amend the Equal Pay Act of 1963 and make it significantly easier for employees to establish unlawful pay discrimination. The PFA broadens the categories of employees that plaintiffs can claim as comparators for purposes of showing pay inequity; it sharply curtails the affirmative defenses available to employers; it makes it easier for plaintiff’s attorneys to bring large class-action lawsuits, and it permits uncapped compensatory and punitive damages. It also allows the OFCCP to use a simplistic and often inaccurate “pay grade methodology” when identifying federal contractors unjustly investigated and make it more difficult for them to defend against agency audits.

Coupled with these legal developments have been a rash of company layoffs, rising unemployment, and an increasing number of employees and former employees who face difficult financial plights. All of these forces make employee compensation discrimination lawsuits more likely. Conducting internal audits to identify disparities in compensation that might be subject to legal challenge, and appropriately addressing such disparities, is one of the best ways to prevent pay discrimination lawsuits and to place your organization in the most favorable position should they occur. This article provides guidance for in-house counsel and human resources executives when undertaking such audits.

A. The Purpose of a Pay Equity Audit
Preventive pay audits help ensure fairness in pay rates among similarly-situated employees, which serves to maintain good workplace morale and potentially averting employee lawsuits. Such audits enable an organization to assess its susceptibility to a claim of systemic, pattern, or practice discrimination, which may be brought by the EEOC, OFCCP or private litigant(s) in either an individual or class action context. Preventive audits also enable an organization to anticipate its vulnerabilities and fix them in advance of any regulatory or private employee challenge. For federal contractors, they also serve to meet the OFCCP compliance requirement that contractors regularly evaluate their compensation systems to determine any sex, race, or ethnicity-based disparities. If a legal challenge should occur, the information learned during the audit, and any ameliorative steps taken by the employer to fix problems uncovered during the audit, will be of critical assistance in defending and ultimately defeating such a challenge.

To be effective, however, it is imperative that the audit results be statistically sound, legally defensible, and, to the maximum extent possible, shielded from disclosure by the attorney-client privilege. The following is a list of tips for conducting these audits.

B. Best Practice Tips

1. Identify the Factors that Influence Compensation.
Before conducting any audit, it is important to identify the legitimate (i.e., nondiscriminatory) factors that influence employee compensation in your organization. Such factors typically include “job-related” characteristics, such as: job title; pay grade/band; function; type of work performed; level of responsibility; sector or personnel area; and geographic location. They also may include “productivity-related” characteristics, such as: time in current job; direct measures of performance – e.g., performance scores or sales results; and indirect measures that may be correlated with performance – e.g., education level, pre-hire experience, and company seniority.

Also important is the identification of whether the compensation variables are universal across the organization, or whether they differ by business unit, geographic location, or other factors. There may be one business unit where a certain educational degree is a critically important factor affecting compensation (e.g., the finance unit at a company might routinely offer $25,000 more in starting salary to an employee who has an MBA). In another unit, the same educational degree may have little or no effect on compensation (e.g., in a creative writing department, an employee who earned an MBA early in his or her career, but then switched careers to become a writer, may not receive any added compensation at all for the MBA). The more accurately the employer can identify and understand the variables affecting compensation up front, the more accurate the results of the statistical analysis will be.

2. Review Compensation Policies and Procedures.
Another important preliminary step is to identify and review all of the organization’s policies and practices that bear on employee compensation. These will include topics such as pay grade/band structure; quartile charts, grids, or matrices used for setting percentage increase amounts; standards for merit and other increases, bonuses, commissions, and any other forms of compensation; and performance evaluations. It is important that the employer’s written policies be consistent with the factors that have been identified as influencing compensation. Additionally, the more the employer has documented the legitimate factors that it considers relevant to compensation, the easier it will be for it to defend use of those factors in its statistical analyses.

To the extent there are pay practices that are not memorialized in writing, consider documenting them and updating them as they arise in the future. Some common events that affect compensation, but which often are not properly memorialized in writing, include:

An employer might decide to eliminate the job position of a group of employees and transfer them into different available positions. To the extent the available positions are within a lower salary grade, the employer might decide not to reduce the pay of the transferred employees, despite the fact that their pay may appear “off the charts” when compared to other employees in that lower salary grade.
An employer might premise base salaries for certain job positions on market studies as to what comparable employees are making elsewhere. Periodically, the company may make adjustments to the salaries of employees in specific job positions so as to remain competitive and retain talent. If such adjustments are not made to the salaries of employees in job positions that, while different in kind, are substantially similar in terms of skills required, level of responsibility and other factors, a statistical pay disparity may result and be subject to future challenge.

The above practices are common; but all too often, they are handled on an ad-hoc basis and are not memorialized in the type of formal writing that could be used to explain resulting statistical pay disparities. Especially in light of Ledbetter, it is in the employer’s interest to invest the time up front to document these practices in a manner that can inform future proceedings.

3. Be Prepared For Possibly Harmful Audit Results.
Before embarking on an audit project, the employer must be prepared for the possibility that the audit will uncover statistically significant compensation differences among protected and unprotected employee groups. These discrepancies may be isolated among a handful of individual comparator employees, or in certain job groups, or within certain geographical or business units. They also may be present across the organization as a whole. Such results do not mean that the company has engaged in discrimination. Cultural and historical factors have resulted in compensation disparities between males and females, and minorities and non-minorities, in society at large into the present day.

Nonetheless, such statistical results may be an indication that discrimination has occurred – either unintentionally or intentionally – at some past point in time. Under Ledbetter, a female or minority employee can challenge a single discriminatory compensation decision that occurred decades ago, but which results today in the employee being paid less than a similarly-situated male or non-minority employee. It may be impossible for the employer to defend the pay discrepancy at issue because the supervisor who made the pay decision is no longer with the company or is otherwise unavailable, and there are no documents or other evidence to rely upon. There may be a perfectly legitimate explanation for the present-day pay disparity despite the unfavorable statistical results.

Depending on the statistical results of the audit, pay adjustments may be advisable for only a handful of employees, or they may be warranted on a larger, systemic scale. Before starting any pay audit, therefore, it is critical that you obtain the buy-in from the high-level decision makers who will have to approve the resources for any such compensation fixes. Knowing about inexplicable pay disparities and failing to correct them is worse than not knowing.

4. Use an Experienced Outside Attorney.
In order to maximize the opportunity to protect audit results from disclosure under the attorney-client privilege, it is imperative to retain outside counsel to conduct the audit. Courts have held that if there is evidence that the audit was performed for general business purposes (such as for determining whether a compensation system is working correctly and fairly, or to assist the company in planning and establishing salaries, etc.), the audit materials may not be privileged and may not in fact be protected from disclosure.

Nevertheless, there are many ways to try to maximize the chance that your audit results, or at least parts of them, will remain confidential and shielded from disclosure, including by engaging outside counsel to conduct the audit for purposes of providing legal advice in connection with an assessment of litigation risk and/or compliance with EEO laws. The engagement letter with outside counsel should reflect the privileged nature of the audit. Other steps, including treating all communications about the audit as attorney-client privileged, limiting internal disclosure and discussion of audit results, and carefully planning the extent and content of any written reports on the audit, can assist in protecting the audit as privileged and confidential.

5. Ensure Use of Proper Statistical Technique.
To ensure a statistically sound analysis, it is critical for your counsel to engage and work with a qualified statistician. The most common approach to an audit of compensation is a multiple regression analysis. In a multiple regression analysis, a “neutral” model is developed that includes certain “variables” that are assumed to affect a given “outcome.” In a pay audit, the “outcome” is typically the proposed pay rate for the following year (that tentatively has been decided, but not yet put into effect). The “variables” are the neutral factors that have been identified as playing a role in predicting salary. In the process of incorporating the variables, the model tests and confirms that each variable does in fact, from a statistical standpoint, have an influence on compensation. In this way, the statistical analysis itself can help to identify the factors that influence pay at a given organization.

Statistics can be powerful descriptive tools, but generated improperly, they will be meaningless and potentially harmful. Improper technique can result in inaccurate and misleading results. By working closely with an expert statistician who is experienced in conducting pay equity audits, you will maximize the reliability of your results.

6. Document Information Learned During the Audit.
Finally, an audit of compensation often will result in company human resources performing some investigative work to determine the propriety of certain individuals’ pay that cannot be explained by the data. The company should document the results of such investigative efforts so that it does not have to reinvent the wheel every year.

C. Conclusion
Pay equity audits are not just for government contractors anymore. Any organization wishing to be proactive in its risk management is wise to consider such audits in light of the Ledbetter Act. The above summary outlines just a few of the important steps an organization should take when deciding to conduct a pay equity audit.

¹For more information on the Ledbetter Act, see our Client Alert at http://www.preceptgroup.com/company/news/article.aspx?PRPRI=209.standard#1.

Doctor’s Orders: Prescription for a Healthy New Year

By Christopher H. Coulter, MD, MPH, Chief Medical Officer

Here’s how to get the best results every year from the resolutions and goals you set.

Many of us start the year off with personal reflection and goal setting, often by making New Year’s resolutions. And many of those resolutions are broken by the end of January.

It’s not that we lack good intentions, or that we’re short of ideas on how to improve ourselves. Most people fail for three reasons: inappropriate goals, unrealistic expectations, and poor planning.

Set the Right Goals
Most resolutions are too ambitious, and people make too many of them. Setting a goal to “Lose 10 pounds in 2010” is realistic and achievable; vowing to lose 100 pounds is not. “Get back into shape” is beyond someone who hasn’t been active in 10 years, but “exercise for 30 minutes, three times a week” is something that anyone can do. It is infinitely better to set and achieve a modest goal than to fail miserably at achieving a huge goal. And you can always take another step further the next year.

Limit Yourself to No More than Five Goals
People who make long lists of resolutions are unlikely to keep any of them. Even if you are only able to achieve two of five important goals, you’ve accomplished something important and you are better off. That would be equivalent to a batting average of .400, which would make you a star on any baseball team.

Pick Goals that are Important
One way is to look at the major aspects of your life, and pick the best achievable thing you could do in each: spiritual, physical, emotional, mental, and financial.

Make Effective Goals
Goals are easier to achieve if they are clear and motivating. “Lose weight” is a fine intention, but how do you make it real? How much is enough? “By June 30, 2010, I will weigh 165 pounds” is a much better definition of your goal.

In setting any goal, you want to make it SMART:
Specific
Measurable
Attainable
Relevant
Timely

Go ahead and make your list, but go back and make sure each goal is SMART. Don’t leave it at “Reduce my stress level,” make it “By December 31, 2010, I will have completed 52 yoga sessions.”

Get Healthy
One of the best steps you can take is to improve your health – you’ll feel better, live longer, be happier, and be there to enjoy the friends and family you’ve been working so hard for. It makes great sense to improve your health as part of your plan to improve your life in 2010.

For most people, the top five ways to improve their health are:

Stop smoking
Maintain a healthy body weight
Be physically active
Eat a healthy diet
Limit alcohol intake

Starting from the top, pick the item that is an issue for your health and set a realistic goal for next year.

Plan for success – figure out the steps that will get you to your goal and measure your progress along the way.

Learn from failure – studies show that, on average, a cigarette smoker quits six times before quitting for good. Those who have successfully quit smoking learned from their five failures how to surmount their obstacles, until they were smoke-free.

Keep trying until you succeed – Any worthwhile goal is a challenge, and achieving it deserves reward. Next December, when you look back at your 2010 resolutions and how well you accomplished them, it will also be a great time to celebrate your successes. Plan on it.

You can help your employees kick off the New Year right, by educating them on and providing access to smoking cessation, weight loss, nutrition, and other wellness programs. These programs don’t have to cost much; many carriers and EAP vendors offer access to healthy resources for members through the health plans that you are already providing. If you are interested in providing wellness programs, please contact your Precept Account Manager for more information.