TERMINATIONS/ LAYOFFS

Under the law in most states, if there’s no employment contract a worker is employed on an “at-will” basis. That means the worker has the right to leave the company at any time, and, conversely, the employer has the right to terminate the employee at its discretion. If a worker is under contract, however, the terms of the contract apply. A written contract may specify the reasons the employee can be terminated, while an oral contract usually implies that termination can occur only for cause. Usually, that means the employer can terminate the worker only for poor performance, dereliction of duty, an act of dishonesty or insubordination, or because the company needs to eliminate the position the employee holds. A contract may be a formal, signed agreement, a collective bargaining pact or an implied contract. Not all states recognize implied contracts. If your state does honor such agreements, a court might conclude that an implied contract exists if an employee handbook, policy manual or verbal statement alludes to job security. Other courts have held that the totality of the parties’ relationship must be reviewed to determine whether the employer’s conduct constitutes an implied promise that it would not arbitrarily terminate an employee. Besides implied contracts, federal laws, state statutes and court decisions are chiseling away at the at-will doctrine sending the number of wrongful-discharge suits spiraling higher. Here’s why: ■ Federal laws. Employers subject to certain federal laws may not terminate employees for prohibited reasons, such as racial discrimination, or for exercising their rights under the laws. The laws include the Equal Employment Opportunity Act, Title VII, the Occupational Safety and Health Act, the ADA, the GINA, the FMLA, the ADEA and the Pregnancy Discrimination Act. ■ State laws. Likewise, state legislatures have passed wage/hour laws, workers’ compensation and other statutes that restrict employment decisions. ■ Implied covenant of good faith and fair dealing. Some states also hold that every agreement contains an implied cove­nant of good faith and fair dealing, which basically means that the parties will treat each other fairly. When an employer fires someone in a manner that a jury considers patently unfair, the former employee may be able to recover damages. ■ Public policy. In some states, courts will hold an employer liable for wrongful discharge if an employee is terminated for a reason that violates public policy. That means, for instance, you cannot fire one of your engineers for informing the EPA that your company has been dumping toxic waste in the river or another employee for refusing to lie to a tax examiner. Likewise, it’s against public policy to fire someone for filing a workers’ compensation claim or reporting for jury duty. ■ Torts. Some employees have won judgments against their companies by suing over a civil wrong, such as “intentional infliction of emotional distress.” In many court cases, an employee handbook is a prime piece of evidence showing the employer’s policies and promises. You must pay careful attention to your handbook to help protect your status as an at-will employer, to the extent allowed by law, and to reduce your chances of losing in court. ■ USERRA. Under a little-known provision in the Uniformed Services Employment and Reemployment Rights Act, it’s illegal to fire returning soldiers and reservists without a valid, business-based reason. In other words, soldiers are temporarily no longer at-will employees even if they were before they deployed or signed up for the Reserves. You can’t terminate employees returning from active duty or reservist leave unless:

• You can point to “just cause” for doing so. This special protection continues for one year if the person served on military duty for more than 180 days or for six months for those on military leave between 30 and 180 days. • You can prove the soldier/employee knew or was notified his or her actions could constitute just cause for discharge. • You can prove that the termination was “reasonable.” Presumably, that means the workplace rules that the organization accused the employee of violating were reasonable.

MINIMIZE YOUR RISK

When you dismiss an employee, be sure to minimize your exposure to charges that you broke a contract, violated public policy, acted vindictively or engaged in discriminatory practices. These steps will help you avoid litigation or support your case in court:

✔ Publicize your policies. Policies that are effectively drafted, communicated and enforced uniformly can help you justify a dismissal. Communicate your policies and any associated penalties for noncompliance clearly. If an employee was never informed of your company’s policies, or if those standards were communicated poorly, you may be forced to overturn his or her termination or pay a large settlement. ➤ Observation: Review your policies for relevance to your business. Policies on attendance and misconduct, for example, are always relevant, but a dress code may not be.

✔ Conduct employee performance reviews regularly. Ensure that you or anyone acting on your company’s behalf adheres to your company’s strict anti-discrimination policy. State­ments from managers and supervisors must be free of any overtones of discrimination. Even just-cause terminations can be jeopardized by discriminatory remarks. ➤ Recommendation: To head off charges of discrimination, periodically review whether your firing policies have a disproportionate impact on certain employees. If an audit of termination practices reveals, for example, that black employees are being discharged at a significantly greater rate than whites, it’s time to make a thorough and immediate examination of your termination criteria. You may want to ask an employment lawyer to conduct the audit to help prevent the audit from being subject to disclosure in subsequent lawsuits.

✔ Use consensus decision-making: One of the best ways to make sure a discharge decision sticks is to adopt a consensus approach to the decision-making. It’s best to include someone from the HR department as well as someone outside the employee’s immediate chain of command.

PROGRESSIVE DISCIPLINE

The most reliable way to protect yourself from charges of wrongful dismissal is to establish a system of progressive discipline. Having such a structure in place, and making it clear to all supervisors that they are expected to abide by it, is your best defense against a wrongful-dismissal suit. You can ensure that any employee fired because of inferior performance was treated fairly and in accordance with your company’s policies. If you do use progressive discipline, leave yourself an out in case you need to dismiss an employee immediately. Retain the right to dismiss an employee for serious offenses without going through progressive discipline. In addition, make sure your handbook doesn’t give any guarantees that employees will have an opportunity to improve their performance. Case in point: An employee handbook contained language a court interpreted to mean entitled employees to progressive­discipline. The handbook stated the company’s progressive discipline counseling “will provide [the employee] with a reasonable opportunity to make the necessary improvements in order to succeed.” A federal appeals court read that to mean the employee must always have an opportunity to improve. Messinger v. U.S. Bancorp, No. 04-35548 (9th Cir.)

CONSTRUCTIVE DISCHARGE

Some supervisors try to get around the whole issue of firing by resorting to constructive discharge. Their logic: If we make an employee’s time at work so intolerable, he or she will choose to resign. This is not a wise strategy. For starters, your company becomes vulnerable to charges of discrimination by the targeted employee. After all, he or she was specifically singled out for special treatment—the essence of ­discrimination. In such cases, a former employee will allege that the working conditions were so intolerable that a reasonable person would have been forced to resign. In fact, some disgruntled employees may even be advised by plain­tiff’s lawyers to “set up” their bosses so it looks as though conditions were intolerable. The worker then quits in disgust and files a lawsuit that adds a hostile work environment count to the complaint. And the court system is increasingly accepting constructive discharges as the equivalent of a firing, especially if it’s a super­visor who appears to be making life a nightmare for the worker. Take, for example, the sexual harassment case won by a woman who claimed her boss regularly made lewd gestures, suggesting she perform a sexual act. The U.S. Supreme Court concluded the harassment was severe enough to compel her to quit without first going through the company’s internal complaint process. Courts view different kinds of personnel practices with varying degrees of disapproval. Practices that can get you into trouble include the following: improper demotion, improper transfer or failure to transfer, coercion into early retirement, discriminatory pay, and sexual or racial harassment or harassment based on age or disability. To increase your company’s odds of prevailing in a constructive-discharge suit:

• You need to educate supervisors about the concept of constructive discharge. Often, supervisors will try to sidestep the unpleasant task of firing an employee outright by forcing him or her to quit. • If an employee is demoted, he should be encouraged to accept the demotion. If you want him out, your best bet is to document his shoddy performance and fire him. If the employee files a complaint, investigate it. Encourage him not to resign until the investigation is completed. • When an employee resigns, have him provide a signed state­ment specifying why he is leaving. Unless he accuses you in the statement of unfair treatment, a court would be unlikely to side with him if he later charges you with constructive discharge. For example, an employee who resigned for a better job with another company could not successfully claim he quit because you discriminated against him.

NONCOMPETE CLAUSES

One of the risks you run when losing crucial employees is the potential leaking of valuable information. If you take the precaution of having them sign covenants not to compete and confidentiality agreements when they join your company, you may be able to limit this risk. The enforcement of such covenants depends on the individual state, and some states refuse to sanction any kind of noncompete clause. Be sure to check with your attorney about the legality of any agreement you are considering. Ideally, your attorney should draft these agreements in consultation with you. Other factors to consider when drafting noncompete covenants: 1. The agreement must be reasonable. If you take too many options away from the employee, the entire contract may not be enforceable and courts will view it as a “restraint of trade.” When the job market is tight, ex-employees have fewer job alternatives and may have little choice but to work for your competitors. In this case, the courts would be more likely to invalidate an unreasonable agreement. Reasonable, in the view of most courts, refers to the time period and the geographic area. For example, preventing a hairdresser from working as a stylist for two years within a 50-mile radius of your shop is probably reasonable, while preventing her from working in the profession anywhere in the country for 10 years probably isn’t. The restrictions should be broad enough to protect you from competition, yet narrow enough to allow the person to make a living. 2. The covenant must have mutuality of obligation. A noncompete covenant is a contract, and in order for it to be valid, both parties must have obligations to fulfill. If you make the noncompete agreement part of the original employment contract, the quid pro quo for agreeing not to compete is the job itself under some states’ laws. 3. Covenants ride up the job ladder. Like other elements of employment contracts, the noncompete provision stays with the employee throughout the term of employment. You don’t have to draw up a new one every time you promote the employee. However, you may want to execute new covenants with new considerations when an employee is promoted, receives expensive training or is exposed to particularly sensitive information or trade secrets.

SEVERANCE PAY

Severance pay is defined as pay an employee receives upon termination from an organization due to job cuts or any reason other than a resignation or being discharged for cause. Severance policies are generally considered employee benefit plans that are entitled to ERISA protection, many courts have ruled. For employers, this means conforming to ERISA’s recordkeeping and disclosure requirements. ➤ Recommendation: If you have a severance pay plan or are thinking of establishing one, review the details with your legal adviser to ensure compliance with ERISA and to determine that the provisions are reasonable and legally sound—particularly if the policy will include waivers. No federal law mandates severance pay. If you do decide to offer severance or other benefits, consider making the payment or benefit contingent on the employee signing a release of any liability for employment discrimination. Just be sure that an attorney prepares the release because certain technical conditions must be met for such a release to be enforceable. In particular, the Older Workers Benefit Protection Act requires special procedures for severance pay offers made to workers over 40. If you offer severance packages, don’t assume workers want money. You may want to negotiate noncash options into your severance plan. You could save money plus avoid legal trouble. Also, don’t assume that taking a severance check always means the employee can’t bring a complaint to the EEOC or that the agency won’t sue. In fact, the EEOC has filed federal lawsuits against employers challenging their right even to include an “I agree not to sue” clause in the agreement. In EEOC v. Lockheed Martin Corp., 444 F. Supp. 2d 414 D. Md., the court ruled that Lockheed’s severance agreement was facially retaliatory. In EEOC v. Ventura Foods, LLC, No. 05-663 D. Minn., Ventura settled, agreeing to remove language from its standard severance agreement that required separated employees to agree not to file a discrimination charge in exchange for severance; reoffer severance benefits to former employees who had refused to sign the agreement; and notify employees who received benefits of their right to file a charge without losing benefits or violating the terms of their prior severance agreement. Note: In 2014, the U.S. Supreme Court unanimously ruled that severance pay is subject to withholding of FICA taxes, which employers and employees pay to fund Social Security and Medicare. U.S. v. Quality Stores, Inc. (No. 12-1408)

PROVIDING REFERENCES

Despite all the risks, providing employers with references concerning your former workers is a good business practice. Refusing to provide references is not a responsible stance and will eventually compromise your own ability to find out about applicants you are considering hiring. In addition, you can be sued for refusing to give a potential employer information on a former worker’s dangerous or illegal conduct. As long as the information you provide is objective and well documented, the courts should side with you in the event a former employee files a defamation suit. Give serious consideration to a policy that limits references to basic employment information, such as dates of employment, job duties and salary history. Another defense: The statements made in the reference are protected by a “qualified privilege”: that is, a libel charge will not stand up in court if the comments were made without malice or deliberate ill-will and were given only to those with a vested business interest. More than half the states have enacted laws protecting employers that provide bad references without malicious intent. But many of those laws don’t provide much protection. For example, under Texas law, employer’s immunity is limited to (1) written statements; (2) regarding the reason for discharge; and (3) in an action for libel. As the Texas example illustrates, the immunity may not cover all potential claims leaving employers potentially liable for retaliation under Title VII and other federal laws. (Be sure to check your statute’s language to determine what protections it provides.) Bottom line: Don’t let the existence of your state’s reference immunity statute lull you into thinking that you can now speak freely about current and former employees. Rely on the statute only in cases of emergency—that is, when you know that the individual in question may be dangerous. To make it easier to defend your company against libel charges brought by ex-workers, follow these guidelines:

• When you fire an employee, record all facts that led to the termination, ensuring that the information is accurate. • Restrict information about the circumstances leading to a termination or resignation only to those in the company with a need to know. • When you discuss the firing with other employees, avoid making derogatory comments about the individual. • Use a “just the facts” approach. Avoid innuendo and emotionally-based criticism..

Caution: The Supreme Court ruled that Title VII’s anti-retaliatory provisions protect former employees, as well as current ones. Robinson v. Shell Oil Co., 519 U.S. 337 (1997) In the Robinson case, a discharged employee filed a complaint with the EEOC against his ex- employer. Meanwhile, he applied for a job elsewhere. The potential employer called the company for a reference check. The plaintiff alleged that the company gave him a negative reference in retaliation for filing the discrimination complaint. The Supreme Court ruled that former employees are still protected by Title VII even though technically they’re not employees anymore.

LAYOFFS: THE WARN ACT

The term “layoff” or “reduction in force” is often used interchangeably with “firing” or “termination.” Yet there are important distinctions between these terms. A layoff occurs when workers are let go for reasons beyond their control—for example, the company has suffered an economic downturn or it has been restructured, bought out or shut down. A wave of corporate mergers and downsizings in the 1980s led Congress to pass the Worker Adjustment and Retraining Notification (WARN) Act of 1988. The act requires certain employers to give 60 days’ notice of an impending layoff or plant closing to affected employees. You can be liable for back pay to employees for any portion of the 60-day notice period. Under the WARN Act, a “plant closing” is defined as a temporary or permanent shutdown that results in 50 or more full-time employees losing their jobs. A “mass layoff” is a workforce reduction that is not the result of a plant closing but causes employment loss at a site for any 30-day period for one-third—but not less than 50—of the full-time workers, even if the plant remains open. If 500 or more full-time employees are affected in the layoff, the one-third requirement does not apply. WARN’s provisions apply to any employer that has 100 or more full-time employees or has 100 or more employees, including part-time workers, whose total work amounts to at least 4,000 hours per week, not counting overtime. Before contemplating a layoff or shutdown, consult an attorney to see what your obligations are under the WARN Act. Also, keep in mind that many states and municipalities have notification laws more stringent than the federal law. The WARN Act requires employers to send notices to:

• Each employee affected by the closing or mass layoff (or, if union workers are affected, to the designated representative). • The state’s dislocated worker unit, which provides training and assistance to employees who have lost their jobs. • The appropriate local government official (usually the mayor or city manager).

All notices must be made in writing at least 60 days before the action and must include, at a minimum, the following:

• Name and address of the employment site where the action will occur. • Name and phone number of a company official to contact for further information. • A statement as to whether the planned action is expected to be permanent or temporary and if the entire facility is to be closed. • Expected date of the first separation and the anticipated schedule for making separations. • Job titles of positions to be affected and names of workers currently holding those jobs.

Notices to the state’s dislocated worker unit must also state the number of employees holding each job title and whether bumping rights exist.

Exceptions to notification The advance-notice rule has four key exceptions. If you rely on any of them to give less than 60 days’ notice, you bear the burden of proof that it’s true:

• “Faltering company” exception. This applies to plant closings but not to mass layoffs. It covers situations in which a company has sought new capital or business in order to stay open and giving notice would ruin the opportunity to obtain new capital or business. • “Unforeseeable business circumstances” exception. Your company can be exempted if the layoff or plant closing was brought about by a sudden, dramatic and unexpected action or condition beyond your control: for example, an economic downturn, a strike at a major supplier or the sudden termination of a major contract. • “Natural disaster” exception. This applies to plant closings and mass layoffs in the wake of a natural disaster, such as a flood, earthquake or storm. Note: Employers don’t have to give notice when closing a temporary facility or if a closing or layoff results from completion of a project. But this exemption applies only if the workers, upon hiring, knew that their jobs were limited to the project’s duration. • “Government action” exception. After 9/11, the government federalized all airport security. Contractors that provided the service were legislated out of business. To add insult to injury, displaced workers sued their employers under the WARN Act, arguing they didn’t provide appropriate notification. The 9th Circuit ruled that company closings due to governmental action are exempt from WARN’s requirements. Deveraturda v. Globe Aviation Security Svcs., Case No. 04-16633, 9th Cir.

Caution: Lawsuits challenging WARN Act compliance have become more common in the wake of the recent increase in layoffs. Meanwhile, states have enacted their own layoff notification laws, which vary considerably from state to state. Check your state law before undergoing any mass layoffs.

YOUR COBRA OBLIGATIONS

Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 you are required to continue offering medical insurance benefits to workers and their covered dependents for a specified period of time after they leave the company. The law applies to all companies that have 20 or more workers and have group health insurance plans (including self-insured plans). Note that some states have lower minimums concerning the number of employees. Under COBRA an employee and any of his or her qualified beneficiaries may elect to continue health coverage if one of the following qualifying events occurs. The length of time coverage will continue depends on the qualifying event:

Qualifying Event Length of Coverage

✔ Voluntary or involuntary termination 18 months (29 months if disabled) ✔ Reduction in hours (a strike, layoff, switching from full-time to 18 months part-time status, leave of absence) (29 months if disabled)

✔ Employee’s death 36 months ✔ Divorce or separation of the employee and spouse 36 months ✔ Employee’s entitlement to Medicare benefits 36 months ✔ Cessation of coverage for a dependent child past a certain age (specified in the insurance plan) 36 months ✔ Employer’s bankruptcy Lifetime (retirees)

Qualified beneficiaries are spouses and dependent children who are covered under the plan the day before the qualifying event occurs. They have rights to COBRA coverage separate from the employee. Thus, a spouse and children could elect to continue coverage under the employer’s plan even if the terminated employee does not. Caution: If you fire an employee for “gross misconduct,” you can refuse to extend COBRA coverage to him. However, since the law does not define “gross misconduct,” you could be on shaky legal ground and the burden of proof is on you to defend your reason. You may require the employee to pay up to 102% of the cost to the plan for maintaining benefits. (The extra 2% is designed to cover any administrative costs incurred.)

Watch notice requirements The law requires you to notify the health plan administrator within 30 days if one of these qualifying events occurs: an employee’s termination, death, reduced hours of employment, entitlement to Medicare or the company’s bankruptcy. (It is up to the employee to notify you of changes in marital status, a dependent’s status or a disability that would trigger eligibility for COBRA coverage.) The plan administrator then has 14 days to notify the employee and beneficiaries of their election rights. The worker and his family have 60 days to make their decision. Caution: You must give proper written, separate notices to the worker and all his beneficiaries regarding the details. If you have an outside plan administrator, make sure that it adheres to COBRA regulations, or else you could face a lawsuit for lack of giving proper notice. Case in point: An employee was forced to retire because of emphysema. A company representative visited the worker and gave him general information about his termination and COBRA rights. The representative, however, failed to send the employee a confirmation letter describing in detail his COBRA rights. The employer subsequently notified the employee that he had failed to elect continuing coverage, effectively terminating his COBRA rights. The employee was later hospitalized but, due to the apparent termination of his COBRA rights, had no insurance to pay for his stay. The court ruled that the employer did not sufficiently in­form the employee about the 60-day notice period regarding con­tinuing coverage under COBRA. It also failed to provide the employee with sufficient information about individual and family coverage, including premium amounts. The court awarded the employee $40,000 in insurance benefits plus $44,000 in ­attorney fees. Smith v. Rogers Galvanizing Co., 128 F.3d 1380 (10th Cir.)

Overlapping coverage issue resolved You cannot cancel a former employee’s medical coverage under COBRA because he was already covered under his wife’s health plan, the U.S. Supreme Court ruled in 1998. In the case a terminated employee who had cancer elected to continue his coverage under COBRA. Six months later, his ex- employer told him he was not entitled to COBRA benefits because, on the date he elected COBRA coverage, he was already covered by his wife’s group plan at work. The ex-employer then forwarded all outstanding medical bills to him, and he sued. The Supreme Court said you cannot deny COBRA coverage under your health plan to an otherwise eligible beneficiary because he is covered under another plan at the time he elects COBRA coverage. Geissel v. Moore Medical Corp., 524 U.S. 74 (1998)

DOL issues revised model COBRA notice In 2013, the U.S. Department of Labor published an updated version of its model COBRA election notice, which health plans must provide to departing workers to notify them of their options for continued health insurance. At the same time, the DOL published model notices that employers can use to tell employees about their options for buying health insurance through the new government-run state exchanges. Employers were required to begin providing those notices—mandated by the Affordable Care Act— to current and new employees no later than Oct. 1, 2013.

Reservist coverage After the events of Sept. 11, 2001, many employers awoke to the reality that employees who serve in the National Guard or other reserve units were being called to active duty. When reservists are away from work for extended periods, they are protected by the Uniformed Services Employment and Reemployment Rights Act. Reservists on active duty can maintain health insurance coverage by electing COBRA continuation. If they drop coverage, the law requires that coverage be reinstated when they return to work with no waiting period. Note: Employers are also obligated to count time spent on active duty toward the calendar and hour requirements for coverage under the FMLA. Reservists who return, for example, after a six- month active tour of duty should be treated as if they had worked those six months for the company: They would be eligible for FMLA leave if that time put them over the 12-month, 1,250-hour requirement for eligibility.

HEALTH INSURANCE PORTABILITY

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 made changes to three areas of the continuing-coverage rules that apply to group health plans under COBRA: ■ Beneficiaries may extend their COBRA coverage period from 18 months to 29 months if they become disabled within the first 60 days of COBRA continuation coverage. The 29-month period also applies to a disabled beneficiary’s nondisabled dependents. Under the old law, a beneficiary had to be deemed disabled (under the Social Security Act) at the time of the qualifying event in order to receive 29 months of COBRA continuation coverage. ■ A child who is born to or placed for adoption with a terminated employee during the continuation coverage period is also treated as a qualified beneficiary. ■ HIPAA limited the circumstances in which health plans can apply exclusions for pre- existing conditions, thus allowing employers to cut off COBRA continuation coverage sooner. The Affordable Care Act rendered this moot by barring all insurance plans from excluding coverage for pre-existing conditions. The intent of the HIPAA is to enhance employees’ ability to continue health coverage when they leave their jobs and to prohibit plans from discriminating against employees and their dependents based on their health status. Note: Since the Affordable Care Act took effect in January 2014, health insurance plans can no longer deny anyone coverage for a pre-existing condition. The HIPAA also amended ERISA’s disclosure requirements for group health plans to improve their summary plan descriptions and summaries of changes. Group health plans must:

• Notify participants and beneficiaries of “material reductions in covered services and benefits” within 60 days of adopting a change. • Disclose to participants and beneficiaries information about their plan, including name and address of issuer, to what extent the plan’s benefits are guaranteed under a contract or policy, and the nature of the payment of claims. • Inform participants and beneficiaries as to what DOL office they can contact for more information on ERISA and HIPAA. • Disclose that federal law generally prohibits plans and issuers from limiting hospital stays for childbirth to less than 48 hours for normal deliveries and less than 96 hours for Caesareans.

HIPAA’s privacy rules If your company sponsors an employee benefit plan, it has to comply with the HIPAA Privacy Rule, designed to protect the confidentiality of employees’ medical information. Your company could bump up against HIPAA’s privacy rules any time it exchanges a person’s individually identifiable health information, such as when an employee with a chronic illness contacts the HR department to ask about a claim. Considering that noncompliance can erupt into civil and criminal penalties, not to mention invasion of privacy lawsuits, it’s important that employers make sure their policies are in line with these new requirements. Under the privacy rules, organizations that have personal information related to an individual’s health care (or payment for health care) can’t disclose it, except directly to the employee, to the government for certain purposes (public health or abuse/fraud prevention) or if there’s a signed consent form to carry out treatment, payment or health care operations. The rules cover personally identifiable information, where the health care data can be linked to a person’s name, Social Security number, employee number or other identifier. It’s legal to disclose summarized data that can’t be linked to any specific person. Gone are the days when an employer could simply call its health plan or a provider to get that information freely. Employers, doctors and health plans must now make an effort to release a minimum amount of medical information. Meanwhile, state laws also play a role. Many states have developed their own health- information protections. HIPAA’s standards generally pre-empt state law unless the state rules are stricter. To comply with the privacy rules, you should:

• Beef up administrative, technical and physical safeguards for health care data. Example: Put up “firewalls” between plan-related uses and employment-related uses. • Amend health plan documents to spell out the rules. • Train employees and name a privacy officer. The law requires employers to assign staff to develop and implement HIPAA policies, including designating a privacy ­officer. • Police any business associates with whom your organization shares protected health information (such as technology vendors and plan administrators), and rewrite contracts to ensure that third parties are in full compliance with HIPAA. Reason: Employers can be liable for violations by business associates if they disclose protected information.

UNEMPLOYMENT INSURANCE

Under the Federal Unemployment Tax Act (FUTA) and state laws, employers are obligated to pay payroll taxes to provide unemployment compensation to workers who have lost their jobs. The federal tax rate is set by law, while the state tax rate varies according to the state. By understanding how the system works, you may be able to cut your state tax rate through efficient claims control. The joint federal/state program on unemployment insurance (UI) originated in the Social Security Act of 1935. The system is financed almost exclusively by a payroll tax on employers. No taxes are withheld from employees’ paychecks. Workers are eligible to receive unemployment benefits if they have become unemployed through no fault of their own and they are physically and mentally able to work. While drawing unemployment, workers must make themselves available for work and must actively seek a job. In most states 26 weeks is the maximum payment period for an unemployed worker. Extended benefits, funded on a shared basis with the federal government, are available during periods of high unemployment.

Federal tax set by law Under FUTA you must pay federal unemployment insurance taxes in the following circumstances: • You employ one or more individuals for some portion of a day during any 20 weeks in the current or preceding year or you paid wages of $1,500 or more in any calendar quarter. • For household employees you are subject to FUTA tax only if you paid total cash wages of $1,000 or more (for all household employees) in any calendar quarter in the current or preceding year. • For farm workers, you must pay FUTA tax if you paid cash wages of $20,000 or more during any calendar quarter or you employed 10 or more farm workers for at least some part of a day during any 20 weeks in the current or preceding year.

The FUTA tax rate is 6.0%, which applies to the first $7,000 paid to each employee in wages during a calendar year. However, you may receive a credit of up to 5.4% of taxable wages against your FUTA tax rate if you pay your state un­employment tax on a timely basis. Therefore, if you consistently pay your state tax on time, your net federal tax rate would be .6%. This would then cost you $42 per employee per year in federal tax (.006 x $7,000).

How states determine your taxable wage base Employers pay UI tax based on wages paid to each worker. Each state sets a taxable wage base. For example, California taxes wages up to $7,000 per worker. Maryland’s base is $8,500; New Jersey’s base is $32,600. State legislatures periodically change these figures. Taxable wages may include other types of remuneration. For example, tips and employer-paid off-premises meals and lodging are taxable, while discounts on goods and other privileges are not.

Setting your tax rate For new employers a new account rate is set based on the average of the rates for all employers in the state. For example, Virginia’s new employer rate is currently 2.5%; Florida’s is 2.7%. An experience rate is set after you have paid employees for a specified period: for example, two fiscal years in Maryland, 10 quarters in Florida. The state may add a percentage to the rate to ensure solvency of the UI fund. Frequent charges to your account result in a high UI tax rate in proportion to reported taxable wages. A low rate reflects fewer claims charged against your account. For example, in New Jersey the experience rates range from 0.30% to 7.7% on the first $32,600 of salary earned by each employee. Virginia’s minimum is 0.01% and its maximum is 6.2%, on a wage base of $8,000.

Charges against your account Generally, the state will first determine: (1) the employee’s wages during a base period, (2) the employee’s reasons for leaving the company and (3) the percentage of employer liability:

1. Determining the base period: State laws vary. For example, Maryland defines base period as the first four of the last five completed calendar quarters prior to the filing of the claim. 2. Reasons for leaving employment: Your account will not be charged if your employee: • Quit voluntarily without good cause. • Quit voluntarily for a better job. • Quit voluntarily to attend approved training. • Was discharged for gross misconduct.

Workers may be disqualified, permanently or temporarily, if they refuse suitable work or are unemployed because of a labor dispute. State law may set other disqualifying reasons.

3. Percentage of liability: You are 100% liable if you are the worker’s only employer. Charges are prorated if the worker had more than one employer.

Reporting requirements Employers are required to deposit FUTA taxes quarterly and file reports of wages paid. Data for each employee must include name, Social Security number, gross wages paid during the quarter and the number of base weeks earned by the employee during the quarter. If your FUTA tax liability for any calendar quarter exceeds $100, you must deposit the tax by electronic funds transfer or in an authorized financial institution using Form 8109 (Federal Tax Deposit Coupon). You report federal unemployment tax on Form 940 (Employer’s Annual Federal Unemployment Tax Return) or, if you qualify, on Form 940-EZ. Note: You can be assessed penalties for late filing or failure to file. Filing is compulsory even if you had no employees during a quarter. For household employees, you are not required to deposit FUTA taxes unless you report their wages on Form 941 or 943. If you don’t use these forms, you report the tax for these employees on Schedule H (Form 1040), Household Employment Taxes.

EXIT INTERVIEWS

Most companies these days conduct exit interviews with departing employees to determine why they’ve resigned. Exit interviews can be a great HR tool, but you have to know what ­questions to ask and, at the same time, what questions to avoid for legal reasons. At its best, an exit interview provides a rare glimpse of the inner workings of your company from a departing employee’s perspective. Your company can benefit from the feedback in several ways. Exit interviews may:

• Uncover reasons for high turnover or poor morale. • Generate ideas to improve business operations or personnel management. • Expose poor working conditions or help you spot potential legal problems at an early stage.

Consider how a routine exit interview for a departing support-level employee at Bankers Trust Co. in New York exposed massive fraud in the firm’s securities-processing business. As a result of comments during the interview, investigators found that ­managers were misappropriating unclaimed money that should have gone to security holders. The funds were used to cover the department’s general expenses, which in turn falsely inflated profits. The evidence led Bankers Trust to plead guilty and agree to a $63 million fine. Exit interviews are usually done with employees who are voluntarily leaving the company. Some large organizations also arrange exit interviews when employees transfer to other divisions or relocate within the company. But what about fired employees? Conducting exit interviews with fired employees introduces a variety of risks. Someone who’s been discharged would have ­little incentive to make dispassionate observations about morale or discuss management issues in an unbiased way. Also, fired employees may disagree with the reason they were terminated. If an argument breaks out, it could lead to legal turmoil later. The worst mistake the interviewer could make is to rehash past decisions: namely, restating in his own improvised language why the company decided to terminate the employee. If he strayed from the wording used in firing the employee, he might expose himself and the firm to legal liability. Thus, many employment lawyers advise managers to skip exit interviews for discharged employees. Instead, they suggest using the termination meeting itself and possibly a follow-up discussion with an HR representative to allow the individual to vent. That way, you can learn the employee’s complaints about the job and address them forthrightly before you get a call from her lawyer or the EEOC. Above all, be consistent in how you handle departing workers. Don’t invite some terminated employees to exit interviews while bypassing others. A standard approach is to set a blanket policy that all employees who leave the company voluntarily will have an exit interview, but terminated employees will not.

Prepare for the worst One reason managers dread conducting exit interviews is that they might hear something they don’t want to hear. An employee might complain about inappropriate or even illegal activity, which could trigger the need for an investigation. You’re better off learning about such matters in an exit interview, rather than getting caught off guard by a lawsuit later. If an employee complains about a boss, determine if it’s mere dislike by a disgruntled worker or if it’s serious improper behavior on the part of the supervisor (such as discrimination, harassment or signs of a propensity for violence). Always document either way. Federal law requires an employer to conduct an investigation if it learns of improper behavior. Say an employee tells you in an exit interview that she has been sexually harassed on the job. Even though she insists she’s quitting for a better job, not due to the harassment, you cannot ignore her allegation. After all, the alleged harasser may be causing harm to others. Even if you ultimately determine there was no harassment, the departing employee may still sue the com­pany in the future. Her remarks in the exit interview may be admissible in court. By investigating her complaint promptly and thoroughly, you strengthen your legal defense. Moreover, an employee’s critical comments or observations about a boss or co-worker may serve as evidence admissible in court if the boss or co-worker was ultimately fired and then sued you. That’s why you must investigate rather than ignore potential problems you hear about in an exit interview. As a rule, treat any mention of harassment or discrimination by a departing employee in an exit interview as you would any similar complaint by another employee. Apply uniform standards, and conduct the same type of investigation. Don’t assume ­employees will always spell out the illegal behavior they’ve witnessed. They may drop hints about a nasty conflict or gloss over an otherwise serious issue that they deem inconsequential. Don’t accept these indirect comments at face value or tuck them away. Dig for more information in a tactful way.

Ease fear of retaliation If an employee seems reluctant to open up in an exit interview, reassure her that you won’t retaliate for her comments. Stress that retaliation is against the law. But don’t open the exit interview with some overly dramatic statement, such as “We promise not to retaliate for anything that’s said in here today.” That would cause the employee to become suspicious. If the employee fears reprisal (such as a bad reference), cite your company’s policy for giving recommendations. For example, say, “Our policy is only to confirm dates and facts of employment.” “As a rule, it’s better to sound wishy-washy in an exit interview than to imply or make a promise,” says Kelly J. Davidson, an attorney with Ober, Kaler, Grimes & Shriver in Baltimore. “Avoid saying, ‘Oh, we’ll give you a great recommendation in any case, so don’t worry.’ That kind of statement can come back to haunt you.”

What should you ask? The questions you ask in an exit interview should flow from your goals. In most cases, employers want to reduce turnover, promote goodwill among departing employees and identify their concerns. Every exit interview should cover the basics, such as asking the employee’s opinion on his compensation and company benefits, training and advancement opportunities, quality of supervision and upper management, as well as the appropriateness of the overriding corporate culture. The most obvious question—“Why are you leaving?”—can present the most problems. Many employees resort to safe code words rather than tell you the real reason. Probe for the truth by trying a different approach. Say, “It’s been said that people don’t quit companies—they quit bosses. What do you think?” Listen and observe the employee’s response. You may find that by broaching this delicate issue in a general sense, you can extract more revealing information than by asking point- blank, “Are you quitting because of your boss?” Also, beware of asking inappropriate questions in an exit interview. In general, steer clear of the kinds of personal questions that are illegal to ask in a job interview, such as “Are you married now?” or “Are you sending your kids to religious school?” Also avoid taunting questions, such as “Do you want a great recommendation?” or “Why were you so difficult to work with at times?” Questions such as these could create problems later. For example, if a departing employee later reapplied for a job and you decided not to hire her, she could claim the personal things you had asked in her exit interview had made you biased. Bottom line: Don’t annoy people in their exit interview. Don’t pry into their affairs or ask questions that will put them on the defensive. Finally, realize that when it comes to exit interviews, confidentiality does not flow both ways. While you can, and should, tell the employee in the exit interview that you won’t share what you hear with other employees, the individual is under no obligation to do the same. Assume the employee will share everything you say in an exit interview with others.