Panel 2 Employment and Employee Benefit Law Update for 2008

1. Panel 2Employment and Employee Benefit Law Update for 2008 Thomas Petrides – K&L Gates Christopher Kondon – K&L Gates Michelle Lancaster – Computer Sciences Corp. Eileen Lyon – Far East National Bank

2. As a courtesy, . . . • Please silence all cell phones, pagers, Blackberries and other electronic devices. • Please be considerate of others if you must respond to an urgent call, page or email. Thank you !

3. Employment Law Update for 2008 • Significant New California Employment Laws for 2008 and Recent Case Law Developments • Moving Forward with Employee Wellness Programs: • The IRS and DOL requirements for wellness programs under HIPAA • The EEOC enforcement guidance on wellness programs • Wellness program features that raise red flags

4. Part I: Employment Law Update • New Employment Laws for 2008 • What Else to Look for in 2008 • Significant Employment Cases from 2007 • Pending California Supreme Court Cases

5. Military Spouse Leave Law (AB 392) • AB 392 became law on 10/09/07 as an urgency statute (California Military and Veterans Code §395.10) • Employers with 25 or more employees are required to provide up to ten (10) days of unpaid leave to a qualified employee spouse of a member of the Armed Forces, National Guard or Reserves, while member spouse is home on leave from military deployment during a period of military conflict

6. Military Spouse Leave Law (Cont.) • A “Qualified Member” means a member of the US Armed Forces who has been deployed during a period of military conflict to an area designated as a combat theater or combat zone by the President, or a member of the National Guard or Reserves who has been deployed during a period of military conflict

7. Military Spouse Leave Law (Cont.) • “Period of Military Conflict” means either (i) a period of war declared by congress or (ii) a period of deployment for which a member of a reserve component is ordered to active duty pursuant to law • “Qualified Leave Period” means the period that the qualified member is on leave from deployment during a period of military conflict

8. Military Spouse Leave Law (Cont.) • To be a “Qualified Employee”, the employee must: • be the spouse of a qualified member; • work for an employer on average at least 20 hours per week; • But excludes independent contractors • notify employer of intention to take this leave within 2 business days of receiving official notice that member spouse will be on military leave; and • submit written documentation certifying that member spouse will be on leave from deployment during the period the leave is requested by the employee

9. Military Spouse Leave Law (Cont.) • Retaliation for requesting or using leave under this law is prohibited • Leave under this statute shall not affect or prevent any other leave or benefits that employee may be entitled

10. Military Spouse Leave Law (Cont.) • What Employers Should Do • Make sure HR personnel are aware and are familiar with this new leave requirement • Update internal leave policies and procedures • May want to update Employee Handbooks or employee leave policies to include this new protected leave • See Sample Leave Policy

11. Adjustments to State Minimum Wage • State minimum wage increased from $7.50 to $8.00 per hour effective 1/1/08 per IWC Wage Orders • Minimum annual salary required to qualify for state law “white collar” exemptions (executive, professional and administrative) increases to $33,280.00 (Two times state minimum wage on annual basis) • Computer Professional minimum wage to qualify for exempt status decreased to $36.00 per hour from previous $49.77 (per SB 929) • Approx. $75,000 annually compared to $103,521 • Hourly rate will still adjust for inflation on annual basis

12. Protecting Employee Information • Labor Code § 226 requires Employers to provide an itemized wage statement with each paycheck that lists certain information, including the employee’s name and Social Security number • However, effective 1/1/08, per SB 101 passed in 2005, only the last four digits of the employee’s Social Security number shall now be listed on the wage statement

13. Protecting Employee Information(Cont.) • Existing law (Civil Code § 1798.82) requires any business in California that owns or licenses computerized data that includes personal information, to disclose any breach of the security of the system following discovery or notification of the security breach, to any resident of California whose unencrypted personal information was, or is reasonably believed to have been, acquired by an unauthorized person.

14. Protecting Employee Information(Cont.) • “Personal information," for the purposes of these provisions, means an individual's name in combination with specified data elements, including Social Security number, driver’s license number, or bank account number and access code, when either the name or the data elements are not encrypted.

15. Protecting Employee Information(Cont.) • Per AB 1298, medical information and health insurance information, as defined, are now added to the list of data elements that, when combined with the individual's name, would constitute personal information that would require disclosure when acquired, or believed to be acquired, by an unauthorized person due to a security breach

16. Protecting Employee Information(Cont.) • “Medical information" means any information regarding an individual's medical history, mental or physical condition, or medical treatment or diagnosis by a health care professional. • “Health insurance information" means an individual's health insurance policy number or subscriber identification number, any unique identifier used by a health insurer to identify the individual, or any information in an individual's application and claims history, including any appeals records.

17. Protecting Employee Information(Cont.) • What Employers Should Do • Make sure itemized wage statements shall only disclose last four digits of Social Security # • Check applicable methods and procedures for storing employee medical information and health insurance information – establish methods for using encrypted data only if possible • If not, and in the event of a security breach and disclosure, be sure to comply with employee notification requirements

18. Hands Free Devices While Driving • SB 1613 (enacted in 2006) adds a new law in California applicable to all persons and effective July 1, 2008 that prohibits the use of cell phones while driving unless a hands free listening and talking device is used. (Vehicle Code § 23123) • Violations will be an infraction punishable by a base fine of twenty dollars ($20) for a first offense and fifty dollars ($50) for each subsequent offense

19. Hands Free Devices While Driving (Cont.) • What Employers Should Do • If the Employer requires its employees to use a cell phone while driving, then it should make sure all employees have the proper hands free devices – Note: the Employer may have to pay for this cost per Labor Code § 2802 • Better practice from a potential liability standpoint would be to prohibit the use of cell phones while driving on Company business

20. Federal Laws of Interest Effective 2008 • New I-9 Form must be used for all new hires effective 12/26/07 • Despite much “hoopla” about the issuance of a new form, there is not much difference between to old form and new form (a handful of authorization documents were dropped, one was added, and some instructions were clarified) • New IRS mileage rate increased to 50.5 cents per mile effective 1/1/08 (from 48.5¢)

21. What To Look For In 2008 -- State • Proposed Universal Health Insurance coverage initiated by Governor Schwarzenegger • $14-billion healthcare plan would be built on new employer and hospital taxes, extra money from the federal government, selling off management of the state lottery, and requiring that all Californians obtain health insurance • Proposed Regulations issued by the DLSE in 2007 on employee expense reimbursement requirements • Would require specific rules and procedures regarding methods and timing for Employers to reimburse employees in connection with business related travel expenses

22. What To Look For in 2008 – Federal • New Rules for “No Match” letters regarding Social Security numbers and Employer’s obligation to have employee correct problem • Currently stayed per court action and rules may be revised and re-issued in early to mid-2008 • IRS Proposed Cafeteria Plan and Flexible Spending Account (FSA) Regulations • Scheduled to become effective 1/1/2009 • Employers should act now to make sure their benefit plans comply with these new regulations

23. What To Look For in 2008 – Federal (Cont.) • Military Leave under the FMLA • Passed by Congress in December but vetoed by President Bush as part of a military spending bill, but may be reintroduced as a new bill • Would provide for 12 weeks of FMLA leave to immediate family members (spouse, child or parent) of any reservist or member of the National Guard who is called to active duty, and also up to 26 weeks of unpaid leave during 12 month period to employees who are providing care to a family member who is wounded while serving in the military

24. Significant Employment Cases from 2007 Murphy v. Kenneth Cole Productions(Cal. Supr. Ct.) • Meal and rest period violations are "premium pay" statutes and not "penalties"; therefore 3 year statute of limitations applies (rather than 1 year) and "waiting time" penalties under Labor Code § 203 are also available. • Employers Should: Further ensure that all non-exempt employees are taking proper meal and rest breaks and recording time for meal periods

25. Significant Employment Cases (Cont.) Prachasaisoradev v. Ralphs Grocery Company(Cal. Supr. Ct) • Bonus plans that supplement fixed salary/wage compensation and that are based on profits which include factors such as workers' compensation costs and losses due to theft/breakage are permissible and do not constitute an impermissible deduction from an employees wages.  Prior cases holding to the contrary are reversed. • Employers Should: Review bonus plans to determine compliance and consider adding profit based criteria

26. Significant Employment Cases (Cont.) Gentry v. Superior Court (Circuit City Stores) • Arbitration agreements in employment that prohibit class action lawsuits are likely unenforceable even if the employee is allowed to “opt out” of the arbitration agreement at the beginning of employment, such that the agreement was not "procedurally unconscionable" • Employers Should: Carefully review their employee arbitration agreements to determine whether any modifications are necessary in light of this decision by the California Supreme Court

27. Significant Employment Cases (Cont.) Gattuso v. Harte Hanks (Cal. Supr. Ct.) • Employers must reimburse employees for costs and expenses incurred by the employee in the performance of his or her duties as required by Labor Code § 2802. However, Employer may satisfy this obligation by paying additional compensation rather than separate expense reimbursements, provided that the Employer can demonstrate that the extra compensation satisfies its expense reimbursement obligations • Employers may wish to review expense reimbursement policies to consider revising per case

28. Pending California Supreme Court Cases • Edwards v. Arthur Anderson -- Whether limited prohibition on former employee performing services for former clients is a permissible "narrow restraint" or instead an unlawful restraint of trade in violation of B&P Code § 16600 • Williams v. Genetech -- Whether it is permissible to replace an employee in their position while on extended disability leave and what reasonable accommodations must be provided after the employee is released to return to work

29. Pending Supreme Court Cases (Cont.) • Jones v. Lodge at Torrey Pines -- Whether an individual supervisor can be held personally liable for retaliation under the state FEHA • Harris v. Superior Court -- Whether the administrative exemption under state wage and hour law can apply to employees who perform regular day to day activities or whether it is limited to only those administrative employees who "formulate and set policies"

30. Part II: Wellness Programs • The IRS and DOL requirements for wellness programs under HIPAA • The EEOC enforcement guidance on wellness programs • Wellness program features that raise red flags

31. Nondiscrimination and Wellness Programs • In December 2006, DOL, IRS and HHS jointly issued final regulations on group health plan nondiscrimination provisions and wellness programs • New rules effective for plan years beginning on or after July 1, 2007 (for calendar year plans, the new rules are effective January 1, 2008)

32. General Nondiscrimination Rules • Individuals cannot be denied eligibility for benefits or charged more for coverage because of any “health factor,” including: • Health status • Medical condition (both physical and mental) • Claims experience • Receipt of health care • Medical history • Genetic information • Evidence of insurability • Disability

33. Uniform Application • Plans can exclude/limit benefits as long as applied on a uniform basis for all “similarly situated individuals” and not directed at individual participants based on a health factor • Plan amendments that apply to all individuals in a group of similarly situated individuals and that are effective no earlier than the first day of the next plan year after the amendment is adopted is not considered to be directed at individual participants

34. Similarly Situated Individual Determinations • Distinctions among groups must be based on bona fide employment-based classifications consistent with employer’s usual practice – NOT health factors: • Part-time and full time • Geographical location • Dates of hire and length of service • Different groups can have different eligibility, benefits and cost provisions • Participants and their beneficiaries may be in different groups

35. Permitted Reverse Discrimination • Nothing prevents a plan from establishing more favorable rules for eligibility for benefits for individuals with adverse health factors • A plan may charge higher premiums for individuals with adverse health factors IF AND ONLY IFsuch individuals would not otherwise be eligible for coverage were it not for the adverse health factor

36. Other Rules Relating to New Regulations • Final Regulations also addressed rules relating to: • Nonconfinement Provisions • Actively-At-Work Provisions • Source of Injury Rules • And other provisions not directly related to Wellness Programs

37. Wellness Programs • Program designed to promote health and prevent disease • Exception to HIPAA’s nondiscrimination rules • Examples include: • Smoking cessation programs • Cholesterol lowering programs • Weight loss programs • Team competitions for above

38. Wellness Programs(Cont.) • Employers are beginning to now provide on a regular basis as a way to help reduce overall costs of medical insurance and as an added “employee benefit” that is desired by employees and relatively inexpensive to implement

39. Wellness Programs (Cont.) • Qualified programs that are NOT subject to any additional HIPAA requirements: • Program that reimburses costs of fitness center membership • Diagnostic testing program that provides reward for participation, not outcome • Program that encourages preventative care through waiver of co-payment/deductible for certain activities (e.g., pre-natal or well-baby visits) • Program that reimburses employees for the costs of smoking cessation programs without regard to whether employees quit • Program that provides reward for attending a monthly health education seminar

40. Wellness Programs (Cont.) • Other wellness programs must satisfy the following: • Reward must not exceed 20% of total cost of coverage—if dependents may participate, reward limit is measured as 20% of the cost of the family coverage • Reasonably designed to promote health or prevent disease • Opportunity to qualify at least once per year • Reward must be available to all similarly situated individuals

41. Wellness Programs (Cont.) • If the reward exceeds the 20% of cost of coverage limit or otherwise fails to comply with the HIPAA requirements, then the benefit would not qualify as a “Wellness Program” under HIPAA and the benefit provided to the employee would become taxable income. (Generally the “reward” is a reduction in the cost of the medical premium)

42. Wellness Programs (Cont.) • When is a wellness program “available to all similarly situated individuals?” • Program must provide for a “reasonable alternative standard” (or waiver of otherwise applicable standard) to qualify for the reward • if it is unreasonably difficult for an individual to satisfy the otherwise applicable standard because of a medical condition, or • if it is medically inadvisable for an individual to attempt to satisfy the standard

43. Wellness Programs (Cont.) • Plan may seek verification, such as a statement from individual’s physician, that a health factor makes it unreasonably difficult or medically inadvisable for the individual to satisfy or attempt to satisfy the otherwise applicable standard • In all plan materials describing the wellness program, the availability of the reasonable alternative standard must be disclosed

44. Wellness Programs (Cont.) • While not explicitly addressed in the regulations, the cost of any “reasonable alternative standard” made available to participants (e.g., participation in a smoking cessation program in lieu of a participant’s certification of non-smoker status) must presumably be paid for by the health plan. Forcing a participant to bear this cost would deny the participant access to the full amount of the wellness program reward.

45. Health Risk Assessments • OK—as long as not used to deny, restrict or delay eligibility or determine individual premiums • Regular testing or education for diabetic probably is acceptable • Testing or classes for smokers may be acceptable under HIPAA

46. ADA Concerns and EEOC Guidance • ADA limits the ability of an employer to subject any employee to a medical examination or disability related inquiry • Only permitted where job-related and consistent with business necessity • ADA allows exception for medical related inquiries if part of a voluntary wellness program

47. Disability-related inquiries under ADA • Health risk assessment questionnaire distributed as part of a wellness program only raises issues if it contains disability-related or medical information questions • Asking an employee how many times per day they smoke as part of a smoking cessation program is not a disability-related inquiry

48. Voluntary Participation under the ADA • Because most health risk assessment questionnaires relating to wellness programs will likely contain questions that elicit medical information, Employers must make completion of such questionnaire by the employee voluntary to avoid a potential violation of the ADA • Compliance with HIPAA might not satisfy ADA

49. Voluntary Participation (Cont.) • Only Wellness Programs that neither require participation nor penalize employees for non-participation may be acceptable under the ADA • EEOC has indicated that the availability of insurance on an employee’s participation in a health risk assessment might well render participation in the assessment as “involuntary”

50. Voluntary Participation (Cont.) • Employers should carefully review their Wellness Programs to determine whether the rewards offered for participation or the disadvantages associated with non-participation would be significant enough under the ADA to make participation in the program to be “involuntary” such that the information sought in the related health questionnaires would violate the ADA