Doing Business in Greater Phoenix, U.S.A. - Chapter 6: Human Resources & Employment Law

6.1: COMPENSATION

6.1: COMPENSATION

Minimum Wage

The minimum age is the lowest wage most employers must pay per hour. States are able to set their own minimum wage as long as they exceed the Federal minimum wage. The minimum wage in Arizona is $7.80 per hour. For tipped workers, such as wait staff at restaurants, Arizona’s minimum wage is $4.65 per hour.

Salaried Employees

Most employees doing post-graduate work are provided an annual salary. The average work week is 40 hours per week, and salaried employees are provided their designated annual salary whether the employee works more or slightly less in any given week. Benefit packages including vacation time, medical insurance and retirement plan options vary on a case-by-case basis.

Executive Compensation

“Management employees” (executive personnel) often have their basic benefits supplemented by executive only compensation arrangements including nonqualified plans, stock-based arrangements, and notional equity arrangements.

Nonqualified Plans: Nonqualified plans play an important role as a tax and retirement planning tool for executives. The principal attraction of nonqualified plans is that they are not subject to many of the requirements of ERISA and the Code that apply to qualified plans. Such plans can provide benefits to executives without providing corresponding benefits to non-executive employees. Two of the most common forms of nonqualified plans are excess benefit plans and deferred compensation plans.

Excess Benefit Plans: An excess benefit plan provides an executive with a supplemental pension equal to the difference between the pension that the executive would have received under the employer’s qualified retirement plan if there were no limitation on benefits imposed by the Code and the benefit actually received by the executive under the qualified plan.

Deferred Compensation Plans: Deferred compensation plans allow covered executives to avoid current income tax by deferring current compensation for a specified period or until retirement. Interest on the deferred amounts during the deferral period may be credited to the executive as a further benefit. To avoid adverse tax consequences and to avoid ERISA regulation, nonqualified deferred compensation plans are neither funded nor secured. Executives generally have no greater right to payment than do other unsecured creditors. Although there are ways to allay a covered executive’s concerns relative to an employer’s promise to pay, there is no way to give an executive priority over their employer’s other creditors without an adverse tax result.

Stock-based Arrangements: The theory underlying stock-based arrangements is that the executive who has the right to acquire the employer’s stock, or to receive compensation based upon the performance of the stock, will have an incentive to work more diligently for the company’s success. Among the most common forms of stock-based arrangements are stock options, restricted stock and stock appreciation rights.

Stock Options: A stock option is a right granted by an employer to an employee that permits the employee to purchase shares of the stock from the employer at a fixed price within a specified period of time. The option permits the employee to share in the appreciation of the stock while avoiding the risk of depreciation in value. Stock options are of two kinds: incentive stock options and nonqualified stock options.

  • Incentive Stock Options: Incentive stock options (ISOs) are creations of the Code and must satisfy the Code’s requirements. One requirement is that the exercise price of the option (the amount payable by the employee to acquire the stock) cannot be less than the fair market value of the underlying stock on the date of the grant of the ISO. Also, an ISO must be exercised within 10 years after the date of grant.

The principal benefit of an ISO is the tax treatment available to an employee. An employee is not taxed either at the time of the grant of an ISO or at the time of the exercise of the ISO, unless the employee is subject to the special alternative minimum tax. If the stock acquired upon exercise of an ISO is held for a mandated holding period (the later of two years from grant and one year from exercise), any gain to the employee from the sale is capital gain. No deduction is available to an employer in connection with an ISO unless the employee sells the ISO stock before the holding period.

  • Nonqualified Stock Options: A nonqualified stock option (NQSO) is any option that does not qualify as an ISO. Unlike ISOs, NQSOs that are granted at fair market value are generally not required to meet specific requirements of the Code. As a result of state and federal tax and securities laws, however, NQSOs tend to have common features. Typical NQSOs permit the employee to purchase stock at a fixed price for a specified period of time at a price equal to or greater than the fair market value on the date of grant. Most NQSOs cannot be exercised until a specified period has expired and most expire upon termination of employment, with the exception of death, retirement or disability.

The employee’s tax treatment under an NQSO generally is not as favorable as under an ISO. Although the employee generally is not taxed upon grant of an NQSO, the employee will realize taxable ordinary income at the time of exercise of the option equal to the difference between the fair market value of the stock at exercise and the exercise price. The exercise price paid by the employee, plus the income recognized by the employee, is the employee’s “basis” in the stock in the event of a subsequent sale. Any amount realized on a subsequent sale that is in excess of the employee’s basis is taxable at capital gain rates.

Although no deduction is available to an employer that issues an ISO, an employer that issues an NQSO is entitled to a deduction upon the employee’s exercise of an NQSO equal to the amount of income includible by the employee.

  • Restricted Stock: Restricted stock is stock of the employer issued to an employee for the performance of services. Restricted stock is subject to transfer and forfeiture restrictions on the employee’s stock ownership rights. For example, the employee’s ownership of the restricted shares may be made contingent on continued employment by the employer for a specified period. Restricted stock is often issued to an employee without cost to the employee or at a significant discount.

An employee generally is not subject to tax on restricted stock until the stock restrictions lapse. When the stock restrictions lapse, the employee realizes ordinary income in an amount equal to the excess of the fair market value of the stock, over the amount, if any, paid for the stock. Any appreciation in the stock that occurs after the restrictions lapse generally is eligible for capital gains treatment upon a subsequent sale.

An employee can elect to be taxed immediately upon the receipt of the restricted stock by filing a special notice with the IRS within 30 days of the stock grant. In such case, the employee realizes ordinary income equal to the excess of the fair market value of the stock on the date of grant over the amount, if any, paid for the stock. Any appreciation in the stock occurring after the date of grant is then eligible for capital gains treatment.

Stock Appreciation Rights (SARs): A stock appreciation right (SAR) is a right to be paid an amount equal to the difference between the value of a share of an employer’s stock on the date the SAR is granted and the value of that share on the date the SAR is exercised. SARs are sometimes granted in conjunction with stock options and often require that the underlying option be exercised as a condition for the exercise of the SAR. Payments under SARs can be made in cash or in employer stock. The tax treatment of SARs is generally the same as the tax treatment of NQSOs.

Notional Equity Arrangements: Notional equity arrangements or “phantom equity” arrangements provide an employee with a contractual right to receive a payment in the future that tracks the value of an employer’s stock. In this regard, notional equity arrangements allow an employer to grant awards that reflect the economic benefits of stock ownership without requiring the employer to issue actual shares of stock to its employees. If used correctly, notional equity arrangements can create an ownership culture that is similar to the ownership culture created through the award of actual stock in the form of options and restricted stock. Notional equity arrangements have historically been used by private company employers that do not want to grant actual stock ownership rights to their employees.

Section 409A of the Internal Revenue Code: Section 409A of the Code imposes a series of very technical and restrictive requirements on nonqualified deferred compensation plans. With respect to nonqualified deferred compensation plans, Section 409A regulates the timing of payment, the timing of deferral elections, the ability to accelerate payment, and the ability to make subsequent deferral elections. The failure to satisfy the requirements of Section 409A can lead to adverse tax consequences for employees including, but not limited to, an additional tax of 20 percent on the amount deferred under the noncompliant plan. Section 409A reaches far beyond the commonly recognized forms of deferred compensation plans. This means that employers who adopt excess benefit plans, deferred compensation plans, employment agreements that provide for severance pay, change in control agreements, severance agreements, discounted stock options or SARs, or notional equity or other arrangements that provide a legally binding right to compensation that will be paid in a later year need to be sure that such arrangements comply with Section 409A of the Code.

Section 162(m) of the Internal Revenue Code: Section 162(m) of the Code places a $1,000,000 limit on the amount of compensation a publicly traded employer can deduct in any one year for compensation paid to the employer’s chief executive officer and any of the employer’s three other most highly compensated executives (excluding the chief financial officer). This limitation, however, does not apply to compensation that qualifies for the “performance-based compensation” exception to the limitations on the deduction of compensation imposed by Section 162(m). Publicly traded employers that operate in Arizona should consider adopting a “performance-based compensation” program to take advantage of the “performance-based compensation” exception to the limitation on deductions imposed by Section 162(m) of the Code.

6.2: LABOR REGULATIONS

Employment Law

Employers in the United States historically have had significant discretion, as to employment matters, including hiring, discharge and working conditions. Legislation in recent years has increased regulation of the workplace. New legislation addresses equal rights for employees in a variety of protected classes: protected work leave rights for certain employees, wage and hour laws, and other issues. The following provides a brief overview of some of the regulations impacting employers in Greater Phoenix.

At-Will Employment: The general rule is that employees in Arizona are employed on an “at-will” basis, which means the employer or the employee may terminate the employment relationship at any time, for any reason, with or without cause with or without notice. The at-will employment doctrine is further strengthened by the Arizona Employment Protection Act, which allows employers or employees to terminate the employment relationship at any time for any reason unless there is a written contract to the contrary. To overcome the presumption that the employment relationship is at-will, the contract must be signed by both the employee and the employer, or be set forth in an employee handbook that identifies itself as a contract, or be signed by the party to be charged. Under this law, implied contracts are not enforceable.

The Act also limits “wrongful discharge” suits based on public policy. Before this law, courts allowed lawsuits alleging that a termination was “morally wrong,” even if it did not violate a specific law. Now these claims are not allowed. The employee must base the claim on a specific Arizona statute or the state constitution. The Act also protects whistle blowers against termination in retaliation for a refusal to violate Arizona law.

The Act limits remedies in some areas. If the statute provides for a specific remedy, a successful plaintiff may receive no more than that remedy. An employee may not base a claim on the statute to obtain a greater award than the one contained in the statute itself, such as damages for emotional distress, humiliation, or punitive damages in a discrimination action. Such damages can, however, be awarded in a proper case. The Act also shortens the statute of limitations for wrongful termination. To pursue a claim, the employee must file suit within one year of termination.

Restrictive Covenants: “A restrictive covenant – whether a covenant not to compete or an anti-piracy agreement – is enforceable so long as it is no broader than necessary to protect the employer’s legitimate business interest. The burden is on the employer to prove the extent of its protectable interest.” Hilb Rogal and Hamilton Co. v. McKinney, 190 Ariz. 213 (App. 1997). Such restrictive covenants can include non-compete, non-solicitation, and/or non-disclosure provisions. Restrictive covenants must be supported by consideration in order to be legally enforceable. In Arizona, continued employment of an otherwise purely “at will” employment relationship may be such consideration. Demasse v. ITT Corp., 194 Ariz. 500, 984 P.2d 1138 (1999); Mattison v. Johnston, 152 Ariz. 109, 730 P.2d 286 (App.1986).

A non-compete is designed to prevent an employee from leaving an employer and subsequently going to work for a competitor or setting up his or her own competing business. In any event, in order to be enforceable, among other things, a non-compete must be reasonable in terms of duration and geographical scope. Bed Mart, Inc. v. Kelley, 202 Ariz. 370, 45 P.3d 1219 (App. 2002). A non-solicitation or “anti-piracy” provision is designed to present an employee from leaving and subsequently soliciting or pirating the former employer’s customers and/or employees for the benefit of a competing or rival business.

Some restrictive covenants are written to prohibit competition or solicitation during the term of the employment relationship. But, unless otherwise agreed, an employee already has a legal fiduciary duty not to compete with his employer during their employment relationship.

A non-disclosure provision is designed to protect an employer’s confidential, proprietary, and/or trade secret information from being misappropriated by an employee during or after their employment relationship.

Courts in Arizona abide by the blue pencil rule, meaning they cannot “add terms or rewrite provisions” of restrictive covenants in employment agreements, but will sever unreasonable terms if the agreement remains grammatically sound. Valley Medical Specialists v. Farber, 194 Ariz. 363, 372, 982 P.2d 1277, 1285 (1999); Varsity Gold, Inc. v. Porzio, 202 Ariz. 355, 359, 45 P.3d 352, 356 (App. 2002) (“By simply authorizing a court to rewrite unreasonable restrictions, an employer may relieve itself of crafting a reasonable restriction with the added benefit that departing employees may adhere to an onerous covenant”).

Generally, the buyer of a business is neither bound by the seller’s union contract nor required to bargain collectively with an existing union, unless there is “substantial continuity” of work force between the successor employer and the predecessor employer. Whether substantial continuity exists depends on a number of factors, the most important of which is whether a majority of the employees of the successor employer were employed by the predecessor employer. Even if a duty to bargain is found, a successor employer is not obligated to comply with the terms of an existing collective bargaining agreement, unless the successor employer expressly or implicitly adopts the agreement or if the successor employer is the “alter ego,” essentially the same party, as the predecessor employer.

Discrimination

Title VII of the U.S. Civil Rights Act of 1964, as amended in 1991: Title VII prohibits discrimination in employment on the basis of race, color, religion, sex, or national origin. The prohibition applies to all elements of the employer-employee relationship, including hiring, firing, wages, promotion, and transfer. Title VII applies to every employer that has 15 or more employees engaged in any business affecting interstate commerce.

Title VII is enforced by the federal Equal Employment Opportunity Commission (“EEOC”). Employees or job applicants can file charges of discrimination with the EEOC. The EEOC itself may also file charges against an employer on behalf of employees or job applicants. Following an investigation and attempts at resolution, the EEOC, employees, or job applicants may file a suit against the employer. Remedies available include compelled employment, reinstatement, back pay, compensatory damages, punitive damages and equitable relief, and attorneys’ fees. Employees are entitled to a jury trial.

Age Discrimination in Employment Act (“ADEA”): The ADEA protects individuals who are at least 40 years of age from employer discrimination based on age with respect to hiring, firing, wages, promotions, transfers, and other terms, conditions, or privileges of employment. The ADEA applies to any employer engaged in business affecting interstate commerce that has 20 or more employees. An exception permits age discrimination when age is a “bona fide occupational qualification” reasonably necessary to the normal operation of the employer’s business. Selection of a younger employee over an older one is permitted if reasonably based on factors other than age.

Age discrimination claims must be filed with the EEOC. Thereafter, the EEOC, employees, or job applicants can file suit against the employer. Remedies available include compelled employment, reinstatement, back pay awards, liquidated damages, and attorneys’ fees.

The Rehabilitation Act: The Rehabilitation Act prohibits employers from discriminating against “qualified handicapped persons” and also requires employers to take affirmative steps to provide employment opportunities to handicapped persons. Employers subject to the Rehabilitation Act are federal contractors and subcontractors and recipients of federal financial assistance.

A “qualified handicapped person” is a handicapped person who can perform a particular job. The employer must make reasonable accommodations to the person’s handicap, unless doing so would cause the employer undue hardship. A “handicapped person” is defined as any person who has a physical or mental impairment that substantially limits one or more major life activities. Examples of handicapped persons are persons suffering from blindness, heart disease, paraplegia or epilepsy. Many factors – such as size of the company or type of business – influence the types of accommodations the employer needs to make for handicapped employees.

Americans with Disabilities Act of 1990 (“ADA”) and its amendments: The ADA prohibits discrimination against “qualified individuals with disabilities.” The prohibition extends to hiring, firing, wages, promotions, transfers, and all other terms, conditions, or privileges of employment. A “qualified individual with a disability” is one who meets the definition of a “qualified handicapped person” under the Rehabilitation Act. The ADA applies to an employer engaged in a business affecting interstate commerce that has 15 or more employees. The ADA is enforced by the EEOC. Rights of action and remedies under the ADA are similar to the remedies under Title VII described above.

The ADA was amended in 2008 by the Amendments Act and is now known as the ADAAA. One of the central purposes of the Amendments Act is to expand the definition of disability, which Congress criticized as having been too narrowly construed by the Supreme Court. The practical effect of the Amendments Act and interpreting regulations is that more individuals will qualify as disabled and will be entitled to reasonable accommodations at the workplace. Moreover, the broad coverage of the Amendments Act increases the number of employees protected under the ADA, thereby increasing the likelihood of litigation if companies are not complying with the statutory requirements.

The main point for companies to keep in mind is that the primary focus of the ADAAA is on whether discrimination occurred — not whether an individual is disabled. The practical effect is that employers should, in almost all instances, move right into the interactive process as the majority of employees will be able to establish an actual disability or record of a disability. Moreover, the regulations reiterate that an individualized assessment is required to determine whether an impairment substantially limits a major life activity. Accordingly, it is now even more important that human resources representatives sit down with employees and discuss why they may be struggling at work and begin the interactive process to determine if a reasonable accommodation might help, assuming the employee is disabled. Companies should ensure that these conversations, and all efforts to provide reasonable accommodations, are documented in writing and maintained with their employees’ confidential medical files.

Equal Pay Act (“Pay Act”): The Pay Act prohibits discrimination in employee wages on the basis of sex. It requires employers to pay equal wages for work at a single site of employment requiring equal skill, effort, and responsibility, regardless of sex. Differences in wage rates are permissible if attributable to operation of a seniority system, a merit system, a system that measures earnings by the quantity or quality of production, or any other system based on factors other than sex. The Pay Act applies to any employer with two or more employees. The Pay Act is administered by the EEOC. Either the EEOC or the employee may file a lawsuit to enforce the provisions of the Pay Act. Remedies include back pay awards, damages, and attorneys’ fees.

Section 1981 of the Civil Rights Act of 1870 (“Section 1981”): Section 1981 prohibits discrimination based on race or membership in an ethnic group. Any employer (regardless of size) engaged in business affecting interstate commerce is subject to Section 1981. Unlike Title VII, a job applicant or employee is not required to file a charge with the EEOC before suing the employer for a violation of the statute. Significantly, courts have found that Section 1981 applies to at-will employees. Remedies under Section 1981 include requiring employment, back pay, compensatory damages, punitive damages, and attorneys’ fees.

Genetic Information Nondiscrimination Act (“GINA”): The Genetic Information Nondiscrimination Act of 2008 (“GINA”) was signed into law in May 2008. The law prohibits genetic discrimination in two areas – employment and health insurance. Title II of GINA applies to employers, labor organizations, and joint labor-management committees and generally prohibits employment discrimination based on the genetic information of an employee or the employee’s family members.

GINA makes it unlawful for an employer to fail or refuse to hire, or to discharge, an employee, or otherwise discriminate against an employee with respect to compensation, terms, conditions, or privileges of employment because of the employee’s genetic information. GINA also makes it unlawful for an employer to request, require, or purchase genetic information with respect to an employee or an employee’s family member, with six limited exceptions.

Regardless of whether an exception applies, GINA makes clear that genetic information, once acquired, may not be used to discriminate against an individual with respect to employment or benefits or disclosed in violation of GINA’s confidentiality requirements. If an employer acquires genetic information, such information must be treated and maintained as part of the employee’s confidential medical records. Such information must be maintained on separate forms and in separate medical files and must be treated as a confidential medical record. This is consistent with the requirements under the Americans with Disabilities Act (“ADA”) regarding the maintenance and treatment of medical information.

Arizona Civil Rights Act (“Arizona Act”): The Arizona Act mirrors the federal civil rights laws and applies to Arizona employers with 15 or more employees. A claimant may pursue identical claims under Title VII and the Arizona Act simultaneously. The Act’s prohibition against sexual harassment applies to employers with one or more employees and is thus more encompassing than Title VII. The Arizona Act is administered by the Civil Rights Division of the office of the Arizona Attorney General.

Wage Payment Laws

Fair Labor Standards Act (“FLSA”): The FLSA establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in the federal, state, and local government. Virtually all employers are subject to the FLSA. Under the FLSA, employers must pay employees not less than the prescribed minimum wage.

Under the overtime provisions of the FLSA, most employees must be paid 1½ times their regular rate of pay for all hours worked in excess of 40 hours per week. There are exceptions to the overtime standards for certain employees, including executive, administrative, professional, certain computer personnel, outside sales employees, and certain highly compensated employees. The FLSA is administered and enforced by the Wage & Hour Division of the U.S. Department of Labor. The Department of Labor may bring an action against an employer to compel compliance with the FLSA, or employees can sue for unpaid wages, liquidated damages, injunctive relief, and attorneys’ fees.

Davis-Bacon Act: The Davis-Bacon Act requires employers that contract with the federal government to pay their employees a special minimum wage (i.e., the “prevailing wage” rate for corresponding classes of employees employed on projects of a similar character in the area in which the contracted work is to be performed). The Davis-Bacon Act is enforced by the U.S. Department of Labor. Failure to pay the required “prevailing wage” can result in termination of the underlying contract and back pay obligations. If the contract is canceled and the work is completed by another contractor, the employer may be liable for any excess costs incurred by the government.

Walsh-Healy Act: The Walsh-Healy Act mandates a special “prevailing minimum” wage that must be paid to employees of employers that supply goods or materials to the U.S. government. Enforcement and sanctions are similar to those applicable under the DavisBacon Act.

Arizona laws relating to wages and hours generally follow the federal laws governing these issues. In addition, an employer in Arizona is required to designate at least two days each month as fixed pay days, not more than 16 days apart. Discharged employees must be paid all wages due within three working days of the date of discharge or by the end of the regular pay period in which they are discharged, whichever is sooner. Employees who quit must be paid all wages due by the end of the regular pay period in which they terminate. Violations can result in employer liability of three times the amount of wages due.

Leave Laws

Family and Medical Leave Act of 1993 (“FMLA”): The FMLA applies to workers who have been employed at least 12 months when the employee works for an employer employing at least 50 people (either at one location or separate worksites within a 75-mile radius). It entitles eligible employees to 12 weeks of unpaid leave during a 12-month period: (1) to care for a newly born or adopted child, (2) due to the employee’s serious health condition, (3) to care for a spouse, child, or parent with a serious health condition, (4) when a qualifying exigency arising out of the fact that the employee’s spouse, son, daughter, or parent is a covered military member on active duty, or has been notified of an impending call or order to active duty, in support of a contingency operation exists, or (5) to care for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the service member. When the leave expires, the employee is entitled to be restored to the same or equivalent position with equivalent pay, benefits, and other conditions of employment. The employer must continue the existing health insurance coverage during the leave, but may have the right to recover the premiums if the employee fails to return to work.

Covered military members only include individuals in the Reserves or retired members of the regular Armed Forces or Reserves. The following categories constitute a qualifying exigency: short-notice deployment, military events and related activities, childcare and school activities, financial and legal arrangements, counseling, rest and recuperation, post-deployment activities, and additional activities that are agreed to by the employer and employee.

For leave due to the care of a covered service member, eligible employees are entitled to 26 workweeks of leave in a single 12-month period. This leave may be taken to care for a current member of the Armed Forces, including a member of the National Guard or Reserves, who has a serious injury or illness incurred in the line of active duty for which he or she is undergoing medical treatment, recuperation, or therapy, or is otherwise in outpatient status or on the temporary disability retired list. Additionally, an employee may have multiple family members who qualify as the next of kin, and they may take FMLA leave either consecutively or simultaneously. The FMLA authorizes the Wage and Hour Division of the U.S. Department of Labor to investigate and resolve complaints. Employees may also file suit to enforce their rights under the law without filing an agency complaint. Employers who violate the FMLA or discriminate against employees exercising their rights under it are liable for lost compensation, compensatory damages, liquidated damages, and attorneys’ fees.

Uniformed Services Employment and Reemployment Rights Act (“USERRA”): USERRA requires employers to grant employees unpaid time off to fulfill temporary military obligations, and also requires employers to rehire individuals who leave work to serve full time in the U.S. Uniformed Services for up to five years. The Act also prohibits discrimination against individuals who apply for, perform, or have performed in a uniformed service. In addition to re-employment, covered employees have seniority rights, pension rights, and the right to continued health insurance coverage.

Except in certain circumstances, employees must notify their employer in advance of the need for military leave, and also must reapply for employment after their service. The time limits for reapplication vary depending on the length of service. Damages recoverable for violation of USERRA include re-employment, lost wages and benefits, liquidated double damages for “willful” violation, and attorneys’ fees.

Workplace Drug Laws

Drug-Free Workplace Act (“Drug Act”): The Drug Act requires federal contractors and grantees to implement anti-drug programs. Employers are required to provide information to employees regarding the dangers of drug abuse in the workplace. If an employee is convicted under a criminal drug law for a violation that occurs at the workplace, the employer must notify U.S. authorities. The employer must also impose sanctions against the convicted employee or require the employee to satisfactorily complete a drug abuse or rehabilitation program. The Drug Act does not require drug testing of employees. Employers covered by the Drug Act are those that hold contracts with the U.S. government in excess of $100,000 and recipients of federal financial assistance. Violations of the Drug Act may result in the termination of existing federal contracts and disqualification from future contracts.

Arizona Drug Testing of Employees Act (“Drug Testing Act”): While the Drug Testing Act neither requires nor prohibits employee drug screening, it grants legal protection to employers who conduct drug or alcohol impairment tests that conform to the requirements of the Act. Compliance protects the employer from liability for actions taken in good faith relating to positive test results, failure to test or detect a specific drug or condition, or the elimination of a prevention or testing program.

To comply with the Drug Testing Act, the employer must publish and distribute a written statement to employees describing the drug and alcohol testing policy. The employer also must pay for employee testing, compensate the employee for his or her time, ensure that it is done in a reasonable and sanitary area, keep all communications relating to the testing confidential, and provide employees with the opportunity, in a confidential setting, to explain a positive test.

Arizona Medical Marijuana Act (“AMMA”): Arizona voters passed the AMMA in 2010. AMMA provides expansive workplace protections to employees who are users of medical marijuana. The most significant of AMMA’s provisions impacting employers are found in A.R.S. § 36-2813. Those provisions protect applicants and employees who use medical marijuana from discrimination.

If an employee is protected by AMMA’s provisions, employers should use care in reviewing all the facts and issues before taking any action, just as they would any other incident where allegations of failure to operate equipment or perform job duties safely, otherwise, allegations of discrimination, harassment and retaliation could arise.

Safety Laws

The Occupational Safety and Health Act (“OSHA”): OSHA imposes a duty on employers to provide employees with a safe and healthful place to work. OSHA requires all employers to furnish employees with a workplace free from recognized hazards causing, or likely to cause, death, serious physical harm, or illness. OSHA is administered by the U.S. Labor Department, which, from time to time, issues mandatory safety standards. The Labor Department is authorized to conduct inspections of the workplace to determine compliance with these standards. Violations of OSHA can result in civil and criminal penalties. In some hazardous situations, an employer can be ordered to shut down its operations.

Mine Safety and Health Act (“MSHA”): MSHA prescribes standards governing working conditions of employees employed in mining operations. Sanctions for violations of MSHA are similar to the sanctions imposed under OSHA.

Arizona Occupational Safety and Health Act (“Arizona OSHA”): Although Arizona OSHA is a federal law enforced by the U.S. Labor Department, Arizona OSHA provides that an individual state may assume responsibility for safety and health within its jurisdiction, provided that the state has a federally approved Arizona OSHA plan. Arizona has assumed responsibility for workplace safety in the state in accordance with standards set by the U.S. Labor Department.

Unionization

Unionization of Employees: The unionization of employees can affect an employer’s discretion in employment matters. Briefly examined below are ways in which unions are recognized, the effect of union recognition, and the impact on unionization of Arizona’s right-to-work law. Also discussed is the impact when a business is sold upon collective bargaining with unions and upon existing union collective bargaining agreements.

Union Recognition: Unions generally obtain recognition through one of two means: voluntary recognition by the employer or an election under the supervision of the National Labor Relations Board (“NLRB”). In a voluntary recognition, an employer generally agrees to a “card check” by an impartial third party to verify that a majority of employees wish to be union represented. A card check is an examination of union authorization cards or some other document signed and dated by employees indicating their desire to be represented by the union. This avenue to union recognition has become more common in recent years in certain industries.

More often, an employer will refuse to recognize the union and declare its doubt of the union’s claim of majority status. The employer is entitled to place the burden on the union to prove the union’s claim of support by an uncoerced majority of employees. In response, the union or an employee will file a petition with the NLRB seeking an NLRB-conducted election by secret ballot. The NLRB petition must be supported by a showing of interest of at least 30 percent of the employees. The showing of interest is usually made by union submission to the NLRB of authorization cards signed and dated by the requisite percentage of employees.

If there is a petition supported by the required showing of interest, the NLRB will schedule a hearing to address the NLRB’s jurisdiction and the status of the parties. The principal issue at the hearing often is the determination of an appropriate “unit” — the grouping of all employees, or of some particular class of employees, who will be eligible to vote for or against the union. Those pre-election issues are resolved by the NLRB regional director in the region where the employer’s facility is located.

The election is customarily held on the employer’s property. The election ballot usually reads, “Do you wish to be represented for purposes of collective bargaining by [the labor union]?” The actual counting of ballots is done by NLRB personnel, but both the employer and employee may be represented at the election by observers. To prevail, the union must obtain a majority of all valid votes cast.

Post-election questions may be raised, and a hearing held, as to the validity of the election or as to conduct affecting the results of the election. Threats, promises of benefits, surveillance, or interrogation are examples of conduct that can provide a basis for overturning an election result.

Effect of Union Recognition: Once a union has achieved recognition, the employer is required to “collectively bargain” with representatives of the union as to wages, hours, and other terms and conditions of employment. The employer must bargain with representatives of the union, which then exclusively represents all employees in the bargaining unit. After union recognition, an employer cannot negotiate with any individual employees within the unit, including those opposed to the union.

Neither the employer nor the union is obligated to make concessions. Each side merely has a duty to “bargain in good faith.” Good faith on the part of the employer generally requires that the employer have an open mind and a sincere desire to reach an agreement, and that it make a sincere effort to do so. If an agreement is reached, a binding contract must be signed for the agreed term, most often from one to three years.

Impact of Right-to-Work Laws: In some states, employees may be required to join a union or to pay dues to a union, either to obtain employment or to retain their positions, once the union and the employer have signed a collective bargaining agreement, which provides for such requirement. This requirement is referred to as “Union Security.” The National Labor Relations Act, however, permits individual states to prohibit such Union Security requirements. States that prohibit such requirements are referred to as “Right to Work” states. Arizona is a Right to Work state. No employee in Arizona may be required to join a union or to pay dues to a union as a condition of employment.

Effect of Union or Bargaining Agreement Upon Successor Employer: The question of union representation often is involved in the context of the sale of a business. If employees of the business are represented by a union, the issue may arise of whether the successor employer must bargain collectively with the union or of whether it must abide by the terms of an existing collective bargaining agreement made between the union and the seller.

Employee Benefits

Although cash wages are the primary form of compensation for services, various non-cash benefits are usually a significant part of employee total compensation. Employee benefits are subject to significant regulation under U.S. law. The Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (the “Code”) are the principal federal statutes governing employee benefits.

ERISA: ERISA is a comprehensive regulatory scheme. Under ERISA, employers must meet reporting and disclosure requirements, including annual reports to the U.S. Department of Labor, the agency that administers the regulatory scheme. ERISA also imposes minimum standards on certain types of plans to assure that basic benefits are provided to salaried employees, rather than being confined to executive employees. In addition, ERISA imposes standards for the administration of employee benefit plans. ERISA can be enforced through proceedings brought by the Department of Labor, employees, beneficiaries of employees or plan fiduciaries, such as a plan administrator or a plan trustee. The Department of Labor in some cases can impose fines for violations of ERISA.

The Internal Revenue Code: The Code’s impact on employee benefit plans is primarily through requirements imposed as a condition of obtaining favorable tax treatment. Failure to satisfy the Code’s requirements can result in loss of employer tax deductions for plan contributions made by the employer or of employer deductions for costs of plan benefits paid by the employer. Violations of the Code can also result in the loss of favorable tax treatment for employees as to receipt of benefits from a plan and the taxation of an otherwise tax-exempt trust. For example, Section 409A of the Code prescribes the rules that apply to nonqualified deferred compensation plans. The failure to satisfy the requirements of Section 409A can lead to adverse tax consequences for employees including, but not limited to, an additional tax of 20 percent on the amount deferred under the noncompliant plan.

Impact of State Law: ERISA generally preempts state laws that relate to employee benefit plans. However, state insurance laws, as they apply to insured plans, are expressly exempted from preemption under ERISA. Accordingly, insured employee welfare benefit plans (but not self-insured plans) are subject to Arizona’s laws regulating insurance, including laws requiring that specific benefits be provided by medical plans.

Medical Plans: The availability of employer-provided medical benefits remains an important part of employee compensation. Medical coverage can be provided by an employer in several ways, including through insured and self-insured plans, health maintenance organizations, preferred provider organizations and medical reimbursement arrangements. Under the Code, certain medical plans must not discriminate in favor of highly compensated employees.

The following federal laws also impose requirements on group health plans: ERISA, the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), the Family and Medical Leave Act of 1993, the Uniformed Services Employment and Reemployment Rights Act of 1994, the Americans with Disabilities Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act, the Pregnancy Discrimination Act, the Health Insurance Portability and Accountability Act (HIPAA) as amended by the Health Information Technology for Economic and Clinical Health Act (HITECH), the Mental Health Parity Act of 1996, the Mental Health Parity and Addiction Equity Act of 2008, the Newborns’ and Mothers’ Health Protection Act of 1996, the Women’s Health and Cancer Rights Act of 1998 and the Genetic Information Nondiscrimination Act of 2008.

The Patient Protection and Affordable Care Act was signed into law on March 23, 2010 and was followed shortly thereafter by the Health Care and Education Reconciliation Act of 2010 (collectively, the Health Care Reform Act). The Health Care Reform Act has significant implications for employer group health plans. For example, all plans must provide coverage for children to age 26, eliminate pre-existing condition exclusions, eliminate annual and lifetime limits on essential health benefits and prohibit the retroactive rescission of coverage. Non-grandfathered plans (those not in effect on March 23, 2010 and plans to which significant changes have been made since that date) are subject to additional requirements.

The Health Care Reform Act also includes a large employer “pay or play” rule that will have significant impacts on employers starting in 2014. Under this new rule, “large” employers (those with more than 50 full-time equivalent employees) are potentially subject to two penalties. The first penalty will generally apply to large employers that fail to offer minimum essential coverage to 95 percent of its full-time employees. The second penalty will apply to the same employers described in the preceding sentence if those employers offer minimum essential coverage that does not provide minimum value or is unaffordable.

The Department of Health and Human Services previously enacted the HIPAA privacy, security, enforcement and breach notification rules. Under those rules, “covered entities” (which include employer-provided medical plans) are prohibited from using or disclosing an individual’s “protected health information” for purposes other than the provision of health care and certain other limited purposes. Accordingly, medical plans must adopt policies and procedures designed to safeguard against the improper use or disclosure of protected health information. On January 25, 2013, the Department of Health and Human Services published final regulations pursuant to the HITECH Act that modified the privacy, security, enforcement and breach notification rules issued pursuant to HIPAA. Medical benefits usually are provided to employees and their dependents only during employment. Pursuant to COBRA, however, an employer who employs 20 or more employees and who maintains a group medical plan must allow certain former employees and their dependents to continue plan coverage, at the employee’s expense, for a minimum of 18 months. Collective bargaining agreements often require longer continued health coverage for former employees.

Qualified Retirement Plans: Retirement benefits can be provided through a wide range of qualified plans. A retirement plan is a “qualified plan” if it satisfies detailed Code requirements. A number of favorable tax consequences result from status as a qualified plan. An employer is entitled to a current deduction for contributions made to such a plan. Employees are not taxed on their plan benefits until benefits are actually received. The trust established under a qualified plan to receive contributions is not taxed on its earnings, which permits tax-free compounding of interest. Three of the most common types of qualified retirement plans are profitsharing plans, Section 401(k) plans and defined benefit pension plans.

Profit-sharing Plans: Under a profit-sharing plan, employer contributions can be contingent on the employer’s profits. More likely, the employer is permitted to make contributions in its discretion, whether or not the employer makes a profit. Contributions made by an employer are allocated to individual accounts established for eligible employees. Upon retirement or other termination of employment, an employee is entitled to the amounts allocated to the employee’s profit-sharing plan account balance.

Section 401(k) Plans: A 401(k) plan is a profit-sharing plan under which employees make pre-tax contributions that are exempt from income tax until the employee takes a distribution from the plan. Plans may also allow employees to make after-tax Roth contributions, which are included in taxable income when made. Roth contributions and earnings are not taxed when distributed if they are part of a “qualified distribution.” Employee contributions, whether pre-tax or after-tax, may be matched by tax-deductible contributions from the employer.

Defined Benefit Pension Plans: Under a defined benefit pension plan, an employee is promised a fixed pension at retirement, the amount being determined by the employee’s salary, years of employment or both. The employer is required annually to contribute an amount actuarially sufficient to fund pension benefits.

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