State Allocation Board Authorizes Collection of “Level 3” Developer Fees for the First Time in California History

*** Update: May 27, 2016***
The litigation that was threatened and that was mentioned in the below client news brief has become a reality. Details here.

May 2016
Number 33

The State Allocation Board (SAB) has taken the unprecedented step of determining that state funding is no longer available for apportionment for school facilities, triggering some school districts’ eligibility to collect higher ‘Level 3’ fees for the first time ever.

The Board’s historic May 25 decision is already facing potential challenges. The California Building Industry Association (CBIA) has indicated that it will seek a temporary restraining order to halt collection of Level 3 fees. If voters approve the $9 billion school bond measure on the November ballot, making state facilities money available again, collection of the fees may no longer be authorized. The triggering of Level 3 fees for the first time – in the nearly 18 years since Senate Bill 50 (SB 50) went into effect, in 1998 – will raise a number of questions for school districts, particularly in light of the threatened litigation and the November vote.

SB 50 revamped the state’s school facilities funding program and rewrote the law regarding school impact fees. Under SB 50, school districts could be eligible for one of three different levels of developer fees. All school districts that are able to justify the fees remained eligible to collect what have commonly become known as ‘Level 1’ fees, the statutory amount authorized by Education Code sections 17620, et seq. The Level 1 fee amounts are adjusted by the SAB every two years, and most recently rose to $3.48 per square foot for residential development and $0.56 per square foot for commercial development. For further discussion of the Level 1 fee increase, see 2016 Client News Brief No. 9.

School districts that meet certain express criteria laid out in Government Code sections 65995.5 and 65995.6, a higher ‘Level 2’ can be imposed on residential development. Unlike a fee justification study supporting a Level 1 fee, which gives school districts some flexibility in how to calculate the justified fee, the Level 2 fee is based on a very specific statutory formula. School districts support their eligibility for this fee in a “School Facilities Needs Analysis.”

Under SB 50, school districts that meet the criteria to be eligible for Level 2 fees would be able to increase to Level 3 fees if the SAB determines that state funding is not available for local school facilities projects. (Gov. Code § 65995.7.) Theoretically, Level 3 fees equate to approximately 100 percent of what the state assumes is the cost of school construction to house students from new residential development. (Both Level 2 and Level 3 fees are limited to residential development; school districts are only eligible to impose fees on commercial development under the Level 1 statutory scheme.)

One major difference between Level 2 and Level 3 fees is that while a Level 2 fee calculation takes into account the amount of local funds school districts dedicate to accommodating new growth (such as a general obligation bond), the Level 3 fee calculation does not include that component. As a result, unlike the Level 2 fee, the Level 3 fee does not penalize a school district for raising funds locally for new construction.

Until yesterday, the SAB has never taken action to determine that state funding is not available for facilities projects.

Since the early 2000s, there have been disputes about what it means for state funds not to be “available.” In 2012, ostensibly to avoid limiting California’s economic recovery, the Legislature amended Government Code section 65995.7 to make Level 3 fees inoperative through the end of 2014, unless no statewide bond measure was placed on the ballot by November of 2014, or such a measure was placed on the ballot but did not pass. When there was no statewide bond measure in 2014, the Level 3 fee legislation became effective again. The renewed the SAB’s authorization to determine that state funding is “unavailable.”

CBIA remains steadfastly opposed to Level 3 fees, as evidenced by their threat of legal action and testimony to the SAB. Until any such litigation is pursued and resolved, the question of how to move forward remains somewhat clouded. For school districts that are already eligible for or are collecting Level 2 fees, existing School Facilities Needs Analyses and previously adopted Board resolutions for Level 2 fees should be reviewed. Lozano Smith has long offered a Level 2 fee Board resolution that includes authorization for a Level 3 fee in the event that the SAB determines that state funds are no longer available. Absent such language in a resolution adopting a Level 2 fee, as well as supporting analysis in an adopted School Facilities Needs Analysis, school districts interested in levying Level 3 fees may have to begin a new process of preparing and approving a School Facilities Needs Analysis. School districts seeking to impose Level 3 fees may wish to consult with their legal counsel regarding the applicable procedures.

The intent of SB 50 was that Level 3 fees would essentially provide bridge financing until state funds again are available. If voters approve the Kindergarten through Community College Public Education Facilities Bond Act of 2016, a $9 billion school bond measure on the November ballot, Level 3 fees will likely no longer be authorized. Thus, any adoption of Level 3 fees may be only a temporary measure in place for the next several months.

Also, consistent with the intent of SB 50, once a statewide bond measure does pass, school districts will be required to reimburse the amount of Level 3 fees that were collected above the Level 2 fees. The reimbursement of this differential must either be made through an optional “reimbursement election” to the developers who pay the higher Level 3 fees, or by a reduction of future state facilities funding in an equivalent amount. (Ed. Code § 17072.20(b); Gov. Code § 65995.7(b).) This affords school districts some flexibility to negotiate with developers regarding school impact mitigation, including just how much may be reimbursed to the developer versus retained by the school district. SB 50 expressly authorized such negotiations. (Gov. Code § 65995.7(c).)

We will continue to monitor and report on the developments regarding Level 3 fees in the coming weeks and months. Lozano Smith authored the Level 3 fee section of “Senate Bill 50 and School Facilities Fees: A Report Prepared by C.A.S.H.’s Legal Advisory Committee” when SB 50 passed, and the firm also authors the “Developer Fee Handbook for School Facilities: A User’s Guide to Qualifying for, Imposing, Increasing, Collecting and Accounting for School Impact Fees in California,” which includes procedures and relevant laws related to Level 3 fees.

Lozano Smith is continuing to make the handbook available to school district clients at no cost. School districts that have not previously ordered the handbook can do so here or by contacting Client Services at clientservices@lozanosmith.com or (800) 445-9430.

For any questions about school impact fees, or Level 3 fees in particular, please contact the authors of this Client News Brief or one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

Megan Macy
Partner

Kelly Rem
Senior Counsel

 

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

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Employer’s Mistaken Belief Is No Defense to an Employee’s First Amendment Challenge to Discipline for His Off-Duty Political Activity

May 2016
Number 32

Last month, the U.S. Supreme Court held in Heffernan v. City of Paterson (April 26, 2016, No. 14-1280) 578 U.S. __ [2016 U.S. LEXIS 2924] that an employee may challenge an employer’s adverse action under the First Amendment even if the employer’s action was based on a mistaken perception that an employee engaged in political activity. The decision impacts government employers, including school districts, county offices of education, and local governments by giving greater protection to all government employees.

Heffernan establishes that actual engagement in a protected activity is not an element that must be proven to prevail in First Amendment retaliation claims. Instead, retaliation claims must be evaluated based on the employer’s motive and whether that motive was constitutional, regardless of whether the motive was based on actual facts or mistaken perception.

During the 2006 mayoral election in Paterson, New Jersey, Jeffery Heffernan worked in the office of Police Chief James Wittig. The candidates included the incumbent mayor who appointed Wittig and former Chief Lawrence Spagnola, Heffernan’s good friend. Before the election, Heffernan’s bedridden mother asked him for a “Spagnola” yard sign. Heffernan visited a Spagnola distribution spot where city police officers saw Heffernan talking to campaign workers and holding a Spagnola yard sign, and word of this sighting quickly spread throughout the department. The next day, Heffernan’s supervisors demoted him from detective to patrol officer as punishment for his “overt involvement” in a political campaign. Wittig later claimed this was against office policy even though Heffernan did not work on Spagnola’s campaign or otherwise show support for the candidate.

In August 2006, Heffernan sued the city for retaliating against him for exercising his First Amendment rights. Heffernan claimed he was demoted because, in his supervisor’s mistaken view, he engaged in conduct that constituted protected speech under the First Amendment.

The city claimed that the First Amendment protects an employee from retaliation for exercising a “right,” and that the First Amendment was not implicated here because – by his own admission – Heffernan was not involved in the Spagnola campaign and only picked up a lawn sign for his mother. Heffernan asserted he was still protected by the First Amendment, which required only that the city believed he was exercising his First Amendment right, not that he actually did so.

The District Court and Court of Appeals both held that, for a retaliation claim, Heffernan needed to show that he actually exercised his free speech and association rights prior to the city’s adverse action. According to these courts, Heffernan was not deprived of any First Amendment right because he never engaged in a constitutionally protected political act.

The Supreme Court heard Heffernan’s appeal and rejected the lower courts’ rationale, reasoning that “[w]hen an employer demotes an employee out of a desire to prevent the employee from engaging in political activity that the First Amendment protects, the employee is entitled to challenge that unlawful action . . . even if, as here, the employer makes a factual mistake about the employee’s behavior.” Simply put by the Supreme Court, “the government’s reason for demoting Heffernan is what counts.”

Public employers are reminded by this case to be wary when considering discipline against an employee for conduct that is related to involvement in political activities, and to consult with legal counsel to ensure that any adverse action taken does not violate a public employee’s First Amendment rights.

For more information on the impact of this decision or employee retaliation claims in general, please contact one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

 

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

Amidst Nationwide Media Coverage, U.S. Departments of Education and Justice Issue Joint Guidance Regarding Transgender Student Rights in Schools

May 2016
Number 31

On May 13, the United States Departments of Education and Justice issued joint guidance to the nation’s schools regarding the Departments’ interpretation of transgender students’ rights under Title IX of the Education Amendments of 1972 (20 U.S.C. § 1681 et seq.) and Title IX’s implementing regulations. The joint guidance addresses various aspects of transgender students’ rights under Title IX, including their rights to use school facilities and participate in athletic activities based on their gender identity instead of their biological sex. The U.S. Department of Education also issued a 25-page guide, “Examples of Policies and Emerging Practices for Supporting Transgender Students.”

Notably, the Departments’ joint guidance – while representing the Departments’ views of the law and relied upon by them reviewing school districts’ legal compliance – is not binding.

Although California’s State Superintendent of Public Instruction praised the Departments’ joint guidance, no fewer than five lawsuits have been filed in other states regarding the federal government’s interpretation that Title IX provides protections for transgender students. In Virginia, the federal Fourth Circuit Court of Appeals recently held that the Department of Education’s interpretation that Title IX and its regulations provide protections for transgender students is entitled to “controlling weight.” Lawsuits filed in Illinois and North Carolina challenge that view, arguing that the federal government’s interpretation is inconsistent with Title IX and violates non-transgender students’ privacy. The federal government has initiated a lawsuit against North Carolina, challenging that state’s recently enacted law requiring individuals to use restrooms based upon their biological sex.

While the stage is set for further legal wrangling before there is nationwide clarity on this issue, California’s Education Code provides protections for students based upon gender identity (see 2014 Client News Brief No. 14). Education Code section 221.5, subdivision (f) provides: “a pupil shall be permitted to participate in sex-segregated school programs and activities, including athletic teams and competitions, and use facilities consistent with his or her gender identity, irrespective of the gender listed on the pupil’s records.” The California Department of Education has also issued a legal advisory and Frequently Asked Questions on Education Code section 221.5’s application to California schools (see 2016 Client News Brief No. 16).

Lozano Smith will continue to provide updates as this issue develops. For more information on the new federal guidance and the implications for your school district, please contact one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

 

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

Employers Subject to New FEHA Regulations on Anti-Harassment Policies, Training, and Notice

May 2016
Number 30

Effective April 1, 2016, California employers are subject to new regulations under the California Fair Employment and Housing Act (FEHA), which prohibits workplace discrimination and harassment. The new regulations focus on changes in the following three areas: employer policies, training and dissemination of an employer’s harassment, discrimination and retaliation prevention policy.

Employer Anti-Discrimination/Anti-Harassment/Anti-Retaliation Policies

All employers subject to the FEHA must have written policies in place that include all of the following content:

  • The types of prohibited discrimination and harassment under the law.
  • A statement that employees are protected under the FEHA from unlawful conduct from their co-workers, managers, supervisors and third parties.
  • The complaint process, including language that explains that a complaint of discrimination or harassment will: (1) be confidential to the extent possible; (2) receive a timely response; (3) be investigated in a timely and impartial manner by qualified personnel; (4) be documented and tracked through the complaint process; and (5) be timely closed with options for remedial action and resolution, as appropriate.
  • Notification that employees may file a complaint with someone other than their immediate supervisor, such as a designated representative for the employer.
  • Notification that employees may not be retaliated against for making a discrimination or harassment complaint or for participating in any complaint investigation.

Training Requirements

Employers with 50 or more employees must provide their supervisors with training on prohibited harassment, discrimination, and abusive conduct. During this training, supervisors must be notified of their duty to report sexual harassment, discrimination, and retaliation. The training must also include instruction on appropriate measures to remediate harassing conduct.

Supervisors must be provided with the definition of “abusive conduct” and informed that unless an act is particularly egregious, a single act will generally not constitute abusive conduct. The training should explain the negative impacts of abusive conduct in the workplace and must include examples of abusive conduct.

Employers must keep written records of harassment training for two years. Records that must be retained during this period include sign-in sheets, copies of webinars, written questions and responses to questions associated with the training, and certificates of attendance or completion. Employers must still keep records of the names of supervisors trained, the date of the training, the type of training, and the name of the training provider.

Policy Distribution/Dissemination

Employers must ensure that employees are provided with their anti-discrimination/anti-harassment policies. The written policies must be translated into all languages spoken by at least 10% of the workforce. Only one of the following methods must be used to distribute the policies:

  • Provide employees with a printed copy of the policy with an acknowledgement form for the employee to sign and return;
  • E-mail the policy with an acknowledgement return form;
  • Post the policy on the internal company intranet with a tracking system to ensure that employees have read and acknowledged receipt of the policy; or
  • Discuss the policy upon an employee’s hiring and/or during an orientation session.

In light of these new regulations, public agency employers should review their policies and process for disseminating the same to ensure compliance with the new law.

For more information on the new FEHA requirements and the implications on your current anti-discrimination and anti-harassment policies, please contact one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

Dulcinea Grantham
Partner

Gabriela Flowers
Associate

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

Appellate Court Orders Publication of Decision on Lease-Leaseback, Making it Binding Precedent

May 2016
Number 29

On May 4, the Second District Court of Appeal in McGee v. Balfour Beatty Construction, LLC, et al. (McGee) ordered publication of its decision upholding the validity of a lease-leaseback arrangement. Publication of the decision means that it now serves as precedent on which school districts and others may rely.

In McGee, the court reviewed the validity of a lease-leaseback arrangement that was challenged on the grounds that the arrangement did not comply with Education Code § 17406. The party challenging the lease-leaseback arrangement relied heavily on the Fifth District’s decision in Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261 (Davis), which held that a valid lease-leaseback arrangement under Section 17406 must include a “financing component” and a “genuine lease.” (For a further discussion of the Davis decision, see Client News Brief No. 30, June 2015.)

On April 12, the McGee court issued its decision to uphold the validity of the lease-leaseback arrangement. McGee also rejected Davis‘ interpretation of Section 17406 and Davis‘ attempt to improperly add requirements into the statute. Specifically,McGee disagreed with Davis‘ conclusion that a valid lease-leaseback arrangement must contain elements of a “genuine lease,” whichDavis understood to include occupancy of the premises during the lease term and a financing component. (For a further discussion of theMcGee decision, see Client News Brief No. 25, April 2016.)

On behalf of the California Association of School Business Officials (CASBO), Lozano Smith filed a request for partial publication, and sought to have the court publish the portion of the decision specific to Education Code § 17406 and the lease-leaseback construction delivery method. CASBO also requested that the court refrain from publishing a portion of the decision concurring with Davis that a third-party taxpayer may have standing to allege a conflict of interest under Government Code § 1090 when applied to the conduct of independent contractors. Although CASBO sought only partial publication, the McGee court granted publication of the entire decision, including the portion relating to a conflict of interest under Section 1090 (the court, however, has at least made it clear that application of Government Code § 1090 to independent contractors is very dependent on the specific facts). As a result of the publication order, the entire McGee decision is now precedent and can be relied on outside the Fifth District Court of Appeal, where Davis still controls. Legislation has recently been proposed which could again address lease-leaseback issues. We will be tracking all such legislation.

If you have any questions about this decision or the lease-leaseback construction delivery method, or about other project delivery methods, please contact one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

Harold Freiman
Partner

Travis Cochran
Associate

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.

Digging Deeper Into Recent Affordable Care Act Topics: Guidance Employers Need To Know

May 2016
Number 28

If you thought you were finally getting a handle on the Affordable Care Act (ACA), the influx of IRS guidance that came at the end of the 2015 calendar year probably reopened some old wounds. On December 29, 2015, we alerted you to IRS Notice 2015-87 (Notice), a compilation of Questions and Answers intended to provide guidance on a number of complex and highly technical topics related to group health plan market reform and employer shared responsibility requirements. The purpose of this Client News Brief is to dig a little deeper into the topics addressed by the IRS Notice that may be of particular interest to state, school, and other local public agency employers. In addition, we encourage you to watch our video on some common questions and issues that arise from the implementation of the Affordable Care Act.

1. Affordability Calculations – Inflation Adjustments

Under the ACA, coverage offered by applicable large employers to their full-time employees must be affordable in order for the employer to avoid liability. Coverage is affordable if the employee’s required contribution for self-only coverage does not exceed 9.5% percent of the taxpayer’s household income. Since employers are unlikely to know their employees’ household incomes, the ACA provides various safe harbors to assist employers in determining whether their offers of coverage are under the affordability threshold of 9.5%. The Notice states that the IRS intends to amend the regulations to clarify that this 9.5% threshold in the affordability safe harbors is subject to the same annual adjustments for inflation as contained elsewhere in the ACA. Specifically, this amount will be adjusted as follows: 9.56% for plan years beginning in 2015; and 9.66% for plan years beginning in 2016. The same adjustments apply to the 9.5% referenced in the ACA with respect to the Multiemployer Plans, as well as to the reporting of “Qualifying Offers.”

2. Penalty Increases – Inflation Adjustments

The Notice also clarifies the adjusted amounts relative to the $2,000 and $3,000 penalty amounts, or “assessable payments,” applicable to employers under the employer shared responsibility provisions of the ACA. Generally, section 4980H of the Internal Revenue Code provides that an applicable large employer may be subject to an assessable payment if certain conditions are met related to the failure to offer appropriate coverage to full-time employees. For 2015, the adjusted $2,000 assessable payment amount is $2,080, and the adjusted $3,000 assessable payment amount is $3,120. In 2016, these assessable payment amounts will go up to $2,160, and $3,240, respectively. The Treasury and IRS anticipate that they will post future adjustments on the IRS.gov website.

3. Affordability & Transition Relief

The Notice addresses how various types of common arrangements are treated, or will likely be treated, for purposes of determining an employee’s required contribution towards the cost of self-only employer-sponsored coverage. This category of guidance is particularly significant to employers because much of the IRS treatment described in the Notice will likely change how employers currently view employee and employer contributions to health care and impact whether coverage is affordable for purposes of the ACA. However, there is some transition relief for employers – described below in the relevant sections – if an arrangement was in place prior to or on December 16, 2015. For an arrangement to be in place prior to or on December 16, 2015, it must meet one the following conditions:

  1. The employer offered the arrangement (or a substantially similar arrangement) for a plan year including December 16, 2015; or
  2.  A board, committee, or similar body or an authorized officer of the employer specifically adopted the arrangement before December 16, 2015; or
  3.  The employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future.

Contributions to HRA
Employer contributions to a plan-integrated health reimbursement arrangement (HRA) are counted toward the employee’s required contribution (meaning they reduce the dollar amount of that required contribution) only if: (1) an employee may use the contribution to pay premiums; and (2) the amount of the employer’s annual contribution is required under the terms of the arrangement or otherwise determinable within a reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan. This is true even if the amount may be used for cost-sharing and/or for other health benefits not covered by that plan in addition to premiums.

Flex Contributions
Under a § 125 cafeteria plan, the employee’s enrollment in a group health plan generally is funded by salary reduction but may also be funded by employer flex contributions. If the employer flex contribution qualifies as a “health flex contribution,” it will count towards the employee required contribution, reducing the amount of the required contribution. To qualify as a health flex contribution, all of the following conditions must be met: (1) the employee may not opt to receive the amount as a taxable benefit (i.e., cash); (2) the employee may use the amount for minimum essential coverage; and (3) the employee may use the amount exclusively to pay for medical care. For instance, if an employee may use the flex contribution towards life insurance or dependent care through the cafeteria plan, the contribution is not a health flex contribution. Similarly, if the employee may opt to receive the contribution as cash instead of putting it towards health care, the contribution is not a health flex contribution. If the employer flex contribution is not a health flex contribution, it does not reduce an employee’s required contribution, which may negatively impact the affordability of coverage.

As a form of transition relief, all employer flex contributions that are available to pay for health coverage, regardless of whether they qualify as health flex contributions, will count toward reducing the employee’s required contribution for plan years beginning before January 1, 2017 unless the flex contribution arrangement was adopted after December 16, 2015, or substantially increases the amount of the flex contribution after December 16, 2015.

Employers that wish to offset the cost of the employee’s required contribution should review their plan structure to ensure that the flex contribution is only available for medical-related expenses.

Opt-out Payments
The Notice focuses on the IRS position regarding the treatment of unconditional opt-out arrangements. An unconditional opt-out arrangement is an arrangement that provides for a payment to an employee that is conditioned solely on an employee declining coverage and not on an employee satisfying any other meaningful requirement, such as proof of coverage elsewhere. For instance, consider an employer that offers employees group health coverage through a § 125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage but offering employees an additional $100 per month in taxable wages if they decline coverage, no questions asked. This is an unconditional opt-out arrangement.

The IRS considers such an arrangement to be analogous to a “cash or coverage” arrangement – the employee must choose between receiving the $100 payment and enrolling in health care coverage. The IRS intends to issue proposed regulations that require employers to include the amount of the opt-out payment in the employee’s required contribution for purposes of the employer shared responsibility provisions. Referring back to our example, under this rule, the employer would report $300 as the monthly required employee contribution towards the cost of coverage, rather than $200 because the employee is foregoing $100 in order to enroll in health care coverage. The likely intent behind this rule is to deter employers from incentivizing employees to decline health care coverage, particularly in instances where coverage is not available to them elsewhere. The proposed regulations will also likely address and request comments on the treatment of opt-out payments that are conditioned on the satisfaction of additional conditions, such as proof of coverage. However, the Notice does not elaborate on what position the IRS is likely to take on these arrangements.

The regulations will apply only for periods after the issuance of final regulations, but the IRS and Treasury anticipate that any unconditional opt-out arrangements adopted after December 16, 2015 will be subject to the rule. In other words, employers that are subject to the ACA should consider these anticipated regulations prior to approving a new opt-out or cash-in-lieu arrangement after December 16, 2015, because these opt-out payments may increase the employee required contribution to the cost of health care coverage.

4. “Hour of Service”

For purposes of determining full-time status of employees, the ACA defines the term “hour of service” as each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (as defined in 29 CFR 2530.200b-2(a)). The Notice provides clarification on certain limitations to this definition, particularly with regard to its reference to 29 CFR 2530.200b-2(a), which is an existing federal Department of Labor regulation. The Notice clarifies that an “hour of service” for purposes of the ACA does not include any of the following:

  1. Hours after the individual terminates employment with the employer.
  2.  An hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers’ compensation, or unemployment or disability laws.
  3.  An hour for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee.
  4.  Periods during which the employee is not performing services but is receiving payments in the form of workers’ compensation wage replacement benefits under a program provided by the state or local government.

The Notice clarifies that the limitation contained in 29 CFR 2530.200b-2(a) regarding the maximum amount of hours that may be credited to an employee for a single continuous period during which the employee performs no duties does not apply in the ACA context (please note that there does exist a 501-hour limit on hours of service required to be credited to an employee of an educational organization during employment break periods, which continues to apply).

The Notice further clarifies that periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability do result in hours of service for any part of the period during which the recipient retains status as an employee for the employer, but only if payments are made from an arrangement to which the employer contributed to directly or indirectly. For example, disability payments made by or from a trust fund or insurer to which the employer contributes to or pays premiums for would be deemed to be made by the employer and therefore would count towards the employee’s hours of service as long as the employee remains employed. A disability arrangement for which the employee contributed to on an after-tax basis would be treated as an arrangement to which the employer did not contribute, meaning it would not be considered hours of service.

5. Rehire/Break Rules for Staffing Agencies

Under the ACA regulations, specific rules apply to educational organizations regarding the identification of full-time employees, including how to treat breaks in service. The Treasury and IRS anticipate amending these regulations to extend the same rules to employees of third-party staffing agencies or other employers that are not technically “educational organizations,” but that employ individuals that provide services for educational organizations. For instance, the rules would apply to an employer with respect to a bus driver who is primarily placed to provide bus driving services for an educational organization, regardless of whether the employer itself is an educational organization.

6. Aggregation Rules (Government Entities)

The ACA regulations include certain aggregation rules for purposes of determining whether an employer has 50 or more full-time and full-time equivalent employees, and therefore is an applicable large employer. Specifically, the following groups may in each case be treated as a single employer: (1) corporations that are part of a controlled group of corporations, (2) groups of other types of entities that are under common control, and (3) members of an affiliated service group. The aggregation rules do not expressly address the application of these standards to government entities, which are defined as the government of the United States, any State or political subdivision thereof, and any Indian tribal governments, and likely include local governmental agencies such as school districts. The Notice clarifies that government entities may apply a reasonable, good faith interpretation of the employer aggregation rules for purposes of determining whether a government entity is an applicable large employer, and therefore subject to the employer shared responsibility provisions and reporting requirements of the ACA.

Please note that this news brief does not detail every element of the topics discussed above. We encourage you to review the Notice for a full review of the topics addressed by the Treasury and IRS.

If you have any specific questions regarding the impact of this Notice on your organization, please contact one of our nine offices located statewide. You can also visit our website, follow us on Facebook or Twitter, or download our Client News Brief App.

Written by:

Karen Rezendes
Partner

Niki Nabavi Nouri
Associate

©2016 Lozano Smith

As the information contained herein is necessarily general, its application to a particular set of facts and circumstances may vary. For this reason, this News Brief does not constitute legal advice. We recommend that you consult with your counsel prior to acting on the information contained herein.