Supreme Court: Will Five and a Half Hours Be Enough?

Fate of the Patient Protection and Affordable Care Act Lies in Hands of Supreme Court

According to the National Law Journal, the Supreme Court justices granted review in three of the five petitions that it had before them regarding the Patient Protection and Affordable Care Act, all from the 11th Circuit Court of Appeals. That court had struck down the mandate that individuals who can afford health insurance must purchase coverage or pay a penalty.

The Journal article lists the issues on which the Court would hear arguments and the amount of time allotted to each issue, for a total of five and one-half hours.

Oral arguments will be made by the United States Solicitor General, 26 state attorneys general (handled by a single lawyer from a Washington firm), and the National Federation of Independent Business (NFIB).

Typically, Supreme Court oral arguments are scheduled for two hours of argument. Arguments are likely to be held in March.

Undoubtedly, with all of the questions raised by the health care act, five hours will not be sufficient time to answer all of them.

Beware: It’s Risky to Misclassify an Overseas Consultant

Substantial Risks Exist for Misclassifying an Overseas Consultant as an Independent Contractor

Part of a series on issues related to Manufacturers, Distributors and International Trade

With both the IRS and the Department of Labor targeting the misclassification of U.S. employees as independent contractors, many companies are re-examining their worker classifications. While most U.S. companies are aware of the costly consequences of such misclassification, they may not be cognizant of the considerable dangers of misclassifying foreign workers as independent contractors.

Frequently, U.S. companies choose to engage local representatives in their overseas markets as independent contractors rather than employees in order to avoid compliance with foreign employment laws, withholding tax requirements and social welfare/insurance contributions. In many countries, these obligations may be considerably more onerous than they are in the United States.

However, the consequences of misclassifying a foreign worker as an independent contractor are frequently more costly as well.

For example, in Germany an employer is obligated to remit social security type payments for its employees that are equal to about twenty percent of the employee’s compensation to German social welfare and insurance agencies. The employer is also required to withhold from the employee’s compensation the employee’s social security obligations which are also equal to about twenty percent of his/her compensation.

If an employer fails to withhold the requisite amount from the employee’s wages, the employer becomes liable for the employee’s social security obligations. The employer many not seek reimbursement for this amount from the employee, regardless of any contractual agreement that provides for such reimbursement. The look back period for collection of these social security payments is thirty years in some cases.

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Bank Transfer Day and its Prospects for “Main Street” Banking

November 5, 2011 marked “Bank Transfer Day” around the United States, as initiated by 27-year old Los Angeles art dealer Kristen Christian, via this facebook page in early October. The movement, purposefully or not, coincided with the Occupy Wall Street movement and spread throughout the United States, denouncing big banks and the Wall Street financial industry. Perhaps the greatest alleged perpetrator, and possibly the greatest victim, of the Occupy and Bank Transfer Day movements was Bank of America, who announced earlier this year it intended to implement $5.00 monthly service fees for certain deposit accounts. Bank of America’s plan imploded when other big banks failed to follow suit with their own fees, and Bank of America became the sole target of criticism for its planned fee policy.

The result, in part, was the concept of Bank Transfer Day, where consumers were urged to withdraw their deposits from big banks and move their money to smaller and locally run credit unions. The result, according to the Credit Union National Association (CUNA), was that more than 40,000 people signed up for accounts at credit unions on November 5th, corresponding to about $80 million in deposits.  CUNA represents most of the chartered credit unions in the United States, and reports that its members saw increases in new account activity during the month of October and early November, prior to Bank Transfer Day.

While Bank Transfer Day created headlines and long lines at credit unions on a Saturday morning, did it really have the desired impact on Bank of America and other big banks?  The answer is probably not, given the size of the market share that Bank of America and other top banks in the United States hold, a loss of even tens of thousands of customers in a given week probably does not represent much of a blip on the banks’ radars. In fact, most large banks are flush with deposits right now, given the unstable market and the desire for many people and investors to remain liquid. Additionally, banks are benefitting from the low interest rates on deposit accounts, which means that many consumers are not even shopping rates to find the best return on their deposits, as has historically been the case.

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Electronic Health Records: Could Your Practice Be at Risk?

The federal government’s efforts at incentivizing medical providers to use electronic health records (EHRs) may be putting some practices at risk.

In “Electronic Records May Increase Malpractice Lawsuit Risk,” Neil Versel with Information Week refers to a white paper published by the AC Group, a Montgomery, Texas, health IT research and consulting firm. The white paper describes the kinds of risks that medical practices may face if they try to implement EHRs too quickly without the appropriate vendors.

Even vendors who have been certified by the Office of the National Coordinator for Health Information Technology (ONC) have been found lacking in the area of “medico-legal training.” For example, according to Versel, it has been discovered that ONC certification may not require providers “to check drug orders against laboratory results or take into account social and family medical history in creating alerts,” such as the need for more frequent mammograms for a female patient with a mother who has had breast cancer.

Here are just a few other issues that have arisen :

• Critical safety alerts are being missed due to incomplete medication lists;
• Problems with time synchronization of records between electronic charting systems; and
• A high percentage of EHRs do not run drug interaction checks when filling prescriptions.

So to the medical practice community: buyer beware.

Terminate an Employee Returning from FMLA Leave and You Could Be Sued in Your “Individual Capacity”

To add to the woes and stress of business owners, supervisors and managers, public and private decision makers who act directly or indirectly in the interest of the employer can be sued in their individual capacity under the Family and Medical Leave Act (“FMLA”).

Most of us forget it, but the same rules that apply to actions under the Fair Labor Standards Act also apply to actions brought under the FMLA (29 C.F.R. Section 825.104(d) (2009)). A July 11, 2011 decision by the Eastern District of Virginia Court, Eastern Division, titled Weth v. O’Leary (U.S. District Court of E.D. Virginia, Alexandria Division) provides important lessons regarding this issue with respect to terminating employees returning from Family Medical and Leave Act, especially if the decision makers are public officials and have sovereign immunity. 

In Weth, the Court refused to grant summary judgment and allowed a FMLA case to proceed to trial because of a highly suspicious timeline, prior raises and highly positive reviews, and the lack of write ups or written documentation bolstering the performance reason defense. 

Plaintiff Weth initially sued O’Leary, both individually and in his official capacity as Arlington County Treasurer. The Court granted Summary Judgment in favor of O’Leary with respect to the official capacity claim because as a state constitutional officer, O’Leary was entitled to sovereign immunity. The Court refused to dismiss the individual claim because sovereign immunity does not apply to individuals sued in their purely personal and individual capacity. The Court cited favorable decisions from various Circuit Courts (Darby v. Bratch, 287 F.3d 673, 681 (8^th Cir. 2002)) where courts found that there was no reason to distinguish liability between individual corporate officers and individual public officials.

Weth was employed as a Deputy Treasurer for Litigation for the Arlington County Treasurer for six years. As late as 2009, Weth had received highly positive reviews regarding her job performance and approved salary increases. 

Weth was diagnosed with cancer in September of 2009 and advised O’Leary. In December, Weth initially sent emails to O’Leary advising him that she would need surgery in January, but then advised that the surgery would be in December. Weth worked until the 21^st of December, underwent surgery on the 22^nd of December and returned to work on the 16^th of February.

On her return date O’Leary advised her that she needed to begin looking for a new job immediately, that she was being demoted and almost all of her job duties were being removed and that her sole responsibility was to find a job. One month later, O’Leary suspended her, sent her home with the directive that she was being relieved of all of her job duties and her sole responsibility was to find other employment. 

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Consumer Financial Protection Bureau releases Supervision and Examination Manual

Established in 2010 by Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (“CFPB”) has released its first edition of the Supervision and Examination Manual. The Manual is a guide to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

As stated on the CFPB’s website, the Manual is divided into three parts:

• Part One describes the supervision and examination process.
• Part Two contains examination procedures, including both general instructions and procedures for determining compliance with specific regulations.
• Part Three presents templates for documenting information about supervised entities and the examination process, including examination reports.

While the Manual is designed in large part to supervise the nation’s largest mortgage servicers, it will impact all lenders who deal with consumer loans.

Misclassification of Workers as Independent Contractors: How to Take Advantage of IRS’s New Voluntary Classification Settlement Program

Both the IRS and the Department of Labor have indicated their intent to target misclassification of workers as independent contractors rather than employees. In the proposed budget for fiscal year 2012, $240 million is allocated for initiatives specifically related to enforcing this misclassification.

Employers who have misclassified workers in the past may want to consider taking part in a new program that will allow them to voluntarily correct their misclassification of workers at a relatively low cost. As part of its “fresh start initiative”, the IRS recently announced a new Voluntarily Classification Settlement Program (VCSP).

Under this program, eligible employers will only pay an amount that equals just over one percent of the wages paid to the misclassified workers in the past year, if they prospectively treat these workers as employees. The IRS will not audit employers on payroll taxes related to these workers for past years, and employers will not be subject to interest or penalties for past misclassifications.

In order to be eligible for the program the employer must:

1. consistently have treated the workers in the past as non-employees,
2. have filed all required Forms 1099 for the workers for the previous three years, and
3. not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of these workers.

To apply for the program, an employer must file Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before it wants to commence treating the workers as employees.

Employers participating in the program will be subject to a six-year statute of limitations for the first three years under the program, rather than the three-year statute of limitations that generally applies to payroll taxes.

Information about the VCSP is contained in IRS Announcement 2011-64.

Posted by Attorney Marcia S. Orgill. Orgill concentrates her practice in the area of business and personal taxation—especially complex domestic and international tax strategies.

How Long Should You Stay in Your Commercial Lease?

Lease Term, Renewal Options, Lease Purchase Options

Part 2 in Series – “10 Lease Traps & Tips for the Small Business Owner”

When contemplating new lease space, the small business owner understands the need for flexibility. The term, or length of time, you will remain in the leased space is a chief concern of any entrepreneur. You don’t want to be forced to look for new space after only a few years, on the other hand, you want to be able to leave if after a period of time you learn the space is not right for your business.

One of the most important aspects of a lease for the small-to-medium sized business owner is flexibility. How much space do you need? Will you grow? Was your initial assessment too ambitious?

Lease Term – Most commercial landlords will insist on a lease term of at least 3 – 5 years. Depending upon your industry, this very well could be a good place to start. For example, if you’re looking for office space, the initial investment on fixtures and other start up costs can be minimal; conversely, if your space is going to be used for heavy manufacturing, just getting the machinery situated can be a huge expense, warranting a longer term lease.

Renewal Options – The more the better. Renewal options allow you to choose to remain in a space, usually under the same lease terms, or to look for a new space after the term has expired. One term that often does change is rent. You’ll want to either include a percentage rental increase for the renewal term, attach the increase to a Consumer Price Index, or agree to negotiate using the future “market rate”. A renewal option doesn’t do you any good if you don’t exercise it per the lease’s requirements – be certain to develop a system to calendar the date by which you must provide notice to your landlord.

Lease Purchase Options – Sometimes it makes more sense for a tenant to own their space rather than pay rent. While this decision inevitabely involves important tax consequences, it allows you to test drive the property before buying. It also gives you the ability to build some equity towards the purchase price if the lease is properly negotiated; meaning, you need to make certain some portion of your monthly lease payment will be applied to the purchase price. The potential downside of a lease purchase option is that the landlord will probably make you pay a premium for it. Again, be certain to calendar the date by which you must give notice to landlord in order to exercise your option.

Part 1 in Series – “10 Lease Traps & Tips for the Small Business Owner”

Control Agreements from the Secured Party’s Perspective – Perfecting Security Interests in a Securities Account

Any secured party, e.g. a bank, making a loan inevitably wants as much control over its collateral as the borrower is willing to give, and the law allows. In a declining real estate market, an obvious source of collateral for lenders may include a borrower’s securities account. But, taking a securities account as collateral adds an additional element to the loan process by bringing a new party to the table – the financial intermediary.

As people in the industry know all too well, different forms of collateral require different procedures to properly perfect their security interests. Real property, for example, is relatively straight forward; a secured party in Missouri records a properly executed deed of trust with the recorder of deeds office in the county in which the property is located. Investment property (stocks, bonds, mutual funds, brokerage accounts, etc.) are a different animal altogether. Under the Uniform Commercial Code (the “UCC”), a securities account is classified as investment property (UCC § 9-102(a)(49)). Most investors do not maintain physical possession of their certified securities (stock certificates or bonds); rather, these are held by their financial intermediaries. Understanding that your borrower will not have the ability to hand you its certified security for this reason, a creditor wishing to obtain its highest priority should perfect its security interest in investment property by control (UCC § 9-314(a)).

The secured party gains control over the securities account when the owner of the account instructs the securities intermediary, after the secured party has rights in the account, that the intermediary shall comply with the secured party’s orders without consent of the owner.

Put more simply, for a lender to perfect its security interest in a securities account two steps are required: (1) execute a written security agreement whereby the borrower acknowledges its pledge of the account (rights to the account); and (2) enter into a written three-party agreement among the lender, borrower, and financial intermediary (borrower’s instructions to the intermediary).

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Making the Most of a Failed Bank: FDIC Loss-Sharing and Purchasing Loan Portfolios

One potentially lucrative by-product of the recent economic downturn and corresponding bank failures is the opportunity to acquire banks or loan portfolios at a substantial discount and on favorable terms. An FDIC receivership of a failed bank presents other healthy lenders with an opportunity to obtain receivables at a discount, and possibly corresponding deposits as well. Bank failures also offer options to investors with capital who may be considering non-traditional investment options given the current economic climate and real property market.

These opportunities usually present themselves in one of two ways. First, the FDIC may sell all of the assets of a failed bank, including receivables and deposits, to a third party, which generally is another lender. Second, the FDIC can pool individual loans together and essentially auction a pooled loan portfolio to a third party without corresponding deposits. Both scenarios require scrutiny of certain issues for the acquiring lender or investor in order to maximize the investment revenue from the purchase and ensure compliance with the terms of the agreement with the FDIC.

Loss-Sharing with the FDIC

A purchaser of a failed bank will generally enter into a Loss-Share Agreement with the FDIC. Loss-Share Agreements have developed in the past two decades, and give a purchaser the benefit of the FDIC’s agreement to absorb a percentage of a loss realized on the acquired receivables. Under a Loss-Share Agreement, the purchasing lender incurs the remaining portion of a loss on a loan, generally around 20%, while the FDIC incurs the greater share.

Loss-Share Agreements are intended to facilitate the FDIC’s sale of a greater number of assets to a purchasing lender while also burdening the acquiring lender with the obligation to manage and collect non-performing loans sold from a failed bank. In effect, loss-sharing results in the alignment of interests between an acquiring lender and the FDIC, which both now face risk associated with the workout of the bad debt acquired.

It is essential to understand the potential effects of a Loss-Share Agreement when bidding on a failed bank. The obvious benefit to the acquiring lender is the reduced risk associated with the purchase of a bank or loan portfolio. However, the benefit to the FDIC is that the loss-share, and the reduced risk to the purchaser, will likely create greater interest in acquiring a failed bank, and therefore increased bids for the purchase.

Dealing with Collateral

Evaluation of collateral packages for loans subject to sale by the FDIC is essential in evaluating the transaction and should be undertaken at the earliest possible opportunity. It is not only important to evaluate the collateral, but to take steps to further protect the collateral, even if a particular loan is not in default.

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