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					9th Circuit: Fitness-for-Duty Exam Can Be Based on
Concern About ‘Volatile’ Behavior

The Americans with Disabilities Act (ADA) allows an employer to require an employee to
undergo a fitness-for-duty examination (FFDE) when health problems have had a substantial or
injurious impact on an employee’s job performance. Such examination must be job-related and
consistent with business necessity. The 9th U.S. Circuit Court of Appeals has held—as an issue
of first impression for that court—that an employer also can require an employee to undergo
such an exam as a “pre-emptive” measure against potential dangerous or harmful conduct,
especially when the employee is engaged in dangerous work.

Oscar Brownfield began working as a police officer for the Yakima Police Department (YPD) in
Yakima, Wash., in 1999. In 2000, he suffered a closed head injury in an off-duty car accident,
which caused symptoms that included reduced self-awareness. He returned to work and, over the
following three years, received positive performance reviews and several commendations.

In 2004, Brownfield began to complain to his supervisor about another officer, Officer
Dejournette, alleging various “shortcomings” on Dejournette’s part, and began to document
those perceived failings. In May 2005, after he was reprimanded for a performance issue,
Brownfield forwarded his notes to the chief, Sam Granato. During a subsequent meeting among
Brownfield and two of his supervisors, Brownfield used profane language and left the meeting
after being asked to stay. Brownfield was temporarily suspended for insubordination after that
incident.

In September 2005, four additional incidents occurred involving Brownfield. First, he engaged in
a “disruptive argument” with another officer; second, Brownfield himself reported that he felt
himself “losing control” during a traffic stop when a young child was “taunting him” during the
stop; third, the YPD received a domestic violence call from Brownfield’s estranged wife after
Brownfield allegedly struck her by closing a door on her; and fourth, a YPD officer reported
several statements made by Brownfield, including a statement that “It doesn’t matter how this all
ends.” Those incidents, taken together with the May incident, led the YPD to send Brownfield
for an FFDE.

The diagnosis offered by Dr. Decker, who conducted the FFDE in October 2005, was mood
disorder that manifested itself in “poor judgment, emotional volatility and irritability,” and was
related to Brownfield’s 2000 head injury. Decker determined that Brownfield was unfit for
police duty and was permanently disabled by the condition.

Brownfield subsequently got a second opinion from Dr. Mar, who agreed with Decker that
Brownfield was unfit for duty but believed that Brownfield’s condition might improve with
treatment. In December 2006, Mar reported that Brownfield was improving and could return to
duty, but at an unspecified date. The YPD scheduled another FFDE, this time with Dr. Ekemo
(Brownfield refused to return to Decker). Although Brownfield attended an initial session with
Ekemo, he refused to return to complete the evaluation, and his employment ultimately was
terminated.

Brownfield sued in federal court, alleging, among other claims, that the YPD had violated the
ADA by requiring him to submit to the FFDE. The district court granted summary judgment in
favor of the city, and Brownfield appealed. The lower court’s dismissal was upheld by the 9th
Circuit.

The 9th Circuit found that the ADA’s directive that a medical exam be “job-related and
consistent with business necessity” was quite high, but that the ADA does not require an
employer to wait until a perceived threat becomes real or to allow questionable behavior to result
in injuries before sending an employee for an FFDE, particularly when the employee is engaged
in dangerous work. In interpreting “business necessity,” the court cautioned that it should not be
confused with mere expediency and that using medical exams to harass employees or to “fish”
for non-work-related medical issues could, in fact, violate the ADA. The behavior that triggers
such FFDEs cannot be merely annoying; rather, there must be some objective reason to doubt
whether the employee can perform his or her job-related functions.

Professional Pointer: Because the employer bears the burden of demonstrating a job-related
reason for an FFDE, employers should understand the relevance and the parameters of the
concept of “business necessity,” especially when used as a basis for a pre-emptory FFDE. Clear,
concise and objective documentation of the incidents that form the basis of the reason for that
exam can help to avoid, or to effectively defend against, an employee’s claims under the ADA.

Brownfield v. City of Yakima, 9th Cir., No. 09-35628 (July 27, 2010)

9th Circuit: Repayment of Training Costs is Not FLSA
Kickback

The 9th U.S. Circuit Court of Appeals held that an employer did not violate the Fair Labor
Standards Act (FLSA) by demanding training costs from an employee who agreed to reimburse
the employer if she resigned, where the employee was paid at least minimum wage for her final
workweek.

The City of Oakland, Calif., and the Oakland Police Officers’ Association entered into a
collective bargaining agreement providing that police officers who resign before completing five
years of service must repay a pro rata share of their police academy training costs of $8,000. The
agreement further provided that repayment was due at the time of separation and that the city
would deduct any amounts owed from the final paycheck and any balance would be due.

During the hiring process for the position of police officer trainee, Courtney Gordon signed a
conditional offer that restated the training repayment schedule in the collective bargaining
agreement but did not include a statement that the city would withhold an officer’s paycheck in
satisfaction of any repayment owed.
Gordon successfully completed her training and became a police officer. However, prior to
completing her second year of service, Gordon resigned. In her final two weeks of work, Gordon
worked 60 hours and received a final paycheck reflecting this amount.

The city notified Gordon that it was entitled to recover 80 percent of the training costs pursuant
to the conditional offer and that it had withheld her paychecks for accrued unused vacation and
compensatory time off. The city’s total remaining demand was $4,449.66 that subsequently
increased to $5,268.00 with the addition of a “collection fee.”

Gordon alleged that the city violated the minimum wage provisions of the FLSA by requiring her
to reimburse it for part of her training costs. She asserted that there was no legal difference
between deducting a sum from an employee’s paycheck and directly demanding the employee to
surrender a sum after being paid. Gordon contended that after subtracting the costs for the
training program, she was actually paid a negative sum for her last week of work.

The district court concluded that since the city issued Gordon a paycheck exceeding the
minimum wage amount, the reimbursement demand did not violate the FLSA’s minimum wage
provision.

The FLSA requires covered employers to pay their employees at least the federal minimum
hourly wage every workweek. Neither employees nor labor organizations can waive employees’
FLSA rights. According to Department of Labor regulations, “wages” are not considered paid
unless the employee receives them “free and clear.” Therefore, the FLSA wage requirement is
not met where the employee “kicks back” directly or indirectly to the employer the whole or part
of the wage received whether in cash or otherwise. Since Gordon did not allege she was paid
below the federal minimum wage for any given week, the 9th Circuit observed that the only
cognizable claim was if her payment to the city for her training costs was a kickback.

The 9th Circuit remarked that the city could have required applicants to independently obtain
their police training prior to beginning employment, but instead elected to essentially loan police
officer trainees the cost of their training. The 9th Circuit noted that the conditional offer Gordon
signed explained that the city would forgive her repayment obligation at the specified rate;
however, Gordon chose not to serve the five years necessary to secure complete forgiveness. As
such, the 9th Circuit categorized the arrangement between Gordon and the city as a repayment of
a voluntarily accepted loan, not a kickback.

Despite the debt Gordon owed, the 9th Circuit affirmed that the city satisfied the FLSA’s
requirements by paying her at least minimum wage for her final week of work and was free to
seek repayment of Gordon’s training debt as any ordinary creditor.

Professional Pointer: A kickback tends to shift part of the employer’s business expense to the
employee and may occur either in advance of or during employment. A common example is
requiring employees to provide tools. Employers should be aware that any deduction from
wages, or payment made to another for the employer’s benefit, that reduces the employee’s
wages below minimum wage violates the FLSA. In this case, the city would have violated the
FLSA had it followed the collective bargaining agreement and withheld the entire final paycheck
in satisfaction of the debt.

Gordon v. City of Oakland, 9th Cir., No. 09-16167 (Nov. 19, 2010)

9th Circuit: Wage and Hour Class Action Prevails

The 9th U.S. Circuit Court of Appeals affirmed judgment for the plaintiffs following a class-
action trial in a wage and hour case.

The district court’s decision in the Wangcase had become infamous because it frequently has
been quoted to support propositions that were generally negative for employers in wage and hour
class actions. The district court decision took a very lax view on what is required to support class
certification in an exemption misclassification case such that certification would be proper in
practically every case. In essence, the decision held that in any case where the employer
collectively classified a job as exempt, certification would be appropriate.

Many wage and hour practitioners presumed the case to be largely dead and buried when, in July
2009, the 9th Circuit handed down two decisions that expressly rejected the central holding of
the Wangdistrict court decision. In Vinole v. Countrywide Home Loans Inc., 571 F.3d 935 (9th
Cir. 2009) and Mevorah v. Wells Fargo Home Mortgage, 571 F.3d 953 (9th Cir. 2009), the 9th
Circuit held that a class could not properly be certified under Rule 23(b)(3) (the primary method
of certifying wage and hour class actions) based exclusively or primarily on the basis that the
employer uniformly treated all of the class members as exempt. The 9th Circuit recognized that
“focusing on a uniform exemption policy alone does little to further the purpose of Rule
23(b)(3)’s predominance inquiry.” This pronouncement suggested a disapproval of the reasoning
in the Wang district court decision and reduced the influence of the district court opinion.

However, Wanghas re-emerged even stronger as an appellate decision. The appeals court
affirmed that the reporter plaintiffs did not satisfy the criteria for the Fair Labor Standards Act’s
(FLSA) creative professional exemption and were unlawfully denied overtime. The Chinese
Daily News articles “do not have the sophistication of the national-level papers at which one
might expect to find the small minority of journalists who are exempt,” the appeals court stated.
The court also upheld the class certification of the state law claims, and ruled that the evidence
presented to the jury was sufficient to support a finding that reporters who worked more than five
hours per day were not provided with meal breaks of at least 30 minutes in violation of
California law.

Although the 9th Circuit did not repudiate its holdings in Vinole and Mevorah, its recent
decision in Wang contains a veritable treasure trove of pronouncements that class plaintiffs will
try to make use of in later cases. Two of its holdings are particularly troubling to employers.

First, notwithstanding Vinoleand Mevorah, the 9th Circuit found an alternative basis to affirm
the Wang certification order, using Rule 23(b)(2) of the Federal Rules of Civil Procedure instead
of 23(b)(3). The vast majority of wage and hour class actions that are certified seek primarily to
recover back wages, interest and various statutory penalties. Because these claims primarily are
interested in monetary recovery, the only way for a court to certify them is to use Rule 23(b)(3),
which requires a court to conclude that common issues predominate over individualized issues.
Rule 23(b)(2) is usually used in cases where the primary purpose of the class action is to obtain
an injunction to change the defendants’ behavior. To obtain certification under Rule 23(b)(2), a
plaintiff must show only that “the party opposing the class has acted or refused to act on grounds
that apply generally to the class,” a much easier standard to satisfy.

The 9th Circuit affirmed certification under this standard notwithstanding that the plaintiffs
recovered more than $7 million in back pay, interest and penalties from Chinese Daily News. It
accepted the district court’s finding that it was as important to the plaintiffs to change the
newspaper’s wage and hour practices going forward as it was to recover money. The opinion
suggests that it is simply left to the broad discretion of the trial court to decide the relative
importance of monetary recovery vs. injunctive relief in each case. As long as the class
representative is a current employee seeking an injunction, a district court seemingly could
routinely decide that the plaintiff considered injunctive relief the most important relief. If a
district court reaches this conclusion, then it could certify a class that would otherwise be
unmanageable under Rule 23(b)(3) standards. Such a rule makes little sense in the exempt
misclassification context where even injunctions are designed to ensure that pay practices are
changed (i.e., that employees receive overtime pay).

Separate from its analysis of class certification, the Wangopinion also rejects a promising FLSA
pre-emption argument. Because the FLSA does not allow class action, the plaintiffs attempted to
use California’s Unfair Competition Law (UCL) to borrow violations of the FLSA but pursue the
action as a class action with a four-year statute of limitations. The defendants argued that the
FLSA pre-empts the UCL when it attempts to borrow the FLSA but drastically alter its remedial
scheme.

In Mevorah, the 9th Circuit had suggested without deciding that the FLSA may pre-empt the
UCL when it seeks to transform FLSA claims in this manner. In doing so, the 9th Circuit cited a
law review article by professor Rachel Alexander that laid out, in scholarly detail, the grounds
for concluding that Congress’ primary purpose in enacting the 1947 “Portal to Portal”
amendments to the FLSA was to bar class actions and require each individual employee
affirmatively to bring his or her FLSA claim on his or her own behalf. If that premise is
accepted, then principles of “conflict pre-emption” would preclude using the UCL to frustrate
Congress’ intent.

In Wang, by contrast, the 9th Circuit held that there was no federal pre-emption, and its analysis
completely ignores the various grounds that Alexander discussed in the cited article. For
example, the 9th Circuit explains, in conclusory fashion, that Congress did not intend to protect
employers in enacting the FLSA but rather “the central purpose of the FLSA is to enact
minimum wage and maximum hour provisions designed to protect employees.” This broad
assertion missed the point that Congress expressly amended the FLSA in 1947 for the primary
purpose of scaling back its provisions, which had been causing “ruinous liability” to employers.
While one could argue whether the evidence that was set forth in Alexander’s analysis of the
legislative history is sufficient to support conflict pre-emption, the Wang court does not even
acknowledge her analysis or try to refute it.

Professional Pointer: There is some hope that the U.S. Supreme Court will grant review to
Wang because the decision does not cite, and refuses to follow, a 4th Circuit decision, Anderson
v. Sara Lee Corp., 508 F.3d 181 (4th Cir. 2007). In Anderson, the 4th Circuit held that the FLSA
does indeed pre-empt state laws that attempt to borrow its standards and apply broader remedies.
This creates a circuit split on an important issue. One of the main reasons for Supreme Court
review is to resolve such circuit splits, so the Supreme Court could take interest in this case.

Wang v. Chinese Daily News Inc., 9th Cir., 08-55483 (Sept. 27, 2010)

Employer was Not Required to Reasonably Accommodate Employee’s Difficulties in
Commuting to Work

Robin Dinatale brought this state law suit against her employer, the New York State Insurance
Fund (N.Y.S.I.F.), alleging disability discrimination. Specifically, Dinatale claimed that driving
to work exacerbated the symptoms of her disability, and that N.Y.S.I.F. had failed to provide the
reasonable accommodation of allowing her to work from home. The New York State Supreme
Court, Appellate Division, dismissed her suit, holding that N.Y.S.I.F. was not required to
accommodate the alleged difficulties caused by her commuting to and from work:

Employers are required to make reasonable accommodations to disabled employees, provided
that the accommodations do not impose an undue hardship on the employer. A reasonable
accommodation is defined in relevant part as an action that permits an employee with a disability
to perform his or her job activities in a reasonable manner.

Dinatale requested that she be allowed to work from home, but she conceded at the hearing
before the ALJ that nothing in her work environment caused the symptoms from which she
suffered. Rather, according to Dinatale, the symptoms were aggravated by her drive to and from
work. Dinatale admitted that she did not know if she would experience the same symptoms if she
were merely riding in a car rather than driving the car, or if she were allowed to work from
home.

Dinatale lived 22 miles from her place of employment and, for personal reasons, would not
consider moving closer in order to reduce the length of her commute. She had tried carpooling
with one person, but the carpooling was not convenient for that person. Dinatale had not asked
anyone else, including family members or friends, to drive her to and from work. Although there
was public transportation near her home, Dinatale had not attempted to use it and did not think
that it would alleviate her symptoms.

We conclude that NYSIF, as Dinatale's employer, was not required to accommodate Dinatale's
difficulties in commuting to and from work. An employee's commute "is an activity that is
unrelated to and outside of the job, and an employer is required to provide reasonable
accommodations that eliminate barriers in the work environment."
Dinatale v. New York State Div. of Human Rights



Genetic Nondiscrimination Final Regulations Announced


The Equal Employment Opportunity Commission has finalized its regulations implementing
Title II of the Genetic Information Nondiscrimination Act (GINA), almost a year after the law
took effect for employers. The final regulations were published on November 9,2010, in the
Federal Register and take effect 60 days from publication.

GINA applies to those employers who are also covered by Title VII and prohibits them from
requiring, obtaining, or purchasing genetic information and making employment decisions based
on that information.

Here are key points from the final regulations:

      Employers to not have to have a specific intent to acquire genetic information; they can violate
       the law by something less than a "deliberate acquisition." So, a request for genetic information
       includes "conducting an Internet search in a way that is likely to result in obtaining genetic
       information, as well as ‘actively listening' to third-party conversations or making requests for
       information about an individual's current health status in a way that is likely to result genetic
       information."

      The EEOC has retained controversial language which defined "employee" to include a former
       employee as well as an applicant. The agency has also retained controversial language which
       extends the definition of family member to adopted individuals despite the fact that they would
       not share a genetic makeup.

      Employers who employ multiple family members will have a little more flexibility obtaining
       information from one family member without that being an offense against another family
       member (remember that one employee's manifestation of disease or disorder could be the
       family medical history of the brother or sister or father, mother, uncle and so on who also works
       for the employer).

      Information about race/ethnicity not derived from genetic testing is not covered by GINA.

      Employers are free to offer financial and other incentives to encourage employees to participate
       in wellness programs, though they cannot offer those incentives to provide genetic information.
       Employees may still be provided the questionnaires seeking the information, but must be told
       that they need not provide genetic information in order to receive the incentive.

Finally, the EEOC has provided a sample "don't send us this information" notice for employers
to use when requesting information about employees (such as medical certifications) that might
result in learning more than they wanted. Here is the text -- use it freely:
"The Genetic Information Nondiscrimination Act of 2008 (GINA) prohibits employers and other
entities covered by GINA Title II from requesting or requiring genetic information of employees
or their family members. In order to comply with this law, we are asking that you not provide
any genetic information when responding to this request for medical information. ‘Genetic
information,' as defined by GINA, includes an individual's family medical history, the results of
an individual's or family member's genetic tests, the fact that an individual or an individual's
family member sought or received genetic services, and genetic information of a fetus carried by
an individual or an individual's family member or an embryo lawfully held by an individual or
family member receiving assistive reproductive services."

State Minimum Wage Changes to Take Effect Jan. 1, 2011
Legislation providing for annual increases to state minimum wage rates based on increases in the
U.S. Consumer Price Index and inflation has been enacted in a number of states. As a result of
economic conditions in late 2009, these states did not increase their minimum wage rates for
2010. For 2011, however, several states, pursuant to such legislation, have announced minimum
wage rate increases effective Jan. 1, 2011.

Oregon – Minimum wage increases from $8.40 to $8.50 an hour. Oregon law does not allow
employers to take a tip credit against minimum wage for tipped employees.

Washington – Minimum wage increases from $8.55 to $8.67 an hour. Washington law does not
allow employers to take a tip credit against minimum wage for tipped employees.

Ruling May Lead to Rise in Use of E-Cigarettes

A recent decision on the regulation of electronic cigarettes may make their use more common. In
a Dec. 7, 2010, decision, the U.S. Circuit Court of Appeals for the D.C. Circuit ruled that the
Food and Drug Administration (FDA) can regulate e-cigarettes only as a tobacco product, not as
a drug (Sottera Inc. v. Food and Drug Administration, No. 10-5032 (D.C. 2010)).

E-cigarettes are battery-powered products that let users inhale nicotine vapor without fire,
smoke, ash or carbon monoxide, the court noted. Designed to look like a traditional cigarette,
each e-cigarette consists of three parts: the nicotine cartridge, the atomizer or heating element,
and the battery and electronics. The plastic cartridge serves as the mouthpiece and contains
liquid nicotine, water, propylene glycol and glycerol. The atomizer vaporizes the liquid nicotine,
and the battery and electronics power the atomizer and monitor airflow. When the user inhales,
the electronics detect the airflow and activate the atomizer. The liquid nicotine is vaporized, and
the user inhales the vapor.

An importer and distributor of e-cigarettes sought a preliminary injunction barring the FDA from
denying its products entry into the United States and from regulating e-cigarettes under the drug-
device provisions of the Federal Food, Drug and Cosmetic Act (FDCA). In April 2009, the FDA
had ordered that a shipment of e-cigarettes be denied entry into the United States, asserting that
the e-cigarettes appeared to be unapproved drug-device combinations under the FDCA. The
district court granted the preliminary injunction, and the appeals court affirmed, ruling that the
FDA can regulate e-cigarettes only under the Tobacco Act.

“This is a victory for the e-cigarette manufacturers,” as they do not have to comply with the
rigorous testing and other FDA regulations that would have occurred had e-cigarettes been
regulated under the FDA as a drug, remarked Celia Joseph, an attorney with Fisher & Phillips in
Radnor, Pa.

“The decision will likely make the use of e-cigarettes more common, as they are simply under
the same regulatory scheme as conventional cigarettes, not drugs or other more highly controlled
substances,” Bill Duda, an attorney with Ogletree Deakins in Columbia, S.C., told SHRM Online.

Also, the decision might spur more localities to bar the use of e-cigarettes in the places where
cigarettes are barred. On Dec. 16, 2010, the King County (Wash.) Board of Health passed a
proposal prohibiting the use of e-cigarettes in the places, including workplaces, that prohibit the
use of real cigarettes, cigars and pipes, Joseph noted. A workplace ban on e-cigarettes was signed
into law in January 2010 in New Jersey, she added.

Employers’ Bans on E-Cigarettes

Some employers, such as the U.S. Air Force, are choosing to ban the use of e-cigarettes in the
workplace except in designated smoking areas, just as they ban the use of other tobacco
products. “I believe it is unlikely legal arguments against a workplace ban of e-cigarettes would
succeed,” Joseph said.

Duda agreed, saying that no state law requires employers to allow the use of tobacco products in
the workplace and that nicotine addiction is not covered as a disability under the Americans with
Disabilities Act.

Plus, there is the likelihood of nonsmokers’ complaints about secondhand vapors if e-cigarettes
are not banned in the workplace. In addition, complaints about e-cigarettes’ smell could come
from employees who are sensitive to colognes, perfumes and other smells. Such sensitivities can
rise to the level of disability, Duda noted.

Jonathan Yarbrough, an attorney with Constangy, Brooks & Smith in Asheville, N.C., said that
some e-cigarettes have flavors like strawberry, coffee and chocolate that might prove distracting,
much like scented soaps and heavy perfumes or colognes. Many employers have banned the use
of tobacco products in the workplace, including smokeless forms of tobacco such as chewing
tobacco, he noted. “An employer could refine its policies banning tobacco use at work to include
e-cigarettes,” he said.

Joseph noted that arguments for not banning e-cigarettes in the workplace include reducing the
number of daily breaks needed to smoke outside. In addition, proponents of e-cigarettes argue
that they are not a safety hazard to the users or to co-workers and say that only a harmless vapor
is emitted, rather than smoke. “Proponents of e-cigarettes allege that the FDA, pharmaceutical
companies, the tobacco industry and anti-smoking groups have engaged in scare tactics about e-
cigarettes with unfounded claims about the alleged dangers of this product,” Joseph added.

Reasons for Banning E-Cigarettes

But Joseph noted that there are many arguments for banning e-cigarettes from the workplace,
including the following:

      Certain state and local laws ban e-cigarettes.
      Employers that are used to the appearance of a smoke-free workplace might not want to allow
       employees to look as if they are smoking cigarettes.
      Employees who see co-workers use e-cigarettes might try to smoke real cigarettes in the
       workplace or at least question why they cannot do so.
      The vapor that is emitted from e-cigarettes might be an annoyance or worse to co-workers.
       Employees might claim that they are allergic to the vapor.
      It is possible that the vapors are not harmless and could cause safety concerns for the person
       using the e-cigarettes and for co-workers.
      Nicotine is addictive, so e-cigarettes might cause employees to continue smoking.

However, many e-cigarette users believe that e-cigarettes are a smoking-cessation product, she
added.

More than two-thirds of the United States is covered by some ban on regular smoking, either in
the workplace, public places or restaurants, Joseph noted. Whether or not e-cigarettes are banned
by state or local no-smoking laws will depend on each individual law.

“Some organizations in the United States have taken the position that e-cigarettes are banned
under non-smoking laws, even when it may not be clear that e-cigarettes are covered by these
laws,” she observed.

Policies’ Wording

An employer that is banning the use of e-cigarettes might note in its smoking policy that
smoking in any form through the use of tobacco products or “vaping” with e-cigarettes is
prohibited during working time, Yarbrough said. Or employees might be told that they may
smoke or vape only in designated smoking areas. Smoking should be defined in the policy as
including the use of tobacco products through pipes, cigars and cigarettes and the use of e-
cigarettes regardless of whether they contain tobacco, he concluded.

Duda agreed that a ban on e-cigarettes in the workplace could be incorporated into existing
smoking policies. “Because the status of e-cigarettes has not been comprehensively vetted under
existing state smoking laws, employers may want to take caution not to restrict their usage any
more or less than conventional cigarettes,” he remarked.

IRS Delays Enforcement of Nondiscrimination Rules for
Insured Health Plans
The Internal Revenue Service on Dec. 22, 2010, announced in Notice 2011-1 that compliance
with the Patient Protection and Affordable Care Act’s nondiscrimination rules for health
insurance plans will be delayed until regulations or other administrative guidance has been
issued. The IRS indicated that the guidance will not apply until plan years beginning a specified
period after guidance is issued. The U.S. Department of Labor and U.S. Department of Health
and Human Services have reviewed the notice and agreed with it.

The nondiscrimination requirement boils down to two mandates. First, a new, fully funded health
plan cannot discriminate in favor of highly compensated individuals as to eligibility to
participate; adherence to the requirement is determined by a numerical test. Second, a plan
cannot discriminate in favor of participants who are highly compensated individuals as to
benefits that are provided.

The IRS noted that regulatory guidance is essential to the operation of the nondiscrimination
statutory provisions. The nondiscrimination requirements already apply to self-insured plans.
Guidance will have to specify to what extent insured plans are subject to the same statutory
provisions that apply to self-insured plans, the IRS noted.

Guidance must take into consideration the operation of state health insurance exchanges and
individual and plan sponsor requirements that take effect after 2013, the IRS added.

Comments Sought

In the notice, the IRS sought comments on various issues, including:

The application of the nondiscrimination provisions to insured group health plans beginning in
2014 when the health insurance exchanges become operational and the employer responsibility
provisions, the premium tax credit and the individual responsibility provisions are effective.

The suggestion in previous comments that the nondiscrimination standards should be applied
separately to employers sponsoring insured group health plans in distinct geographic locations,
and whether application of the standards on a geographic basis should be permissive or
mandatory.

The suggestion in previous comments that the guidance should provide for “safe harbor” plan
designs.

The application of the nondiscrimination rules to multiple employer plans.

The treatment of employees who waive employer coverage voluntarily in favor of other
coverage.

Potential transition rules following a merger, acquisition or other corporate transaction.

The application of sanctions for noncompliance with the nondiscrimination requirements.
Comments are due March 11, 2011. They should be submitted to Internal Revenue Service,
CC:PA:LPD:RU (Notice 2011-1), Room 5203, PO Box 7604, Ben Franklin Station, Washington,
DC 20224. Submissions may be sent electronically to Notice.Comments@irscounsel.treas.gov,
and should include Notice 2011-1 in the subject line.

Disclaimer: This report provides information only. It does not provide legal services or legal
advice. Although we try to make our information accurate and useful, you should consult an
attorney to verify, interpret and apply this information to your particular situation.

				
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