Do Colorado employees get paid for snow days?

With winter weather in full swing employees in Denver and other parts of Colorado wake up to a lot of snow and ice days. Employers make decisions to open for limited hours or to close entirely for those days. For some workers that can mean an extra day off; but for other employees that can mean losing work hours and badly needed pay. That can leave many employees wondering if work is closed on a snow day, do I get paid? The answer is sometimes depending upon the worker’s status as an employee or independent contractor and exempt or non-exempt. Let’s explore this answer for Colorado workers.

Exempt employees vs. Nonexempt employees

Rules for payment of wages to employees differ depending upon whether an employee is appropriately classified as an exempt or nonexempt employee under the Fair Labor Standards Act and Colorado employment law. Under federal and Colorado wage law an exempt employee is exempt from overtime pay and minimum wage rules. Exempt employees are generally salaried employees who meet one or more statutory exemptions.

An employee is not exempt merely because he or she receives pay on a salary basis or because the employer says the employee is exempt. Most nonexempt employees receive hourly pay on the basis of hours worked in the workweek; but there are employees properly classified as nonexempt who receive a salary. Many employers misclassify nonexempt employees as exempt employees which often results in unpaid overtime pay and minimum wage violations. If you believe you may be misclassified then you should talk to a Colorado unpaid wages lawyer right away.

Snow day pay for nonexempt employees in Colorado

Nonexempt employees are not entitled to pay for hours the employer closes a work site under federal or Colorado employment law. Nevertheless, you may receive wages for an inclement weather day under an employer’s voluntary policy or under a contracted benefit such as:

  • An employer’s elective policy to pay wages for an inclement weather day;
  • The employer allows employees to elect to receive vacation pay or other PTO instead of taking the snow day unpaid;
  • A collective bargaining agreement between your union and employer includes required paid time for inclement weather days;
  • An individual employment contract includes provisions requiring the employer to pay wages for inclement weather days.

You should review the employer’s handbook or any employment contract for these provisions.

Snow day pay for exempt employees in Colorado

The rules for salaried exempt employees under the Fair Labor Standards Act and Colorado employment law are more complex. Employers must pay salaried exempt employees within specific rules to maintain the exemption from overtime pay and minimum wage. If an employer violates these rules then the exemption is destroyed and the employer must pay the employee at least minimum wage plus overtime pay for applicable hours. One of these rules applies to situations where an employer closes for a partial or full day due to weather.

Under the Fair Labor Standards Act an employer generally must pay a salaried exempt employee for an entire week of pay if the employee worked any part of the workweek. Under this rule the employee must be willing to work but is unable to work due to conditions not caused by the employee. This certainly includes days the employer shuts down work, such as snow days. It also includes days in which weather prevents you from getting to the office but the employer is open. (By contrast, an employer can make deductions for narrow reasons, such as the salaried, exempt employee’s FMLA leave.) Although employers cannot deduct salaried exempt employee’s pay for snow days it may deduct the time the employer closes from the employee’s PTO bank.

Employment discrimination lawyers in Colorado

Independent Contractors in Colorado and snow day pay

Independent contractors are not employees and therefore only receive pay under the conditions of their contracts. Often contractors only receive pay for days they work or generally for performing services; therefore, it is not common for contractors to receive pay for snow days. Independent contractors must review the terms of their contracts to determine whether the contract gives them snow day pay.

However, it is common for employers to misclassify employees as independent contractors to avoid employee rights laws and wage requirements. Misclassified employees may have remedies against their employer including overtime pay and FMLA rights. If you believe your employer misclassified you as an independent contractor then you should talk to a Colorado unpaid wages lawyer right away.

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NLRB revises independent contractors test for federal labor law rights

Last week the Republican-majority National Labor Relations Board overturned its 2014 independent contractor test expanding labor law rights to more workers under the National Labor Relations Act. This unsurprising move reflects the Trump administration’s hostility towards administrative regulation and workers’ rights. The revised test will open the door for employers to classify workers as independent contractors to further erode worker rights and compensation.

The NLRB 2014 independent contractor test for labor rights

Under the National Labor Relations Act and its later amending acts, a worker obtains labor rights under the NLRA if the worker is classified as an employee. The problem is that the statutory language, like many labor and employment laws, lacks a clear mechanism to determine who is an employee under the statute. Courts and administrative agencies often rely on one of several common law tests. These tests weigh factors related to important components of the employer-worker relationship.

Historically the NLRB applied the common law agency test first focusing on the employer’s control over the worker and later shifting to focusing on the entrepreneurial opportunity for gains or losses. Ten years ago a challenge to the independent contractor classification of drivers at Fedex led to the D.C. Circuit applying the ten factor common law agency test and focusing on the entrepreneurial opportunity for gains or losses. (Fedex I.) The D.C. Circuit in FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009) reviewed the NLRB’s historical application of the test and applied the test to hold the drivers were independent contractors and not employees.

In a subsequent NLRB proceeding in 2014 the labor board disagreed. The NLRB refined its application of the common law test to a test by adding a factor considering whether the independent contractor works for an independent business rather than the usual wink wink relationship that a worker is an independent contractor because the business says so. The now eleven factor test included:

  1. Extent of control by the employer
  2. Whether or not the individual is engaged in a distinct occupation or business
  3. Whether the work is usually done under the direction of the employer or by a specialist without supervision
  4. Skill required in the occupation
  5. Whether the employer or individual supplies instrumentalities, tools, and place of work
  6. Length of time for which individual is employed
  7. Method of payment
  8. Whether or not work is part of the regular business of the employer
  9. Whether or not the parties believe they are creating an independent contractor relationship
  10. Whether the principal is or is not in the business
  11. (New:) Whether the evidence tends to show that the individual is, in fact, rendering services as an independent business

The NLRB applied this refined test to find another set of drivers are employees. Agast, Fedex appealed the decision. The D.C. Circuit again insisted its pro-business interpretation was correct and the NLRB should have expected the same result. (Fedex II.) Nevertheless the NLRB refused to walk back its refined test.

The NLRB’s 2014 refinement of its independent contractor test makes tremendous sense in light of current trends in employment. Employers increasingly shift jobs from employee to independent contractor to avoid labor and employment laws and reduce labor costs. Jobs shift to supposed independent contractors who do not operate independent businesses, only work for a single employer and have their work substantially controlled by that employer. Few disinterested and rational individuals would look at these relationships as anything less than employer-employee.

New NLRB decision on independent contractor classification

In 2018 a complaint was filed by franchisee drivers at DFW Airport alleging, under the NLRB’s refined test, that they are employees eligible to unionize under federal law. The employer was quick to point out Fedex II and the now Republican-majority NLRB agreed. It overturned the 2014 refinement returning to the ten factor common law agency test. 

“The board majority’s decision in FedEx did far more than merely ‘refine’ the common-law independent contractor test — it ‘fundamentally shifted the independent contractor analysis, for implicit policy-based reasons, to one of economic realities, i.e., a test that greatly diminishes the significance of entrepreneurial opportunity and selectively overemphasizes the significance of ‘right to control’ factors relevant to perceived economic dependency’…”

The majority claims it does not give entrepreneurial opportunity heightened consideration or raise it as a super-factor (as the court does in Fedex I) but it certainly devotes considerable space to that single factor before addressing in less detail any other. It’s difficult to imagine the majority did this unintentionally or that the board will not proceed with heavily weighing the entrepreneurial opportunity over other factors–at least in these contractor relationships.

In between 2014 and 2018 the NLRB rule gave employers pause from believing independent contractor classifications rid them of worry about unionization; but that pause is certainly over. Returning to a rule that makes it easier to avoid labor law concerns in the workplace does more than help employers sleep better at night or trim their legal budget for labor law attorneys. It incentivizes employers to structure jobs as independent contractors which in turn means fewer worker rights and less pay.

Labor and employment law bills proposed in the 2019 Colorado legislative session

Colorado starts 2019’s legislative session with a healthy list of 227 proposed bills, many including provisions affecting the state’s labor laws and employment laws. Today’s post will briefly identify and discuss the major Colorado labor law and employment law changes proposed so far this year. Denver labor law will update as these bills move through the legislature and potentially become law.

SCOTUS rejects mandatory arbitration for transportation workers classified as independent contractors

Last week the Supreme Court dropped its unanimous decision in New Prime v. Oliveira penned by Justice Gorsuch, weighing in on the application of the Federal Arbitration Act to independent contractors of a transportation company. Many liberal media outlets describe the opinion as a win for workers because the court held in favor of the workers rather than the employer. Even articles taking issue with Justice Gorsuch’s textualist approach to the Federal Arbitration Act consider the opinion a win without considering its broader effect that employer-side employment lawyers will surely grasp. Viewed from its broader consequences, New Prime is not without collateral damage.

A brief history of employment law and the Federal Arbitration Act

Mandatory arbitration became commonplace in employment contracts and employment agreements as a condition of employment after the Supreme Court heavily rewrote the Federal Arbitration Act in the 1980s.

In 1925 Congress passed the Federal Arbitration Act which enforces arbitration clauses in contracts covered by the act. The Federal Arbitration Act was designed to create a meaningful dispute resolution framework between businesses that conducted transactions across the country. It intended to avoid situations in which a dispute arose over a purchase agreement and the parties might end up fighting in court for a long period of time or maneuvering a dispute into a local court that might heavily favor one party over the other. Instead the parties could agree to have a dispute resolved quickly by an arbitrator who was impartial and likely had familiarity with transactions in that industry.

Everybody seemed to agree with this history until we reached the excess capitalism of the 1980s. In the late 1970s and early 1980s enterprising businesses, primarily in banking and lending, fought to repurpose the Federal Arbitration Act to apply to consumer transactions. Courts agreed and mandatory arbitration agreements became part of many consumer agreements for credit cards, bank accounts, utility services and sometimes even retail purchases.

Arbitration in consumer agreements provides businesses several advantages over litigation. Arbitration proceedings are often cheaper and result in smaller adverse judgments. Companies have less incentive to settle and even when they lose they lose less. Arbitration proceedings are framed by the party demanding arbitration so it is often a friendly environment and avoids courts which may be more impartial. Arbitration decisions are often not published so even when companies suffer adverse judgments they are concealed from the public which makes it harder for consumers to assess their potential relief in this forum.

Companies liked arbitration so much that they expanded mandatory arbitration to employment agreements. Employers in the 1980s and 1990s began requiring employees to sign forced arbitration agreements for employee claims under a wide range of employment law and labor law claims. This was different from labor arbitration under a collective bargaining agreement in which the union and employer negotiated the terms of arbitration proceedings. Under these forced arbitration agreements, employers held absolute control over arbitration terms. Employees signed the agreements or lost their jobs.

Circuit City v. Adams and the FAA in employment agreements

In 2001 the Supreme Court rendered judgment in Circuit City v. Adams holding that the FAA applied to employment agreements. Adams applied for a job with Circuit City in which the employment application contained a unilateral agreement to arbitrate all employment claims. Adams later filed an employment discrimination lawsuit against Circuit City, which attempted to move the lawsuit into arbitration pursuant to this agreement.

The Supreme Court majority took on a tortured reading of the Federal Arbitration Act to reach this conclusion. Within the FAA are two relevant passages:

Section 1: “…nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.

Section 2: “A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

At issue in Circuit City is how expansively Section 1 limits the FAA’s application to employment contracts and the extent any employment agreement not exempted by Section 1 falls within Section 2. The majority applies two different cannons of statutory construction to give the word “commerce” two opposing definitions in the same statute. According to the majority, commerce in Section 1 must be narrowly defined because the section describes some of the workers. The applicable cannon of statutory construction mandates when a general term follows specific terms, the general term is interpreted as including items like the specific. As a result, the employees exempted by Section 1 only include employees involved in transportation (like railway workers and seamen). All other employee contracts are not exempt. Conversely, commerce in Section 2 must be expansively defined because it lacks any limiting language and the FAA intended to expansively cover the extent of Congress’s power under the Commerce Clause.

(The reasoning here is awful and well excoriated by the dissenting opinions. It is well worth exploring but beyond the scope of this post.)

As a result of Circuit City we have expansive legal protection for forced arbitration in employment with very little limitation.

New Prime v. Oliveira and forced arbitration of independent contractors

New Prime deals with relationship between the FAA and non-employee workers. Here Justice Gorsuch’s majority opinion provides further confusion into interpreting the FAA in the employment context although he finds an interpretation that favors the workers in this particular situation.

New Prime is a transportation company that hires truck drivers as independent contractors. As part of their contracts the drivers agree to arbitrate claims related to their work on an individual basis. Oliveira filed a class action lawsuit on behalf of himself and his co-workers alleging wage-based claims. New Prime sought to remove the lawsuit to arbitration and chop up the class action into individual actions under its arbitration agreement.

Justice Gorsuch applies a supposed textualist approach to determine the drivers have contracts of employment under the Federal Arbitration Agreement. He advances the position that language of the act must be interpreted within the ordinary meaning of its time. He finds that in 1925 there was no distinction between independent contractor and employee and the term employment applied to all employment relationships. Truck drivers are as well employees like railway workers and sea workers therefore they are the types of workers covered even among Circuit City‘s limited scope of Section 1. Therefore, although New Prime did not employ the drivers as employees their employment agreement fell within the FAA’s contract of employment language.

New Prime gives us an even more confusing view of the Federal Arbitration Act. Combining New Prime and Circuit City we have no consistent standard to interpret the statute. On one hand, New Prime tells us to read the statute in the context of its time but Circuit City tells us to read the statute in its modern setting in which commerce is defined in a much broader term than at the time the FAA was enacted. We are forced to read Section 2 in a post-Wickard, everything-is-commerce interpretation but read section 2 in a pre-Wickard interpretation where commerce is narrowly defined. It’s almost like this kind of textualism is goal-oriented.

Why New Prime isn’t worth quite the praise it gets

Across liberal and legal press one can quickly find piece after piece congratulating Justice Gorsuch for overlooking his traditionally pro-business position to give the day to the workers in New Prime. (For example, here, here, here, here and here.) That oversells the inevitable impact of this opinion for labor law and employment law.

Sure, New Prime is a win for workers engaged in transportation jobs like those covered by Circuit City‘s interpretation of workers covered by Section 1’s exemption. Employers may no longer get away with properly or improperly defining these workers as independent contractors, rather than employees, to force them into mandatory arbitration agreements. It does not help them gain any other protections as employees but it does avoid mandatory arbitration. This is certainly a tremendous win for transportation workers regardless of their classification as employee or independent contractor.

However, New Prime‘s interpretation of Section 1 is not without collateral damage. Although all transportation workers may fall within New Prime‘s interpretation of Section 1’s exemption it does not mean those same workers may receive exemption under state law. In the end, all these workers may find themselves in mandatory arbitration anyway. It also does not help that New Prime doubles down on the narrow interpretation of Section 1 found in Circuit City. The greatest problem with New Prime is that it leaves little question that SCOTUS definitely views independent contractor relationships as well within the FAA’s scope. Enterprising plaintiff-side employment lawyers are likely to find reason to challenge applying the FAA to independent contractor relationships particularly in light of last year’s Epic Systems opinion (and its basis in AT&T Mobility v. Concepcion) upholding class action waivers in mandatory arbitration employment agreements.

Denver public school teachers on the verge of strike

For the past year, teachers in the Denver public school system have negotiated with administrators over a new bargained agreement covering their employment with little success. As the current CBA reaches expiration on January 18, employees face a strike vote on the following day. If Denver teachers vote to strike it may leave Denver public schools with the choice to close schools temporarily, replace teachers with short term replacements or bargain to give its teachers appropriate compensation. The final negotiation sessions before the strike take place this week ahead of the expiration of the current CBA. The teachers’ union has already informed the Colorado Department of Labor and Employment of its intent to strike, as required by the Colorado Peace Act.

Denver teachers currently receive compensation through a complicated formula of base salary and bonuses. The existing collective bargaining agreement, like many educational CBAs, includes lanes for salary compensation that reward teachers for continued education and tenure in addition to cost of living adjustments. Additionally, Denver teachers receive bonuses based upon several additional factors, such as teaching in underserved areas and school performance. The bonuses are funded from a local tax initiative for this purpose. Any bargained agreement lacking these bonuses will result in losing access to that revenue for teacher compensation. This compensation program is known as ProComp.

Downtown Denver, Colorado

The divide between the Denver teachers’ union and Denver Public Schools

The Denver Public School system and the Denver teachers’ union (Denver Classroom Teachers Association) remain at odds over several basic issues. The Denver teachers’ union wants to increase funding for compensation, simply the compensation structure, move more funding into base pay rather than bonuses and create salary lanes making it possible for ambitious teachers to earn $100,000 in compensation. The Denver Public School system, like any employer, wants to add far less to teacher pay and maintain the bonus structure. This represents an extremely common divide in labor law negotiations.

The Denver teachers’ union is not fighting for more pay for the sake of simply increasing member compensation. Denver teachers are underpaid compared to surrounding districts and face higher costs of living to live in the same district where they teach–even with regular cost of living pay adjustments. This has the result of driving successful teachers out of Denver schools and into other surrounding Colorado districts. It also causes many teachers to have to live outside of Denver, increasing their commute and diminishing their ownership of the success of their schools. The lack of financial predictability in pay also makes it harder for teachers to plan appropriately for their financial future.

Denver school administrators talk a good game about wanting to improve these problems but so far fail to put enough of the district’s $1 billion budget towards one of its most important assets. Predictably school officials want to maintain a complex formula based on bonuses because it forces teachers to absorb the consequences of administrative failings by tying their compensation to school success. It also has the effect of reducing overall compensation by preventing teachers from accumulating an increasingly higher salary over time. 

These are not hypothetical problems justifying improving Denver teacher pay. Comparisons of compensation structures between Denver and other school districts reflects underpaid Denver teachers. The high turnover of teachers as they flee Denver for more pay is not hypothetical. It is a real and statistically proven problem. High turnover creates several problems for the Denver school district:

  • Schools lose institutional knowledge of the students at the school and loses long term bonds with the local community;
  • Teachers with the best qualifications are able to find better paying jobs elsewhere, lowering the quality of teachers remaining in the schools;
  • Tenure of teachers at Denver schools declines which reduces the level of experience from which younger teachers can learn;
  • The Denver district spends more resources recruiting and training teachers which are lost as teachers leave for other districts, making each teacher more expensive despite not increasing compensation; and
  • Teachers have less incentive to invest personally in the performance of the school when they expect to leave in a few years for another district.

Why Denver teachers should strike if Denver Public Schools cannot agree to a fair negotiation package

Denver teachers deserve a fair compensation structure for their work that reflects their value to the community. If teachers are expected to be professionals working in a major city then they should be appropriately compensated as such. Denver school administrators should treat the investment of public resources into recruiting and training teachers as an important investment in the city. A compensation structure that treats teachers as fungible and a burden to the city does not improve Denver schools.

Teachers in Denver should strike if a fair agreement cannot be reached. Denver school officials will feel no pressure to move the terms of their proposal as long as they feel teachers will eventually cave. A labor strike will put school officials on a clock to figure out how to deal with the problem or face a school district without teachers. It will also add publicity to the dispute and motivate parents to push the district towards finding a solution. Teachers around the country face similar problems (including the extremely similar situation currently in Los Angeles). Each union that strikes over unfair compensation will put the next district on notice that it needs to deal fairly with the union or face similar consequences.

Colorado Labor and Employment Law 2019 Outlook

Predicting twelve months of legal changes, even in labor law or employment law, is a tough game in 2019. We have an unpredictable White House, a recent change to the U.S. Supreme Court and turnover in the U.S. House and Colorado Senate in favor of Democrats. It may simply be too early to tell how 2019 will treat Colorado, if only because we do not even know what bills legislators will submit to the federal and state legislatures. That said, we can look at the changes for 2019 in existing federal and Colorado law and at least set up some basic predictions about how labor and employment law may change for Coloradans this year.

Changes to federal labor law and employment law in 2019

Federal employment law changes are already on the books for the administrative agencies. Executive Order 13658 increases minimum wage for federal contractors to $10.60/hour (or $7.40/hour for tipped employees who suffer the tip credit). Beginning January 14, 2019, 45 C.F.R. § 147.132 and 45 C.F.R. § 147.133 allow certain private employers to opt out of federally required contraceptive coverage if the employer has a sincere moral or religious objection to covering contraceptives on the employer’s health insurance plan.

Additionally, the EEOC published new rules on wellness program incentives that take effect on the first day of 2019. Previously employers were permitted under EEOC guidance to grant employees up to a 30% discount on health insurance premiums if the employee participated in an employer-sponsored wellness program without violating the Americans with Disabilities Act (ADA) or Genetic Information Nondiscrimination Act (GINA). In late 2018 a federal district court ruled the incentive rules could render a wellness program involuntary and run afoul the ADA and GINA.

Changes under Colorado labor law and employment law for 2019

Colorado state law will also see a significant change. Beginning January 1, 2019, a minimum wage increase goes into effect. In 2016 Amendment 70 to the Colorado Constitution was passed by voters establishing a new minimum wage regime for the state. Each year through 2020 minimum wage increases by a fixed amount. Subsequent years will increase with inflation. The 2019 Colorado minimum wage is $11.10/hourly. (Read here to learn more about the Colorado minimum wage for 2019 and years forward.) Colorado joins twenty-one other states increasing minimum wage above the federal minimum wage in 2019. 

What 2019 will likely bring for federal labor law and employment law

Predicting 2019 for labor law and employment law is not necessarily an easy task given the changes in the legislature, Supreme Court and the White House. The interplay between Democratic control of the House and Republican control of the rest of the federal government is already on play with the shutdown. Who knows how that will continue to unfold until the Dems put in motion their legislative agenda for the year. The current administration would surprise few to continue to unwind Obama administration DOL regulations. 

Federal shutdown’s effect on labor and employment law

The current federal shutdown is certain to have some effect on federal labor and employment law issues. Although courts remain open through a shutdown, many labor and employment law agencies close, including the EEOC. That can create problems filing administrative complaints for employment discrimination claims, among other administrative remedies. Federal employees in particular who believe they have labor or employment law-related complaints should contact an employment law attorney right away. Do not assume the shutdown of an agency means filing deadlines for complaints are suspended. That is often not the case.

Anti-union activist support

Across the country we should expect to see continued challenges to the validity and activity of public unions. In 2018’s awful Janus decision the Supreme Court trashed public union agency fees and set the tone for anti-union activists that they would find an ally in the current SCOTUS majority. 

Sexual harassment lawsuits

2017 and 2018 saw a rise in sexual harassment lawsuits as part of the #metoo movement and Weinstein effect. These lawsuits are likely to continue through 2019 although new high profile cases may wane with the Supreme Court’s 2018 activity. It’s hard to imagine Brett Kavanaugh’s contentious confirmation hearings was not a serious wound to the spreading belief that the #metoo movement was stamping out the acceptability of sexual harassment.

Perhaps more importantly, SCOTUS decided a trio of cases last year affirming the use of class action waivers in employment arbitration agreements. These class action waivers permit employers to push class actions out of litigation into private arbitration forums where they will avoid publicity of the details of the case, not to mention the final outcome. Employers fearing class action sexual harassment lawsuits likely will add these waivers to their arbitration agreements or review existing waiver to ensure complicity with the Supreme Court opinions. 

Predictions for Colorado labor and employment law in 2019

Colorado labor law and employment law will likely see changes in 2019 as well, particularly with Democrats obtaining control of both houses of the state legislature and the executive. Every legislative session House Democrats propose pro-employee and pro-labor bills that were generally blocked by the Republican-controlled Colorado Senate. Now that Democrats control both houses they should be able to pass many of these bills. We do not yet know what the legislative agenda will include for the Colorado legislature but we can predict two likely areas of labor and employment law that will appear in 2019.

Colorado minimum wage changes

In addition to the constitutional minimum wage change for 2019 across the state, this may be the year Democrats pass legislation to allow cities to set their own minimum wage. Senate Republicans blocked this frequent proposal but now Dems may get their wish to push through more flexibility across the state. Liberal cities like Denver and Boulder are likely to raise minimum wage to $15/hour if given the opportunity. 

Marijuana laws and employment

Denver marijuana employment laws

Colorado has been an important place for the intersection of marijuana legalization and employment, particularly since the 2015 decision in Coats v. Dish Network. Colorado Democrats may push legislation this year to resolve the unfortunate result in Coats by statutorily prohibiting employers from adversely using a marijuana-positive drug test in employment decisions. 

There also appears strong momentum behind proposals to erase pre-legalization marijuana possession convictions. Boulder and Denver indicated intent to make these changes through judicial means. There is also a lot of talk among Colorado legislators to enact state-wide legislation erasing these convictions. That could substantially help workers in the job market held back by marijuana possession convictions. 

 

401k and 403b hardship distribution rule changes proposed by IRS

Earlier this month the IRS released its final draft of proposed regulation changes that will incorporate statutory provisions of the Bipartisan Budget Act of 2018 and Tax Cuts and Jobs Act of 2017 that will have the effect of relaxing the rules on 401k hardship distributions. These proposed regulations extend existing permitted safe habor hardship distributions for 401k and 403b retirement plans. The proposed regulations will become final, subject to potential changes, after a sixty day comment period. It is highly likely that these regulations will become final regulations with little change.

Much of what has been written on these proposed changes by employment lawyers focuses on the effect to employers and plan design moving forward. While employers should consider how these regulations will affect their operations and plans, there is also an effect on employees and other plan participants to consider. Today’s post will look at how these proposed hardship distributions changes will affect employees and their 401k plan benefits.

For a primer on hardship withdrawals, review this post from earlier in the month.

Background on hardship withdrawal changes

401ks and other employer-sponsored retirement plans in the private sector are primarily governed by the Employee Retirement Income Security Act of 1974 (ERISA) which is further defined by a series of Department of Labor and Department of Treasury regulations. When Congress amends ERISA through statute it often requires regulatory changes to reflect the new statutory framework. Here regulatory changes are required due to statutory changes in the Tax Cuts and Jobs Act of 2017 and the Bipartisan Budget Act of 2018. (Specifically, the latter statute cures some of the unintended 401k effects of the earlier statute.)

Initially some plan administrators viewed the statutory changes as voluntary changes they could elect to adopt for their plans; however, regulatory changes in the proposed regulations make it obvious these changes are mandatory and plan administrators must amend plans to conform to the new rules for 401k plans and 403b plans.

Changes to 401k hardship withdrawals

The new regulations deal with safe harbor provisions of hardship withdrawals and rules around procedural aspects of hardship withdrawal eligibility. Today many hardship withdrawals are available under IRS regulations for safe harbor reasons which are strictly defined. Participants may only receive hardship distributions for the amount of the loss under one or more safe harbor reasons but before taking the distribution the participant must exhaust all other loan and withdrawal options from the plan. The participant can only receive a hardship withdrawal under safe harbor rules from his or her elective deferrals and must cease deferring wages to the plan for six months. The proposed regulations change many of these restrictions.

The new regulations change safe harbor hardship distribution procedures to:

  • Eliminate the six month suspension on employee deferrals. Employees will not stop contributing to their 401k despite alleging a financial hardship.
  • Eliminate the requirement to exhaust plan loans prior to a hardship withdrawal. Often today participants do not want to take a loan and will take the smallest loans possible to satisfy the regulatory requirement. The new regulations remove this often low value procedural requirement. Plans may elect to retain this requirement.
  • Expand sources of hardship withdrawals to include qualified nonelective contributions (QNECs), qualifed matching contributions (QMACs) and earnings on QNECs, QMACs and elective deferrals. This change is optional for plans.

Additionally, the proposed regulations change the safe harbor rules to:

  • Expand tuition, funeral and medical expense safe harbor reasons to include a primary beneficiary of the plan participant. This will greatly expand hardship distributions to include a larger circle of people around the participant.
  • Return the definition of a casualty loss to the participant’s primary residence to its pre-2017 definition. The Tax Cuts and Jobs Act reduced the tax deduction for a casualty loss for a primary resident to those involving a federally defined disaster. This had the effect of substantially reducing the available hardship distributions for primary home casualties. The Bipartisan Budget Act of 2018 returned the broader, pre-TCJA definition for hardship withdrawal purposes.
  • Add a seventh safe harbor provision for expenses incurred following a federally declared disaster in an area designated by FEMA. In the past special IRS regulations or a statute would be necessary to expand hardship withdrawals in the face of disasters like hurricanes. The new regulations will automatically make these hardship withdrawals permissive upon federal declaration of a disaster.
  • Clarifies the standard for plan administrators to approve hardship distributions. Under the new rules plan administrators have clear guidance when a distribution is necessary to satisfy a financial need. The plan administrator would:
    • limit the distribution to the participant’s financial need (including taxes and penalties for the distribution);
    • verify the participant has exhausted all other available withdrawals from the plan (not including nontaxable plan loans);
    • receive a representation from the participant that he or she lacks liquid assets to otherwise satisfy the financial need; and
    • the plan administrator does not have contrary information about the participants available assets.

Changes for 403b plans

403b plans receive all the same changes as 401k plans with two exceptions. Hardship withdrawals for 403b plans cannot include earnings on QNECs, QMACs, or elective deferrals. Additionally, if QNECs and QMACs are held in a custodial account within the plan they are not eligible for hardship withdrawal.

Timeframes to make changes and retirement plan amendments

Assuming the highly probable result that the proposed regulations become final regulations, plan administrators will need to begin making changes to plans right away. Most of the changes must take effect on January 1, 2019 which means plan administrators should already be in the process of amending their plans. Although the regulations may not be final at this time, these changes reflect statutory changes that plan administrators must follow. Therefore, plans should be changed to reflect the regulations even before they become final.

Elimination of the six month suspension on deferrals and the requirement for participants to confirm a lack of other resources to cure a financial emergency may wait until January 1, 2020 for implementation. Plans adopting amendments for January 1, 2019 may consider a single plan amendment for simplicity and cost but may choose to wait.

Additionally, the changes to casualty losses and the seventh safe harbor reason are statutory provisions that are already in effect so plans may extend these hardship distributions for distributions after January 1, 2018.

To summarize the required plan admendments: plans must adopt amendments eliminating the six month suspension; must change the safe harbor rule definitions; and must adopt the minimum requirements to prove a participant’s financial need. All other changes are optional changes.