Author: LP

How the Secure Act 2.0 Affects ESOPs, 401(k)s, and Other Retirement Plans

LPLeave a comment

Authors Kevin Burch, Kristy Britsch, Kenneth Kneubuhler

The Secure Act 2.0 of 2022, enacted in the closing days of 2022, makes a substantial number of changes to tax-qualified retirement plans, most of which are intended to increase plan coverage and retirement savings. Although we continue to digest the hundreds of pages of new law, here we summarize certain key changes that affect ESOPs, KSOPs, and 401(k) plans:

  • Cash-Out Limits. The limit for involuntary distributions to a participant prior to attaining normal retirement age is increased from $5,000 to $7,000 for distributions after 2023.  The current maximum cash-out limit in ESOPs, KSOPs, and 401(k) plans is $5,000 and generally applies to participants that terminate employment with a vested account balance lower than the cash-out threshold in the plan.
  • RMD Age. The age to start taking “required minimum distributions” increases to age 73 in 2023 for participants who reach age 72 in 2023 through 2032 and to age 75 for participants who reach age 74 in or after 2033. Also, beginning in 2024, plans will not be required to include Roth contribution balances in required minimum distributions prior to the participant’s death.  This represents a further change from the increase to age 72 under the first Secure Act, which took effect January 1, 2020, for distributions to participants born after June 30, 1949.
  • Deferral of Gain on Stock Sales to ESOPs. The rule allowing C Corporation shareholders to defer gain on the sale of shares to an ESOP is expanded to cover S Corporation shareholders, but only for sales to an ESOP after 2027 and only for up to 10% of the gain. 
  • Standards for FMV on sales to ESOPS. The Department of Labor, in consultation with the Internal Revenue Service, is directed to provide guidance on acceptable standards and procedures for establishing the “good faith fair market value for shares of a business” to be acquired by ESOP. We will provide additional information on this topic as it is released.
  • Mandatory Automatic 401(k) Enrollment. Starting in 2025, new KSOPs and 401(k) plans (those adopted after the December 29, 2022 enactment date) will be required to automatically enroll eligible employees, at a contribution rate of at least 3%. Thereafter, these new plans must increase a participant’s automatic contribution rate by 1% each year until the participant’s contribution rate reaches at least 10% (but the plan may provide for increases up to 15%). As under the current law, participants may stop contributions or change their deferral rates.
  • Coverage of Part-Time Employees in KSOPs and 401(k) Plans. Current law requires part-time employees who worked at least 500 hours in three consecutive years beginning after 2020 and reach age 21 be allowed to make 401(k) contributions.  January 1, 2024, is the first date that this provision could require a part-time employee be eligible. The new law reduces the service requirement to two years effective for plan years beginning after 2024. Neither the prior law nor the new law requires that the part-time employees be allocated employer contributions.
  • Vested Employer Contributions may be treated as Roth Contributions. Beginning with contributions made after the December 29, 2022 enactment date, plans may allow participants to elect to have employer-matching contributions and nonelective contributions that are fully vested when made to be treated as Roth contributions.
  • Catch-up Contributions by Highly Compensated Participants must be ROTH. Beginning in 2024, 401(k) catch-up contributions by a participant who had compensation over $145,000 (adjusted for cost of living) for the prior calendar year must be treated as Roth contributions. Participants earning no more than $145,000 in the prior year must be allowed to elect Roth treatment for their catch-up contributions (assuming at least one participant eligible for catch-up contributions earned over $145,000 in the prior year).

If you have any questions about Secure Act 2.0, please reach out to a member of LP’s ESOP Team.

2023 Compensation Check Up: Legal Updates

LPLeave a comment

Authors Laura Friedel, Becky Canary-King

Compensation is always a top-of-mind issue for employers, but on the heels of the “Great Resignation,” and amidst ongoing labor shortages, economic uncertainties and evolving legal requirements, many employers are reassessing their compensation practices.

In addition to compensation best practices to assist with attracting and retaining talent, employers must make sure to comply with state-specific legal requirements. Here we share new legal requirements for employers.

  1. Prepare to Apply for Illinois Equal Pay Registration Certificate. Employers with 100 or more employees in Illinois must apply for the Certificate between March 24, 2022, and March 23, 2024, and recertify every two years after that. Companies will be notified by the Department of Labor when it is time for them to register and will be given at least 120 days’ notice of their individual deadline. Employers will need to provide certain pay, demographic, and other data as part of the application process. If you have not received the notice from the Department of Labor yet, get started now by considering how you will answer the questions in the compliance statement and report the necessary information.
  2. Ensure Job Postings Comply with New Pay Disclosure Requirements. California, New York City, and Washington State have joined Colorado in requiring some or all employers to disclose wage ranges in job postings. Notably, these requirements include jobs that may be performed remotely in these states. Additionally, Rhode Island joins a growing list of states that require disclosure of the salary range for a position upon request. Employers must understand what information needs to be included in job postings to avoid inadvertently violating these laws. Employers that don’t currently practice pay transparency should also think about how they might get in front of requirements as pay disclosure laws continue to spread. Companies should also consider wage transparency and equal pay laws’ impact on the due diligence process in M&A transactions. 
  3. Be Aware of Minimum Wage and Minimum Salary Increases. 2023 brings minimum wage increases in many states and localities, as well as increases to the minimum salary that employees must receive to be eligible to be exempt from overtime requirements. Make sure that you are aware of – and complying with – the minimum wage and minimum salary requirements in the jurisdictions where your employees perform work, including the requirements in the locations where you have any remote employees.

For additional information on employment-related best practices, refer to LP’s 2023 Employment Law Checklist.

2023 Compensation Check-Up: Four Questions to Ask About Your Compensation Practices

LPLeave a comment

Authors Laura Friedel, Becky Canary-King

Compensation is always a top-of-mind issue for employers, but on the heels of the “Great Resignation,” and amidst ongoing labor shortages, economic uncertainties, and evolving legal requirements, many employers are reassessing their compensation practices.

Here we share some questions to help guide you.

  1. Is Our Compensation Competitive? Pay isn’t the be-all, end-all to employee recruitment and retention, but it’s important. Employees who feel that they are underpaid are far more likely to entertain another opportunity. If you haven’t done so recently, look closely at how you compensate your employees to ensure that they are being paid appropriately – both inside the company and in the industry/marketplace. If you cannot offer higher salaries, there are other ways to remain competitive. Many employers offer new hire signing bonuses, home office allowances, bonus opportunities, paid professional development opportunities, and generous paid time-off policies.
  2. Are Our Compensation Practices Fair? Employers should ensure that they have a solid rationale for compensation determinations and that there aren’t inappropriate pay disparities that appear to be linked to gender, race, ethnicity, or other protected classes. If a self-audit uncovers any areas for concern, employers should make necessary changes. This is particularly important for Illinois employers preparing to apply for their Equal Pay Registration Certification.
  3. Does Our Compensation Boost Retention? Research shows that helping employees feel valued and part of something bigger is vital to boosting retention. While there are non-monetary ways employers can do this, employers should also consider different compensation arrangements that help put the company’s proverbial “money where its mouth is.” Some examples of ways to help employees feel more invested in their work aside from salary increases are profitability-based bonus pools, phantom equity programs, and long-term bonus programs that allow employees to share in the company’s growth, or transaction bonus programs that enable employees to share in sale proceeds if the company is sold. These kinds of deferred compensation programs can present potential complications so they must be documented in writing with clear terms and crafted with the help of an attorney who understands the applicable tax requirements. When done properly, such programs can create a stronger link for employees between their work and the success of the company.
  4. Are our Compensation Practices Compliant? Many states have new compensation based legal requirements. Employers should ensure they are complying with any state-specific laws that may impact minimum wage and overtime compliance, equal pay reporting, and pay transparency in recruiting/hiring.

For additional information on employment-related best practices, refer to LP’s 2023 Employment Law Checklist.

M&A Diligence Considerations Related to Wage Transparency Laws and Equal Pay Act

LPLeave a comment

Authors Kevin Slaughter, Becky Canary-King

Several states – including Colorado, California, New York, and Washington – have wage transparency laws that require employers to post wage ranges in their job postings. Additionally, a growing list of states require disclosure of the salary range for a position upon request and prohibit an employer from requesting an applicant’s salary history. 

These laws seek to promote transparency and fairness in the workplace. By requiring employers to disclose salary information,  these laws aim to reduce the gender pay gap and promote greater equality in the workforce.

Though the specific provisions of these laws vary from state to state or apply only to specific industries, for the most part, these requirements apply to jobs that may be performed remotely in these states. This means that, even if an employer’s home state doesn’t have wage transparency laws, if the job could be performed remotely, the wage transparency laws of other states will likely apply.

Accordingly, all employers must understand what information should be included in job postings to avoid inadvertently violating these laws. The penalties for non-compliance vary depending on the applicable law and the jurisdiction where the violation occurs, but penalties could include fines, loss of business license, public disclosure of violation, and possible legal action.

These state requirements are in addition to the federal Equal Pay Act, which prohibits employers from discriminating against employees based on gender in the payment of wages or benefits for substantially equal work. It also prohibits retaliation against employees who assert their rights under the law. 

Not only do employers need to be aware of equal pay requirements with their own employees and concerning their own compensation practices, but the laws can also impact M&A transactions. 

When conducting M&A due diligence, it is important to assess the target company’s compliance with wage transparency laws and the Equal Pay Act. This involves reviewing the company’s policies, procedures, and records related to compensation, as well as any applicable state and federal laws governing wage transparency.

Here are some steps to consider when conducting M&A diligence related to compliance with wage transparency laws:

  • Review the target company’s compensation policies and procedures to determine if they have established guidelines for wage transparency and pay equity.
  • Review the target company’s past job postings to confirm compliance with wage transparency laws. 
  • Review the target company’s job application and interview process to confirm compliance with laws prohibiting requests for salary history.
  • Review the target company’s records related to compensation, such as employee pay stubs, time records, employment contracts, and any internal compensation audits, to assess whether there are any discrepancies in pay between employees doing similar work.
  • Assess the target company’s compliance with federal and state laws related to wage transparency, including the Equal Pay Act and state laws requiring employers to provide information about employee compensation upon request.

The attorneys in LP’s Corporate and Employment & Executive Compensation Groups are available to answer any questions regarding wage transparency laws or the Equal Pay Act, whether in the ongoing management of your business or in connection with M&A transactions. If you have any questions, please don’t hesitate to reach out.

NLRB Rules that Standard Confidentiality and Non-Disparagement Provisions in Severance Agreements Violate Federal Law

LPLeave a comment

Authors Peter Donati, Laura Friedel

On February 21, 2023, the National Labor Relations Board (NLRB) issued its decision in McLaren Macomb [1], overturning recent precedent and finding that giving an employee a severance agreement containing commonly used confidentiality or non-disparagement provisions violates the employee’s rights under the National Labor Relations Act (NLRA). This decision means that employers that use severance agreements with non-supervisory employees need to review – and likely revise – their standard forms.

This case arose after a unionized hospital in Michigan furloughed nearly a dozen employees in June 2020, offering each of them a severance agreement in exchange for releasing employment claims. The severance agreements contained broad confidentiality and non-disparagement provisions that prohibited the employees from disclosing the terms of the severance agreement to any third parties and from making statements to other employees or to the general public which could disparage or harm the hospital or those affiliated with it.

The NLRB found that the confidentiality provision would prohibit an employee from discussing the agreement with union representatives and other employees and thus unlawfully restricted the employees’ right to communicate with others about their employment and to assist co-workers and former co-workers with workplace issues.

Similarly, the NLRB found that the non-disparagement provision was impermissible because it would prohibit statements beyond the “disloyal, reckless or maliciously untrue” statements by employees that the Supreme Court has found can be limited by an employer.

Because these provisions “interfere with, restrain or coerce employees’ exercise” of their rights, the NLRB found that giving an employee an agreement containing them violates the NLRA.  The NLRB’s decision in this case overturned recent precedent that looked to the circumstances of the severance agreement, rather than just to its text, to assess permissibility.

Who the Decision Covers – and Doesn’t Cover

The NLRB’s decision impacts all US employers that use severance agreements with non-supervisory employees – whether their workforce is unionized or not. It is important to note, though, that because the NLRA only applies to employees in non-supervisory roles and doesn’t cover supervisors, managers, and executive-level roles, severance agreements with these employees are not affected by the McLaren decision.

What does this mean for Severance Agreements going forward?

In light of the McLaren Macomb decision, it is critical that employers revisit standard separation agreements and adjust confidentiality and non-disparagement language.  However, what exactly employers choose to do in response will depend on their risk tolerance.  Employers wishing to avoid a potential violation altogether should remove confidentiality and non-disparagement provisions from their separation agreements with non-supervisory employees.  However, it remains to be seen whether adding a clear disclaimer that nothing in the agreement limits the employees’ rights under the NLRA (which the agreements in McLaren Macomb did not include) will suffice to avoid a violation.   As such, and until the NLRB speaks further, employers may choose to take some risk and use limited confidentiality and non-disparagement clauses together with a clear disclaimer rather than removing them all together.

Next Steps

The NLRB’s decision is subject to appeal, but, going forward, the NLRB is likely to closely scrutinize any severance agreement that includes confidentiality or non-disparagement provisions. In the wake of this decision, employers should consider taking the following steps:

  • Reviewing and updating form severance agreements that are used with non-supervisory employees.
  • Removing confidentiality and non-disparagement provisions from severance agreements if they restrict employees’ rights under the NLRA or (depending on risk tolerance) carefully tailoring such provisions to be as narrow as possible and adding a clear disclaimer that nothing in the agreement restricts the employee from assisting co-workers or former co-workers with workplace issues, from communicating with others about their employment, or from engaging in other protected concerted activity.
  • Including severability language in the severance agreement so that the remainder of the agreement remains intact even if the confidentiality or non-disparagement provision is deemed impermissible.

If you have questions about the NLRB’s decision, severance agreements, or other employment matters, do not hesitate to reach out to LP’s Employment & Executive Compensation Group.

[1] 372 NLRB No. 58.

Illinois Supreme Court Opens Door to Enormous Damages Awards for Violation of Biometric Privacy Law

LPLeave a comment

Authors: Peter Donati, Becky Canary-King

Illinois employers that use biometric timeclocks (such as finger, face, hand, or retina scan timeclocks or entry devices) or collect other biometric information should take action immediately to confirm they are in compliance with Illinois’s Biometric Privacy Act (BIPA). Although BIPA has been in effect in Illinois since 2008, its requirements continue to catch businesses off guard – most recently with the Illinois Supreme Court’s decision in Cothron v. White Castle, issued on February 17, 2023.

The case centered on White Castle’s use of fingerprint scans when employees logged onto their computers. White Castle argued that a BIPA violation only occurred the first time the law was violated by collecting employee biometric information. The plaintiff, on the other hand, argued that a separate violation occurred each time she and fellow employees logged onto their computers with their fingerprint scans. The Illinois Supreme Court agreed with the plaintiff.

For employers using biometric timeclocks, this means that it is a separate violation—and potentially a separate penalty—for each time an employee clocks in and clocks out. With penalties of $1,000 for negligent violations and $5,000 for intentional or reckless violations, liability for companies could be astronomical. As penalties compound, even small employers could face seven-figure damages awards if they have used a biometric timeclock for a number of years. 

In White Castle, the Court found that the company had repeatedly scanned fingerprints of nearly 9,500 employees. With each instance deemed a separate violation, the company estimates the penalties could be as much as $17 billion. The Court rejected the company’s argument that assessment of penalties for each scan would be “annihilative liability” for employers, noting that damages are not mandatory under the language of the statute and that lower courts will still have the discretion to fashion remedies that do not bankrupt defendants. The Court also suggested that it is up to the Illinois legislature to reform the statute if it intended a different outcome. However, these aspects of the ruling may be of limited comfort for employers seeking to negotiate settlements with plaintiffs’ attorneys armed with this decision.

The White Castle decision follows another major BIPA decision, in which the Illinois Supreme Court held in Tims v. Black Horse Carriers Inc. that the statute of limitations for BIPA claims is five years, rejecting the one-year limitations period advocated by the defendant.

These decisions will have significant implications for Illinois employers that use biometric information. If your company uses – or previously used – biometric information (such as finger, face, hand, or retina scan timeclocks or entry devices), it’s critical that you confirm that you are complying with BIPA’s requirements.

Attorneys from our Employment & Executive Compensation Group and Cybersecurity Team are available to help you ensure that your business is compliant with BIPA and help mitigate exposure from past violations.

Illinois Legislature Passes Mandatory Paid Leave for Any Purpose, to be Effective in 2024

LPLeave a comment

Authors: Laura Friedel, Becky Canary-King

On January 10, the Paid Leave for All Workers Act passed both houses of the Illinois legislature. Governor J.B. Pritzker says he will sign the bill and lauded the legislation. The new law would require nearly all Illinois employers to provide employees with up to 40 hours of paid leave per year. Assuming it is signed, this requirement will be effective in January 2024, and the paid leave will be able to be used for any purpose. 

Under this new law, employees will not be required to provide a reason for leave or documentation of the need for leave. Employees also cannot be required to find a replacement worker to cover the leave period. However, employees may be required to provide 7 days’ notice if the need for leave is foreseeable.

The new law will apply to all employers in Illinois, including state and local government (except school districts and park districts), with a few limited exceptions. The law does not cover employees covered by a collective bargaining agreement in effect on January 1, 2024. However, where a collective bargaining agreement is entered into after January 1, 2024, the law’s paid leave requirements will apply unless the collective bargaining agreement contains a clear and unambiguous waiver.

Paid time off will accrue at a rate of one hour of paid leave for every 40 hours worked, beginning on January 1, 2024, or first day of employment. For exempt employees (i.e., those who are not eligible for overtime under the federal Fair Labor Standards Act and the Illinois Minimum Wage Law), one workweek is considered 40 hours. Employees may carry over up to 40 hours of unused paid leave from one 12-month period to the next. Instead of the accrual method, employers may choose to “frontload” the 40 hours of paid leave on the first day of the 12-month period, in which case unused leave will be forfeited at the end of the 12-month period. Employees may use their paid leave after they have completed 90 calendar days of employment or March 31, 2024, whichever is later.

Notably, leave accrued under the new law does not need to be paid out upon termination of employment. This distinguishes leave accrued under the new law from accrued and unused PTO or vacation time, which must be paid out on termination of employment. While we will await further guidance from the Illinois Department of Labor (IDOL) on this issue, this presents a potential opportunity for Illinois employers to adopt new, generous leave policies without risking substantial payouts to departing employees.

We expect that the IDOL will provide additional guidance before the law goes into effect on January 1, 2024. We will continue to monitor any developments and provide updates. We encourage employers to begin reviewing their paid leave policies and assessing whether any changes are necessary. Please do not hesitate to reach out with any questions.

FTC Proposes New Rule to Ban Non-Competes

LPLeave a comment

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule restricting the use of non-compete agreements as an “unfair method of competition” in violation of Section 5 of the FTC Act. The proposed rule would (i) ban employers from entering into non-compete agreements with workers and (ii) require employers to rescind existing non-competes. As defined in the proposed rule, “non-compete agreements” would include any clauses or agreements between an employer and worker that prevent the person from working for a competitor or starting a competing business after their employment ends.  

Notably, the proposed rule covers non-competes between employers and “workers,” which would include not only employees, but also independent contractors, interns, volunteers, apprentices, and sole proprietors.  However, as drafted, the proposed rule does not appear to prohibit agreements that limit post-employment solicitation of or acceptance of business from the company’s clients or customers, so long as the provision doesn’t have the same result as a traditional non-compete.

It’s also important to note that, the proposed rule would not apply to non-competes in connection with the sale of a business if the person restricted by the non-compete is a substantial owner of the business (at least 25% ownership interest) at the time the non-compete is executed. The rule also would not apply to franchise relationships.

In her dissenting statement to the proposed rule, FTC Commissioner Christine Wilson raised potential challenges to the rule, including: (i) a lack of authority for the FTC to enact the rule, (ii) questions regarding whether the FTC has Congressional authorization to enact the rule, and (iii) questions about whether the rule is an impermissible delegation of legislative authority.

The FTC is currently seeking public comment on the rule through March 10, 2023. 

We will continue to monitor the rule and provide updates as they become available. If you have questions about the proposed rule, non-competes or other employment matter, do not hesitate to reach out to LP’s Employment & Executive Compensation Group.

New Unpaid Leave Requirements Under Illinois Family Bereavement Leave Act Went into Effect January 1, 2023

LPLeave a comment

The new Illinois Family Bereavement Leave Act took effect on January 1, 2023. The new requirements apply to employers who are covered by the federal Family and Medical Leave Act. Under the law, employees are entitled to 10 days of unpaid bereavement leave to: 

  • Attend the funeral, make arrangements for, or grieve the death of a “covered family member” (a step/child, spouse, domestic partner, sibling, step/parent, parent-in-law, grandchild or grandparent) 
  • Be absent from work due to fertility-related issues such as a miscarriage, unsuccessful round of assisted reproduction, failed adoption or surrogacy, or stillbirth 

Employees are entitled to up to a total of six weeks of unpaid bereavement leave in the event of two deaths of a covered family member in a twelve-month period.

For additional information regarding state and local employment law updates, we share this video on local and state law updates.

If you have questions, please reach out to a member of LP’s Employment & Executive Compensation Group.

Lessons and Reminders for Employers from Elon Musk’s Employment-Related Actions at Twitter

LPLeave a comment

Since taking control of Twitter at the end of October, Elon Musk has been making news headlines for all the wrong reasons. Shortly after the acquisition was complete, he fired nearly half of Twitter’s workforce – before hiring some of these employees back a few days later. He fired employees who criticized him (even those who did so privately)—including firing employees by tweet—and eliminated contractors.

On November 16th, he sent an early-morning email to all Twitter employees with the subject line “A Fork in the Road.” In the email, Musk gave Twitter employees an ultimatum: continue working “extremely hard core” or be let go with three months of severance.

“In an increasingly competitive world, we will need to be extremely hard core,” he wrote. “This will mean working long hours at high intensity. Only exceptional performance will constitute a passing grade.”

Since taking control of Twitter, Musk’s employment decisions have occupied prime real estate in the media and faced harsh criticism from former employees, business leaders, and industry experts. 

We know that our clients and readers are unlikely to take actions as drastic as Musk. Still, the Twitter chaos has sparked conversations about the legality and rationality of Musk’s employment decisions at Twitter. 

What employers should know about making employment termination decisions and announcing layoffs

  1. Employers must comply with WARN Act notice requirements when laying off large groups of employees. The federal WARN Act requires employers to notify the workforce of a mass layoff, a temporary shutdown, or a closure of all or part of a business. Employers that fail to provide adequate notice could be on the hook for damages of back pay and benefits-related compensation per employee for each day the company violated the WARN Act (up to 60 days). Many states, including Illinois, also have laws similar to the WARN Act.
  2. Have difficult conversations, including terminations and layoffs, on a one-on-one basis. Even if you can’t be in the same room as the person physically due to a remote workplace, the employee’s manager should have a personal conversation with the employee over video conference.
  3. Review employment contracts before making termination decisions. If the employee has an employment contract in place, you’ll want to understand the terms of that agreement before making any employment decisions or discussing termination.
  4. Don’t name-call. The reasons for termination can be communicated, whether company downsizing or poor performance, but avoid name-calling or using insults to criticize (current or former) employees.
  5. Discuss layoffs and other employment separations with employment counsel before making decisions. An employment attorney can help guide you through the termination process so that it goes as smoothly as possible and you minimize the risk of any potential legal action from a disgruntled ex-employee.

If you have any questions regarding remote workplace issues, please reach out. A member of our Employment & Executive Compensation Group would be happy to speak with you.

Additional Information:

How to Effectively and Compassionately Handle Dismissals and Layoffs in a Remote Workplace

3 Reminders for Employers After an Employee Is Awarded $450,000 for His Unwanted Birthday Party