Baker's Choice: January 2010

Happy New Year! Is it just us, or did the “aughts” fly by much too fast for comfort? The end of 2009 found L&B busy tracking the surprising number of changes and “fixes” going on in our specialized corner of the legal world; we've got action at the California Supreme Court, extended COBRA subsidy, mounting employment tax audit activity at the IRS and an avalanche of rulings, regulations and procedures from the SEC, IRS, EEOC, DOL . . . you name it. Enjoy!

• California Supreme Court says that restricted stock constitutes wage compensation. Yes, we know that’s not the primary thing you’ve been reading about Schachter v. CititGroup Inc., the recent equity compensation case decided by the California Supreme Court. However, the top court’s declaration that equity compensation is statutory “wages” closes out a ten year period of confusion and removes significant financial barriers for aggrieved employees wishing to litigate or arbitrate equity comp claims. We’re pleased with the result in Schacter; here’s a brief discussion of our take on this important case.
  


• Congress extends the COBRA subsidy. Last spring we sent you a summary of the special 65% subsidy for COBRA premiums for individuals who would otherwise have lost group health coverage due to an involuntary termination of employment between September 1, 2008 and December 31, 2009. There’s good news on this: the subsidy has now been extended to cover terminations through February 28, 2010, and recipients can use it for an additional six months (i.e., up to 15 months total). The Department of Labor moved quickly to modify its Model COBRA Notices for the extension; for your convenience I’ve posted the DOL’s three new forms, which also include explanations of the new rules in layperson’s language. Note that the extension applies to eligible employees covered under either federal or Cal-COBRA programs.
  


• IRS gets busy with employment issues. In mid-2009, tax professionals started to hear rumblings that the IRS was looking at employee/independent contractor issues, an area that has escaped significant attention for a quarter century. Sure enough, on November 9 the IRS announced that over the next three years 6,000 taxpayers will be randomly selected for “comprehensive” employment audits. Those of us who remember the misclassification audits of the 1980s are steeling ourselves for this initiative, which can be expected to focus on (i) whether workers are properly classified as employees or contractors for payroll tax reporting and nondiscrimination purposes, (ii) compliance with the reporting and inclusion rules for fringe benefits, especially noncash finges, and (iii) tax treatment of executive compensation, such as equity compensation, nonqualified deferred compensation, golden parachute inclusions etc. Our best advice: don’t wait until you get an audit notice; review employment tax compliance procedures with us now, while you can do something about inadvertent errors. Past experience tells that the IRS can be brutal when it comes to misclassification issues, and those issues can spill over into all of your compensation practices.
  


• SEC gets serious about disclosure. After various fits and starts in 2009, the SEC finalized the rules on executive compensation disclosure effective February 28, 2010 -- just in time for the 2010 proxy filing season. If the rules work (and most observers are optimistic that they will), public company investors will have a much easier time determining both the quality and quantity of executive compensation awarded to corporate decision-makers. The final rules require enhanced disclosure of compensation policies, leadership qualifications and risk management strategies as well as calling for detailed descriptions of individual compensation packages (including equity and other noncash awards). SEC Chairman Mary Schapiro has made it clear that the SEC is not fooling around: “accountability is impossible without transparency”. It should be a very interesting filing season, indeed!
  


• Rulings, regulations and miscellaneous guidance. . . . Is there actually a right to privacy in the workplace in California? If so, it looks very limited under the California Supreme Court's recent decision in Hernandez v. Hillsides, Inc. Check out our short summary of this interesting case and its sobering lessons for employees. . . In response to the layoffs of the past year, the EEOC has released some very useful guidance (including Q&As) for terminated employees, Understanding Waivers of Discrimination Claims in Employee Severance Agreements; well worth reading. . . The final final ISO and ESPP reporting regulations were finally issued in November (after being proposed in 1984. . . then 2004. . .) Twenty-five years of tinkering produced very few changes in this round, which we think will be, well, final. Effective date for return requirements, 2010 (more or less). . . Had enough of the Section 409A deferred compensation rules yet? Just in case you have a hankering for more, the IRS released Notice 2010-6 on January 5, 2010. The 86-page notice is but the latest annual set of procedures for correcting errors in document compliance, this time through December 31, 2010.
  


• A little catch-up. L&B’s big news last year: we moved our offices to the wonderful, historic Jackson Square section of San Francisco’s financial district. Rick and I love our new space at 535 Pacific Avenue (between Montgomery and Kearny at Pacific); we each kept our direct dial numbers but now you can also reach us through our main number at (415) 391-2995. And, on a personal note, just wanted to share the news of my election in November to be a Fellow of the American College of Employee Benefits Counsel. In addition to it being an unexpected honor, the induction ceremony gave me a great excuse to return to my old Georgetown Law stomping grounds in Washington DC (and see just how much has changed since I actually did any stomping there .. . wow!)