Vol. 29, No. 7 July 2012

(Continued on Page 2)

The Supreme Court of the united States has ruled that the 2010 health care reform law (the Patient Protection and Affordable Care Act of 2010 as amended by the Health Care and Education Reconciliation Act of 2010) is constitutional. In a 5 to 4 decision, Chief Justice John Roberts wrote that the law is constitutional as an exercise of Congress’ power to tax. Therefore, the changes made by the health care reform law to the Employee Retirement Income Security Act of 1974 (“ERISA”), Internal Revenue Code of 1986 (“Code”), and other statutes remain in force.

SPECIAl FoCuSImplications for Employers

Employers sponsoring group health plans now need to focus on ensuring compliance with the summary of benefits and coverage regulations. These require distribution of summaries of benefits and coverage during upcoming open enrollments. The summaries must be distributed no later than the first day of the first open enrollment period beginning on or after September 21, 2012. Employers that are negotiating collective bargaining agreements now must take into account the near- and long-term effects of the health care reform requirements. Employers also must prepare to issue Form W-2s for 2012 that include the cost of group health coverage.

Here is a summary of other key health care reform provisions affecting employers:

• Patient Rights. The law already requires plans to provide coverage for children up to age 26, provide specific preventive care benefits on a first-dollar basis, and supplement the claim procedures already required under ERISA.

• Benefit Dollar Limitations. Employer group health plans are currently limited from imposing lifetime limits on benefit amounts. In 2014, lifetime limits are totally prohibited.

• Tax Reporting. For the 2012 tax year, employers must report the annual cost of health coverage on each employee’s W-2.

• Tax Treatment. Eliminated are the Code’s tax-free reimbursements for over-the-counter medicines and, beginning next year, the law limits the maximum health care flexible spending account amount to $2,500.

• Retiree Drug Costs. Beginning next year, the employer tax deduction for retiree prescription drug benefit costs for employers receiving a related subsidy is eliminated.

• Non-discrimination. Insured group health plans are barred from discriminating in favor of highly compensated individuals regarding coverage and benefits. (The Internal Revenue Service has not yet issued implementing regulations for this prohibition to become effective.)

U. S. SUPREME COURT UPHOLDS

HEALTH CARE REFORM LAW

WHAT’S INSIDEU.S. Supreme Court Strikes Parts of Arizona Immigration Law, but Most Controversial Provision Survives ..........................................................3

U.S. Supreme Court Rules Pharmaceutical Sales Reps are Exempt from Overtime ................................................................................................6

BENEFITS CORNER

Randy Limbeck is a partner in the Omaha, Nebraska office of Jackson Lewis LLP and has spent more than 25 years specializing in representation of clients in the areas of ERISA, employee benefits, and executive compensation.

2

U. S. SUPREME COURT UPHOLDS HEALTH CARE REFORM LAW (Continued from page 1)

• Play or Pay. Each employer with 50 or more full-time employees will have to either (a) provide at least a specified minimum level of health coverage that its employees can afford or (b) pay a penalty beginning in 2014.

• Automatic Enrollment. Beginning in 2014, employers with more than 200 full-time employees are required to automatically enroll new full-time employees in group health plans.

• Miscellaneous. In 2014, no limitations on pre-existing conditions are allowed, waiting periods may not exceed 90 days and annual limits on benefits are prohibited.

Individual Mandate

In addition to imposing requirements and restrictions on employers and employer-sponsored group health plans, the law requires individuals to purchase health coverage or pay a tax penalty (the “individual mandate”) and increases the Federal Income Contributions Act (“FICA”) tax on individuals with compensation in excess of $200,000 by 62 percent. The law also permits states to expand Medicaid eligibility to cover some additional 30 million individuals.

Putting the Decision in Context

last year, the Court agreed to take three cases that could determine the fate of the health care reform law: Department of Health and Human Services v. Florida (to decide whether the individual mandate is constitutional and whether, as an initial matter, that issue even could be decided before the individual mandate actually goes into effect), National Federation of Independent Business v. Sebelius (to decide whether the rest of the law can survive if the individual mandate is found unconstitutional), and Florida v. Department of Health and Human Services (to decide whether Congress can force states to choose between complying with the health care reform law or losing Medicare funding and whether the rest of the law can survive if the individual mandate is found unconstitutional).

The Court heard arguments in these cases for three days this March, reviewed 126 amicus briefs, and analyzed and discussed the law, possibly for more hours than did Congress. The decisions were released June 28, 2012.

Readers should bear in mind that while the Court’s decisions are the final word on the specific challenges presented, they may not be the last word on health care reform legislation. Republican lawmakers have vowed to repeal and replace the health care reform law and the presumed Republican presidential candidate Mitt Romney has vowed to support that effort.

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3

any person with whom they come into contact if they believe the person may be an alien unlawfully present in the country.

The injunction was later affirmed by the u.S. Court of Appeals for the Ninth Circuit.

Provisions Struck

In a highly anticipated decision, the Supreme Court upheld the injunction with respect to three of the four challenged provisions. The Court emphasized that the federal government has broad powers in the area of immigration, and that there are significant policy reasons for having a unified, comprehensive system for the enforcement of immigration laws. At the same time, it acknowledged that Arizona bears many of the consequences of illegal immigration, including “crime, safety risks, serious property damage, and environmental problems.” Thus, the Court was sympathetic towards Arizona’s desire to take action to address the matter. With these concerns in mind, the Court reviewed each of the four provisions at issue, finding three preempted by federal law.

Section 3. under federal law, aliens must carry documentation regarding their immigration status. Section 3 of S.B. 1070 creates a new Arizona misdemeanor for failure to possess the required documentation. In effect, Section 3 establishes a state law penalty for conduct that is prohibited by federal law.

The federal government has promulgated a comprehensive scheme for the registration of aliens (including penalties for noncompliance). The Court concluded that Arizona was not permitted to adopt its own requirements in this area. It explained that if Section 3 became law, Arizona would have the power to bring criminal charges against individuals for violating a federal law even in circumstances where federal officials in charge of the comprehensive scheme determine that prosecution would frustrate federal policies. The Court also noted that Arizona’s penalties differed from those under the federal immigration statutes, which was a further indication that Section 3 should be preempted in favor of the unified federal immigration system.

Section 5(C). This section makes it a misdemeanor for an illegal alien to seek or obtain employment in Arizona. In assessing whether Section 5 is preempted, the Court noted that Congress previously enacted the Immigration Reform and Control Act (“IRCA”), which makes it illegal for employers to knowingly hire, recruit, refer, or continue to employ unauthorized workers. In

U.S. SUPREME COURT STRIKES PARTS OF ARIZONA IMMIGRATION LAW, BUT MOST

CONTROVERSIAL PROVISION SURVIVES

In a 5-3 decision, the u.S. Supreme Court largely upheld a lower court’s injunction against S.B. 1070 (the controversial Arizona statute giving state law enforcement an expanded role in combating illegal immigration) on the grounds that the law intrudes upon the federal government’s broad enforcement powers. Arizona et al. v. U.S., No. 11-182 (June 25, 2012).

The Court, however, reversed the injunction against a polarizing provision of S.B. 1070 that requires law enforcement officials to attempt to determine the immigration status of any person they reasonably suspect to be an alien unlawfully present in the united States. Critics have argued this requirement will encourage racial profiling. While the Court concluded that there was insufficient evidence the provision would undermine or conflict with the federal immigration laws, it left the door open to future challenges based on evidence regarding the manner in which the provision is applied by law enforcement officials and interpreted by the Arizona courts.

Background

In April 2010, Governor Jan Brewer signed S.B. 1070 into law, setting off a storm of protests and legal proceedings. The stated purpose of the law was to “discourage and deter the unlawful entry and presence of aliens and economic activity by persons unlawfully present in the united States.” The u.S. Attorney General filed suit challenging the constitutionality of S.B. 1070 on federal preemption grounds, arguing that the power to regulate immigration is vested exclusively in the federal government. The Attorney General also moved to bar S.B. 1070 from taking effect until there is final determination as to its constitutionality.

In July 2010, a district court judge issued an injunction that prevented the following provisions from becoming law:

• Section 3: Making it a crime to be an illegal immigrant present in Arizona by creating a state charge for “willful failure to complete or carry an alien-registration document.”

• Section 5(C): Making it a crime for an illegal immigrant to seek or engage in work in Arizona.

• Section 6: Allowing a peace officer, without a warrant, to arrest a person if the officer has probable cause to believe the person “to be arrested has committed any public offense that makes the person removable from the united States.”

• Section 2(B): Requiring law enforcement officials to make a reasonable attempt to determine the immigration status of

(Continued on Page 5)

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so doing, Congress rejected criminal penalties for illegal aliens. According to the Court, the “IRCA’s framework reflects a considered judgment that making criminals out of aliens engaged in unauthorized work—aliens who already face the possibility of employer exploitation because of their removable status—would be inconsistent with federal policy and objectives.” Thus, the Court concluded Section 5(C) conflicts with the non-criminal regulatory system chosen by Congress and is preempted by federal law.

Section 6. This section allows Arizona law enforcement officers to make warrantless arrests of individuals who are suspected of being subject to removal from the united States. under federal law, an officer may arrest an alien for being “in the united States in violation of any [immigration] law or regulation,” but only where the alien “is likely to escape before a warrant can be obtained.” Thus, the Court noted that Section 6 gives more arrest authority to Arizona law enforcement officers than Congress gave to trained federal immigration officials. Therefore, the Court once again found that S.B. 1070 is inconsistent with the comprehensive immigration scheme adopted by Congress.

Surviving Provision

Section 2(B) is perhaps the most controversial aspect of S.B. 1070. It requires law enforcement officers to make reasonable attempts to determine the immigration status of individuals who are suspected of being in the country illegally. Among critics of S.B. 1070, this provision has engendered fear of widespread racial profiling.

In challenging S.B. 1070, the Attorney General argued that Section 2(B) is unconstitutional because it may require an officer to delay the release of suspects in order to verify immigration status. The Supreme Court acknowledged this as a potential problem, but noted:

The Federal Government has brought suit against a sovereign State to challenge the provision even before the law has gone into effect. There is a basic uncertainty about what the law means and how it will

be enforced. At this stage, without the benefit of a definitive interpretation from the state courts, it would be inappropriate to assume §2(B) will be construed in a way that creates a conflict with federal law.

Thus, the Court vacated the injunction against Section 2(B), but left open the possibility of future challenges based on the manner in which the provision is interpreted and enforced.

* * *

overall, the Supreme Court’s opinion reaffirmed the federal government’s dominance in the area of immigration law and likely will impede all but the most limited efforts by States to enact their own immigration reform.

This marks the second decision by the u.S. Supreme Court in as many years on immigration legislation passed by the Arizona legislature. In May 2011, the Court rejected preemption arguments made by various groups challenging the legal Arizona Workers Act, which imposes sanctions on employers that knowingly or intentionally hire unauthorized workers and requires employers to participate in the federal E-Verify program. Chamber of Commerce v. Whiting, 131 S.Ct. 1968 (2011).

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U.S. SUPREME COURT STRIKES PARTS OF ARIZONA IMMIGRATION LAW, BUT MOST CONTROVERSIAL PROVISION SURVIVES

(Continued from page 3)

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an attempt to persuade physicians to prescribe products. The industry is subject to a federal regulation that prescription drug must be dispensed only upon a physician’s prescription. Therefore, the industry, for more than 70 years, has employed PSRs to promote products to physicians, urging them to write prescriptions for the products in appropriate cases. The plaintiffs argued that because it is illegal for PSRs and doctors to exchange money for pharmaceuticals, PSRs do not actually make sales.

Federal law defines an outside salesperson as an employee (1) whose primary duty is: (i) making sales within the meaning of Section 3(k) of the FlSA; or (ii) obtaining orders or contracts for services or for the use of facilities for which consideration will be paid by the client or customer; and (2) who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty. 29 C.F.R. § 541.500(a).

Here, the company employed the two named plaintiffs in the case as PSRs for approximately four years. Their average gross annual pay was $74,000, 25%-30% of which was incentive compensation based on sales volume or market share within their territory. The PSRs’ duties included calling on physicians in their assigned territory to provide information to physicians regarding the pharmaceuticals in the PSR’s portfolio with the goal of obtaining a nonbinding commitment from the physician to prescribe the drugs to appropriate patients. PSRs worked “in the field” and had no “office” and very little day-to-day supervision.

The majority’s opinion outlined the “important textual clues” the Court used in interpreting the statute to determine that PSRs make “sales.” First, the statute’s use of the term “in the capacity of [an] outside salesman” favored a “functional,” rather than formal, analysis, with an eye toward the “employee’s responsibilities in the context of the particular industry in which the employee works.” Second, in defining “sale,” the regulations use “includes” instead of “means,” which, the Court explained, indicates an illustrative, rather than exhaustive, list. The same regulation also uses “any” to modify the definition of “sale,” further expanding the definition. Finally, Congress included the catchall “other disposition” in its statutory definition of “sale.” The Court concluded that “ ‘other disposition’ seems . . . to represent an attempt to accommodate industry-by-industry variations in methods of selling commodities.” The transfer of title to tangible property is not required for an employee to “in some sense” make a sale. Further, evidence that plaintiffs earned 25%-30% of their compensation as incentive pay based on sales within their territory, worked “in the field,” and had little day-to-day supervision reinforced the Court’s reasoning.

U.S. SUPREME COURT RULES PHARMACEUTICALSALES REPS ARE EXEMPT FROM OVERTIME

Pharmaceutical sales representatives are outside salesmen exempt from the overtime requirements of the Fair labor Standards Act, the u.S. Supreme Court has ruled. Christopher et al. v. SmithKline Beecham Corp., dba GlaxoSmithKline, No. 11-204 (June 18, 2012). Both the majority and dissent in the 5 to 4 decision agreed that the Court owed no deference to the Secretary of labor’s interpretation of the FlSA’s outside sales exemption and related regulations as asserted in amicus briefs filed by the Department of labor in various circuit courts and the Supreme Court. The Court’s decision in this class action upholds a 2011 Ninth Circuit decision, resolving a split between the Ninth and Second Circuits, and ending years of uncertainty for pharmaceutical companies.

Court Deference to Regulatory Agencies has Limits

Justice Samuel Alito, writing for the majority, analyzed the reason the Court afforded no deference to the interpretation(s) of the regulation offered by the Department of labor. Although in Auer v. Robbins, 519 u.S. 452 (1997), the Court ruled that in ordinary circumstances, deference to an agency’s interpretation of its own ambiguous regulation is appropriate, the Court noted that deference is unwarranted when the agency’s interpretation is “plainly erroneous or inconsistent with the regulation” or when the interpretation “does not reflect the agency’s fair and considered judgment on the matter in question.”

Here, Justice Alito said, an important, “strong reason” for the Court withholding deference was the element of surprise to the pharmaceutical industry after 70 years of Dol acquiescence to the practice of classifying PSRs as exempt employees under the FlSA. The Court noted that affording deference to a new or contrary regulatory interpretation advanced by Dol through an amicus curiae (friend of the court) brief would allow the agency to evade the required notice-and-comment process for implementing regulations. under these circumstances, it concluded, deference by courts would encourage agencies to implement vague regulations that would be subject to a variety of interpretations.

In addition, the Court found the Dol’s interpretation unpersuasive. Because the Court afforded no deference to Dol’s interpretation of the statute and regulations, it “employ[ed] traditional tools of interpretation to determine whether [PSRs] are exempt outside salesmen.”

Definition of “Sales” is Expansive and Functional

The Court determined the applicability of the outside sales exemption to PSRs hinged solely on whether PSRs make a

“sale” when they provide product information to physicians in (Continued on Page 7)

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U.S. SUPREME COURT RULES PHARMACEUTICAL SALES REPS ARE EXEMPT

FROM OVERTIME (Continued from page 6)

PSRs thus “bear all of the external indicia of salesmen,” and exempt classification, the majority determined, was consistent with the purpose of the FlSA’s exemption for outside salesmen.

Dissent

Judge Stephen Breyer, writing for three other justices in his dissent, agreed the Dol’s interpretation, in its amicus brief, should not be given “any especially favorable weight.” A PSR is not an “outside salesman,” however, under Judge Breyer’s examination of the statute and the related regulations.

Implications

Most significantly, this decision should serve to abate numerous similar claims pending across the country. Because the Court held PSRs are exempt under the outside sales exemption based on how “sale” is defined, the decision is broadly applicable to the industry. According to Will Anthony, chair of Jackson lewis’ Class Action Practice, “The Court’s decision was extremely well reasoned. Giving a functional definition to the expansive definition of a ‘sale’ in the FlSA regulations was correct from both a legal and practical perspective. This was a real win for the Pharma industry and, frankly, for the thousands of current sales representatives who wanted nothing to do with this litigation.”

Paul DeCamp, chair of the firm’s Wage and Hour Practice and former Administrator of Dol’s Wage and Hour Division, adds, “These PSR cases underscore everything that is wrong with our wage and hour laws. over the past several years, the industry has had to spend many millions of dollars defending itself against claims by relatively highly-compensated former employees who never actually would have wanted to be classified as non-exempt while they were employed.” He notes, “Current employees prefer to be exempt, but former employees want to be non-exempt. That, plus lawyers looking to make a living, is what drives litigation. It is a shame that the laws are sufficiently ambiguous to allow for such opportunistic lawsuits.” DeCamp observes, “In addition to the victory that this ruling brings for the pharmaceutical industry, its workers, and common sense, perhaps it will also serve as a catalyst for changes in our wage and hour laws. Greater clarity, simplicity, and predictability are needed so that employers and workers alike will be able to know exactly what the law requires. our economy today is much more than 1930s-era brick-and-mortar factories, and our wage and hour laws need to catch up with that reality.”

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