CWS 3.0: March 29, 2011 - Vol.3.8

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Feature: Going Back to Work

As substantial and growing economic and demographic forces lead to more and more business changes and talent mobility, it's become progressively more common for companies to turn to former employees to use as contingent labor. Workers who have had careers with a company, retire, and then return, are often referred to as "alumni."

Reengagement of alumni is an excellent way for businesses to preserve institutional memory, recapturing talent that can "hit the ground running" on projects in a way that would not be possible through engagement of true strangers. At the same time, however, numerous legal issues intersect with the engagement of alumni talent. This article addresses a number of issues that businesses need to be aware of when engaging alumni talent in order to avoid unanticipated consequences.

Classification Considerations

While it is not impossible for a business to re-engage a former W-2 employee as an independent contractor, such a working relationship can be a red flag for the Internal Revenue Service. As CWS 30 has reported many times, the IRS is cracking down on IC misclassification in general for tax collection purposes. The IRS is more likely to audit an independent contractor classification if the contractor has recently been treated as a W-2 employee of the same entity that is now engaging him/her as an independent contractor. This is because the IRS might perceive the working arrangement to be an attempt for the business to avoid paying its taxes. Businesses should be wary of engaging alumni as independent contractors, at least immediately following engagement as an employee. Alumni might truly be independent contractors, but should get extra scrutiny before independent contractor engagement.

Companies might consider engaging their alumni through a third-party staffing provider rather than as an independent contractor.

Benefits? Check Your Plan Documents

Once you've gotten past classification, perhaps the single greatest challenge presented by reengaging alumni talent has to do with benefits. As discussed in previous Employment Law articles for this publication, sometimes contingent workers are eligible for benefits. If contingents are eligible for health, pension or retirement benefits, would alumni status make a difference or pose any problems? The short answer: check your plan document -- the formal document that creates and governs most employee benefit plans.

In most cases, the applicable formal plan document defines who is eligible. If the alumnus fits the plan definition of an "eligible" employee, the alumnus is eligible for benefits under the plan. If the alumnus does not fit the definition of an eligible employee, then the alumnus is not eligible for benefits. A business that engages alumni without consulting its own plan documents regarding benefits eligibility faces significant risks.

Companies also should be aware that certain federal laws -- for example, the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code -- affect the terms of employment for returning employees. Some of these laws mandate that benefit plans, particularly retirement plans, include language describing specific treatment of new and existing employees, which would also affect returning employees.

For example, employees who work at least 1,000 hours in a plan year must be permitted to participate in a retirement plan regardless of whether he or she previously retired and then becomes re-employed. Other federal laws permit a plan to adopt a particular treatment for returning employees, for example, some retirement plans have provisions where retirees who have already begun to receive pension benefits will have those benefit payments suspended if the employee is re-employed. (Under ERISA, regardless of the plan, retirees working 1,000 hours or more in a plan year will have their pension benefits suspended, though ERISA allows for plans to be even more restrictive.)

Therefore, it is critical to refer to your plan document to determine whether or not it contains such provisions. Companies and their returning alumni should make sure they understand how the returning employee will be treated by the applicable benefit plans when establishing the details of the working relationship. While some benefit plan amendments are possible to address the situation of returning employees, it is necessary to know exactly what the plan provides and what applicable laws permit it to provide.

Whether contingent alumni are eligible for any other benefits also would depend on the language of the plan documents. While a hiring manager and an alumnus, within certain parameters, can negotiate the terms of an alumnus' reengagement with his/her former employer, such decisions normally do not apply to eligibility for benefits.

Also consider that health plan documents and retirement plan documents often vary widely in the way alumni benefits would be handled. Typically, health plans provide that full-time "employees" are eligible for coverage, without much additional detail. Occasionally, one will see an exclusion of employees in particular classifications, such as seasonal employees. On the other hand, retirement plans will generally contain rules as to when prior service will be taken into account in determining eligibility and vesting if the employee returns.

Two situations in particular merit consideration. First, suppose a manager and an alumnus agree that the alumnus will be eligible to a particular benefit; but, under the plan, the alumnus is not eligible. In this case, the business is providing benefits that it cannot deliver. If the plan/insurer learns that an ineligible person is receiving benefits, the business faces liability.

On the other hand, what if a hiring manager and an alumnus agree that the alumnus will not be eligible for a particular benefit? In most cases, while this agreement may carry some weight, at the end of the day, the most important factor will be the plan terms. What did the worker actually do? Does the person's actual working arrangement (not the arrangement on paper) meet the definition of covered employment under the plan? Even if the talent agreed that s/he would not be eligible, if the plan says s/he is eligible under the plan terms, the business faces liability.

When engaging alumni talent, businesses should be familiar with their own plan documents, and ensure that alumni are covered where the business wants them to be covered, and are not covered where the business does not want them to be covered. If the plan document does not provide coverage in the manner the business wants, the business may be able to amend the applicable plan documents to create the desired coverage situation (within certain IRS-imposed limitations). Otherwise, businesses should be careful to structure agreements that comply with their own plans.

Break-In-Service

A common feature of alumni reengagement rules self-imposed by businesses is a "break-in-service" requirement: a defined period of time alumni must wait upon leaving the company before they can return in any capacity. Such a policy is neither good nor bad, per se. There are nearly infinite justifications for break-in-service requirements, but in most cases, a break-in-service requirement is adopted as a method of avoiding unintended benefits liability. Many benefit plans define eligibility such that a break in service would affect eligibility. Moreover, under the terms of a plan, a break in service may affect vesting, or timing of eligibility. Businesses must refer to their plans to determine what effect a break in service has on benefit eligibility.

In some cases, businesses adopt break-in-service rules that do not have any relation to actual plan terms. Under a particular plan, a one-year break in service might be significant to eligibility or vesting. But, the business might have a six month or 18 month break-in-service rule. Businesses should refer to their actual plan eligibility rules in adopting any break in service policy, and should ensure that the plan terms fit the businesses needs, and also match any break in service rules the business has adopted.

Fair Employment

Businesses that have gone through one or more resizing exercises as business activity has gained, receded, and gained, are by now accustomed to severance agreements and accompanying waiver/release forms commonly supplied to departed workers. In particular, the Older Workers Benefit Protection Act (OWBPA) and some state laws contain detailed notice and revocation requirements, and in some cases require employers to provide a list of job titles and ages of all individuals eligible or selected for an exit incentive or termination program, and those not eligible or selected.

Waiver/release legal requirements, and particularly notice requirements, are onerous and are specifically designed to allow employees to determine if they have a valid discrimination claim that they are giving up by signing a waiver/release. In the context of re-engagement of alumni, this raises serious issues. Suppose a business re-engages an alumnus who had just retired as part of an exit incentive workforce reduction event. The business may have explained (in a severance document) how the worker was selected for an exit incentive.

Businesses typically conduct an internal statistical analysis of termination and exit incentive programs to attempt to detect any evidence of bias against any demographic group. That analysis may be undone by disproportionate re-engagement of a particular group. Businesses re-engaging alumni need to know that they may be challenged by the alumni (or by other terminated employees who are not re-engaged) and accused of discrimination, and they need to be able and ready to explain "what changed," and why they picked who they picked for re-engagement. In particular, business managers involved in re-engaging alumni need to know what the business said about why it parted with the alumni in the first place, and ensure that the business does not contradict itself (at least not without a good reason and not before thorough consideration).

Intellectual Property

Re-engaging alumni enables companies to preserve and access an excellent source of institutional and industry knowledge. However, alumni that return as contingent talent may have other clients, perhaps in the same industry with your competitors, and may be working on outside projects. This fact raises the issue of trade secret protection. In almost every state, the status of information as a "trade secret" depends in large part on whether a business has taken reasonable steps to maintain confidentiality of the putative trade secret.

For traditional employees, "reasonable" confidentiality efforts vary from case to case, and often include steps like password protection of files, physical security, "need-to-know" access to certain information, and non-disclosure/confidentiality agreements. The exact same precautions are often appropriate for vendors, contractors, and other non-employees. Businesses engaging alumni may have been adequately vigilant (or not) about confidentiality while its alumni were regular employees. Businesses must not forget that adequacy of confidentiality efforts does not depend on whether the person receiving information is a regular employee, contingent employee, or independent contractor. Businesses should take reasonable confidentiality steps for alumni, just as they do for employees, vendors, and business partners.

Conclusion

Businesses lose talented workers (that they would prefer to keep) due to economic pressure, competition, worker mobility, and a myriad of other factors. When the chance comes for an alumnus to return in a contingent capacity, smart businesses will want to find a way to make it happen. Before engaging alumni, however, businesses should carefully consider whether the alumnus is classified correctly and educate themselves or work with an attorney with regard to applicable legislation. They should also review their benefit plans and structure the engagement (or restructure the plan(s)) to have the desired benefit result, and ensure all bases are covered with regard to protecting their intellectual property.

Eric H. Rumbaugh and Charles P. Stevens are partners with the law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee (www.michaelbest.com). They advise employers in labor, employment and employee benefits law matters.

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