Benefits Basics – When an Employee Becomes Disabled: A Resource Guide for HR & Benefits Professionals
When an employee becomes disabled, a variety of questions arise regarding that employee’s entitlement to compensation and benefits. As a member of your company’s human resources or employee benefits department, employees and their families will often look to you to help them understand the impact of disability on the employee’s benefits and compensation during what is often a stressful time for them. This guide provides a high-level reference resource, in a plan-by-plan format, on how to approach each type of compensation or benefit arrangement when an employee becomes disabled and offers up some practical tips on employee benefits issues that may come up as you manage your company’s compensation and benefit administration for a disabled employee.
The information given in this guide is general in nature and is not intended to address every benefit or tax issue that may come up when dealing with a disabled employee or other nuances that may arise when considering the disabled employee or the specifics of your company’s benefit plans. In addition, any tax or other rules described in this guide are current as of the date of this guide, and do not infer that the rules described are the only rules (tax or otherwise) that may apply and are subject to change. As a result, we always recommend that you engage your in-house or external legal counsel or other tax or employee benefits advisors when working through compensation and benefits issues related to employee disability.
This guide is part of Foley’s Employee Benefits & Executive Compensation Practice “Benefits Basics” resource series—please see our resource guide for important benefits considerations when an employee dies.
An Overview of the Meaning of Disability
Before we dive into discussing issues for administering your company’s compensation and benefit plans, one critical thing to be aware of is that not all disabilities are defined equally. For example, the Employee Retirement Income Security Act of 1974 (ERISA) does not apply a single definition of disability to be used for all ERISA plans. Depending on the particular plan, policy or program at issue, you might find that there are multiple definitions of disability in your documents. Here’s an overview:
Effect of the Disability
Legally-Required Definition of Disability
Source of Definition
Ability to take a 401(k)-plan withdrawal due to disability
None
Governed by plan terms, but may want to align with the definition for exemption from excise tax (described below)
Exemption from 10% early distribution excise tax on distributions from qualified retirement plans
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration
IRC § 72(m)(7)
IRC § 409A plan distribution and deferral purposes
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months OR By reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the service provider’s employer
Treas. Reg. § 1.409A – 3(i)(4)
Ability to stop 409A deferrals (exception to irrevocability rule)
Medically determinable physical or mental impairment resulting in the service provider’s inability to perform the duties of his or her position or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six months
Treas. Reg. § 1.409A- 3(j)(4)(xii)
COBRA extension to 29 months
Social Security Administration (SSA) determination of disability
IRC § 4980B(f)(2)(B)(i)(VIII)
Incentive stock option exercise period extended from three months after termination of employment to one year
Unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months
IRC § 422(c)(6); cross-references to IRC § 22(e)(3)
All other, e.g., vesting of retirement benefits, short-term disability (STD) and long-term disability (LTD) plans, employment agreements, bonus entitlement, etc.
No specific definition
Governed by plan or agreement terms
Wow! As you can see, there are several definitions of disability, all of which vary in one way or another. What this means is that if someone is disabled, you will have to review the definition of disability in each and every plan or individual agreement to determine whether the employee qualifies for all, or just some of, the disability provisions of that plan or agreement.
A best practice is to consider harmonizing definitions across plans and agreements as much as possible (except where a legally required definition just will not allow that). This will streamline administration significantly.
Finally, to the extent you are able, consider defining disability in a way so that you, the employer, can rely on a third party’s determination of disability so that you will not actually have to make the determination yourself, which can be very tricky. For example, if you can define disability by reference to whether someone is entitled to long-term disability insurance benefits or has received a SSA determination of disability, then you need only rely on that third party’s determination and do not have to undertake your own review of an employee’s medical and occupational records.
A Quick Note on ERISA vs. NON-ERISA Plans
Determining whether a benefit plan is covered by ERISA can be complicated. While your company’s most common broad-based retirement and welfare benefit plans, such as 401(k) plans, pension plans, and medical, dental, vision or other welfare benefits, will most likely be governed by ERISA, there are many nuances in the rules that exempt certain benefit plans depending on how the plan is structured. This issue commonly comes up with certain disability or severance benefits or policies. Bonus programs, deferred compensation plans or other voluntary benefits or payroll practices (discussed in more detail under “Short-Term Disability” below) are usually not subject to the ERISA preemption rules. However, due to the complexity of these rules, if you are unsure whether a benefit program is an ERISA or non-ERISA plan, consult with your benefit plan advisors when deciding whether to allow beneficiary designations.
Practical Steps to Take When an Employee Becomes Disabled
Who You Should Involve
Most employee disabilities begin with an employee requesting a leave of absence. In that case, you simply follow your normal leave of absence process, whether that involves working with internal HR or directing the employee to a third-party leave vendor. If, however, the employee is incapacitated and you receive the initial call about an employee’s disability from a family member, it is imperative that you promptly contact the following individuals within your organization: the head of HR for the employee’s business unit (who should, in turn, contact the employee’s manager) and all relevant members of the employee benefits team. From there, you should follow the same leave of absence procedures that you would follow in a non-emergency situation, except that the family member may be acting on the employee’s behalf in completing paperwork and providing any needed information to apply for a leave of absence and any available short-term disability benefits, and to communicate payment arrangements for any health and other benefits that continue during the leave period.
If the employee’s disability is expected to be more than temporary and your retirement plans permit disability distributions or disability commencement, then you may need to provide disability information to your plan’s recordkeeper so that the employee can be permitted to commence benefits under the plan.
The Information You Need
An employee’s disability will often begin with a request for leave of absence due to injury, illness, or a medical condition. In those instances, you should follow your company’s normal leave of absence policy, whether that is an internal process or run by a third party that administers leave and/or STD benefits. This will typically involve the employee completing an application and, where needed, providing documentation supporting the application, such as medical records and a letter from the employee’s physician. If the employee’s disability begins with more of an emergency situation, such as an accident or sudden illness, then you may need to work with an employee’s family member to process a leave or STD benefits request and gather needed information.
You or your leave vendor will also need to communicate the impact of the leave on employee benefits. As discussed in more detail below, you must offer the employee the opportunity to continue group health plan benefits such as medical, dental, vision, and medical flexible spending account benefits during a Family Medical Leave Act (FMLA)-covered leave. For other types of leave and types of benefits, benefits continuation will depend on the terms of the applicable policy or plan document. If you offer the employee the opportunity to cancel all or some of their benefit elections during leave, then you will need to collect those elections from the employee, through election forms or an online system. If the leave will be paid, then benefit deductions can typically continue from the leave pay. If the leave will be unpaid (e.g., no STD or other leave pay) and the employee desires to continue medical and other benefits during leave, then you will also need to provide the employee with information on how to pay for those benefits should the employee choose to continue them. If you follow a direct pay approach (as opposed to, for example, a pay when you return to work approach), then you or your vendor will need to verify the address or email address for billing statements and obtain ACH information where electronic payment is offered or required, and provide that information to payroll.
You will also need to figure out which benefit plans or programs the employee was enrolled in or otherwise had an accrued benefit under, and whether the employee had any individual agreements in effect with the company (such as equity awards, employment agreements, employee loans, etc.) and make sure you have copies of all of those documents. This information may come from internal HR records or from third-party benefit plan administrators or vendors. You will also want to determine whether any of these plans require you to make a determination of disability or whether that determination is made by a third party.
As discussed in more detail below, if the employee’s disability continues beyond a STD period (generally, six months maximum depending on the terms of your STD program), then you may be receiving a disability determination from a long-term disability insurer or the Social Security Administration and to follow company policy in terminating the employee’s employment at the appropriate time.
A Quick Note About HIPAA
We often hear from clients who are concerned about HIPAA during the leave of absence process, either because they are concerned that they are not allowed to collect or store the information needed to process and approve a leave or STD benefits request or because the employee or employee’s family members are pointing to a HIPAA concern with providing the requested information. HIPAA does not apply to leave or STD benefits programs, nor does it apply when an employee is providing medical information to you, whether directly or via an authorization for a health care provider to send you the employee’s medical information. However, and regardless of whether HIPAA applies, you should always limit access to an employee’s medical information to only members of HR or benefits who must have access to such information to process a leave or STD application and always securely store such information. If you are using a third-party vendor to process leave or STD benefits, then you should ensure that your contract with that vendor obligates them to protect the employee’s information.
Cash and Equity Arrangements
Overview
When an employee becomes disabled, a variety of different compensation programs have to be considered. First, it is important that you survey all of the cash and equity compensation that is or may be due with respect to the disabled employee. For example:
Is the employee covered by an annual or long-term cash bonus plan?
Is the employee in a commission program?
Does the employee have an employment agreement in effect?
Does the disabled employee have equity awards, such as stock options or restricted stock units?
Second, after identifying all of the agreements, policies, and arrangements under which cash or equity compensation may be due, determine whether there are any special provisions applicable to a disabled employee, paying close attention to whether the rights arise due solely because the person has become disabled, or only upon a termination of employment due to that disability.
Typical Provisions (including One Gotcha):
Entitlement to Bonuses and Equity Awards. For cash bonus programs, you’ll need to review the terms of the documents to determine what happens on a disability. Bonus plans often will either payout automatically at target upon a disability (or termination due to disability) or may provide for payout to occur at the end of the performance period based on the level of achievement of actual performance, and either on a pro-rated basis or in full.
For all types of equity awards, the governing plan document or the award agreements will specify what happens to the awards upon the employee’s disability. Similar to cash bonus plans, equity awards will either vest automatically upon a disability (or termination due to disability) or on a pro-rated basis. For equity awards subject to performance goals, the award may provide that performance is deemed met at the target level, or may provide for payout to occur at the end of the performance period based on the level of achievement of actual performance, and either on a pro-rated basis or in full. Finally, for stock options, it’s very typical for an employee to get an extended period to exercise their options following a termination due to disability.
If the disabled employee has an “incentive stock option” (also referred to as an ISO), which is a type of option that may provide beneficial tax treatment to the employee, for a normal termination of employment, an employee must exercise an ISO within three months after termination as one requirement to obtaining favorable tax treatment. For a termination due to disability, however, the Internal Revenue Code extends this time period to one year following the termination. (What are the other requirements to obtain favorable tax treatment? – The employee has to hold the stock acquired upon exercise of the ISO for one year from the date of exercise and two years from the grant date. This holding period requirement does not change for disabled employees.)
Sometimes, an employment agreement might also describe what happens to bonuses or equity awards upon a disability, or termination due to disability, so those should be reviewed as well.
There is one “gotcha” that often comes up in these types of arrangements. Whenever a pro-rated bonus or award is at issue, the pro-ration often runs through termination of employment due to disability, and not through the commencement date of the disability leave. This often surprises employers, especially those employers that don’t have a robust process in place under the American with Disabilities Act (the ADA) to engage in an interactive process to determine when a termination of employment is appropriate.[1] We find that such employers often leave disabled employees as “employees” for a very long period of time. So, when it comes to pro-rating a bonus or award, the employee gets the benefit of a very-long pro-ration period, often with the result that they end up getting the entire award because their termination does not occur at all during the bonus or equity award vesting or performance period. When this comes to light, we have found that most employers like the idea of pro-rating through the end of the employee’s STD leave, which normally runs for no more than six months. This rule doesn’t “punish” an employee who needs to take a short-term leave but also does not create a windfall for employees who have a more serious disability and end up never being able to come back to work. There is a downside to this type of pro-ration provision – many employers do not have systems in place to automatically measure when STD ends. So, whatever pro-ration rules you adopt, it is important to consider whether your HRIS is set up to handle the rules you implement or if some manual review and implementation process will be necessary.
Entitlement to Severance. Often, an executive’s employment agreement will provide for severance pay if termination of employment is due to disability. Pay careful attention to these types of provisions, because occasionally they will require a certain process to be completed for the company to be able to terminate the executive’s employment, e.g., the full board of directors needs to make the determination of disability, or the disability has to be based on the conclusion of an outside physician. And if your agreements have these provisions, check whether your long-term disability insurance policy has any type of offset for these payments so you can warn the terminating executive about the impact the severance pay will have on their LTD benefits.
Benefit Plans
Qualified Retirement Plans
401(k) and Other Types of Defined Contribution Plans. 401(k) plans are the most common employer-provided retirement benefit offered to employees. While not required, 401(k) plans often permit an employee to take a distribution of some or all of his or her vested account balance upon a disability. We recommend including these types of provisions in plans sponsored by employers who, as mentioned above, tend to never take action to terminate the employment of a disabled employee. By allowing the disability withdrawal, the employee is able to access their account balance when they need it, even if the employer has not terminated their employment.
Other issues to consider in 401(k) plans are:
What types of disability compensation may an employee defer? For example, if the plan defines compensation as all W-2 compensation of the employee, that works fine as long as disability compensation is being paid from the employer’s payroll. But when the compensation is being paid by a third-party, such as an STD administrator or an LTD insurance carrier, how will that work in practice? In such a case, either the plan’s definition needs to be revised to clarify that it is only compensation paid directly by the employer, or the employer and the third-party will need to discuss the coordination and sharing of compensation information to figure out how an employee remains able to defer STD or LTD payments into the 401(k) plan.
Does your plan provide for full vesting upon a termination due to disability? While this is not legally required, we find that it is almost always the case.
If your plan requires an employee to be employed on the last day of the plan year or to have completed 1,000 hours of service as a requirement to receive an employer contribution for the year, is there an exception to those rules for a disabled employee? Typically, that would be the case, but it is not legally required.
Pension Plans. While pension plans are getting scarcer as each year goes by, many employers still maintain them, even though the benefits under them have almost all been frozen at this point.
If a disabled employee who is terminated from employment participates in a pension plan, the first issue to consider is whether the employee is vested in their plan benefit, and if not, whether the plan provides for full vesting in that circumstance. Similar to 401(k) plans, we find that pension plans will often fully vest a participant who terminates employment due to a disability. Even if the plan does not provide for full vesting in this circumstance, check the plan’s terms to see when vesting service stops being counted. Occasionally, a pension plan might provide for favorable service-crediting rules during disability leaves.
The second issue to consider is whether the plan provides for a disability retirement benefit. This is not legally required so many plans do not have a disability retirement provision. A disability retirement typically allows a terminated employee to commence their pension benefits right away upon a termination of employment, even if the employee has not yet reached early or normal retirement age, when benefits would normally be able to commence. A disability retirement might also provide for some sort of enhanced benefit, such as a full pension with no reduction for starting early. If a disabled employee may be eligible for a disability retirement, you should let them know so they can apply for the benefit if they wish.
ERISA Claims and Appeals Regulations. ERISA has specific claims and appeals regulations for disability plans that impose a host of requirements for plan administrators. Importantly, these regulations also apply to retirement plans where some sort of disability provision exists, and the plan states that the administrator must make its own determination of disability, rather than relying on a third-party, such as the SSA or an LTD insurance carrier. To avoid these requirements, which many plan administrators find to be onerous, you should consider amending your retirement plans to eliminate any concept of a plan administrator-determined disability, keeping the following issues in mind:
For all qualified plans, the new definition of disability cannot affect the vesting rules in a manner adverse to participants. In other words, if the plan provides for vesting upon a termination due to disability, the new disability definition cannot be stricter than the prior one.
For 401(k) and other defined contribution plans, the new amendment cannot result in the cut-back of a protected benefit, right or feature. For example, if the plan permits a withdrawal upon a disability, the new disability definition should not be stricter than the prior one so that the individual’s right to the withdrawal is not impaired.
For defined benefit pension plans, a disability retirement benefit is typically not considered a part of the accrued benefit, which means that you are permitted to amend a defined benefit pension plan to eliminate disability retirement altogether if you wanted. Because of that, you are also free to change the criteria to be eligible for a disability retirement, such as by redefining disability to require an SSA determination.
Of course, for all of the above, if the plan covers union employees, you’ll also need to consider whether these changes require bargaining with the union.
Welfare Plans
Short-Term Disability. Most short-term disability plans are payroll practices, in which the employer simply continues paying all or a portion of the employee’s salary or hourly wage rate while the employee is on a disability leave, typically lasting from 90 days to six months. Of course, ensuring that an employee (or a family member who is assisting in their care) understands their rights to STD plan benefits is one of the critical things you need to ensure happens.
You should consider how state laws will impact the design and operation of the STD program. For example, a Wisconsin law permits an employee who takes an unpaid maternity or paternity leave to “substitute” paid leave otherwise available to them for other reasons for such unpaid leave. In other words, the employee can use their STD paid leave to provide for salary continuation payments during their maternity or paternity leave, even if the person is not otherwise considered disabled. See Wis. Stat. 103.10(5)(b). In addition, many states and even local governments have mandatory paid disability leave. If you have employees in those locations, you’ll need to consider how to coordinate these mandatory leave provisions with your STD program. For example, if you are paying into a state disability fund in New York, then you may wish to exclude New York employees from your STD program to the extent the law allows.
It is important to note that payroll-practice STD programs are not subject to ERISA, meaning they don’t enjoy some of the protections that ERISA provides, such as requiring an employee to exhaust the plan’s claims and appeals procedures prior to bringing a lawsuit, and limiting damages to the plan’s benefits and, in some cases, the employee’s attorneys’ fees. On the flip side, fully-insured STD plans are subject to ERISA and so get the benefits that ERISA provides, as well as the obligations, such as the requirement to issue a summary plan description.
Long-Term Disability. LTD programs are typically fully-insured, which means that the employer’s sole obligation is to ensure that the employee, if covered by the program, knows how to apply for insurance, and to provide whatever information the LTD insurance carrier requests to make its determination of disability and to determine the amount of the benefits owed under the terms of the policy.
The “gotcha” with this type of program is when employers, in the guise of being helpful, either do not permit the participant to apply for benefits, or actively discourage such application. An employer should never do this, even when they feel very certain that the insurance carrier will deny the application. ERISA gives employees who are covered by an insurance policy the right to apply for benefits. While it is okay for an employer to set the employee’s expectations, an employer should never preclude a plan participant from applying for benefits under any ERISA plan.
The tax treatment of long-term disability benefits depends on how the premiums for the coverage were taxed to the employee:
To the extent the employee paid his or her insurance premiums for LTD coverage with after-tax dollars, or the employer’s contribution towards those premiums were included as compensation income on the employee’s Form W-2 and taxed accordingly, then the LTD benefits are non-taxable.
To the extent the employee paid his or her insurance premiums for LTD coverage with pre-tax dollars, or the employer’s contribution towards those premiums were not included as compensation income to the employee, then the LTD benefits are taxable.
Opinions vary about which approach is best. Some employers like the first approach so that the benefits, which are typically often a reduced percentage of compensation, such as 60%, are not further reduced for taxes. Others like the second approach which saves all employees current tax dollars and may be the most valuable to the group as a whole given that very few employees will actually utilize the LTD benefits. And some employers who don’t want to make that judgment call allow their employees to choose the tax treatment of their premiums.
Group Health Plans. You should check the terms of the plan (or summary plan description) to determine what happens to an employee’s eligibility for coverage when the employee takes a disability leave. Some plans will continue coverage, at the active employee rates, during the period of STD leave, but that is not legally required. If the disability leave is also a leave covered by the federal Family Medical Leave Act (FMLA), however, then the employee must be allowed to continue participating in the plan during that FMLA leave on the same terms as active employees (e.g., at active employee rates). If the employee does not return to employment following the FMLA leave, the plan may terminate participation at that time, although COBRA (which is discussed in the next paragraph) would then be offered.[2]
If you are subject to federal COBRA rules (generally, employers with at least 20 employees are subject to federal COBRA), and if the employee loses coverage due to the disability leave, which is a “reduction in hours” in COBRA parlance, then you generally must notify the COBRA administrator of the employee’s loss of coverage within 30 days from the date of the loss of coverage. The COBRA administrator then has 14 days to send out the COBRA election packet to the participant and his or her enrolled dependents. If you administer COBRA internally, then you have a total of 44 days to send out the COBRA election packet. Note that an employee who is on an FMLA leave can never have a COBRA event until after the expiration of the leave, and COBRA must be offered following the expiration of the leave even if the employee chose not to continue coverage during some or all of the FMLA leave period.
Remember that COBRA continuation coverage can last for up to 18 months when the loss of coverage is due to a reduction in hours (such as the taking of a disability leave) or a termination of employment. However, that 18 months can be extended for up to a total of 29 months if:
The SSA makes a determination that the employee’s disability began at any point up until the first 60 days of the COBRA continuation coverage.
The employee (or a family member) provides the COBRA administrator with a copy of that SSA determination no later than the end of the first 18 months of COBRA coverage. In addition, the SSA determination must be provided within 60 days after the later of (i) the date of issuance of the SSA determination letter and (ii) the date on which the qualifying event occurs or, if later, the date coverage would have otherwise been lost due to such event. These time frames assume the employee has been provided proper notice of his or her right to extend COBRA coverage due to an SSA disability; if not, the period to provide notice of the SSA determination extends until 60 days after the employee becomes aware of this right.
The premiums for COBRA coverage are permitted to be 102% of the full premium amount (both the employer and employee portions) for the first 18 months of coverage. If the disability extension applies, then following the end of the first 18 months of COBRA, the premium can be increased to 150% of the full premium amount.
If you are a small employer not subject to the federal COBRA rules, there still may be similar requirements under a state “mini COBRA” law of which you should be aware. You should not assume that the insurance carrier will administer your insurance policy’s mini COBRA provisions; often, insurance policies impose certain administrative obligations on the employer, such as notice obligations.
Flexible Spending Accounts (FSAs). Most health FSA and dependent care FSAs will provide that participation ends when the employee is no longer receiving compensation, although health FSAs must permit the employee to continue participation during an FMLA leave.
For the health FSA, COBRA coverage must be offered when the employee ceases to be eligible due to either a reduction in hours (such as due to taking a disability leave) or termination of employment. Most health FSAs qualify for a limited COBRA obligation that permits an employer to only offer COBRA coverage to the participant when the participant’s account is underspent (generally, more money has been contributed as of the date of the COBRA qualifying event than has been reimbursed) and only for the remainder of the plan year.
For dependent care FSAs, a typical question is whether childcare expenses incurred while the employee is on disability leave are eligible for reimbursement from the FSA. Because the dependent care FSA is intended to pay for eligible dependent care expenses to allow the employee to work, day care expenses incurred while the employee is not working cannot be reimbursed from the account. Therefore, the employee cannot be reimbursed for daycare expenses incurred while on a leave of absence. This is frustrating for both employers and employees because an employee who is unable to work due to a disability is often also unable to care for their children at home.
Nonqualified Deferred Compensation Plans
Like pension plans and 401(k) plans, the first issue to consider is whether the individual was vested in their plan benefit or account at the time of disability, and if not, whether the plan provides for full vesting upon either a disability or upon a termination due to disability. If any portion of the account balance or benefit is unvested, it should be forfeited in accordance with the terms of the plan.
Assuming there is a vested balance, you should check to see whether the plan provides for a distribution upon a disability. A disability is a permissible payment event under Internal Revenue Code Section 409A, which governs most types of nonqualified deferred compensation plans. Alternatively, the plan may provide for a payment to begin (or commence) upon a separation from service. A separation from service generally means the date when the employee’s level of service decreases to less than 20% of his or her prior level of services over the preceding 36 months. But, there is a special rule in Section 409A that says an employee on a sick leave does not experience a separation from service for the first six months of the leave (or such longer period of employment for which the employee has the right to return to employment by law or contract), provided the employee is reasonably expected to return to work before the end of such period. When the individual is disabled within the meaning of Section 409A (see the section “Overview of the Meaning of Disability” above), however, then the plan may provide that the separation from service is delayed until the end of 29 months of leave, even if the employee is not expected to return to work. Many nonqualified deferred compensation plans utilize this 29-month leave rule, but employers are often ill-equipped to track it from an HRIS perspective.
If employee deferrals are being made to the plan, you should also check whether the plan permits the employee to cease making deferrals upon commencement of the disability. This is one of the limited exceptions to the normal rule in Section 409A that provides that deferral elections must be irrevocable for the entire plan year.
Other Issues to Consider
Form 8-K Requirement. Generally, the termination of a CEO, CFO, COO, chief accounting officer or any named executive officer of a publicly traded company triggers the need to file a current report on Form 8-K with the Securities and Exchange Commission (SEC). This requirement is triggered when one of the listed officers’ employment is terminated as a result of disability. However, it can be more difficult to determine whether disclosure is required in the case of disability or illness that limits or incapacitates an officer but does not result in immediate termination of employment. The SEC Staff has not provided specific guidance for this situation, saying only that a “termination” includes situations where the officer “has had his or her duties and responsibilities removed such that he or she no longer functions in the position of that officer.” As a result, any disability that results in the removal or reduction of an officer’s duties should lead to an evaluation of whether the officer is continuing to function in his or her officer role and of the materiality of the change to the Company’s investors.
Section 16 Reporting. The disability of an executive or the termination of the executive’s employment due to disability generally will trigger a Form 4 filing only to the extent the event triggers a forfeiture of an equity award, accelerated vesting or settlement of a unit-based award (e.g., restricted stock units or performance share units) or a tax withholding obligation that is covered by withholding or selling shares. In addition, any transaction with respect to the company’s stock that is initiated after the executive’s disability but while the executive’s employment continues (such as, for example, the exercise of an option by the executive’s guardian) would be reportable in the same manner as a transaction initiated by the executive. Any transaction that is initiated after the executive’s employment is terminated due to disability, by contrast, would not be reportable unless it were “matchable” against an earlier opposite-way transaction (i.e., a sale if the transaction is a purchase, or a purchase if the transaction is a sale) that had occurred while the executive was still employed and within six months of the second transaction. In addition, if the disabled executive (or his or her guardian) initiated a transaction prior to the executive’s termination of employment that had not yet been reported on a Form 4 or Form 5 (for example, if the disabled executive sold stock the day before his or her termination of employment or gifted stock earlier in the year), then there is an obligation to report on a timely basis such transactions that occurred prior to the executive’s termination of employment. The disabled executive’s reports can be signed and filed with the SEC by the executive’s guardian. Regardless of who signs and executes the report, the disabled executive should be named as the reporting person in Box 1 of the report, and the person executing the report on the disabled executive’s behalf should sign the report in their own name, indicating the capacity in which they are signing.
Powers of Attorney
When a disabled employee is unable to care for their personal or financial affairs the employee may designate another person (called the “agent”) through the use of a Power of Attorney (a POA). The agent is permitted to take action on the employee’s behalf to the extent permitted by the terms of the POA. If you receive a POA, it is important to check state law to determine whether (a) the POA is valid, and (b) the POA permits the action that the agent wishes to take. For example, some state laws may prohibit an agent from changing a beneficiary designation unless the POA explicitly gives the agent that right. If you determine that a POA is valid, then you are permitted to take direction from the agent with respect to compensation and benefit plan matters that are within the scope of the authority granted by the POA.
[1] The requirements of the American with Disabilities Act are beyond the scope of this article.
[2] The rules on benefit elections and payment options during an FMLA leave are complex, and when digging into these rules (which are beyond the scope of this article), many employers find that their approach is not fully compliant with those rules.
Tricky Compliance Issues for Companies When an Executive Terminates Employment: 409A Applicability to Severance
Executive employment relationships are rarely permanent. When an executive or other senior-level employee terminates employment, companies often must deal with difficult tax, equity, and benefits issues that arise in connection with the employee’s termination.
This article is the second in a series of articles that address important compliance pointers for structuring post-termination benefits or addressing issues and considerations for companies when an executive terminates employment.
Last month, we discussed whether ERISA applies to your executive severance plan. This month, we are diving into the applicability of Section 409A of the Internal Revenue Code (Section 409A) to severance benefits. Specifically, this article discusses the difference between Section 409A compliant vs. Section 409A exempt severance, and how that impacts your approach to severance entitlements.
Exempt vs. Compliant Severance
Practitioners will sometimes use the phrase “409A Compliance” to refer generally to a payment arrangement that is drafted to avoid the 20% excise tax and other penalties prescribed by Section 409A. This can be achieved by either structuring payments to meet one of the exemptions in Section 409A or by structuring payments to meet all of the compliance requirements of 409A (i.e., payments can either be EXEMPT FROM or COMPLIANT WITH Section 409A). While both 409A exemption and compliance prevent the employee from adverse tax outcomes, there are certain nuances in how exempt vs. compliant payments are treated under other provisions of Section 409A. As a result, it is important to understand whether promised severance payments are intended to be 409A exempt or compliant.
409A Exemptions for Severance
There are generally two exemptions available for severance benefits: (1) the short-term deferral exemption, and (2) the separation pay plan exemption.
Short-Term Deferral
To be considered a short-term deferral, the severance payments must meet the following two requirements:
The severance is only paid upon an “involuntary separation from service” (see the section below entitled “What Qualifies as an Involuntary Separation from Service?” for more information); and
The severance is required to paid in its entirety, by its terms, no later than March 15th of the year following the year of the employee’s separation from service (or, if later, the 15th day of the third month of the company’s taxable year in which the termination occurs).
As a result, severance benefits that are payable in a single lump sum shortly after termination of employment should generally be exempt from Section 409A as a short-term deferral. However, be mindful that even when cash severance is payable in a single lump sum, other taxable benefits (such as medical insurance continuation) may be paid or provided over a period of time, and as a result, such benefits must be analyzed separately.
Separation Pay Plan
Severance payments that meet all of the following three requirements are also exempt from Section 409A under the separation pay plan exemption:
The severance is only paid upon an “involuntary separation from service.”
The total amount of severance does not exceed two times the lesser of (a) the employee’s annual compensation for the prior taxable year or (b) the IRS 401(a)(17) limit (which is US$350,000 for 2025) (the “Separation Pay Cap”).
The severance is required to be paid by its terms no later than December 31st of the second year following the year in which the separation occurs.
What Qualifies as an Involuntary Separation from Service?
For this purpose, an involuntary separation from service means that the employee either was terminated by the company when the employee was willing to continue providing services or resigned with “good reason,” provided that the good reason definition is limited to material negative changes in the employment relationship. The Section 409A regulations include a safe harbor definition of good reason that is generally prudent to follow when relying on either of the exemptions described above. (See Treasury Regulations § 1.409A-1(n)(2)(ii).) This safe harbor definition provides the conditions that can establish good reason as well as the process that the employee must follow to claim good reason (including providing the company with timely notice of the event alleged to constitute good reason and a reasonable opportunity to cure the good reason condition, and actually terminating employment within a short period of time thereafter).
Also, as a reminder, while “separation from service” generally aligns with a layperson’s understanding of termination of employment, extra attention must be given when an executive continues as a consultant or other part-time position for some transition period after their cessation of regular employment. Depending on their expected continued level of services as a consultant, their “separation from service” for purposes of Section 409A rules could either occur at their termination of employment date or at the later date when they cease to be a consultant.
Stacking Exemptions
Often, an executive’s total severance package exceeds the maximum amount permitted to be exempt from Section 409A under the separation pay plan exemption. For example, in 2025, the maximum amount of severance that can fit under the separation pay exemption is US$700,000 (i.e., twice the US$350,000 401(a)(17) limit). For higher-paid employees, often whom receive severance that is worth more than one year of base salary, it can be easy for this US$700,000 limit to be exceeded.
If such higher severance amounts are paid in installments, then can it ever be exempt from Section 409A? Potentially yes, by relying on a Section 409A concept that allows you to “stack” the short-term deferral and separation pay plan exemptions. Under this concept, you can treat the portion of the installments that will be paid during the short-term deferral period as short-term deferrals, and the remainder as separation pay. By stacking these exemptions, it is possible for more than US$700,000 of severance payments to be exempt.
409A Compliant Severance Arrangements
To the extent severance benefits are not exempt from Section 409A, then the non-exempt portion of the benefits must comply with Section 409A. This requires that:
Payments can only commence upon a “separation from service” (see note above regarding tricky situations where executives continue as a consultant after employment).
Payment dates must be specified in the agreement in an objective manner, and cannot be subject to any employee or employer discretion to change payment timing (whether directly or indirectly). Note, this may also include payment timing considerations if the executive is required to execute a release of claims to receive severance benefits and the release consideration period could span between two calendar years.
With limited exceptions, there must be a single payment schedule for all separations from service to comply with Section 409A’s “anti-toggling” rules.
If the executive is a “specified employee” within the meaning of Section 409A (generally, one of the top 50-paid officers of a publicly traded company), then the non-exempt severance pay must be delayed for at least six months after the executive’s separation from service.
Although the most common scenario when severance must comply with Section 409A is when the severance is paid in installments and exceeds the Separation Pay Cap (even with utilizing any “stacking” of the short-term deferral exemption with the separation pay plan exemption), the other time the exemption can be lost is when the definition of “good reason” is too executive-friendly, e.g., the executive can trigger terminating employment for good reason on one or more circumstances that is not considered a material adverse change to the executive’s working conditions. In this latter event, none of the severance pay would qualify for any Section 409A exemption because the severance pay would not be considered to be paid due to an “involuntary separation from service” as Section 409A defines it.
Differences Between Exempt vs. Compliant Severance
As noted above, while both 409A exempt and 409A compliant severance avoids the 20% penalty tax, there are meaningful differences between how exempt vs. compliant severance is treated under other Section 409A rules. Specially, if severance is exempt from Section 409A, then:
The severance payments can be accelerated without penalty. For example, severance that is originally required to be paid in installments, but is exempt under the separation pay plan exemption, can be accelerated and paid in a lump sum without causing problems under Section 409A.
The severance package may be able to be replaced with a new arrangement with different payment terms without a Section 409A “substitution” risk that is inherent when 409A compliant arrangements are replaced.
The six-month delay that applies to specified employees at public companies does not apply to exempt severance.
In practice, the first two bullets above can be especially invaluable because it is not uncommon for either the executive or the company to want to renegotiate severance terms at some point during the employment relationship or at the time of a separation. So, parties typically prefer to structure severance as exempt from Section 409A to the extent possible for maximum flexibility down the road. And, if you are currently facing an executive separation and severance obligations, make sure to confirm whether your severance is exempt from, or complies with, Section 409A before agreeing to any changes in the payment terms.
Washington State Scales Up Paid Family and Medical Leave Law
On May 20, 2025, Washington Governor Bob Ferguson took the final step toward implementing House Bill (HB) 1213’s expansion of the state’s paid family and medical leave program when he greenlit funding for the program as part of the state appropriations budget for the 2025-2027 biennium. With this funding, the new law will take effect on January 1, 2026.
Quick Hits
Washington State’s HB 1213 expands job protection rights under the state’s paid family and medical leave program.
The amended leave program reduces the minimum increment of time off from eight consecutive hours to four consecutive hours.
HB 1213 also broadens health insurance coverage requirements, along with a variety of other miscellaneous changes.
HB 1213 expands the Washington Paid Family and Medical Leave (WPFML) program, which is a state-administered program that provides Washington employees with paid time off from work for serious personal and family medical leave.
Here is an overview of the key changes to WPFML made by the new law.
Expanded Job Protection Rights
HB 1213 expands the job protection rights under the WPFML program in several ways. First, it gradually requires more employers to provide job protection. Currently, the law only requires employers with fifty or more employees in Washington to provide job protection. Under the new law, the size of employers required to provide job protection will be implemented over a three-year period, as shown in the table below.
IMPLEMENTATION DATE
EMPLOYER SIZES
January 1, 2026
25-49 Employees
January 1, 2027
15-24 Employees
January 1, 2028
8-14 Employees
Second, HB 1213 lowers the eligibility requirement for employees to qualify for job protection. Generally, employees do not qualify for job protection unless they have worked for their employer for at least twelve months and for 1,250 hours in the year before the start of their leave. The amendment will only require employees to have worked for their employer for at least 180 days before the start of their leave, regardless of how many hours they have worked.
Third, as explained in the final bill report, “[a] mechanism for addressing stacking of certain employment protection benefits is established.” This relates to the interplay of WPFML with the federal Family and Medical Leave Act (FMLA), which is complicated. FMLA and WPFML run concurrently only if the employee chooses to use them at the same time. Employees can opt to take WPFML leave after exhausting FMLA leave or to forego WPFML leave altogether. Also, in some cases, employees may not qualify for leave under the FMLA when they do qualify for leave under the WPFML.
HB 1213’s new “stacking mechanism” allows employers to count FMLA leave toward the total amount of leave entitled to job protection under the WPFML, if the employee was eligible for WPFML but did not apply for and receive it. To take advantage of this mechanism, employers must provide a written notice within five business days of the employee’s initial request for or use of FMLA leave, whichever comes first, and then monthly thereafter for the remainder of the employer’s FMLA twelve-month period.
The notice must be in a language understood by the employee and delivered in a method that is “reasonably certain to be received promptly by the employee.” The notice must include the following:
the employer is “designating and counting” the unpaid leave as FMLA leave, with the amount of FMLA time used and remaining, which the employer can estimate from information it receives from the state and the employee;
the employer’s twelve-month FMLA leave year;
because the employee is eligible for the WPFML program but has not applied for and received its benefits, the FMLA leave is counted against any permitted period of employment protection under the WPFML program;
the start and end date of the FMLA leave;
the total amount of FMLA leave counting toward the new job protection period under the WPFML; and
the employee’s WPFML benefits are not impacted by the stacking of the job protection rights of the FMLA and WPFML.
Fourth, employers must also provide a new notice of reinstatement rights to any employee taking more than two weeks of continuous leave or more than fourteen days of intermittent leave. The employer must provide the new written notice to the employee at least five business days before the return-to-work date. It must include the estimated expiration of the right of employment restoration and the date of the employee’s first scheduled workday after their leave.
Fifth, the amendment establishes maximum periods of employment protection. Unless there is a written agreement that says otherwise, the employees lose their right to employment restoration unless they exercise it on the earlier of the first scheduled workday following: (1) the actual leave period under the FMLA and/or WPFML or (2) sixteen weeks (or eighteen weeks for incapacity due to pregnancy) of continuous or combined intermittent leave during fifty-two consecutive calendar weeks.
Insurance Continuation Mirrors New Job Protection Period
Currently, employers must continue health insurance coverage during both FMLA and WPFML leaves only if there is at least one day of overlap between the two types of leave. Employees must continue paying whatever portion of their insurance premiums they normally pay.
The new law expands the employer’s requirement to maintain health insurance coverage to “any period of leave in the PFML Program in which the employee is also entitled to job protection.”
Other Changes
HB 1213 implements a slew of miscellaneous other changes, including allowing the state to periodically audit employer records to assess compliance, changing how an employer’s size is determined for premium calculations, and changing the grants available to small employers.
Next Steps
Employers may want to prepare for the changes coming to the WPFML program by reworking written policies and procedures and evaluating whether to change other forms of company-provided leave to address the expanded rights under WPFML. Washington State’s new mini-WARN Act takes effect on July 27, 2025, so employers may want to consider whether to implement reductions in force or closures before the amendments to WPFML begin on January 1, 2026.
California District Court Partially Enjoins Application of DEI and “Gender Ideology” Executive Orders Against Coalition of LGBTQIA+ Nonprofit Organizations
Last week, the U.S. District Court for the Northern District of California in the case of San Francisco AIDS Foundation v. Trump temporarily halted enforcement of parts of the diversity, equity and inclusion and “gender ideology” Executive Orders – specifically, as they apply to the named plaintiffs in the case.
The lawsuit was filed on February 20, 2025, by the San Francisco AIDS Foundation and eight other LGBTQIA+ and HIV advocacy organizations. The complaint challenges three Executive Orders:
Executive Order 14168: “Defending Women From Gender Ideology Extremism and Restoring Biological Truth to the Federal Government”[i]
Executive Order 14151: “Ending Radical And Wasteful Government DEI Programs And Preferencing”[ii]
Executive Order 14173: “Ending Illegal Discrimination and Restoring Merit-Based Opportunity”[iii]
Collectively, these EOs seek to restrict or defund federal funding for programs supporting DEI initiatives and what the Trump Administration labels as “gender ideology.” The plaintiffs contend that these EOs violate constitutional rights, including due process and free speech, and unlawfully exceed presidential authority due to unconstitutionally vague language.
The Court partially granted the plaintiffs’ request for a permanent injunction, holding that the plaintiffs had demonstrated a likelihood of success on the merits of several of their challenges to the EOs. The Court found that the challenged provisions in the EOs likely violate plaintiffs’ rights and protections under the U.S. Constitution. Accordingly, the Court barred enforcement of three provisions in the EOs only as to the plaintiffs: the “Equity Termination Provision” – requiring agencies to terminate all “equity-related grants or contracts”; and the “Gender Termination” and “Gender Promotion” Provisions – barring federal funding for programs that “promote gender ideology.”
The Court held that the plaintiffs had standing to challenge the funding terminations as they faced actual or imminent loss of federal funds. In its analysis, the Court determined that the Equity Termination Provision is unconstitutionally vague – likely in violation of the Fifth Amendment’s Due Process Clause – creating arbitrary and discriminatory enforcement, and failing to give clear notice as to what conduct triggers funding termination.
The Court also concluded that the Equity Termination and Gender-related Provisions unconstitutionally target protected expression, likely in violation of the First Amendment. Specifically, the Court found that these provisions impose viewpoint-based restrictions on speech and activities that promote “gender ideology” or that advance DEI and equity, while allowing speech that opposes those concepts.
In addition, the Court determined that the “gender ideology” provisions facially and purposefully discriminate against individuals based on transgender status, without a legitimate government interest. As a result, the Court concluded that these provisions likely violate the Equal Protection Clause of the Fifth Amendment.
The Court declined to enjoin the “Certification Provision,” which requires federal grant recipients to certify that they do not operate DEI programs in violation of applicable federal anti-discrimination laws. The Court reasoned that this provision does not require grantees to abandon or refrain from engaging in DEI activities generally; it simply requires that grantees certify that their activities do not violate federal anti-discrimination laws. Furthermore, the Court saw no evidence that enforcement would extend beyond what is already otherwise required or prohibited by law. The Court thus found that the plaintiffs had not demonstrated a likelihood of success on the merits of their constitutional claims as to the Certification Provision.
The Court’s order provides temporary relief from the challenged provisions only to the named plaintiffs, and all other federally funded organizations remain subject to enforcement. Nonetheless, the Court’s reasoning may provide guidance for how similar challenges might be considered as litigation proceeds.
During this period of legal uncertainty, employers – especially those receiving federal funds – must carefully balance current federal directives with ongoing obligations to employees and applicants under civil rights laws. Given the complexity and evolving nature of these issues, employers are strongly advised to seek legal advice before making any changes to policies or practices to ensure continued compliance.
FOOTNOTES
[i] Sheppard Mullin previously reported its analysis on EO 14168.
[ii] Sheppard Mullin previously reported a primer on EOs 14151 and 14173.
[iii] Sheppard Mullin previously reported its analysis on EO 14173.
Public Hearings on OSHA’s Proposed Heat Hazard Rule Begin
Monday, June 16, 2025, marked the first day of informal public hearings on the Occupational Safety and Health Administration’s (OSHA) proposed rule aimed at preventing heat-related injuries and illnesses in both outdoor and indoor work environments. With rising temperatures posing increased risks to worker health and safety, this rule would establish the first national standard specifically for heat hazard protection.
With an initial heat trigger at 80 degrees and additional control measures at 90 degrees, OSHA’s proposed regulations would significantly increase employer compliance obligations, requiring businesses to develop comprehensive plans to evaluate and manage heat risks. This includes identifying hazards, implementing engineering and administrative controls, and providing employee training. Preventative measures, for example, would require employers to create acclimatization procedures and provide water, rest breaks, cooling areas, and shade. Failure to comply could lead to citations and enforcement actions. While there is currently no federal standard addressing heat, many state plan states already have their own specific regulations targeting heat. A patchwork system of regulations and enforcement can make it difficult for large employers to operate across jurisdictions.
The public hearings have so far featured public testimony from employee advocates, industry safety experts, and business interest groups, such as the U.S. Chamber of Commerce. Worker advocacy groups generally supported the proposed standards, calling them “critically overdue,” but they also expressed a need for stronger measures in areas like recordkeeping and anti-retaliation protections. On the other hand, business representatives argued for a more flexible, performance-oriented approach, rather than a strict checklist. Voicing concerns about the proposed rule, business proponents argued that the rule does not account for factors like geographic location and employers’ unique operational needs.
The future of OSHA’s proposed heat safety standard is uncertain. As OSHA initiated the formal rulemaking process during the Biden administration, at least one business representative expressed surprise that these proceedings remained on the docket, given the current administration’s focus on deregulation.
OSHA’s hearings on this topic are currently scheduled through July 2, 2025.
Compliance Deadlines for Chicago Employers Coming July 1, 2025
July 1 has become a key date for labor law changes in recent years — and 2025 is no exception. This year two important provisions delayed under the Chicago Paid Leave and Paid Sick and Safe Leave Ordinance and the One Fair Wage Ordinance will take effect. Here’s what you need to know to stay compliant.
Chicago minimum wage increase
Effective July 1, 2025, there will be an increase in the Chicago minimum wage for all employees. The minimum wage will increase to $12.62 for employees engaged in occupations that primarily receive gratuities and to $16.60 for all other employees.
Expanded salary covered under One Fair Workweek
Similarly, the salary threshold for employees who are covered under the One Fair Workweek Ordinance will increase to cover employees who earn equal to or less than $32.60 per hour or $62,561.90 per year. Employers whose industries involve building services, healthcare, hotels, manufacturing, restaurants, retail and warehouse services should review their employee classifications to determine which roles now fall under the coverage of the ordinance coverage.
New paid leave payout requirements for medium-sized employers
Lastly, the temporary exemption for medium-sized employers (those with 51 to 100 covered employees) under the Chicago Paid Leave Ordinance will end on July 1, 2025. Under the Chicago Paid Leave Ordinance, medium-sized employers were previously only required to pay out two days of any accrued and unused paid leave upon termination of employment. On July 1, 2025, all medium-sized employers will be required to pay out all accrued and unused vacation time upon termination of employment.
Preparation for upcoming changes
Staying ahead of regulatory changes is essential for protecting your business and supporting your workforce. To proactively address these changes, employers should meet with their human resources departments in the coming weeks to update company policies and ensure compliance.
Maine Enacts Ban on Reporting Medical Debt to Credit Bureaus
On June 9, Maine Governor Janet Mills signed into law LD558, which prohibits the reporting of medical debt to consumer reporting agencies. The law bars medical creditors, debt collectors, and debt buyers from furnishing information about medical debt to credit bureaus, regardless of payment status or consumer repayment activity.
The new statute amends the Maine Fair Credit Reporting Act by replacing the term “medical expenses” with “medical debt” and eliminating carveouts that had previously allowed reporting in limited situations.
Putting It Into Practice: Maine’s statute comes just weeks after the CFPB formally withdrew its proposed rule that would have barred medical debt reporting nationwide (previously discussed here), and follows Vermont’s law that banned medical debt in consumer reporting statewide (previously discussed here). Companies operating in other jurisdictions should expect the trend to continue and plan accordingly.
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Supreme Court Unanimously Sides with Catholic Charities in Wisconsin Unemployment Tax Exemption Case
On June 5, 2025, the United States Supreme Court (the “Court”) unanimously ruled in Catholic Charities Bureau, Inc. v. Wisconsin Labor and Industry Review Commission that a Catholic charity group was entitled to a tax exemption from the state’s unemployment fund, and that interpreting the statutory language to the contrary, as the lower court (defined below) decision did, would violate the First Amendment.
This decision overturned the ruling of the Wisconsin Supreme Court (the “lower court”) that denied tax exemption based on the nature of the group’s activities as being “secular in nature, not religious,” holding that the decision below resulted in unconstitutional “denominational discrimination.” Justice Sotomayor delivered the majority opinion. Justice Thomas and Justice Jackson separately concurred.
Background
Under Wisconsin law, employers are required to pay into the state’s unemployment compensation program through payroll taxes.[1] There is an exemption for certain nonprofit organizations, including religious employers that are “operated primarily for religious purposes” and “operated, supervised, controlled, or principally supported by a church or convention or association of churches.”[2]
Petitioners in the case include the Catholic Charities Bureau, a nonprofit affiliate of the Roman Catholic Diocese of Superior, and its four sub-entities. They provide charitable services to local communities in Wisconsin, such as employment training and daily assistance to people with disabilities. They do not engage in “proselytization,” and they employ and serve people of all religious faith.
Petitioners sought a tax exemption under the relevant provisions and were rejected for not being “operated primarily for religious purposes.” The lower court affirmed the rejection, stating that petitioners’ activities are not typically religious because, among other things, they did not restrict charitable services to Catholics, nor did they attempt to proselytize or engage in any other activities that were not secular in nature.
The Decision
The Court unanimously overturned the lower court, in an opinion written by Justice Sotomayor. The Court concluded that the lower court’s interpretation granted “denominational preference” to religious organizations based on theological practices—such as whether to proselytize as part of the provision of other services or whether to only serve co-religionists. This “denominational discrimination” among religions, the Court reasoned, was presumptively unconstitutional under longstanding precedent under the religion clauses of the First Amendment, and could only be upheld if justified by a compelling governmental interest and if the discrimination was closely fitted to further such interest[3]—a test that the Wisconsin Labor & Industry Review Commission failed to meet.[4]
Justice Thomas and Justice Jackson both had separate concurring opinions. Justice Thomas’s opinion criticized the lower court’s conclusion that the Catholic Charities organization should be viewed as separate from the associated Catholic Diocese of which they are a part. Justice Jackson’s opinion agreed with the Court’s opinion with respect to the application of the “denominational discrimination” test to the decision below, but wrote to explain her views as to the reading of the similar exemption under the Federal Unemployment Tax Act (“FUTA”). Justice Jackson argued that a pure functional analysis of the relevant tax exemption was appropriate. In other words, it is entirely appropriate to analyze what an organization does to determine the eligibility for the relevant tax exemption, regardless of its motive or inspiration. Although not entirely clear, it is possible that Justice Jackson would agree that organizations such as the petitioners here could be denied tax exemptions under FUTA as long as organizations with other theological approaches (such as more active proselytization) were also denied tax exemptions.
Discussion
Given the very specific and narrow tax exemptions at issue, and the particularities of the lower court’s decision with respect to the lines it was drawing with respect to different types of religious organizations, it is possible that the opinion in this case will have a relatively narrow impact. The opinion does emphasize, at the very least, that when analyzing the scope of religious exemptions or religion-specific tax provisions, courts and practitioners need to be aware that drawing lines that benefit certain theological traditions over others could bear special scrutiny. A parsonage allowance with a limited scope only applicable to the ministers of certain religious traditions, or a real property exemption that only applies to religious land usages that have specific theological features, could be subject to searching review. That said, it is always difficult to predict how the Court will apply the principles of a decision interpreting the First Amendment in other cases with substantially different facts.
Summer Associate, Zhizhou (Josie) Liu, assisted with writing this post.
[1] Wis. Stat. §108.17-18.
[2] Wis. Stat. §108.0215(h)(2).
[3] Larson v. Valente, 456 U. S. 228, 246–47 (1982); Epperson v. Arkansas, 393 U. S. 97, 106 (1968); Zorach v. Clauson, 343 U. S. 306, 314 (1952).
[4] The Court noted that Wisconsin could not explain why an organization which did not proselytize and served all-comers was more at-risk to leave employees without unemployment benefits as compared to an organization that did so. Wisconsin’s exemption was also found to be underinclusive: organizations that did the same work as the petitioners but directly by a church or the ministers itself could be exempted. Additionally, the exemption did not draw distinctions between religious and non-religious employees, which was further evidence of the lack of a close fit between asserted government interest and the scope of the exemption.
Texas Energizes Nuclear Energy Strategy with Passage of Three Key Bills
The Texas Legislature recently passed three key bills: House Bill 14 (H.B. 14); Senate Bill 1061 (S.B. 1061); and Senate Bill 1535 (S.B. 1535), which introduce a comprehensive legal framework to promote nuclear energy in Texas, including uranium mining and workforce development. The bills are expected to be signed by Texas Governor Greg Abbott, who during the interim session instructed the Texas Public Utility Commission to establish an advanced nuclear working group to study and plan for the use of advanced nuclear reactors in Texas. The final report of the working group contains many of the recommendations on which these bills are based.
Key Provisions of the Advanced Nuclear Bills
1. Creation of the Texas Advanced Nuclear Energy Office
At the heart of H.B. 14 is the creation of the Texas Advanced Nuclear Energy Office (TANEO), a new agency housed within the Office of the Governor. [New Section 483.101(a) of the Texas Government Code]. TANEO is designed to facilitate advanced nuclear development in Texas by providing strategic leadership for the advanced nuclear reactor system in Texas, coordinating permits and regulatory efforts, engaging in public education and outreach, promoting the development of advanced nuclear reactors for dispatchable electric generation, creating high-wage manufacturing jobs, identifying barriers to nuclear project development, and supporting the creation of an in-state advanced nuclear supply chain. [Id. at subsection (b)]. The bill authorizes the Governor to appoint a Director of the Office to oversee and administer programs established under the Office [New Section 483.103 of the Texas Government Code] and a Nuclear Permitting Coordinator to assist developers with navigating federal, state, and local permitting requirements. [New Section 483.104 of the Texas Government Code].
2. New Grant Programs to Support Nuclear Development
H.B. 14 establishes the Texas Advanced Nuclear Development Fund, a dedicated account in the state’s General Revenue fund. [New Section 483.201(a) of the Texas Government Code]. The fund will support three new grant programs designed to reimburse expenses for qualifying projects using advanced nuclear technologies, including small modular reactors and microreactors. The Legislature has appropriated $350 million into the fund.
Project Development and Supply Chain Reimbursement Grants. Reimburses up to 50% of eligible early-stage costs (e.g., feasibility studies, engineering, licensing work), capped at $12.5 million per project. [New Section 483.203 of the Texas Government Code].
Advanced Nuclear Construction Reimbursement Grants. Covers up to 50% of qualifying construction costs, including Nuclear Regulatory Commission application fees and long-lead component procurement, with a cap of $120 million per project. Projects must have a construction permit or license application docketed with the U.S. Nuclear Regulatory Commission. [New Section 483.204 of the Texas Government Code].
Completion Bonus for ERCOT-Connected Reactors. Provides performance-based grants for advanced nuclear reactors that reach commercial operation and connect to the ERCOT power grid. Award amounts will be based on the facility’s generation capacity determined on a per-megawatt basis. [New Section 483.205 of the Texas Government Code].
TANEO will evaluate each grant applicant based on the applicant’s quality of services and management, efficiency of operations, access to resources essential to the project, application for a permit or license with the U.S. Nuclear Regulatory Commission, ability to repay the grant if benchmarks are not met, and the project’s potential benefit to the state. [New Section 483.206 of the Texas Government Code]. H.B. 14 ensures that these grants are reimbursement-based and not up-front funding. [New Section 483.202(b) of the Texas Government Code]. Recipients must repay grant funds if project milestones are not met. [Id. at subsection (e)(2)]. The bill also prohibits grants to applicants who already received state-appropriated funds under certain conditions. [Id. at subsection (c)].
3. Legislative Oversight and Confidentiality
Before finalizing any grant award under H.B. 14, TANEO must provide notice to the Lieutenant Governor and Speaker of the House, who may jointly disapprove of the proposed grant within 30 days (with one possible 14-day extension). [Id. at subsection (d)]. Grant application materials are deemed confidential and not subject to public disclosure under the Texas Public Information Act. [New Section 483.207 of the Texas Government Code].
4. Streamlined Procedures for Uranium Mining and Production
S.B. 1061 streamlines the uranium-mining application process by reducing procedural delays and clarifying permitting rules. Specifically, S.B. 1061 amends the Texas Water Code to provide that applications for authorization or amendment to authorization can be uncontested if:
the authorization covers a production area located within the boundaries of a permit that incorporates a range table of groundwater quality restoration values for each area;
the restoration values for each production area are below the established range’s upper limit;
the authorization covers a production area located within the boundaries of a permit that incorporates wells’ groundwater baseline characteristics as required by Texas Commission on Environmental Quality (TCEQ) rule; and
the TCEQ mails the application’s notice of receipt to the county’s groundwater conservation district and surface and mineral owners in the area no later than 30 days after the TCEQ determines the application to be administratively complete. [New Sections 27.0513(d)(1) – (4) of the Texas Water Code].
These changes allow companies to avoid the full permitting process when amending applications and will apply to applications or amendments submitted on or after September 1, 2025. [S.B. 1061, Sections 3 and 4].
5. Creation of an Advanced Nuclear Energy Workforce Development Program
S.B. 1535 creates the advanced nuclear energy workforce development program to develop a talent pipeline for the anticipated advanced nuclear industry growth. The bill directs the Texas Workforce Commission (TWC) to create and administer this initiative. [New Section 302.0081(b) of the Texas Labor Code]. The TWC must collaborate with the Texas Education Agency and the Texas Higher Education Coordinating Board to assess labor supply gaps in the advanced nuclear energy industry, retain talent and strengthen the nuclear workforce pipeline [Id. at subsection (c)(1)(A)], and support the development of academic and training programs in nuclear-related disciplines. [Id. at subsection (c)(2)]. The bill also authorizes support for public-private partnerships to create nuclear career awareness, academic pathways into nuclear fields, workforce training programs offered by public colleges and technical schools, and research and leadership development at general academic institutions. [Id. at subsection (c)(1)(B)]. Overall, S.B. 1535 intends to increase workforce capacity to meet the anticipated growth of Texas’s advanced nuclear energy industry.
What Adoption of these Bills Means
Collectively, these bills represent a landmark for nuclear energy in Texas. They institutionalize state-level support, from permitting coordination to sizable grant and workforce development. With full gubernatorial backing and alignment with established energy needs, lawmakers and industry are positioned to see a major shift in Texas’s energy portfolio. For the energy sector, emerging nuclear capacity could greatly strengthen much needed grid resilience, drive economic activity in project development, manufacturing and finance, and signal that Texas is preparing for diverse and reliable power sources in addition tofossil fuels and renewables.
Yes, Menstrual Cramps May Qualify as a Disability Under ADA
If a qualified job candidate asks to reschedule a second-round interview due to severe menstrual cramps associated with endometriosis, is that a request for an accommodation under the Americans with Disabilities Act? If you deny the request, could it be the basis of a sex discrimination claim under Title VII? The EEOC thinks so and filed a lawsuit against Equinox Holdings.
The EEOC’s Allegations and Settlement
Equinox Holdings runs fitness centers nationwide. The EEOC alleged that Equinox rejected an applicant due to her “monthly cycle.” The EEOC’s complaint alleged that Equinox violated the ADA by failing to hire the applicant on the basis of her perceived disability and by failing to make a reasonable accommodation for her endometriosis during the hiring process. The complaint also alleged that Equinox violated Title VII by failing to hire her due to the innately sex-based characteristic of menstruation.
Notably, the EEOC pointed to a text message sent by the Equinox hiring manager to the applicant as evidence of discrimination. Although Equinox had previously described the employee’s qualifications as “excellent” in a text to the applicant, the hiring manager explained that she was rejected “[o]nly because [of] the concern in the future if your absence may occur due to your month cycle,” according to the EEOC’s complaint.
The EEOC recently announced that it had settled this matter for $48,000. The settlement also requires Equinox to implement anti-discrimination policies, post notices regarding employee’s rights under federal anti-discrimination law, and provide ADA and Title VII training to employees and hiring managers.
The Legal Landscape
The ADA prohibits employers from discriminating against qualified individuals — including both applicants and employees — with a disability. It also requires employers to provide reasonable accommodations to qualified individuals with a disability if the employer can do so without undue hardship.
Importantly, the ADA prohibits discrimination against job applicants in the hiring process. In the hiring stage, this could mean making modifications or adjustments to the job application process that enable a qualified applicant with a disability to be considered for the job.
Takeaways
The EEOC’s allegations and the resulting $48,000 settlement bring to light two points employers should remember.
First, your ADA obligations run even to nonemployee applicants. Employers should navigate the hiring process with this in mind and pay attention to any concern raised by an applicant regarding a medical condition that impedes his or her ability to navigate the hiring process. Requested accommodations in the hiring process can include a wide variety of things (e.g., rescheduling an interview, a translator for an applicant who is deaf). Train your front-line hiring managers to recognize situations where an applicant may need an accommodation, particularly if the applicant identifies a medical issue.
Second, keep in mind that common conditions such as endometriosis and severe menstrual cramps may qualify as disabilities under the ADA. Treating an applicant or employee differently because of menstruation-related issues may also implicate Title VII.
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Workplace Strategies Watercooler 2025: A Ransomware Incident Response Simulation, Part 2 [Podcast]
In part two of our Cybersecurity installment of our Workplace Strategies Watercooler 2025 podcast series, Ben Perry (shareholder, Nashville) and Justin Tarka (partner, London) discuss the steps to take after resolving and containing a ransomware incident. Justin and Ben, who is co-chair of the firm’s Cybersecurity and Privacy Practice Group, highlight several key areas, including preparing the response team, implementing training for relevant employees and regular reviews of cybersecurity measures; developing a comprehensive incident response plan and assembling a dedicated response team; identifying opportunities for long-term infrastructure improvements; and assessing other areas of external risk management, such as data mapping and retention processes, vendor due diligence, and notification obligations.
Texas Supreme Court Holds Unique Employment Structure Limits Liability for Physicians
In Renaissance Medical Foundation v. Lugo (No. 23-0607), the Texas Supreme Court held that the legislature modified traditional, common-law vicarious liability for certain health care entities that employ physicians. The Court pronounced that non-profit health organizations (NPHOs) certified as such by the Texas Medical Board may employ physicians, but they “may not interfere with, control, or otherwise direct a physician’s professional judgment” in violation of Section 162.0021 of the Texas Occupations Code (Code) and other long-standing civil and criminal prohibitions on interfering with physicians’ independent, professional judgment.
The Court explained that making an NPHO vicariously liable1 “for employee conduct it is statutorily prohibited from controlling would be inconsistent with” the principle that control of the employee’s work justifies vicarious liability. The majority opinion explained that this “unique” employment structure in Section 162 of the Code “altered the landscape” and allows NPHOs “to choose to employ physicians without engaging in the unlicensed practice of medicine.”
The concurring opinion by three justices more firmly explained that “[v]icarious liability claims against these [NPHOs] that allege a physician’s medical judgment caused the patient’s injury thus have no merit absent allegations of the [NPHOs’] unlawful interference.” Indeed, “Section 162.0021 forecloses such liability to the extent it rests on a physician’s exercise of medical judgment as the cause of the injury.”
This decision overruled the court of appeals’ conclusions that Section 162’s text does not modify common-law vicarious liability and the preclusion on NPHOs controlling a physician’s independent medical judgment is largely inapplicable as a defense to this type of vicarious liability claim. The court of appeals reached these conclusions despite acknowledging that there is no “suggestion or evidence” that the NPHO exercised actual control of the surgeon’s medical care to the patient, which is the alleged injury-causing conduct.
The Court’s majority opinion left open the theoretical possibility that an NPHO might have sufficient lawful control over a physician to justify vicarious liability. The Court remanded the case to the trial court and invited the NPHO to file a new motion for summary judgment to flesh out application of the Court’s newly articulated limitation on vicarious liability to the facts of this case.
Health care industry stakeholders may wish to monitor development of the law relating to this unique structure that the legislature created with the objective of expanding health care, particularly in rural Texas. An amicus brief from the Texas Hospital Association showed progress in meeting this goal by noting that more than 10,000 physicians in Texas had already been employed by the more than 1,000 NPHOs certified by the Texas Medical Board.
1 Employers generally are vicariously liable for conduct of their employees within the scope of employment. Historically, this rule does not apply to physicians credentialed to perform procedures in hospitals in Texas because physicians performing procedures in hospitals are independent contractors. This is part of Texas’s prohibition on the corporate practice of medicine. Section 162 applies similar treatment to physicians engaged by NPHOs pursuant to the statute.