Many employees may not realize that they can take loans from the money that they have saved in their 401(k) plans. While doing so carries some risk, as failing to pay back the money will trigger significant tax penalties, it does provide employees with ...


401(k) Loans and more...

401(k) Loans

Many employees may not realize that they can take loans from the money that they have saved in their 401(k) plans. While doing so carries some risk, as failing to pay back the money will trigger significant tax penalties, it does provide employees with the ability to quickly borrow money interest free regardless of their credit score.

401(k) owners are allowed to borrow up to 50% of the vested balance in their 401(k). The vested balance is the amount of money in the 401(k) that an employee would have access to if he or she were to leave the company immediately. Many companies require employees to fulfill certain conditions, like working for a certain amount of time, before they will be entitled to receive all of the money that the company has set aside for them. The maximum amount of money that can be borrowed in a 401(k) loan is $50,000.

401(k) owners who take a loan have five years to repay it. Payments must be made at least quarterly. Owners actually have to pay interest on the loan (which is about 2 points higher than the prime rate), but since this interest goes back into the owner’s 401(k) account the owner is not actually losing any money. The loan must be paid back with money that has already been taxed, and the money paid is not considered a contribution to the plan.

If an employee fails to repay a loan taken from his or her 401(k) account, then it becomes a 401(k) distribution. This means that the employee will have to pay income tax on the distribution plus an additional 10% early withdrawal penalty. Depending on the employee’s tax rate, this could mean that he or she will be required to pay a tax bill of 35% to 45% of the loan amount. Also, if an employee switches jobs or the 401(k) program ends, then the employee has just 60 days to repay the loan or suffer the 10% penalty in addition to paying income tax.

Other downsides from 401(k) loans are potentially origination, administration, and maintenance fees for the loans. Also, money taken out for a loan will not be available for market appreciation.

Most employers hire companies to run their 401(k) plans, and they will handle the details of an employee’s withdrawals from a 401(k) policy. I would suggest contacting this company if you have specific questions about how 401(k) withdrawals work.

7th Circuit Holds Salary History Can Explain Disparate Pay

Differences continue to exist among federal courts as to whether use of salary history is a gender-neutral basis to justify salary differences between male and females doing the same job. The federal Equal Pay Act prohibits unequal pay for the same work based on sex. Many argue, and some courts agree, that because women continue to earn less than men for the same work (the gender gap), to allow employers to base wages on the candidate’s salary history only perpetuates the sex-based pay disparity and should not be lawful.

The most recent notable case supporting the argument against use of wage history came out of California. In Rizo v. Yovino, which has been the subject of a few posts here, the court of appeals ultimately ruled that the school district who hired plaintiff in that case violated the Equal Pay Act when it paid her as a teacher significantly less for the same work than male teachers because the school district based pay on salary history.  The U.S. Supreme Court took the case on appeal but dismissed it because the court of appeals judge who wrote the decision and was part of the majority (but not unanimous) vote, died before the decision issued. Dismissal of the case means that different federal circuits can rely on the precedent in their own circuit to decide whether salary history can lawfully be used to set salaries, even if it perpetuates pay disparity between sexes.

We jump back to the 7th circuit; which covers all of Illinois and some of Indiana and Wisconsin and is known as one of the more conservative and employer friendly courts of appeals. Last week it affirmed its consistent holding that using salary history to set pay is not a violation of the Equal Pay Act because it is not a criterion based on sex.

In Hubers v. Gannett, the plaintiff sold advertisement for USA Today, owned by Gannett. Her pay wasn’t shabby, earning a base at the time that she left of $137,000 with the ability to earn another $135,000 if she met all of her sales goals. The problem was that a male employee who had previously worked in the sports advertising division was transferred to a position identical to hers after the sports ad division closed. While in the other job, his base salary was $190,000 with the ability to earn more if he met sales goals. Gannett did not adjust his salary when he was transferred to the same position as plaintiff, nor did they increase plaintiff’s salary to be the same as his. Ultimately, and for a number of reasons in addition to the pay disparity, plaintiff quit and sued the company for, among other things, violation of the Equal Pay Act.

The company responded, in part, that the male employee was simply kept at his previous salary to avoid morale problems that often occur when an employee’s salary is reduced. In other words, the company maintained his salary based on his pay history. Plaintiff argued that because their positions were identical, the fact that he was placed at a higher salary violated the Equal Pay Act.

Relying on 7th Circuit precedent, the court held that employers can cite salary history to explain pay disparities between male and female employees and case law does not require employers to increase the pay for women when salary discrepancies between sexes are based on prior compensation. The court stated that “prior salary alone…is sufficient to support a pay differential.”

Until the U.S. Supreme Court has another opportunity to address this issue, employers should be aware of two things. Nationwide companies may be subject to different interpretations of the use of salary history in different jurisdictions. Secondly, many local governmental units, like the City of Chicago, have enacted ordinances which ban employers from inquiring about salary history. While use of salary history to set pay may be lawful in the 7th Circuit’s jurisdiction, in some places within those boundaries it is unlawful to ask about salary history.

What Functions of a Job Are Really Essential?

Complying with the ADA can be complicated. While most employers know that they must provide a reasonable accommodation to a disabled employee to allow that worker to perform the essential functions of their positions, our clients sometimes ask us for assistance in determining the actual essential functions of a job. Are they just what the employer labels as essential functions in a job description? And, as so often is the case, what if the job description is not completely up to date and does not identify duties as essential that the employer believes are so?

Earlier this week, the 7th Circuit Court of Appeals reiterated the test that courts in this jurisdiction should use to determine what job duties are essential functions. In the case of Papenfuss v. Butitta Bros. Auto, Inc, the plaintiff had worked for the auto repair company for a few years when he began suffering from seizures. His doctor restricted him from driving for an indefinite period of time. Upon hire, plaintiff was given two job descriptions, one for a service advisor which did not require driving and one for a technician, which did require driving. The parties both acknowledged that all employees occasionally drove, regardless of their job title. The company determined that plaintiff’s complete prohibition against driving made it impossible to reasonably accommodate his seizure disorder. Plaintiff sued the company, claiming failure to accommodate under the ADA because, among other things, driving was not an essential function of his job. The question became whether driving was an essential function of plaintiff’s job.

 The court noted that a plaintiff must plead and prove in an ADA claim that “(1) [he] is a person with a disability as defined by the ADA; (2) the defendant knew about [his] disability; and (3) the plaintiff is otherwise qualified to perform the essential functions of the job sought, with or without reasonable accommodation.” A plaintiff who clears this first hurdle must then show that his or her employer failed to provide a reasonable accommodation.

In order to determine whether an employer failed to provide a reasonable accommodation, the court must first (1) define what the “essential functions” of plaintiff’s job were and then (2) determine whether plaintiff could have performed those “essential functions” with (or without) a reasonable accommodation.

While employers might think that it is in their discretion to determine what functions are essential to a job, the court here cautioned that “courts should not “rubber-stamp an employer’s assertions about which functions are essential,” because doing so would allow employers to undermine the ADA by creating new essential functions as “post hoc rationalizations for unlawful discrimination.”

Rather, the court reiterated the various factors used to determine whether a particular duty is an “essential function,” including (a) the employee’s job description, (b) the employer’s opinion, (c) the amount of time spent performing the function, (d) the consequences for not requiring the individual to perform the duty (the hardship), and (e) the actual practices in the employer’s workplace.

Whether a function is essential to a job is answered case by case, but employers should be aware in general that identifying a job function as essential will not automatically make it so. Rather, employers should keep in mind the tests used by courts to determine whether a function is essential both when drafting job descriptions and when engaging in the ADA interactive process.

Atlantic City Firefighter Sues Over Beard

An Atlantic City, New Jersey firefighter filed suit last week for religious discrimination after he was removed from service over his beard.

The firefighter, who alleges that his job is to ensure that the masks that firefighters wear when fighting fires are in good working order, ironically was removed from service allegedly because his beard could compromise the seal of the masks which are designed to supply oxygen if needed and to prevent firefighters from breathing smoke while putting out a fire.

Firefighter Alexander Smith claims that he recently became a born again Christian and symbolic of his faith he began growing a beard late last year. The Department has a policy prohibiting beards and goatees because they interfere with the seal on the masks that firefighters wear when engaging in fire suppression. In early January of this year, Smith asked for a religious accommodation allowing him to maintain a beard. He claims that he does not actually engage in fire suppression, but rather is a mask specialist. The Department denied his request and he filed suit last week claiming religious discrimination.

Facial hair and hair length are two of the more common religious accommodations requested by employees related to appearance. Like other reasonable accommodations, they are evaluated on a case by case basis. The determination is driven by the duties of the requesting employee and the hardship the accommodation may case. While on its face, Firefighter Smith may seem to have a compelling case for an accommodation, one can easily imagine other factors that led to the Department’s denial of his request. For instance, if Firefighter Smith is required to be present at fires to work on the masks of other firefighters, his own health and safety may require him to occasionally wear a mask. Similarly, even if his regular duties are not fire suppression, he might need to be available to engage in that activity when necessary.

Fires are unpredictable and demand strict safety guidelines, which is not always the case for other jobs. In any event, employers should ensure that job descriptions accurately reflect the duties of a position and when evaluating a request for religious accommodation, the need and ability to do those job duties is analyzed fairly, keeping in mind that a reasonable accommodation is usually not hiring another employee to pick up the work that can’t be done by the requesting employee or placing the safety of the employee or others in jeopardy in order to grant the accommodation.

New York Releases Training Videos on Sexual Harassment Prevention

Employers might want to check out sexual harassment prevention videos that were recently released by the State of New York. You can check out the videos by clicking here and here. Also available are the slides used in the videos along with the video’s transcript and case studies, as well as a webinar that discusses recent changes in the State’s employment laws. The information contained in these materials is applicable to employers in Illinois and other states, so if employers are looking to conduct sexual harassment prevention training in house, these materials are a good place to start.

These materials have been released as part of a sweeping series of changes to New York’s laws governing sexual harassment in the workplace. Starting last October, New York employers were required to adopt written sexual harassment prevention policies and undertake annual workplace sexual harassment training.

Ancel Glink provides sexual harassment training, so if you are interested in having us conduct such training, feel free to contact us. It is important to make sure that you do your sexual harassment training the right way. Of course, this will make it clear to employees what constitutes sexual harassment and what does not, and hopefully decrease the likelihood that it will occur. But in the event your company is sued for sexual harassment, it will provide evidence that you attempted to take measures preventing sexual harassment from occurring in the workplace.