REPORT FROM COUNSEL

SUMMER 2005 ISSUE

UNEMPLOYMENT COMPENSATION UPDATE

By Anne E. Zerbe

In February 2005, Employers in Pennsylvania suffered a setback in defending Unemployment Compensation (UC) hearings. On February 3, 2005, a majority of the Commonwealth Court of Pennsylvania issued an opinion that barred Employers from representing themselves or being represented by someone who is not licensed to practice law.

The Court's decision in Harkness v. Unemployment Compensation Board of Review was issued in response to an appeal by a claimant who was terminated from her position at a Macy's department store for using rude language toward a customer. At the Referee's hearing, William Forrest, an employee of TALX UC EXPRESS represented Macy's, a St. Louis company engaged in the business of representing employers in Unemployment Compensation cases. The claimant objected to Mr. Forrest's representation of the company on the grounds that he was not an attorney. The Referee overruled the objection, and during the course of the hearing Mr. Forrest conducted cross-examination, entered exhibits into evidence, and gave a closing statement.

On appeal, the Commonwealth Court found that Mr. Forrest's conduct constituted the unauthorized practice of law. Noting that non-attorneys may not represent parties before Pennsylvania Courts or administrative agencies, the Court found that a business entity may act before a judicial or administrative tribunal, including an Unemployment Compensation Referee's hearing, only through an agent who is authorized to practice law.

The employer argued that the informal nature of the proceedings and the relatively small amounts at stake should be considered by the Court in allowing employers to retain non-attorney, non-employees to represent them in Unemployment Compensation proceedings. The Court was not persuaded by the argument. Thus, effective February 3, 2005, employers cannot be represented by an individual who is not an employee of the company unless the individual is an attorney. Claimants are permitted to be represented by a non-lawyer in an Unemployment Compensation proceeding as permitted by Section 702 of the Unemployment Compensation Law 43 P.S. Section 862.

As a result of the Commonwealth Court's decision, all business entities, including corporations, limited liability companies, associations, trusts and government agencies, must retain a licensed attorney if the employer wishes to be represented at an Unemployment Compensation hearing. An employer may still appear at a hearing and present testimony without being accompanied by an attorney. However, company representatives may not question witnesses, admit evidence, make objections, or present legal arguments.

After the Court's ruling was handed down, the Department of Labor and Industry issued new regulations for employers governing Unemployment Compensation appeals and hearings. These regulations require employers who want to request a subpoena or otherwise be represented at the hearing, to "use an individual allowed by law to represent you." The new regulations also state who can represent different types of corporate entities in Pennsylvania.

For example, an attorney or the owner/proprietor may represent a sole proprietorship. A partnership may be represented by an attorney or a general partner. All other employer entities, such as corporations, trusts, associations, limited liability companies and government agencies, may be represented only by an attorney or officers or employees. Employers may call employees as witnesses, but non-attorneys will not be permitted to represent the employer and will not be allowed to object to evidence, question witnesses or give legal arguments. In addition, all corporate entities filing an appeal will be required to have an attorney sign the Petition for Appeal.

Two weeks after the ruling was handed down, the Department of Labor & Industry announced that the Unemployment Compensation Board of Review (UCBR) intends to ask the Pennsylvania Supreme Court to reverse the Commonwealth Court decision that banned the long-standing practice of allowing employers involved in an Unemployment Compensation proceeding to be represented by individuals who are not attorneys. At this time, efforts are underway by state legislators to enact changes in the current legislation to permit employers to be represented by non-attorneys.

Appeal to Supreme Court

On March 7, the Department of Labor and Industry (the Department) filed an appeal of this decision to the Pennsylvania Supreme Court. Many business groups will be filing an amicus brief to support the appeal.

Pending Legislation

On March 28, 2005, Senate Bill 464 was referred to the Senate Labor & Industry Committee. This Bill is intended to allow employers top be represented at Unemployment Compensation Hearings by non-lawyers, as has been the practice within the Commonwealth until the recent ruling by the Court.

Notice to Employers

Although the Harkness ruling does not prevent a witness from testifying for the corporate employer about events that he or she witnessed, some Unemployment Compensation Referees have interpreted the ruling to prohibit any corporate employer from presenting any testimony. This restriction is contrary to the new regulations published by the Department of Labor and Industry. If an Employer is not represented by counsel, the Employer may print out the regulations issued by the Department of Labor and Industry and request that the witness be permitted to testify to events about which he or she has first hand knowledge. If the Employer's witness is not permitted to testify, the Employer should request a continuance to secure counsel.

Pending the proposed legislation or review by the Supreme Court, the Department's interpretation of the Harkness decision imposes a significant burden on employers and stretches well beyond the Commonwealth Court's ruling. Employers are now also required to utilize an attorney to file any appeals or continuances. Additionally, every appeal filed after February 3, 2005, involving a case in which the employer did not have legal representation will be remanded for a new hearing. These interpretations unnecessarily complicate the method and manner by which employers conduct and defend Unemployment Compensation matters.

FIRM UPDATE

Joseph C. Adams is a candidate for Judge of the Court of Common Pleas of York County. We believe that he has the knowledge, experience and skill to serve well.

Anne E. Zerbe presented a seminar entitled "Employment Law from A to Z in Pennsylvania."

Attorneys Jon C. Countess, John D. Flinchbaugh, Timothy J. Bupp and Jeffrey L. Rehmeyer II presented a seminar entitled "Estate Planning Under the New and Changing Tax Laws" to the members of the York County Heritage Trust.

ENVIRONMENTAL LAW UPDATE

Wetlands Inspection

Paul owned waterfront property that included some tidal wetlands that were subject to state regulation. When he decided to extend his existing dock and add another boat lift, he submitted the necessary application to the state, but he refused to consent to a land-based inspection of the premises. Nevertheless, following the usual procedure, an inspector went to the property to make sure that plans submitted with the application accurately reflected existing conditions and to evaluate the possible impact of the project on the wetlands.

When the inspector arrived and no one answered the door, she passed through a gate with a "No Trespassing" sign on it to get into the backyard that led to the dock area. With a video camera rolling, Paul confronted the inspector, who identified herself and explained the reason for her visit. Paul told the inspector that she was trespassing, threatened to have her arrested if she did not leave immediately, and then escorted her off the property. The whole encounter took about three minutes.

Paul sued the state inspector for violation of his right not to be subjected to unreasonable searches or seizures. It is true as a general rule that an inspection of a private dwelling by a local or state officer, without either a warrant or the consent of the owner, is unreasonable absent certain exceptional circumstances. Unfortunately for Paul, his case fell within one of those exceptions, causing his lawsuit to fail. Under the "special needs" doctrine applied by the court, a weighing of several factors can justify a warrantless administrative inspection undertaken as part of a regulatory scheme.

In Paul's case, he had a diminished expectation of privacy since the outside areas around his home could be viewed by the public. Paul's privacy interest was also weakened by his having submitted the application that prompted the inspection in the first place. The intrusion by the inspector was minimal and was hardly different from the kind of observation of the property that anyone could have accomplished from the water behind Paul's house. The court emphasized that each case would turn on its particular facts, but in Paul's case the state's interest in regulating construction on tidal wetlands overrode any expectation of privacy.

No Help for Toxic Waste Cleanup

A company bought an aircraft engine maintenance business and operated the business for a few years. It then discovered that the property on which the business was located was contaminated with toxic waste, both because of the company's activities and the activities of the previous owner. The company reported itself to a state environmental agency, which told the company that it was in violation of state laws and directed that the site be cleaned up. However, neither the state agency nor its federal counterpart, the Environmental Protection Agency, ever brought a proceeding to force the cleanup.

Under the state's supervision, the company cleaned up the property (incurring costs in the millions of dollars) and unsuccessfully sued the previous owner that had contributed to the contamination, in hopes of getting a contribution to the cleanup costs as well. This case is a study in how a few words in a statute can control the outcome in a dispute where large sums of money are at stake.

The claim for a contribution to the cleanup costs rested on a part of the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). That statute states that any person "may" seek contribution from any other person who is or may be liable under CERCLA, "during or following any civil action" under CERCLA. The U.S. Supreme Court interpreted the statutory language as meaning that the company could not seek contribution from the previous owner (and fellow polluter) because no proceeding under CERCLA was ever instituted against the company that cleaned up the toxic waste.

The use of "may" by Congress meant that an action for contribution was authorized only if the conditions that followed were present, including a civil action under CERCLA. Appeals by the company based on the underlying purposes of CERCLA fell on deaf ears before the Court. As the Court put it, "It is ultimately the provisions of our laws rather than the principal concerns of our legislators by which we are governed."

NEW TAX DEPOSIT RULES FOR SMALL BUSINESSES

As of January 1, 2005, the IRS increased the minimum threshold for Federal Unemployment Tax Act (FUTA) deposits. Under the previous rule, employers were required to make a quarterly deposit for unemployment taxes if the accumulated tax exceeded $100. Now the threshold is $500.

The IRS estimates that this change will lighten the load for more than 4 million small businesses. Assuming an employer makes timely state unemployment tax payments, the most that the IRS will collect from employers per employee is $56 per year. Before the threshold was increased, most employers with two or more employees had to make at least one federal tax deposit a year. Now employers with eight employees or fewer will be freed from the requirement of making as many as four FUTA deposits per year.

FAMILY LIMITED PARTNERSHIPS DRAW IRS SCRUTINY

A family limited partnership (FLP), like other limited partnerships, is a form of business consisting of one general partner and one or more limited partners. In an FLP, however, the individuals involved usually are members of different generations of the same family. One of the advantages of a well-executed FLP is a reduction in federal estate and gift taxes. Instead of transferring assets directly to beneficiaries, an individual may transfer interests in a limited partnership. Since interest in an FLP is not marketable and since a limited partner does not control management of the enterprise, the value of interests in an FLP usually can be discounted by anywhere from 25% to 50%, with a corresponding reduction in tax liability.

As with many transactions among family members, the IRS has a history of casting a skeptical eye on FLPs. Essentially, the IRS is intent on assuring that the tax advantages of any particular FLP are not the be-all and end-all for its existence. If the FLP is deemed to be a sham, the IRS may challenge the valuation discount and perhaps even the very existence of the partnership.

In one recent case, a federal appeals court found an FLP to be legitimate despite some circumstances that had aroused IRS suspicion. A 96-year-old woman put about $2.5 million into an FLP, keeping $450,000 for her personal expenses. She died two months later. The fact that the transfer included interests requiring active management and that no personal assets, such as a house or car, were involved weighed in favor of the FLP. Also, the person making the transfer into the FLP did not manage the FLP. Perhaps most importantly, oil and gas operations provided an essential legitimate business purpose for the FLP.

In another case that was similar in many respects, including the age of the individual transferring the assets to the FLP, the assets were found to be subject to the estate tax because the FLP had not been formed for a valid business purpose. Transactions made by the FLP never went outside the family circle and amounted to financing the needs of individual family members.

Emerging from the cases are a few rules of thumb for setting up and running an FLP so as to realize its tax benefits without attracting the attention of the IRS:

* Articulate real business reasons for the FLP that can be substantiated by persons outside the FLP;

* Do not let the person transferring assets into the FLP transfer all of his or her assets or use the FLP to pay personal expenses;

* Assign control over the FLP to a general partner who is not the same person who funded the FLP. Often the general partner is an entity, such as a limited liability company;

* Have some "actively" managed assets in the FLP; and

* Follow the formalities for setting up and operating the FLP, including separate accounts and scrupulous adherence to formal accounting practices.

VETERANS' BENEFITS IMPROVEMENT ACT

A new federal law has enhanced the rights of members of the armed services during active duty and on their return to the civilian workforce. The Veterans' Benefits Improvement Act makes two significant additions to the Uniformed Services Employment and Reemployment Rights Act (USERRA). USERRA is intended to encourage non-career uniformed service by balancing the needs of individuals in those services with the needs of civilian employers who also depend on those same individuals.

Notice Requirement

The first provision requires that civilian employers inform employees of their rights and obligations under USERRA annually. The notice requirement may be met by posting a notice where employers customarily place notices for employees. This part of the new law became effective on March 10, 2005.

Extension of Benefits

The second change is an extension of employer-sponsored health care from 18 to 24 months, beginning with the person's absence from employment because of duty in the armed services. USERRA gives the individual the right to elect to continue coverage under the employer's health plan, even though the coverage otherwise would end because of the individual's absence. A "health plan" encompasses an employer's health, dental, vision, and prescription drug plans, as well as health reimbursement arrangements and flexible spending accounts. The employee, not the employer, pays for the coverage during the employee's absence. This health-care provision went into effect on December 10, 2004.

USERRA, the comprehensive legislation that was changed only in part by the Veterans' Benefits Improvement Act, is far-reaching in its impact, as it applies to private and public employers alike, regardless of size. It is subject to various conditions and exceptions that make a full reading of the law, not to mention professional guidance, advisable.