If you are in business long enough, chances are that you’ll eventually be involved in at least one benefits-related legal dispute with an ex-employee.

The good news: There are ways to avoid common mistakes that get in the way of resolving disputes quickly. Even if you are sued, taking these three steps can keep things from going from bad to worse:

1. Focus on a narrow time period

Companies open the door for trouble when a poor-performing employee is given a raise or bonus – and then fired shortly thereafter.  Huge red flag: Employees who are terminated shortly after a dispute over paid leave or disability.

In many cases, the employers can’t fall back on a history of poor performance reviews. The problems are often more recent in nature.

Best practice: In performance reviews, supervisors should focus the documentation only on the time period the review covers – and not anything earlier. If an issue’s taken to court it may look like the employer’s retaliating against the employee for taking leave or claiming a disability.

2. Follow up promptly

It’s dangerous to terminate someone shortly after he or she has filed a complaint.  If an employee’s made a written or verbal complaint shortly before being fired, the employer is vulnerable to retaliation lawsuits.

Timing’s of the essence when it comes to following up on complaints. An investigation that’s started within a day or two of a complaint shows that the firm took the issue seriously.

3. Abide by plan documents

Sometimes the first time you’ll hear about a benefits or pay-related complaint is after the employ files a claim with the DOL or EEOC.

Emotions usually run high when this happens. But it’s crucial to follow to the letter the investigation and dispute-resolution procedures spelled out in your plan documents.  Failure to do so almost always puts the company in legal jeopardy.

The result is almost always a court case or an expensive settlement – even if the company was in the right. Reason: Under ERISA, the only thing that’s worse than deviating from plan documents is not having written dispute-resolution procedures at all.

Benefits and HR managers are used to handling accommodation requests for an array of medical issues. But handling mental health issues are especially tricky — and filled with legal pitfalls.

As employees have become more aware that mental health issues like depression and anxiety are considered medical conditions, accommodation requests have shot up dramatically. How far does your organization need to go to honor such requests?

As long as the employee’s anxiety can be documented medically and unless honoring the request would create extreme economic hardship for your organization, you must honor the request. It’s also crucial to look at the employee’s job description. The key issue to look at is whether the employee can still perform essential job functions.

Also, the employee may not need a permanent accommodation. Example: He or she has started taking a new type of anti-anxiety medication.

Courts have ruled that ADA permits employers to obtain enough information from employees’ mental health provider (psychiatrist, psychologist, licenced clinical social worker, etc.) to determine whether an accommodation is needed and, if so, for how long.

Keep in mind: The purpose of ADA is to provide equal – not preferential – treatment to employees with physical or mental disabilities.

Reasonable vs. unreasonable requests

Legally speaking, mental health conditions are protected under the Americans with Disabilities Act (ADA). That means your organization must honor any reasonable accommodation request tied to a mental health issue. But what’s considered reasonable and unreasonable?

A reasonable request would be something like, “I have an anxiety disorder and my therapist says that I need to limit my work travel.”

An unreasonable accommodation request: “My therapist says my boss is the cause of my depression. I need a new supervisor.”

Even if the accommodation request is unreasonable, you may still have additional legal obligations. In the example above,  you may have a discrimination – rather than accommodation – case on your hands.

Key question to answer: Did the supervisor single the employee out for abuse or ridicule due to his or her mental-health condition? 

MHPA compliance

The Mental Health Parity Act (MHPA) also protects employees in most organizations. MHPA requires that your annual or lifetime dollar limits on mental health benefits (including through your EAP) be no lower than the limits for medical benefits offered through your firm’s health plan.

Even so, you still have discretion regarding the extent and scope of the mental health benefits you offer to employees and their families. This includes sharing the cost of premiums, limits on numbers of visits or days of coverage, and requirements related to proving medical necessity.

Supervisor training is crucial

In many cases, supervisors’ level of education and training in handling the challenges of mental health issues is your best defense – or biggest risk – in avoiding lawsuits. Experts recommend making it a top priority to train supervisors to follow three basic rules:

• Refer employees to the EAP program. Don’t play amateur psychologist if you suspect an employee has a problem.
• Direct employees’ accommodation requests and benefits-related problems (e.g., scheduled therapist appointments clash with work schedule) to HR/Benefits, and
• Avoid making – and don’t tolerate – inappropriate jokes or comments at the affected employee’s expense.

The last issue may be a sore spot with supervisors. But it’s critical. Employers have lost or been forced to settle multi-million dollar mental health discrimination lawsuits because of someone’s “innocent joke.”

That’s all changed, with the rules established last year by the DOL and U.S. Treasury Department. The rules themselves haven’t changed, but they’ve been clarified. Here’s what you need to know:

‘Participation incentives’ are fine

As long as you structure incentives as rewards for wellness participation, the new rules provide a lot of freedom. All of these are fine under HIPAA:

• reimbursing all or a portion of the cost of fitness club membership
• financial rewards for undergoing health risk assessments so long as the reward is based on participation rather than test results
• encouraging preventive care by waiving co-pays or deductibles for these services (i.e., well-baby visits or prenatal care)
• reimbursing employees for the cost of smoking-cessation programs without regard to the result, and
• offering rewards tied to employees attending a monthly health education seminar or working with a health coach.

Conditional rewards OK if…

But what if you want to make the reward conditional on participants meeting specific health goals? Example: Employees who achieve a cholesterol count under 200 get a 20% reduction in the cost of their health plan contributions pending results of an annual cholesterol test.

The feds say it’s OK under HIPAA to do this, too, but your plan must meet five additional requirements:

• The reward can’t exceed 20% of the cost of employee-only (or, if you allow dependents to participate, employee-plus-dependent) coverage under your health plan.
• The standards must be reasonable (e.g., you can’t limit rewards to folks who can run a marathon). The rewards also can’t be used as a backhanded way to negatively single out certain employees (e.g., rewards for all non-diabetics).
• Participants must have the opportunity to qualify for the reward at least once per year (e.g., a smoker who fails to quit this year gets another chance next year).
• Rewards must be available to all “similarly situated individuals.” In other words, you can’t make a company-paid weight management program available to certain employees but not others.

If, for medical reasons, it’s unreasonably difficult for an individual to satisfy conditions that are otherwise reasonable, you must offer an alternative. Example: A pregnant employee may not be able to meet certain standards, so you must offer her an alternative.

Negative incentives violate HIPAA

So what’s not allowed under HIPAA’s non-discrimination rules? Anything that punishes people for their health conditions or health risks.

The rules prohibit employers from charging different premiums, contributions, co-pays or deductibles based on personal health factors such as obesity or smoking. However, it’s OK to reimburse these expenses based on someone’s participation in your wellness program, without regard to success.

In addition, the feds have added an important new non-discrimination rule: Employers’ health plans can’t deny benefits for treatment of injuries resulting from a medical condition, even if the condition wasn’t diagnosed before the injury.

For instance, some health plans have a “suicide exclusion” that denies payment for treating self-inflicted wounds from a suicide attempt.

Now let’s suppose the employee suffers from clinical depression. Even if the depression was undiagnosed prior to the suicide attempt, it’s illegal for your plan to deny benefits to this employee.

One common glitch: some employees enrolled in the old plan fall through the cracks when transferring to the new carrier.

What happens if, for technical reasons, an enrollee is declared ineligible for the new plan? Read the facts and decide – Who won this case?

The facts: A long-time employee was forced to on long-term disability while he battled a usually fatal form of cancer. During the last stages of his lengthy illness, the company switched its supplemental life insurance plan for employees.

The employee passed away, and his family put in a claim for a $150,000 death benefit. The TPA denied the claim, because the plan documents stated that only active employees were eligible to enroll in the new plan.

The employer said: While the situation was unfortunate, the eligibility conditions spelled out in the plan document were crystal clear. Nothing in the plan document stated that exceptions would be made to carry over inactive employees who were inactive due to a pre-existing illness or serious injury.

The employee’s family said: The family was eligible for death benefits under the company’s old life insurance plan. Even after the plan switch, the man was still technically employed by the company. He was placed on long-term paid disability during the final months of his life.

Who won? The employee’s family.

Why: The court said the company, as sponsor of both the old and new plans, had dropped the ball on its ERISA obligations. Simply changing carriers wasn’t enough to release the firm from all of its legal obligations to employees enrolled under the old plan.

Specifically, it was up to the company – before the new policy took effect – to inform anyone who’d soon lose their benefits. It was the firm’s duty to give the man’s family a heads up that, as an inactive employee, he’d become ineligible for the new plan.

After all, the judge said, management at the company knew ahead of time about the employee’s failing health and inability to work.

Cite: Miller v. Rite Aid Corp., Miller v. Rite Aid Corp, 9th Circuit Crt.,
No. 05-35505, 10/11/07.

Examples of HRA designs that don’t qualify for tax breaks:

• plans that cover only health care, but reimburse employees all or a portion of their unused money at the end of the year
• plans that provide a death benefit to employees’ dependents from unused funds, if the money isn’t limited to reimbursing their medical expenses, and
• plans that permit unused account dollars to count as “credit” toward other company benefits (example: a 401(k) contribution).

Note: These rules don’t apply to flexible spending accounts (FSAs) in Section 125 cafeteria plans, as long as unused flex account money is not applied from one plan year to the next.

With an HRA, an employer can’t reimburse employees for non-medical expenses. If you do, even payments for otherwise eligible medical expenses can become taxable as a form of deferred comp.

The EEOC has warned that such programs can unwittingly break the law. The reason: Referral programs can limit workplace diversity and increase the risk of discrimination. Employees typically recommend colleagues of the same race, gender and/or ethnicity. 

Even if it’s not meant as a form of discrimination, the end result is the same when companies do large-scale hiring based on these programs. As a result, the EEOC’s compliance manuals recommend that the majority of employers scale down or eliminate their referral programs.

If you have a referral program, be sure to measure its impact on diversity. Non-compliance is expensive. Example: Overreliance on a referral program by Chicago firm Carl Budding & Co. led to a $2.5 million settlement and EEOC fines. The firm rarely hired African-American job candidates.

If you already have a diverse workforce, there’s no need to scrap your program. The ROI on referral programs is usually good, because retention rates are higher among referral-program hires than those recruited other ways.

One statement that should never be in a handbook is “authorized overtime
is paid at 1.5 the hourly rate.”

Legally, that’s the same as saying “Our organization violates FLSA.”

Under FLSA, if a non-exempt employee works overtime – whether authorized or not – you must pay the overtime rate. What is legal is to head off unwanted OT before it happens.

It’s fine to say, “All overtime must be authorized by your supervisor.”

Next, describe the authorization process, and the disciplinary steps (if any) for breaking the rules.

Tax season is right around the corner.  Which fringe benefits are considered taxable compensation and which are de minimus?

Here are key areas to check to keep both your company and employees protected:

Employee discounts

The rule of thumb: Employee discounts are generally tax-free if they’re for the products or services your own firm offers.  But there are limits.

For merchandise, the discount’s tax exclusion is limited to the gross profit margin the firm makes off it.

Example: If your firm typically sells an item for $75 and it costs $50 to make, the gross profit margin is $25. A discount more than $25 is taxable.

For services, the limit is a 20% discount on the value of the service your firm offers.

Quantity and/or volume discounts may also be offered tax-free to employees, as long as they’re the same as those offered to the public.  Example: If your company offers customers a discount for buying 10 tickets, employees can get it, too.

What about external discounts on other companies’ products?  Officially, these are taxable fringe benefits, unless the perks have little or no monetary value. For example, some are available free to the public,  like supermarket “savers club” cards.

In reality, few firms withhold taxes on things like discounted gym memberships or entertainment books. Unless it’s for big bucks or you offer people numerous external discounts, you’re usually OK lumping them in as a de minimus benefit.

When is it de minimus?

The de minimus exclusion protects you from having to account for occasional small perks. Basic rules:

• it should be tied to a legit business purpose. Even cash is considered
  de minimus if it’s for occasional transportation fares or meal money.
• personal gain is limited. It’s fine  if folks get occasional personal use of the office copier, but unlimited use isn’t OK. The law says 85% of use must be related to your business.
• limited monetary value. In the case of group-term life insurance payable on the death of a spouse or dependent, it’s de minimus if the policy value is under $2,000.

Best bet: Check your state labor department Web site for current regs.

Most but not all. Examples of HRA designs that don’t qualify for tax breaks:

• plans that cover only health care, but reimburse employees all or a portion of their unused money at  the end of the year
• plans that provide a death benefit  to employees’ dependents from unused funds, if the money isn’t limited to reimbursing their medical expenses, and
• plans that permit unused account dollars to count as “credit” toward other company benefits (example: a 401(k) contribution).

These rules don’t apply to flexible spending accounts (FSAs) in Section 125 cafeteria plans, as long as unused flex account money is not applied from one plan year to the next.

Beware non-medical payments

With an HRA, an employer can’t reimburse employees for any of their non-medical expenses.  If you do, even payments for otherwise eligible medical expenses become taxable as deferred compensation.

For more info, click here.

Contrary to common belief, the rules – with a few key exceptions – apply only to a fraction of the health information Benefits handles.

As long as the company remains legally “hands off” of employee’s private health information, you can dodge most of the HIPAA bullet.

For HIPAA privacy purposes, your firm is considered “hands off” even when you obtain de-identified personal information, aggregate claims data and routine enrollment info.

Bottom line: If your organization’s health plans are fully insured and the claims administered through a TPA, the insurance company – not your firm – bears the brunt of the HIPAA privacy compliance responsibility.

One major exception: medical cafeteria plans. In most cases, you have two compliance options:

• Process reimbursement requests first through your TPA, with the TPA making sure the claim qualifies under the terms of the cafeteria plan before your firm reimburses it, or
• Create a written cafeteria plan privacy policy, issue a notice to employees, appoint a privacy officer and amend your plan documents.

Rarely affects FMLA

Many people – including healthcare providers – misunderstand how HIPAA affects medical certifications for FMLA leave. The key: HIPAA only applies to personal information that filters through your health plan, not certifications obtained from a doctor.

Under FMLA, you’re allowed to obtain the minimum information you need to approve and administer leave. Likewise, HIPAA doesn’t apply to most workers’ comp, return-to-work notices or disability claims.

Even so, it pays to be careful how you ask for and use the information. Other state and federal privacy laws often protect the same types of info people assume falls under HIPAA.

Following procedures

The HIPAA privacy rules are heavy on paperwork and procedure.

But as long as your firm follows  the info-gathering process spelled out in your health plan documents, the HIPAA privacy rules should present few major obstacles.