Summary
March, 2000
MODIFYING CONTRACT DISCLAIMERS IN EMPLOYEE HANDBOOKS
To avoid creating enforceable employment contracts, prudent employers these days usually include two prominent clauses in their employee handbooks: (a) an at-will clause specifying that an employee can be discharged at any time, with or without cause or notice; and (b) a contract disclaimer clause, reciting that nothing in the handbook constitutes or gives rise to a contractual obligation binding upon the employer. Some employers have attempted to add these clauses to preexisting handbooks that lacked them. This can cause problems, as a recent case demonstrates. But there may be a way out.
During Mary Doyle's employment, Holy Cross Hospital issued to existing and new employees an employee handbook, which did not contain at-will or contract disclaimer clauses. Moreover, one of the policies in the handbook covered "economic separations". The policies to be followed in determining which employees would be affected included:
- Job Classification;
- Length of Continuous Hospital Service; and
- Ability and Fitness to Perform the Required Work.
Because of the special needs of patients, three additional factors were to be used in an economic separation affecting R.N.s:
- Nursing Areas of Expertise;
- Length of Service Within Each Area of Expertise; and
- Ability and Fitness to Perform the Required Work.
After Holy Cross modified the handbook to include at-will and no-contract clauses, Doyle and several other nurses were discharged in a reduction in force. Holy Cross did not follow the procedures contained in the economic-separation clause.
The Illinois Supreme Court held that the hospital's unilateral modification of a pre-existing employee handbook was not effective.
The court acknowledged that as a result of its decision, different employees would be subject to different contract terms, depending on when each employee was hired and what handbook provisions were then in force. Nonetheless held the court, contract law must control, and employers must live up to the contractual obligations they voluntarily enter into with their employees and sort out the confusion for themselves.
Employers wishing to amend their existing employee handbooks to add contract disclaimers and at-will clauses thus need to make sure that existing employees are given something of value - consideration - in exchange for the clauses. And this something generally does not have to be much under Illinois law. For example, benefits like a small cash payment, extra vacation time, or discretionary raises, if employers can time the handbook amendments to coincide with these raises, may be sufficient. Doyle v. Holy Cross Hospital 186 IL2d 104, 708 NE2d 1140 (IL Sup. Ct., 1999)..
AUTOMATIC RENEWAL OF CONTRACT
The new Automatic Contract Renewal Act requires that automatic renewal clauses appearing in a contract must be "clear and conspicuous". If a contract does not comply with the Act, the automatic renewal provisions are not enforceable by the party preparing the contract. If you do not see a termination provision, be sure to look for a renewal clause. The law does not say where the clause is supposed to appear in the contract and there are no specifications on size of type, font, or other printing details. If you do not attentively read the contract you sign, you may be signing on for longer than you think.
On the other hand, the party preparing the contract must give fair notice of the automatic renewal clause. If the clause is not "clear and conspicuous" then it cannot be enforced by the preparer. If you do not follow the law, you may have an agreement for a shorter period than you think. Federal, State, and local government units and school districts are exempt from the provisions of the Act effective 06/01/00. 815 ILCS 601/1, et seq..
MANDATORY INTEREST ON SUPPORT ARREARAGES
As of January 1, 2000, the cost of delaying payments of child support went up. Under a new law effective January 1, 2000, any portion of a child support payment unpaid more than 30 days after it was due is required to carry interest at 9% per annum until it is paid. . This is a clear incentive for fathers to pay on time - - and for mothers to ask the court for help on late payments. Deadbeats, beware! (P.A. 91-397).
FAMILY EXPENSE ACT AND HUSBAND'S UNPAID PROMISSORY NOTE
The Illinois Rights of Married Persons Act (commonly referred to as the Family Expense Act) provides that "the expenses of the family and of the education of the children shall be chargeable upon the property of both husband and wife, or either of them, in favor of creditors therefor, and in relation thereto they may be sued jointly and separately." The purpose of the Act is to protect creditors.
But not all creditors, says an Illinois Appellate Court. Money borrowed from North Shore Community Bank by the deceased Mr. Kollar and secured by a promissory note (and some shares of stock) held the court, does not constitute a family expense and, therefore, one spouse cannot be held responsible for the default of the payment of the note executed by the other spouse. The bank, as a mere lender of money, was not entitled to pursue a claim under the Act because the Bank merely sought repayment of a loan, not payment for goods and articles provided to the family. Cash is fungible, in contrast to specific goods, articles and services. To hold otherwise would open up every loan to minute dissection, tracing every dollar to its ultimate use.
The Bank was also held liable for Mrs. Kollar's costs, expenses and attorney fees. The provision in the Act allowing for such recovery is mandatory. North Shore Community Bank and Trust Company v. Mary Ann Kollar, 304 IL App 3d 838, 710 NE2d 106 (1999).
COLA CHANGES FOR 2000
A number of the dollar amounts set forth in the Internal Revenue Code for pension and profit sharing plans may be increased due to cost of living adjustments ("COLA"), and therefore have a fluctuating dollar amount. Some COLA changes are made only when larger rounded increases (such as $10,000) are due. Some important changes for the year 2000 are set forth below.
The maximum amount of "Compensation" which may be taken into account for high paid employees has increased to $170,000 for 2000. The original $150,000 limitation changed for 1997 to $160,000, which remained constant until annual COLA increases totaled 6.25% (of $160,000) so that the figure could jump to $170,000.
The simplified "compensation" test for who is a Highly Compensated Employee ("HCE") has been raised from $80,000 to $85,000. Thus for 2000 an HCE includes an employee who had compensation in excess of $85,000. Caveat: Plan administration is simplified because the determination of who is an HCE for the preceding year can be made as of the beginning of the year. Thus the $85,000 test for 2000 compensation will not come into play until testing for discrimination in 2001.
The 1999 $10,000 maximum compensation deferral allowed to a participant in a 401(k) plan has been increased to $10,500 for 2000. On the pension plan side, the maximum annual pension of $130,000 for 1999 has been increased to $135,000 for 2000.
The profit sharing plan contribution by an employer can be larger upon compensation of those participants earning more than the Taxable Wage Base. The Taxable Wage Base -- the maximum amount of earnings taxed at a 6.20% rate for Social Security payroll tax purposes -- will increase by $3,600. For 2000 the TWB will be $76,200, up from $72,600 for 1999. Remember that there is no longer any maximum on earnings subject to the 1.45% Medicare portion of the Social Security tax. The combined Social Security and Medicare tax rate will remain at 7.65%.
Five-year income averaging of lump-sum distributions is unavailable after 1999. However, for employees turning 65 (or older) in 2000, an old grandfather rule for averaging remains in effect. The 10-year averaging method remains in effect for any individual who attained age 50 before January 1, 1986, i.e. age 64 or older on December 31, 1999.
The limitation on overall contributions and benefits for individuals who participate in both a pension plan and a profit sharing plan of the same employer has been repealed. In general, Participants who previously took a lump sum distribution may be able to get a second distribution if the Plan is amended to provide past service benefits, and the monthly benefit of pensioners may be increased. A Plan may be able to increase benefits to reflect the repeal, for a current or former employee who has already commenced benefits, if he or she is a participant on or after January 1st.
BANKS WARNED ON STOP PAYMENT ORDERS
A bank customer has a statutory right to stop payment on a check he (or she) has issued. He may do so orally or in writing. The stop order must arrive in time to give the bank time to act. In..addition, there is a requirement of identification; the customer must describe the check to be stopped "with reasonable certainty."
"Identification" has been a recurring source of trouble for three quite different reasons. First, the UCC standard of "reasonable certainty" is general in character. Second, as a result, the bank on which the check is drawn will have its own rules for what constitutes "reasonable certainty" in executing the stop order. Five identifying features commonly required by a bank to stop payment on an individual check are the account number, name of payee, amount, date of issue, and check number.
Third, the customer placing the stop order frequently does not know every required feature. For example, a customer may know his account number, the correct name of the payee and the exact amount of the check, but be uncertain about the check's date of issue or the precise check number. Another customer may have all the details at hand, i.e., check number, date of issue, account number, name of payee and amount, but be off on the exact amount of the check. The bank may require an exact amount or a precise check number, and execute the stop order only where the sum stated is accurate to the penny or the check number given is letter perfect.
However, said a federal court, the bank must inform customers of its requirements for an effective stop-order. Depositors expect to be able to stop payment on a check and are entitled to receive this service. The entitlement would be meaningless without guidance from the bank as to precise information required for processing a stop payment order.
The plaintiff lost here, but only because he had been "specifically informed" of at least one requirement and had provided the wrong information. The court's decision should be an alert to depositors that they have a right to be informed of the bank's stop payment rules. In any case of doubt the depositor should ask about the bank's rules and give exact information for each required item. Rovell v. American National Bank, 1998 U.S. Dist. Lexis 15799 (N.D. IL 09/29/98).
REIMBURSEMENT RIGHT OR SUBROGATION RIGHT?
The right of a medical plan to recover over against a third party if the injured plan participant also recovers from the third party (e.g., the driver of the car that hit the plan participant) should be provided for in writing in the plan. This gives the plan a reimbursement right under a written contract, a more dependable right than relying upon a subrogation right under state law which..may be preempted under ERISA. A recent decision of the Federal Appellate Court in Chicago has upheld a written reimbursement right.
Ms. Gauf was injured in an automobile accident, when her vehicle collided with another vehicle. She received medical treatment for her injuries. The Plan reimbursed Ms. Gauf $8,870 for this treatment. Ms. Gauf later brought an action in state court against the two people involved in the accident and collected $36,000. The Plan sought an order compelling Ms. Gauf to reimburse the moneys paid for her as benefits under the Plan. The Plan based its claim on a Plan provision stating that "The Plan has the right to...receive (subrogate) 100% of the benefits previously paid by the Plan to the extent of...any judgment, settlement, or any payment, made or to be made by a person considered responsible for the condition giving rise to the medical expense or by their insurers."
Agreeing with the majority view, the Federal Appellate Court in Chicago upheld the Plan's claim. The right asserted by the Plan is most appropriately characterized as a reimbursement right under the terms of the Plan, and, therefore, a matter of federal law and not a subrogation right arising under state law. The Plan was seeking to protects its contractual right to repayment from Ms. Gauf. The court distinguished reimbursement and subrogation rights. Because the Plan's committee is a fiduciary and is seeking equitable relief, the claim is in equity and, therefore, governed by ERISA law.
The lesson? Put it in writing. Administrative Committee v. Gauf, 188 F.3d 767 (7th Cir. 1999).
BEFORE WE GO...
We are pleased to announce that John W. Loseman has become a partner. John specializes in general litigation.
Three new associates have joined us. Phil Tortorich did his legal work at Loyola University School of Law, Pat Waltz graduated from John Marshall Law School and Joe Jeffery went to St. Louis University School of Law. Welcome aboard, gentlemen.
SUMMARY
Summary is intended for your general information purposes only. Because the information may not be precisely suited to your needs, we urge you to consult with us before using this information in specific situations.
