SHOW ME THE MONEY: IRS Issues First FAQs on Employer Tax Credit for Paid Family and Medical Leave

*By Stephen S. Zashin

The recently enacted Tax Cuts and Jobs Act of 2017 (the “Act”) created an employer tax credit for paid family and medical leave provided to employees. Specifically, Internal Revenue Code section 45S provides a general business tax credit to employers that voluntarily offer paid family and/or medical leave to their employees. On April 9, 2018, the Internal Revenue Service (“IRS”) issued a set of frequently asked questions (“FAQs”) that provides guidance to employers planning to take advantage of the tax credit.

The FAQs provide an informative overview of the tax credit and clarify several definitions. For instance, the FAQs provide that for purposes of the credit, “paid family and medical leave” includes time off for the following:

• Birth of an employee’s child and to care for the child;
• Placement of a child with the employee for adoption or foster care;
• To care for the employee’s spouse, child, or parent who has a serious health condition;
• A serious health condition that makes the employee unable to perform the functions of his or her position;
• Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces; and
• To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The FAQs note that an employer cannot claim the credit for any paid leave provided by the employer to comply with a state or local law or for leave paid by a state or local government. Additionally, if an employer provides paid vacation leave, personal leave, or medical or sick leave, that paid leave is not considered “family and medical leave” and is not eligible for the credit.

Other FAQs address the effective dates of the credit, how the tax credit is calculated, and how to adjust the deduction for wages if an employer elects the credit. Notably, unless extended by Congress, the credit only applies to tax years 2018 and 2019.

The IRS expects to provide additional information on the following:

• When the written policy must be in place?
• How paid “family and medical leave” relates to an employer’s other paid leave?
• How to determine whether an employee has been employed for “one year or more?”
• How state and local leave requirements will impact the credit?
• How members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit?

Z&R will continue to monitor additional IRS guidance on the paid family and medical leave tax credit and report any significant developments. Until additional guidance is issued, employers should contact counsel to determine if they can take advantage of this tax credit.

*Stephen S. Zashin is an OSBA Certified Specialist in Labor and Employment Law and the head of Zashin & Rich’s Labor, Employment and Sports Law Groups. Stephen regularly litigates FMLA cases and provides employers with FMLA guidance. For more information about the paid family and medical leave tax credit, please contact Stephen at ssz@zrlaw.com or 216.696.4441.

Salary History is No Defense to an “Equal Pay Act” Violation, Says Ninth Circuit

By Scott H. DeHart*

On April 9, 2018, the U.S. Court of Appeals for the Ninth Circuit – which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington – held that, under the Equal Pay Act of 1963 (“EPA”), employers can no longer rely on an employee’s prior salary to justify different wages paid to male and female employees. The case is Rizo v. Yovino, No. 1:14-cv-00423-MJS, slip op. (9th Cir. April 9, 2018). The Court’s decision came on the eve of “Equal Pay Day,” a symbolic date chosen each year to illustrate how far into the new year women in the U.S. must work to ‘catch up’ to men’s earnings from the prior year.

The female plaintiff, Aileen Rizo, was a math consultant hired by the Fresno County Office of Education. She previously worked as a middle and high-school math teacher. To determine her salary, Fresno County followed its policy of taking Rizo’s prior salary, adding 5%, and placing her in the appropriate “Step” on a 10-step hiring salary schedule. Several years later, Rizo learned that the County placed male colleagues who had been hired after her at higher salary steps. Rizo filed a lawsuit claiming, among other things, that her employer had violated the EPA.

Congress passed the EPA to prohibit sex-based wage discrimination in employment. The core principle of the EPA is that men and women should receive equal pay for doing equal work, regardless of their sex. The EPA contains several exceptions to this anti-discrimination principle, including a catch-all for a wage “differential based on any other factor other than sex.” 29 U.S.C. § 206(d)(1) (emphasis added).

The question before the Ninth Circuit in Rizo was whether an employee’s prior salary was a “factor other than sex” on which an employer could rely to defend different salaries between male and female employees. A three-judge panel of the Ninth Circuit initially answered yes to this question, and held that prior salary was a permissible “factor other than sex” under the EPA, relying on the Ninth Circuit’s 1982 decision in Kouba v. Allstate Insurance Co., 691 F.2d 873 (9th Cir. 1982). In Kouba, the Ninth Circuit had upheld a salary system that calculated employee salaries based on prior salary, along with ability, education, and experience.

After the three-judge panel’s decision, the Ninth Circuit agreed to rehear the case en banc (i.e., all the judges of the court hear the case, not just three). The full Ninth Circuit disagreed with the three-judge panel’s decision and overturned Kouba. The Ninth Circuit held that prior salary (alone, or in combination with other factors) cannot justify a wage differential. The Court explained that allowing employers to defend an EPA lawsuit based on ‘prior salary’ gives employers the ability to “capitalize on the persistence of the wage gap and perpetuate that gap ad infinitum.” That would be contrary to the text and history of the Equal Pay Act, and would undermine the basic principle for which the EPA was passed.

Although the decision is only binding law in the states covered by the Ninth Circuit and not in Ohio, the Rizo decision may have far-reaching impact. In the era of #metoo and #timesup, employers are facing increased scrutiny of policies and practices that negatively impact women in the workforce. Other courts may soon be persuaded by the Ninth Circuit’s reasoning in Rizo and issue similar decisions limiting or prohibiting employer reliance on “prior salary” to justify different salaries for men and women who perform equal work.

Employers should work closely with legal counsel to ensure that their existing wages and compensation policies are consistent with the requirements of the EPA and other federal and state laws.

*Scott H. DeHart is a member of the firm’s Labor and Employment Group and practices out of the firm’s Columbus, Ohio office. Scott has experience defending against equal pay claims. If you have questions about employee pay or any other labor or employment issues, please contact Scott at shd@zrlaw.com or (614) 224-4411.