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NEW LAWS 2008:

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1031 TAX DEFERRED EXCHANGES OF VACATION HOMES:
N EW IRS GUIDANCE
The Internal Revenue Service recently issued new guidelines for individuals wishing to use 1031 tax deferred exchanges for their vacation homes. Internal Revenue Code § 1031 allows taxpayers to defer the recognition of gain on the sale of property held in productive use in a trade or business or for investment if the property is exchanged solely for property of a “like-kind” that is to be held either for productive use in a trade or business or for investment.

Generally, personal residences may not be considered property held for a productive use in a trade or business or for investment and do not qualify for a 1031 treatment. For example, in Moore v. Commissioner, a 2007 Tax Court case, the taxpayers exchanged one lakeside vacation home for another. The taxpayer never rented either vacation home to any third parties. Both vacation homes were used by the taxpayer solely for personal purposes. The taxpayers claimed that the exchange of the homes was a like kind exchange pursuant to Section 1031 because they expected the properties to appreciate in value and were, therefore, held for investment. However, the Tax Court held that the properties were held for personal use and that the “mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence.”

In early 2008, the IRS issued Revenue Procedure 2008-16, which provides a "safe harbor" under which taxpayers may use vacation homes as relinquished and replacement property in a 1031 transaction. Under this safe harbor, a vacation home must meet the following guidelines in order to qualify for a 1031 Exchange:

  • Any vacation home used in a 1031 tax-deferred exchange must be held for at least twenty-four (24) months. This applies to both relinquished property and replacement property.
  • The taxpayer must rent the vacation home to another person or persons at a fair market rent for fourteen (14) days or more in each of the two (2) twelve (12) month periods prior to the 1031 tax deferred exchange.
  • The taxpayer's personal use of the vacation home cannot exceed the greater of fourteen (14) days or ten percent (10%) of the number of days that the vacation home is rented out at fair market value during each of the two (2) twelve (12) month periods.

If you are planning to acquire a vacation home through a tax deferred 1031 transaction or wish to sell your current vacation home and exchange into another property or properties on a tax deferred basis, careful tax planning is appropriate. We would be pleased to assist you with such tax planning and any other real estate or tax matters.
Contact: Troy Kingshaven @ (831) 373-1241 ext.281

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NEW LAWS 2008
The year 2007 saw some important changes in California’s employment laws, due both to legislative changes as well as to a series of significant court decisions. It is important for employers to be aware of these new developments, especially now that the new year has begun. The following represents a summary of the most significant of those developments, in order to highlight the issues that will affect the greatest number of employers. The majority of these changes in the law took effect on January 1, 2008, and are therefore now applicable. In addition, some of the changes to the law (such as the new Family Medical Leave Act regulations, and military spouse leave) will require that employers revise their employee handbooks and/or personnel policies accordingly.

 

WAGE AND HOUR LAWS

Increase in the Minimum Wage
The minimum wage increased on January 1, 2008 to $8.00 per hour. This increase impacts the minimum annual salary requirement for employees who are designated as exempt from the California Wage Orders under the executive, administrative, or professional exemptions. In order to be exempt from the Wage Orders’ provisions regarding overtime and meal and rest periods, an employee must engage in certain job duties and must be paid a monthly salary equivalent to no less than two times the minimum wage for full time employment. With the increase in the minimum wage, this means that exempt employees must now be paid at least $2,773.33/month, which equates to $33,280.00/year. In addition, commissioned salespeople must now be paid $12.00 (1.5 times the minimum wage) for each hour worked in order to meet the salary requirements for their exemption. The minimum wage for employees who work split shifts has also increased, since these employees are entitled to receive at least one hour’s pay at no less than the minimum wage for the time between shifts.

California law allows an employer to provide meals and/or lodging to an employee, and to credit those amounts against the employer’s obligation to pay minimum wage. Meals and lodging cannot be credited against the minimum wage, however, unless a voluntary written agreement exists between the employer and the employee. Information regarding the maximum meal and lodging credits for 2008 is available on the Department of Industrial Relations website at the following address:
http://www.dir.ca.gov/IWC/iwc.html.

Employers must post a minimum wage order in the workplace, as well as the industry or occupation wage order that applies to their business. The minimum wage poster, which is available in both English and Spanish, is available on the California Industrial Welfare Commission website at:
http://www.dir.ca.gov/Iwc/Minwage2007.pdf. This poster should be posted alongside the applicable California wage order(s), which can be found at the following website:
https://www.dir.ca.gov/IWC/WageOrderIndustries.htm.

Computer Professionals
Highly skilled computer professionals whose specialized duties qualify them for the computer professional overtime exemption must also satisfy a minimum hourly rate to meet the test for the exemption, which applies even if an employee is paid a salary. The rate was previously $49.77. However, effective January 1, 2008, that rate has been reduced to $36.00 per hour. The rationale behind this change is the maintenance and creation of jobs in a market that is diminishing due to a trend of outsourcing and job relocations.

MISCELLANEOUS REQUIREMENTS

New Employment Eligibility Form I-9
The United States Citizenship and Immigration Services (USCIS) recently introduced a newly amended Form I-9, which is used for verifying the identity and employment authorization of newly hired employees. As of December 26, 2007, employers who fail to use the new Form I-9 may be subject to applicable civil penalties as enforced by U.S. Immigration and Customs Enforcement (ICE) of the Department of Homeland Security.
Employers do not need to complete the new Form I-9 for current employees who already have a properly completed Form I-9 on file. However, employers must use the new Form I-9 for any re-verification of employment authorization conducted on or after December 26, 2007, and for newly hired employees. The new Form I-9 and instructions regarding its use can be found on the USCIS website at the following address:
http://www.uscis.gov/files/form/i-9.pdf

Social Security Administration “No Match” Letters
When the Social Security Administration (SSA) determines that an employee’s name and social security number do not match the SSA’s records, it sends what is called a “no-match letter” to the employer, advising them of the discrepancy. The Department of Homeland Security (DHS) recently amended its regulations so as to increase an employer’s responsibility to investigate a no-match letter issued by the SSA. In addition, if an employer is unable to resolve the discrepancy after conducting an appropriate investigation, it must terminate the employee. However, in October of 2007 a San Francisco judge granted a preliminary injunction due to questions about the new regulations, and related increased compliance costs for employers and greater termination risks for employees. The DHS has since stated that it will issue a revised rule, following a status conference that is set for March of 2008.

In the meantime, if you receive a no-match letter from the SSA, you should do the following:

Check your records to see if the mismatch is due to a typographical or other clerical error. If such an error exists, you should correct the mistake and notify the proper agencies; you should also be sure to document this for your records.

If there does not appear to be a clerical error involved, you should request that the employee confirm that your records are correct. If there is an error, you should correct it as described above. However, if the employee indicates that your records are correct, you should ask the employee to handle the matter personally by contacting the SSA.

In either of the above situations, you should attempt to resolve the no-match discrepancy as quickly as possible, and no later than 30 days after receipt of the no-match letter.

LEAVES OF ABSENCE

Servicemember Family Leave/Qualifying Exigency Leave Under the FMLA
On January 28, 2008, President Bush signed into law H.R. 4986, the National Defense Authorization Act for FY 2008 (NDAA). Among other things, the NDAA amends the Family and Medical Leave Act of 1993 (FMLA) to permit a “spouse, son, daughter, parent, or next of kin” to take up to 26 workweeks of leave to care for a member of the Armed Forces, National Guard or Reserves, who is “undergoing medical treatment, recuperation, or therapy, is otherwise in outpatient status, or is otherwise on the temporary disability retired list, for a serious injury or illness.” While the provisions in the NDAA are effective as of the date of the President’s signing, the Department of Labor (DOL) is working to prepare more comprehensive guidance regarding rights and responsibilities under this new legislation. In the interim, employers should act in good faith in providing leave pursuant to the NDAA, and should be sure to comply with any FMLA-related procedures (e.g., notice and reinstatement requirements, substitution of paid leave, etc.).
The NDAA also permits an employee to take FMLA leave for “any qualifying exigency…arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on active duty (or has been notified of an impending call or order to active duty) in the Armed Forces in support of a contingency operation.” Note that this provision of the NDAA will not become effective until the Secretary of Labor issues final regulations defining a “qualifying exigency.” We therefore do not yet know what will constitute a “qualifying exigency” or what kinds of proof employers will be permitted to require of employees requesting this type of leave. Draft regulations have been submitted to the Office of Management and Budget; the regulations will be come effective following a 60-day public comment period. In the meantime, employers covered by the FMLA will need to begin amending their FMLA polices to include these new leave requirements.

Leave for Military Spouses
Another new law that recently went into effect requires employers with 25 or more employees to allow employees who are spouses of “qualified members” of the Armed Forces, National Guard, or Reserves to take up to ten days of unpaid leave while their spouses are home on leave. To be a “qualified employee,” the individual must work an average of twenty or more hours per week, and must be the spouse of a member of the U.S. Armed Forces who has been deployed during a period of military conflict to an area designated as a combat theater or a combat zone, the spouse of a member of the National Guard who has been deployed during a period of military conflict, or the spouse of a member of the Reserves who has been deployed during a period of military conflict. A “period of military conflict” means either a period of war declared by the U.S. Congress, or a period of deployment for which a member of a reserve component is ordered to active duty. An employee who wants to take this type of leave must provide their employer with notice within two business days of receiving official notice that their spouse will be on leave. The employee must also submit written documentation certifying that the spouse is in the Armed Forces, National Guard, or Reserve, and will be on leave from deployment during the same time that the employee is seeking to take leave. This piece of legislation was an “urgency statute,” which means that it became effective immediately (on October 9, 2007) for all employers with 25 or more employees. This new law will also require that affected employers revise their handbooks’ existing leave policies, so as to reflect this additional benefit.

SEXUAL HARASSMENT & DISCRIMINATION LAWS

Sexual Harassment Prevention Training
AB 1825, which was passed in 2005, required that all employers with 50 or more employees provide at least 2 hours of sexual harassment prevention training to all supervisory employees by January 2006, and that they repeat the training every 2 years. However, there were no guidelines initially issued with AB 1825, and questions soon arose regarding the specifics of what was required for the training. As a result, on July 18, 2007, the Office of Administrative Law approved proposed regulations implementing AB 1825.  The new regulations became effective with the force of law on August 17, 2007.  Some of the highlights (and clarifications) of the newly adopted regulations are as follows:

Covered_Employers: The law applies to those California employers with 50 or more employees, regardless of employee locations.  However, note that only supervisors actually located in California are required to receive training.

Effective_Interactive_Training: The training can be done in a traditional classroom setting, via interactive computer programming, via an internet-based seminar (“webinar”), or through a combined use of audio, video and/or computer technology in conjunction with any of these three methods. 
 
Tracking_Compliance_With_the_Law: Employees may now either be tracked individually (i.e., ensuring that they receive training once every two years), or they may follow the “training year” method, in which an employer designates a year during which all supervisors must receive training, and thereafter must retrain those supervisors by the end of the next “training year,” two years later (e.g., supervisors trained during a 2007 training year would have to be retrained in 2009).  A record of who received training, when, what type, and from whom must be maintained for two years.

QualifiedTrainers: “Qualified trainers” now include employment law attorneys with two or more years of experience; “human resource professionals” or “harassment prevention consultants” with a minimum of two or more years of practical experience handling sexual harassment issues; and professors or instructors in law schools, colleges or universities who have a post-graduate degree or California teaching credential, and either 20 instruction hours or two or more years of experience teaching about employment law.
The full text of the newly revised regulations is available at the following website:
http://www.fehc.ca.gov/pdf/SexualHarassmentTrainingRegulations
_Approved_by_OAL_July_18_2007.pdf

EEOC Guidelines on Caretakers
In 2007 the federal Equal Employment Opportunity Commission (EEOC) issued an Enforcement Guideline on the “Unlawful Disparate Treatment of Workers with Caregiving Responsibilities.” In that guideline, the EEOC identifies circumstances in which an employer’s conduct toward employees with caregiving responsibilities (e.g., caring for a spouse or child) could be deemed to be discriminatory in violation of Title VII of the Civil Rights Act of 1964 and/or the Americans with Disabilities Act (ADA). While caregivers are not a protected class, discrimination against a caregiver can constitute unlawful disparate treatment if the employee is subjected to discrimination because of a protected characteristic such as sex, pregnancy, or race. Employers can also be held liable for a hostile work environment if an employee with caregiving responsibilities is subjected to severe or pervasive harassment because of his/her responsibilities (e.g., harassing a female employee because she is a mother of young children).

PROHIBITED ACTIVITIES

Cell Phones
There is new legislation in California regarding the use of cellular telephones while driving. The new law, which goes into effect on July 1, 2008, makes it illegal to use a wireless telephone while operating a motor vehicle unless the driver is using a hands-free device. Drivers who violate the law will face an initial $20 fine, and a $50 fine for every subsequent offense. In enacting this law, California has joined Connecticut, the District of Columbia, New Jersey, and New York in prohibiting the use of handheld mobile phones while driving. Another piece of recent legislation that also takes effect on July 1st prohibits anyone in California under the age of 18 from using cellular phones, text messaging devices, and laptop computers while driving. The under-18 cell phone ban applies regardless of whether the phone is equipped for hands-free use.

Failure to Cooperate With Worker’s Compensation Audit
 The law requires that workers’ compensation insurers perform a payroll verification audit to compare actual premiums to estimated premiums. This information is generally supplied by the insured employer. Pursuant to Assembly Bill 812, if an employer fails to provide the insurer with access to its records (in order to enable the insurer to perform an audit), the employer is liable to pay to the insurer an amount equal to 3 times the insurer’s then-current estimate of the employer’s annual premium. The employer will also be liable for related costs.

SIGNIFICANT 2007 COURT DECISIONS

Wage and Hour
The recent California Supreme Court decision in
Prachasaisoradej v. Ralphs Grocery Company, Inc. addressed the issue of profit-based bonus programs. The plaintiff in the Ralphs case argued that the company’s incentive plan unlawfully deducted the costs of business expenses from employees’ wages, because these things affected a store’s profit margins, which in turn affected the bonus amounts. The California Supreme Court disagreed, ruling that a company can offer its employees profit-based bonuses that take into account ordinary operating losses, including expenses that are beyond the employees’ control. Because compensation under the bonus plan was paid in_addition to employees’ regular wages, and because those regular wages were guaranteed and not subject to any deductions, Ralphs’ plan did not unlawfully pass along Ralphs’ business expenses to its employees. The Ralphs decision is a positive one for employers who wish to motivate their employees with profit-based bonus plans, but who also need to take into account legitimate business expenses before determining bonus amounts.

Meal and Rest Periods
An important case addressing missed meal and rest periods was Murphy v. Kenneth Cole Productions (40 Cal. 4th 1094), which was decided on April 16, 2007. Employees who are covered by the California Wage Orders are deemed to be non-exempt employees, and thereby have a statutory right to meal and rest periods during their shifts. Employees who are not provided their full meal and/or rest periods are entitled to one hour’s pay at their regular rate for each meal period that is missed, as well as an hour’s pay for each day during which one or more rest periods are missed. The issue before the Court in the Murphy case was whether the extra pay that a non-exempt employee receives for a missed meal or rest period is to be characterized as a “wage” or a “penalty.” The Court held that the “one additional hour of pay” is a wage, and that an employee who is not paid for missed meal and/or rest periods has three years in which to sue to recover those missed payments. Because missed meal/rest period payments are now deemed to be “wages,” employees can now recover attorney’s fees incurred in the course of a lawsuit to recover those wages, as well as pre-judgment interest on all unpaid wages. Employees may also be able to recover waiting time penalties if the wages are still due and owing at the time their employment is terminated. The Murphy decision has greatly expanded the potential monetary liability of an employer when meal or rest periods are not provided in compliance with the law.

Unequal Pay
The U.S. Supreme Court case of Ledbetter v. Goodyear Tire & Rubber Co., Inc., involved a female supervisor at a mostly male Goodyear Tire plant, who learned that she was making significantly less money than her male counterparts because of several negative performance evaluations she had received. Ms. Ledbetter claimed that her poor performance reviews were the result of sex discrimination, and that if she had been evaluated fairly she would have received larger raises over the years. The Supreme Court ruled that Ms. Ledbetter could not bring a claim against Goodyear for sex discrimination because no discrimination had taken place within the 180-day statute of limitations period preceding the filing of her Equal Employment Opportunity Commission charge. In other words, even if Goodyear had discriminated against Ms. Ledbetter in the past, she could not show that she had been discriminated against recently enough to support a claim. In California, a discrimination claim under the Fair Employment and Housing Act (FEHA) must be filed within one year of the alleged discriminatory act.  However, California courts recognize a “continuing violation” doctrine, which permits a plaintiff to sue for an entire course of discrimination, including employer actions occurring outside the charging period.

Employee Privacy Rights
In a case called Hernandez v. Hillsides, Inc., the Court of Appeal addressed whether an employer’s hidden surveillance camera violated the rights of the employees who worked at the facility. The employer suspected that someone had been accessing pornographic websites at night from one of the office computers, and decided to hide a motion-activated video surveillance system in the office. The facility’s employees were not told about the camera. It turned out that one of the facility’s female employees used the office in question to change her clothes before leaving for the gym. In that same office, another female employee would sometimes raise her shirt to show her coworker how her body was recovering after having given birth. After learning about the hidden camera, these women sued their employer for invasion of privacy; a review of the video footage showed that the plaintiffs had not actually been recorded. Even so, the court found that the mere placement of the camera was in fact an invasion of privacy, regardless of whether the offended employees had actually been filmed, and that the women had a reasonable expectation of privacy in the office.

In U.S. v. Ziegler, an employer reported that its employee, Ziegler, had accessed child pornography sites from his work computer. The FBI conducted an investigation, which included entering Ziegler’s locked office and making copies of his hard drive. Ziegler sued, claiming that he had a legitimate expectation of privacy in his office and computer. The Court found that while Ziegler may have had a reasonable expectation of privacy, the employer could lawfully consent to a search of the office and computer. It also found that the company’s routine monitoring of its employees’ computers, and the fact that the employees had been notified of this monitoring, meant that Ziegler did not have a reasonable expectation that his computer was his personal property, free from any type of employer control.

Reimbursement for Business Expenses
In the case of Gattuso v. Harte-Hands Shoppers, Inc., the California Supreme Court ruled that an employer can satisfy its obligation to reimburse employee mileage and travel expenses in any of the following three ways:

Based on actual expense;

At the IRS rate, plus additional actual operating expenses, to the extent they exceed reimbursement under this method; or

Using a lump-sum method based upon a fixed mileage or car allowance, a per diem, or an increased salary or commission.

Employers wishing to utilize the lump-sum method must identify the portion of the employee’s compensation that is intended to be used for expense reimbursement, and that amount must be sufficient to fully reimburse employees for their actual expenses.

Military Service
In the 2007 federal case of Garcia v. Horizon, an employee claimed that he was terminated because of his military service. The employee testified that his supervisors complained about his military reserve training sessions, which required that he adjust his work hours. The employee also testified that he was called “G.I. Joe,” “little lead soldier,” and “Girl Scout.” When the employee was later terminated for operating a check-cashing business on company property, he sued, claiming that he had really been terminated because of his military status in violation of the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA). The court ruled in the employee’s favor, finding that an employee need only show that his/her military service was a “motivating factor” in order to prove liability, unless the employer can prove that the adverse employment action would have been taken regardless of the employee’s military service. In the Garcia case, the court found that while the check-cashing business might have been sufficient grounds upon which to terminate the employee, the employer had to demonstrate by a preponderance of the evidence that it would have fired him regardless of his military status.

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