United States: Leave-Based Donation Programs Facilitate Hurricane Katrina Relief Efforts

In the past month, residents of the Gulf Coast region have suffered extreme hardship following the unprecedented damage and destruction caused by Hurricane Katrina. Americans across the country have answered the call to help once again, and aid is pouring in.

Leave-based donation programs, where employees can forego vacation, sick or personal leave in exchange for cash payments, can be a very effective tool for raising the level of charitable contributions.

Notice 2005-68 outlines the IRS’s approach to leave-based donation programs for Hurricane Katrina relief. Cash payments must be made directly from the employer to qualified relief agencies working with victims in the Gulf Region. A qualified organization to whom these funds may be distributed, includes: (1) federal, state, or local governments; (2) a non profit entity (e.g., the Red Cross) operated solely for public purposes; and (3) a post or organization of war veterans if none of its earnings go to a private person. Notice 2005-68 also makes it clear that employer contributions must be used by the organization only for assisting Hurricane Katrina victims.

In addition, Notice 2005-68 says the IRS will not assert that payments made by an employer through a leave-based donation program constitute income or wages for an employee so long as payments are made (1) to qualifying §170(c) organizations for the relief of Hurricane Katrina victims and (2) before January 1, 2007. Second, the IRS will not assert that an employee’s opportunity to make these leave-based donations is constructive receipt of income or wages. Third, employees electing to make a contribution cannot claim a corresponding charitable deduction under §170. Fourth, the IRS will permit an employer making leave-based donations to Hurricane Katrina victims to deduct the cash payments under either §170 or §162 (the standard tax code provision that permits businesses to deduct "ordinary and necessary" expenses incurred in "carrying on any trade or business") of the Internal Revenue Code. Finally, leave-based donation payments do not have to be included in Box 1, 3 or 5 of Form W-2.

In Kruchowski v. Weyerhaeuser, 2005 WL 2212312, --F.3d--- (10th Cir. 2005), the court ruled that former employees of an Oklahoma mill, who signed releases as part of a reduction in force, could pursue their age discrimination claims because the releases failed to meet the technical requirements of the Older Workers Benefit Protection Act ("OWBPA").

At the time of the reduction in force and in exchange for a severance package, each of the plaintiffs executed releases waiving their claims under the ADEA. Under the OWBPA, where a waiver is requested for an exit incentive or other termination program offered to a group of employees affected by a layoff, each of the individuals must be provided the following in writing in a manner that can be understood by the average individual: (1) any class, unit or group of individuals covered by such program (also referred to as the decisional unit); (2) any eligibility factors for such program; and (3) any time limits applicable to such program.

The court ruled that the releases were legally insufficient because defendant failed to meet two of the informational requirements under the OWBPA. Specifically, the defendant failed to provide sufficient information regarding the decisional unit and the eligibility factors. As to the decisional unit, defendant did not properly give the plaintiffs the positions and job titles of all the individuals in the decisional unit. Defendant initially defined the decisional unit as all salaried employees. However, later, the defendant changed the scope of the decisional unit and failed to provide the job titles and ages for 15 employees who were a part of this newly defined decisional unit.

With regard to the eligibility factors, the defendant did not disclose any of the criteria it used in making layoff decisions (e.g. leadership, abilities, technical skills, employee behavior and employer needs). The court stated "the term ‘eligibility factors’ must refer to factors used to determine who is subject to a termination program, not the factors used to determine who is eligible for severance pay after termination."

The informational requirements under the OWBPA were created to ensure that, before executing a release, plaintiffs have sufficient information to determine the factors defendant used in making the layoff decision and whether evidence of age discrimination exists. The court here emphasized that a single error or omission can lead to the invalidation of a release.

As this case highlights, there is no room for error in the area of OWBPA compliance. Courts are "sticklers" and require strict adherence to the requirements.

Companies that are undergoing a reduction in force must carefully analyze the requirements under the OWBPA to determine compliance. Companies must also take great pains to accurately define the decisional unit that is subject to layoff and ensure that it discloses the job titles and ages of all employees who are part of that decisional unit. This includes both those that are ultimately laid off and those that are not. Moreover, the information disclosed must reveal the criteria used for the termination decision, as well as the factors that determine eligibility for any severance.

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