“Top 10” Most Frequently Asked Tax Questions
(For Relocation Professionals New to the Mobility Industry)
More detailed information on these topics and more is available through Tax & Legal MasterSource.
Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter K. Scott Associates
Current as of December, 2015
Q1. How are relocation reimbursements and payments taxed?
A. With the exception of the shipment of household goods and travel to the new location, and expenses incurred in a qualifying program under which the employer purchases the employee’s old home from the employee, any relocation expenses that an employer reimburses or pays on behalf of an employee must be included in the employee’s gross income. The payment or reimbursement is subject to withholding and employment taxes. For example, when an employer reimburses its transferees for homesale expenses, temporary living, and house-hunting, these reimbursements must be reported in the employees’ incomes as wages. Likewise, the provision of miscellaneous and cost-of-living allowances, coverage for loss on homesale, and employer payments for destination home purchase closing costs must be treated as compensation and reported in transferees’ W-2 forms.
There is no corresponding moving expense tax deduction and, as a result, the employee faces taxes on these reimbursed expenses. Most employers make an additional payment, commonly referred to as a “gross-up,” to assist employees with this added tax liability.
Q2. Please explain “gross-up” and how it is calculated
A. Because reimbursements or payments of non-deductible relocation expenses increase the employee’s taxable income, the employee will pay more tax and lose part of the benefit of the payment or reimbursement. The great majority of companies alleviate this impact to some extent by paying the employee an additional amount to help with the tax liability. This tax assistance usually is referred to as "gross-up." The term refers to the fact that the employee is paid a larger gross amount so that the net benefit, after taxes, will approximate the moving expenses. The gross-up payment itself also is taxable to the employee and subject to withholding and payroll tax. Therefore too fully tax protect the employee, the gross-up must itself be "grossed up," and the gross-up of the gross-up must be grossed up, and so on. Consequently, a reciprocal formula is generally used to calculate the gross-up. The gross-up formula to fully tax protect for income taxes is: gross-up percentage equals the employee’s marginal rate divided by (1.0 minus the employee’s marginal rate). For example, if the employee’s marginal tax rate is 28%, then gross up would be .28 divided by (1 minus .28 = .72) = 38.9%. The taxable payments or reimbursements would be multiplied by this percentage to calculate the additional amount necessary to protect for federal taxes.
For more on this topic, see Gross-up (Tax Assistance) in the Worldwide ERC® Tax & Legal MasterSource.
Q3. What moving expenses are deductible, and what are the rules for doing so?
A. The law permits a deduction for moving expenses incurred in connection with a new job if the job is located at least 50 miles farther from the individual’s old residence than the individual’s old job, and certain other requirements are met.
The only moving costs that are deductible however, are those for moving the household goods and the final trip traveling to the new location. (Although real estate sales and purchase expenses are not permitted as deductions, they are added to the basis of the residence, and recovered in the form of reduced gain when the residence is sold.) There is no limit on the amount deductible, except that the costs must be “reasonable.” Meals are not deductible, even during the final trip.
Reimbursed expenses that would be deductible by the employee are not included in the employee’s income. Rather, under §132(a)(6) of the Code, these reimbursements are excluded from the employee’s income. Thus, they are not included in taxable wages on the employee’s W-2.
Exclusion is permitted only if the so-called "accountable plan" rules of Section 62(c) are met. Under those rules, the employee must account to the employer for the expenses, and may not retain any excess reimbursement.
Further, reimbursements of expenses are not excludable if the employee has already deducted the expenses in a prior year. Thus, for the exclusion rule to apply, four conditions must be met:
- The expenses being reimbursed are deductible by the employee under §217.
- The employee accounts to the employer for the expenses within a reasonable time.
- The employee does not retain any excess reimbursement.
- The employee must not have deducted the expenses in a prior year.
The law also permits employees to deduct moving expenses "above the line," that is, in computing adjusted gross income, rather than as an itemized deduction on Schedule A. Therefore, an unreimbursed employee without enough expenses to itemize deductions is able to deduct moving expenses in addition to the standard deduction. The same rule applies to a reimbursed employee if the exclusion discussed above is unavailable or the employer chooses not to take advantage of the exclusion mechanism.
The requirements for deductibility include a rule that the distance between the former residence and the new place of work must be at least 50 miles more than the distance between the former residence and the former workplace. That is, if the employee did not move, the employee’s commute would increase by at least 50 miles. There are no exceptions to this rule, which must be met if moving expenses are to be deducted. In addition, the employee must be employed full time in the general vicinity of the new job (but not necessarily in the new job itself, or even for the same employer) for a total of 39 weeks during the 12 months immediately following the move. And finally, if the expenses are not incurred within one year of beginning the move, the taxpayer must be prepared to show that circumstances prevented the taxpayer from incurring them in that time period (for example, the move was delayed to allow children to finish school).
For more on moving expenses, see Tax Concepts in Relocation: An Outline of the Basics and The Basics of Moving Expense Taxation.
Q4. What is a “Home Purchase Program” and how is it taxed?
Certain programs for disposing of the employee’s home in the old location (referred to in the mobility industry as home purchase programs or homesale programs) enjoy tax advantages that direct reimbursement of the employee’s homesale expenses do not.
Direct reimbursements (that is, plans in which the employer simply reimburses the employee for the costs the employee incurs in selling the old home) constitute compensation that will be taxable to the employee. Properly structured home purchase programs, however, allow an employee to avoid incurring these costs in the first place (and thus do not require the employer to reimburse or provide in-kind services, which would create income to the employee).
The best home disposal program for minimizing the tax liability for both the employer and the employee is one that is structured so that the disposal of the residence is accomplished through two separate, independent sales, rather than one. That is, a home purchase program in which the employer buys the home from the employee. Thus, the most important planning consideration for a home disposal program is how to create two sales: one from the employee to the employer or relocation management company (RMC), and a second sale of the residence by the employer or RMC to a third-party.
Since publication of Rev. Rul. 72-339 in 1972, the IRS has agreed that if the employer buys a home from an employee in a bona fide purchase for fair market value, the costs the employer incurs to dispose of the home are not income to the employee. In November 2005, the IRS reiterated and expanded on that agreement in Rev. Rul. 2005-74. The 2005 ruling includes considerable detail as to the procedures that will result in a purchase from the employee being considered a bona fide transaction in which the employer obtains all the benefits and burdens of ownership.
The IRS position is based on the premise that two separate, independent sales have occurred, one from the employee to the employer, in which no sale expenses are generally incurred, and a second sale from the employer to the outside buyer, on which the employer incurs the usual costs of sale such as a real estate sales commission. The employee is not a part of the second sale, and does not benefit from it. Consequently, the costs incurred are considered expenses of the employer incurred for its own benefit to dispose of the home, and not taxable to the employee. Note that this result is unrelated to whether the employee would be allowed to deduct moving expenses. That is, there are no work-related, time, or distance tests.
There are two common exceptions to the principles of Rev. Rules. 72-339 and 2005-74. First, if costs actually are incurred on the sale between the employee and the employer that local law or custom would impose on the seller (e.g., title insurance or transfer taxes) and the buyer (employer) pays them, that payment counts as taxable wages to the employee and is subject to withholding and payroll taxes. The reason is that the employer paid a cost for which the employee was liable.
Second, if the employer pays more than fair market value for the employee’s home, the excess is a “directed offer” and taxed to the employee as wage income, not as homesale proceeds. This amount, too, would be subject to withholding and payroll taxes.
Although Rev. Rul. 72-339 involved a direct purchase by the employer, the IRS has repeatedly held in private letter rulings that the result is the same if the purchase and sale is made by a RMC on behalf of the employer. That result is formally confirmed by Rev. Rul. 2005-74.
Consequently, if the program is properly structured as two, independent, bona fide sales, the expenses are not taxable to the employee whether the employer operates the program “in-house” or outsources it to a RMC (with the two exceptions noted above).
For more on this topic, see The Basics of Moving Expense Taxation.
Q5. What kinds of home purchase programs are used, and how does the IRS treat them?
A. The most common kinds of home purchase program are described briefly below.
In an Appraised Value program (also sometimes referred to as a Guaranteed Buyout) the employee’s residence is appraised by two or more independent appraisers. The employee then sells the residence to the employer or a relocation management company (RMC) hired by the employer at the average of the appraised values (or at some variation of this method to determine fair market value).
In an Amended Value program (AV), the transaction is the same as the appraised value sale, except that before the employee decides whether or not to accept the offer to purchase at the appraised value, the employee may place the residence on the market to determine whether a higher price can be obtained. The employee’s listing agreement with the Realtor must include an “exclusion clause” under which the listing agreement terminates and the Realtor does not earn a commission if the home is sold to the employer or RMC. If a third party makes a bona fide offer to purchase the residence at a price above the appraised value, the employer or relocation company will raise its offer to equal the third party offer. This new price is called the "amended value" of the residence. The employee then sells the residence to the employer at the higher amended value and the employer attempts to execute a contract with the third party buyer and sell to him/her.
A Buyer Value Option program (BVO) is similar to an amended value sale, except that no guaranteed offer to purchase is made to the employee, and no appraisals are done, at least initially. Rather, the employee markets the house seeking a bona fide offer in the market place. Once such an offer is received, the employer or relocation company will make an offer to purchase the home at the "buyer value" established by the outside offer. Thereafter, the procedures are the same as the amended value sale. In some programs, if the employee does not find a buyer during the initial marketing period, the employer will have the home appraised and make a guaranteed buyout offer based on the appraisals, which the employee can accept after an additional attempt to find a buyer in the marketplace. Such a procedure is better from a tax perspective.
In an Assigned Sale program, the transaction is somewhat the same as the amended value sale, except that when the employee places the residence up for sale and receives an offer to purchase from a third party, the employee signs a contract accepting the offer, creating a binding contract of sale between the employee and the outside buyer. The employee then sells the residence to the employer or relocation company, and assigns the contract of sale with the outside buyer to the employer or relocation company, which then attempts to close that sale. Generally, the employee does not receive the higher equity from the outside sale unless and until that sale closes.
In Rev. Rul. 72-339, the IRS held that the real estate commission was not taxable in an appraised value transaction, but the ruling did not detail the procedures used to purchase and sell the home, nor did it articulate a clear rationale for the result. In Rev. Rul. 2005-74, the IRS formally accepted not only the procedures contained in Worldwide ERC® guidelines for appraised value programs, but also accepted amended value programs. Although the ruling is silent as to both BVO’s and assigned sales, the analysis used in the ruling to find that two separate, independent sales occur in a properly structured amended value program generally would also apply to BVO’s, so that there is now a strong case that such programs are effective. However, such programs are stronger if they include an eventual appraisal and buyout if the employee does not find a buyer.
In contrast, the IRS has always held assigned sales to be taxable, and will continue to do so notwithstanding the lack of mention of such programs in Rev. Rul. 2005-74. Among the reasons for that result is that when the employee signs a contract to sell the house, the employee becomes obligated to pay the expenses of sale, such as the real estate commission. When the employer pays those costs, it is paying an obligation of the employee, and simply completing the employee’s own sale.
For more on these topics see Tax Concepts in Relocation: An Outline of the Basics and The Basics of Moving Expense Taxation.
Q6. Are costs and losses on home purchase programs deductible by the employer?
A. Yes, but the IRS and the relocation industry differ as to what type of deduction is allowable. Under Rev. Rul. 82-204, the IRS typically contends that the homes acquired are capital assets, and that the costs result in capital loss deductions, which are deductible only against capital gains. However, Worldwide ERC believes that the ruling is wrong, and that unlimited ordinary deductions are allowable because the homes are excluded from capital asset treatment as property held for sale in the ordinary course of business under section 1221(a)(1). Further, many companies will have arguments that Rev. Rul. 82-204 is distinguishable. The result may also differ under “fixed fee” programs. The majority of companies do not follow the IRS ruling. For more on this topic, see the various headings under “Capital versus Ordinary Loss” in the tax index to the Worldwide ERC® Tax & Legal MasterSource and the Federal Tax Hotline article from Mobility Magazine, December, 2007.
Q7. Is gain on sale of the home taxable to the transferee?
A. Usually, no. Section 121 provides that taxpayers of any age can exclude up to $250,000 of gain ($500,000 if married and filing a joint return) on the sale of a home if the taxpayer has owned and used the home as his or her principal residence for at least two of the five years prior to sale. Generally, this exclusion, (which is permanent, unlike the old rollover rule which merely deferred taxation but was repealed in 1997 when the new section 121 homesale capital gain exclusion was enacted), can be used on one sale every two years. For transferees who fail to meet one of the "two-year" rules above, the law provides relief under some circumstances. If failure to meet one of the two-year rules is "by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances" the taxpayer is given a partial exclusion based upon the ratio that the period of actual ownership and use as a personal residence bears to two years. For example, if a married transferee moved again in 18 months, the maximum gain exclusion would be 18/24 x $500,000 = $375,000. Any gain in excess of the allowable exclusion amount is taxed as capital gain. The tax rate for long-term capital gain is currently 20% for high-end taxpayers subject to the 39.6% income tax rate, 15% for taxpayers in the 25%, 28%, and 33% income tax brackets, and 0% for individuals in the 10% or 15% tax brackets. For more on this topic, see the various headings under “Homesale-Capital Gains Exclusion” in the Tax Index in the Worldwide ERC® Tax & Legal MasterSource.
Q8. Can companies make no-interest relocation loans to employees?
A. Yes. But there are a number of complicated requirements in order to avoid the tax consequences of so-called “below market” loans. When a loan is made at a below market interest rate, or with no interest at all, the Internal Revenue Code may impute interest to the loan even though the lender and borrower never did. If imputed interest rules apply to an employee relocation loan, the amount by which a market rate of interest exceeds the loan’s actual rate of interest is considered income to the employee borrower. (The market rate used is the "applicable federal rate," which is computed by the IRS under a formula in the Internal Revenue Code and periodically adjusted.) This income is considered to be derived from the employer-lender, because the employer-lender is considered to have paid interest on the loan to itself on behalf of the employee-borrower.
If interest is imputed to loans it has negative tax consequences for the employer-lender and may have for the employee-borrower. The employer-lender must pay payroll taxes (FICA, RRTA, and FUTA) on the amounts imputed as interest income to the employee-borrower. (The employer-lender, however, does not have to withhold federal income taxes on the imputed interest income.) The employee-borrower may or may not be eligible for a deduction of the imputed interest. The interest on a mortgage or bridge loan may be deductible as "qualified residence interest" under the general rules applicable to homeowners. However, there may be situations in which interest income is imputed to the employee, but the employee is unable to take a corresponding interest deduction. For example, there is a $100,000 limit on the amount of home equity debt upon which interest is deductible.
When regulations were written under these provisions, Worldwide ERC® was successful in obtaining exemption from the rules for two types of employee relocation loans, bridge loans and mortgage loans. Under section 1.7872-5T of the regulations, no interest is imputed on employee relocation bridge loans or mortgage loans, even if they are interest free, provided they meet a number of requirements set forth in the regulations. Consequently, it is common for companies to make interest-free loans to transferees equal to the equity in their old home so they can purchase a new one (a bridge loan), or loan them money for their new mortgage (a mortgage loan). For more information on this topic, and for the requirements such loans must meet to avoid imputed interest, see Tax Concepts in Relocation-Employer Provided Relocation Loans and Below Market Interest Rate Loans in the Worldwide ERC® Tax & Legal MasterSource.
Q9. Are expense reimbursements for short-term assignments taxable to employees?
A. Travel and living expenses of an employee while away from home overnight on business are deductible (and reimbursements by the employer are not included in the employee’s income), but only if the assignment is “temporary” as opposed to permanent or indefinite. Generally, “home” is considered to be located at the employee’s regular place of work. The tax law includes a provision under which an assignment is no longer considered temporary if it exceeds one year. The IRS has interpreted this provision to mean that an assignment must at its inception be realistically expected to last one year or less, and that it ceases to be temporary if that expectation changes at any time during the year. Consequently, if an assignment is expected initially to be for six months, but at the seventh month it becomes apparent that the assignment will in fact last longer than one year, expenses up to the seventh month are deductible/excludable, but expenses thereafter are not. As a result, temporary assignments must be constantly monitored and evaluated to make sure the original expectation is still valid. For more on this topic, see Temporary Assignment in the Worldwide ERC® Tax & Legal MasterSource.
Q10. What is a “payback” or “repayment” agreement?
A. Relocation is expensive. Companies want to make sure they receive some benefit in the form of future services for the costs incurred to move an employee. Therefore, relocation programs generally incorporate provisions requiring employees to repay all or a part of the expenses incurred to relocate them unless they continue to work for the company for a specified period.
Such provisions, usually called "payback agreements," take many forms. The enforceability of payback agreements depends on local law, but the agreements also can have significant federal tax consequences.
A typical payback agreement might be structured as follows: When an employee is relocated, a written agreement is entered into in which the employee, in consideration of the employer’s payment of moving expenses, agrees to repay all such expenses to the employer unless the employee continues to work for the employer for two years following the move. The agreement also provides that for every six months of continued employment, one-fourth of the potential obligation is forgiven. No promissory note is executed, nor is any interest due from the employee.
In general, the payback agreement has no initial tax consequences. It does not mean that the payment of relocation expenses was a loan. But if the employee in fact leaves employment before expiration of the agreement, the amount the employee is required to repay is an enforceable debt at that time. If the employee does make repayment, the IRS treats this as an itemized deduction for employment expenses, but there are a large number of issues surrounding what is deductible and how that are unresolved. In general, employers should not offer employees advice as to how to deduct any repayment. Further, if the employer forgives all or part of the required repayment, that may also have tax consequences, and may be treated as additional wages to the employee.
These issues are discussed in some detail in Payback Agreements in the Worldwide ERC® Tax & Legal MasterSource.
“Top 10” Most Frequently Asked Legal Questions
(For Relocation Professionals New to the Mobility Industry)
More detailed information on these topics and more is available through Tax & Legal MasterSource.
Prepared by Richard H. Mansfield
Mansfield & Associates
Edited by Tristan North
Worldwide ERC® Government Relations Advisor
Current as of August, 2012
Q1. As an overview, what areas of law are important for the mobility professional to be aware of?
A. That depends, in part, on the individual’s job function. In these FAQ’s we will look at the specialized topics which everyone should be aware of. Depending on one’s actual area of employment, more or less knowledge may be relevant. More detailed information on all of these topics can be found in Worldwide ERC®’s MasterSource. This knowledge is critical in two very important business areas: risk management and compliance.
Risk management refers to the knowledge of relevant laws, regulations, and court decisions which apply to business decisions. Many of these are discussed in these FAQ’s. For example, there are several federal regulations which mandate privacy and safekeeping of private, personally identifiable financial information, exactly the type of information normally collected by employee mobility programs. Identifying the information that a company collects, devising a program in accordance with the federal regulations, and overseeing its operation, are examples of risk management.
Compliance is similar to, but less broad than risk management. It is the business function which reviews operations and makes certain that the proper information, procedures, and record keeping, as called for in a risk management plan, are followed.
In most cases, non-lawyer mobility professionals need be aware of legal requirements of both kinds, and in many cases, may devise the risk management and compliance strategies. Complicated issues should be reviewed by counsel. However, even experienced corporate and outside counsels are often unfamiliar with the complexities and interrelations common in our industry.
Q2. What are the privacy laws which apply to financial data collected during a relocation?
A. There are several federal requirements which apply to personal financial information collected from the transferring employee during a relocation, and during a pre-decision counseling program. The most familiar are those mandated by the Gramm-Leach-Bliley Act, which includes the Privacy Rule and the Safeguards Rule.
The Privacy Rule is the more restrictive of the two, and may not apply to every segment of the employee mobility industry. However, courts and regulators have interpreted them broadly, so a detailed analysis of coverage is appropriate in many cases. This rule is primarily aimed at allowing the owner of the personal financial information – the consumer – to determine collection and dissemination of his or her private financial data, and to inform the consumer about the steps the collecting entity has in place to protect that data.
The Safeguards Rule is much broader and arguably applies to any private financial information collected from an employee or a transferee. It is aimed at physically protecting both written and electronic records.
Finally, since January 1, 2011, a regulation called the Red Flags Rule, applies to private financial information collected from employees or transferees. This rule requires specific steps be taken to protect consumer financial information from identity theft.
Real Estate Settlement Procedures Act (RESPA)
Q3. What is RESPA and why is it important?
A. Although there are several federal laws affecting U.S. domestic residential real estate transactions, the one which relocation practitioners most commonly deal with is the Real Estate Settlement Procedures Act (RESPA), which regulates “settlement service providers” providing services in a sale financed by “federally related mortgage” loans.
The Act regulates disclosure of settlement costs and fees, and referral and other fees paid among settlement service providers.
RESPA deals with disclosure by mandating that standardized forms are supplied to the buyer before and at settlement (closing). The rules regarding referral fees (known as “kickbacks” when they are in violation of the Act) were not subject to the modifications, but have been changing by virtue of regulation and court cases over the years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred enforcement of RESPA, TILA (Truth In Lending Act), and many federal consumer laws to the Consumer Financial Protection Bureau (CFPB) which officially began operations late in January 2012. RESPA had been enforced by the U.S. Department of Housing and Urban Development (HUD). The Bureau has taken an active role in investigating RESPA issues, and constitutes yet another reason for industry members to make certain their compliance mechanisms are in place and active.
While the CFPB enforces RESPA, states can enact their own laws regulating real estate settlements, so long as their laws are not less stringent than RESPA. Most states do have laws or regulations on real estate settlements but in the vast majority of cases, it is RESPA which applies.
RESPA also allows for two methods of enforcement in addition to the normal administrative enforcement powers inherent in the agency. The statute specifically provides that individuals may bring private law suits, including class action suits, against alleged violators; indeed the past decade has witnessed dozens of these suits, not all of which have been successful, of course. Since the statute authorizes the court to award treble (triple) damages attorney fees to victorious plaintiffs, class action suits are common. In addition to authorizing civil suits, certain sections of the act carry criminal penalties for violations with fines up to $10,000 per violation, and imprisonoment up to one year upon conviction.
Thus, it is clear that a basic knowledge of the mandates of RESPA is important to relocation professionals who deal with real estate transactions.
For more information visit U.S. Department of Housing and Urban Development (HUD) Releases Final Rule on RESPA Reform
Q4. Are there any exceptions to the RESPA requirements?
A. Yes. There are several common types of real estate transactions which are exempt. Perhaps the most common in the relocation industry is the sale from the transferring employee to the employer (or relocation management company) in an amended value or BVO transaction. In this situation, the employee is traditionally paid his or her equity by the employer, and there is no mortgage involved. Many companies however, use the new "closing disclosure" form or the previous HUD-1 form for detailing the transaction to the employee; this is for convenience and clarity, not because of the law.
Other exemptions include: cash sales, sales where the seller takes back the mortgage, temporary financing such as construction loans, sales of vacant land, properties of over 25 acres, commercial and agricultural property, and some mortgage assumptions.
For more information visit U.S. Department of Housing and Urban Development (HUD) Releases Final Rule on RESPA Reform and the Consumer Financial Protection Bureau.
For more information visit U.S. Department of Housing and Urban Development (HUD) Releases Final Rule on RESPA Reform
Q5. What are the anti-kickback prohibitions found in RESPA?
A. In addition to the disclosure requirements discussed above, RESPA contains strict prohibitions against the payment of unearned fee splitting and referral fees in section 8 of the Act, which also contains exceptions to the prohibitions.
Basically, the law defines referral fees, a common form of business to business payment, as a “kickback”, and bans them among settlement service providers except in certain highly regulated circumstance.
Although the law and court cases involving referral fees becomes more complex in actual application, the basic rule is that there must be four elements in a business transaction for it to be an illegal referral fee: 1) it must involve a federally related mortgage, 2) it must consist of a settlement service, 3) a “thing of value” must be received for a referral, and 4) an agreement or understanding must exist that the “thing of value” is in return for a referral. Each of these terms have specific definitions based on the statute and court cases, which is one of the reasons that expert legal assistance is often required when examining specific cases.
Needless to say, there are several exceptions to the anti-referral fee prohibitions contained in section 8 of RESPA, the most common of which include payments to attorneys, duly-appointed agents, promotional and educational activities, affiliated businesses, and pursuant to cooperative brokerage and referral agreements between real estate brokers (real estate referral fees).
Perhaps the most common of these exempted transactions in relocation transactions is the referral fee between brokers. Since broker-to-broker referral fees are a very common part of most domestic home purchase programs, making certain that the broker to broker nature of the fees paid is essential so as not to run afoul of RESPA.
For more information visit, RESPA Enforcement .
Pre-decision Counseling Programs
Q6. Are there any legal issues to watch for in pre-decision counseling programs (PDC)?
A. Yes. But these programs, if set up properly, produce little legal risk. There are three general legal categories to monitor; state employment law, the type and coverage of the program, and special circumstances of a particular employee or group of employees.
Every state and the federal government have anti-discrimination laws which prohibit an employer from making a hiring, firing, or promotion decision on the basis of an improper, discriminatory motive. This is law familiar to all, so it needs to be discussed only in passing here. Anti-discrimination policies must be built into PDC programs, too. In the past, there were some concerns that mandatory PDCs – programs which made the move contingent on certain financial criteria – could be discriminatory because of the potentially larger impact on certain classes of employees. There is no evidence that this has ever been raised judicially, and so long as a mandatory program is applied fairly according to its terms, such a claim, would be hard to support, at best.
State employment law also comes to play; all states except Montana are “at will” employment states which mean that unless there is an employment contract with an employee (such as an executive contract or a union collective bargaining agreement), companies are free to hire and fire for any reason, except for discrimination. But what constitutes a “contract” varies from state to state. Some hold that an employee manual or similar document can be a contract, while others say that only a specifically signed document counts.
The majority hold that even though there is a detailed manual regarding hiring, firing, promotions, and compensation (including relocation) policies, this does not rise to the level of a contract. But there are circumstances where a handbook can become a contract in a growing number of states, especially if the employee was improperly counseled or promised that its terms are “like a contract”. HR counsel should know and can advise of the actual state case law in this regard, and should always be asked to look over any published policy, especially if it is a mandatory PDC program. And promises should be avoided during the actual counseling process.
Real Property Condition Disclosure
Q7. Homesale programs involve two distinct sales. What do I need to know about the process?
A. The purchase and sale of a transferring employee’s home is usually the single largest cost in a domestic relocation. The costs are somewhat offset by real estate referral fees (discussed elsewhere), but the fact that the employer or RMC purchases the employee’s house before it is sold to the ultimate purchaser adds a very important risk management checkpoint to any program. Many of the issues arise out of the condition of the house sold to the ultimate purchaser; especially in good real estate markets (remember them?)
Effective risk management becomes even more important because suits and claims regarding property condition form a large part of legal actions arising from domestic relocations.
Regardless of the type of home sale program, the employer or RMC ends up in title of the house, and will be the selling entity to the ultimate purchaser. This is true regardless of the deed process (one deed or two), or the program type (amended value, BVO, or a composite). The employer’s knowledge of the condition of the house is garnered through the inspection report, appraisal, reports from the listing agent, and perhaps the employee’s disclosure reports. However, the employer has no firsthand knowledge to pass on to the prospective purchaser, and the employer can indeed be held liable for errors and omissions in disclosing significant property condition issues to the buyer, even if the employer is unaware of them.
This is therefore a very important area for active risk management. The cost of a lawsuit can easily eat up any referral fee income, even before the outcome.
For more information visit, Property Condition Disclosure.
Q8. What types of defects need to be disclosed to prospective buyers?
A. Most disclosure issues involve the physical condition of the property, or the ownership and title issues regarding it.
There are other, intangible issues which are coming to the public’s awareness and which could potentially affect the value of a residence. These fall under the rubric of “stigmatizing factors” and include, for example proximity to registered sex offenders, AIDS, murders or other deaths in the house, and similar public notoriety factors.
Buyers in most markets routinely obtain their own home inspections prior to purchase, and inspection contingencies area common part of purchase contracts. While many sellers feel that the resulting report becomes simply another negotiating tool, nevertheless, it certainly eases the disclosure burden. That does not mean that the seller can rely on the inspection report to replace or supplement his or her disclosures, but it does raise the threshold for liability because the buyer has had the chance for an independent professional look at the property prior to purchase. Most employers and relocation management companies insist on contractual language encouraging the buyer to inspect.
States routinely add or subtract items from their mandated property condition disclosure statements; for example, in 2009, Illinois added a specific question regarding the seller’s knowledge as to whether the property had ever been the site of an illegal methamphetamine manufacturing operation. While these specific questions are often inserted by the legislature to highlight newsworthy issues which have surfaced in the state, all state-mandated disclosure forms have at least one general question which should require the disclosure of known issues such as methamphetamine manufacture on the premises.
The individual state forms are for the most part available on line, and are easy to download for study. Real estate brokers, of course, have the most current for use in their transactions.
For more information visit, Property Disclosure: Stigmatized Properties.
Q9. Does the property disclosure requirement vary with the type of home sale program?
A. Not really. In amended value sales and buyer value option transactions (BVOs), there is no less need for disclosure information from the transferee. Here, the employer or relocation management company has even less of a chance to view the home, because its ownership period is briefer than when a house goes into inventory. In these cases, unless there is a statute to the contrary, the employer or relocation management company should include the transferee's disclosure to it in the disclosure package given to the ultimate purchaser. And it should include any other reports it may have received concerning the condition of the house, including inspection reports.
For more information visit:
Q10. How are relocation services sold to the federal government?
A. The federal government buys relocation services in several ways, all subject to the complicated law of government contracts. Some agencies contract directly with service providers, others buy off a pre-negotiated and pre-approved “schedule”. Individual contracts can vary significantly, while the rules regarding the schedule are less complex and more homogeneous.
One of the reasons that federal programs are not patterned exactly after commercial policies is because by law, the federal government itself is not allowed to buy an employee’s home, which is the hallmark of commercial home sale programs. This results in a shift in risk to relocation contractors in declining real estate markets, because the prohibition also does not allow the government to indemnify the contractor for losses incurred as a result of the home sale.
Most federal agencies contract for relocation services through a blanket agreement – known as the Schedule – published by the GSA. Even those agencies which sign separate relocation management contracts often incorporate some or all of the Statement of Work (SOW) contained in the GSA schedule. The Schedule was first adopted in 1992, and has undergone some revisions since then.
In July 2009 the GSA released a complete revision of the Statement of Work for Home Sale Services (SIN 653-1) and customized Home Sale Services (SIN 653-5). The revised SOW incorporates flexible options for services and prices, and allows federal agencies to contract for services which more closely resemble those offered to private employers.
The SOW for Home Sale Services was revised to include four optional service/pricing groups which can be contracted for by an agency; each option is based on a different set of services provided by the relocation management company, which can now bid on a known basket of services. The options more closely follow commercial practices.
The SOW also provides for special properties and “one off” situations, similar to many commercial relocation management contracts.
The options, each of which presents a different cost to the agency and a different risk to the RMC, range from full AV programs where the RMC immediately purchases the transferring government employee’s home, to a program similar to an open ended BVO.
For more information visit, U.S. General Services Administration (GSA) - Revision to Statement of Work (SOW).
Q11. Are there any laws affecting guerrilla marketing of relocation services through social media?
A. The use of social media, including blogs, Facebook, Twitter and whatever will come next has become a ubiquitous method of advertising for individuals and companies, sometimes intermixed in the same post. Ads mixed with discussions and analyses are commonplace in Worldwide ERC®’s discussion boards along with those throughout the Internet.
There are some basic risk management issues surrounding these activities, of course, but in general the risk is slight once the basics are followed.
Perhaps the first issue to address is a companywide social media policy. Usually these are integrated among all parts of a company, and are formulated in that way. They are as different as companies themselves, dealing with the use of the company’s name, endorsement of products, and the like. Warnings against defamation and product disparagement are also often included, depending on the company’s philosophy and policy.
From a risk management perspective, employees discussing their company’s products, and nonemployees who are paid or given things of value for endorsing them, need to be aware of the Federal Trade Commission’s (FTC) Guides Concerning the Use of Endorsements and Testimonials in Advertising, which became effective December 1, 2009. While the Guides are not law, they provide the FTC’s view of the law prohibiting deceptive and unfair practices in advertising.
In general, they require advertisers to provide greater disclosure of “typical” product performance, and of connections between endorsers and advertisers. They also make clear that endorsers as well as advertisers may be liable for misleading advertising.
The Guides recognize that endorsements appear on an array of nontraditional advertising media, including social networking sites, message boards, and the like. Endorsers using blogs, Twitter, Facebook, and other forms of social media are specifically mentioned, and they are expected to disclose a connection with the advertiser if one exists. Employees who endorse their company’s products should also disclose their relationship to the company in these forums.
One of the requirements of the Guides requires that advertisements that feature a consumer and convey his or her experience with a product or service as typical, when that is not the case, will be required to disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.
The revised Guides also add new examples to illustrate the long standing principle that “material connections” (including payments or free products) between advertisers and endorsers – connections that consumers would not expect – must be disclosed. These examples address what constitutes an endorsement when the message is conveyed by bloggers or other “word-of-mouth” marketers. They specify that while decisions will be reached on a case-by-case basis, the post of a blogger who receives cash or in-kind payment to review a product is considered an endorsement. Thus, bloggers who make an endorsement must disclose the material connections they share with the seller of the product or service. Likewise, if a company refers in an advertisement to the findings of a research organization that conducted research sponsored by the company, the advertisement must disclose the connection between the advertiser and the research organization. And a paid endorsement – like any other advertisement – is deceptive if it makes false or misleading claims.
Today, everyone spends part of his or her time advertising themselves, their company, or both. Keeping these rules in mind will keep the legal risk to a minimum.
Q11. What is the Dodd-Frank Act, and how did it affect the talent mobility industry?
A. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or DFA), is a comprehensive 2,000 page law that mandates an overhaul of the entire U.S. financial regulatory regime. Among its changes, it established a new independent Consumer Financial Protection Bureau (Bureau) within the Federal Reserve Board to oversee mortgages, credit cards and other financial products, creates a new Financial Stability Council to identify and regulate systemic risks posed by large, complex companies, products and activities before they threaten the stability of the economy, and establishes new regulations for the over-the-counter derivatives markets.
It directly affects the employee mobility industry in several key areas; it adds The Mortgage Reform and Anti-Predatory Act, a comprehensive regulatory process for residential mortgages – and their underwriting and terms -- to the existing requirements of the Truth in Lending Act; it places jurisdiction for policing the requirements of this Act, RESPA, and other mortgage and settlement related laws under the newly created Bureau; and it potentially regulates the financial instruments used in domestic real estate and home purchase programs.
The Act heavily regulates the mortgage industry as a part of its regulatory scheme, and both the statute and other regulations changed the manner and method that residential mortgages are structured, underwritten and sold. Regulatory compliance adds to the price of any mortgage product.
This legislation is, however, merely the end of the first phase of radically changing financial regulatory system. The Act delegated a significant amount of authority by requiring a series of rule makings by various federal agencies, including the U.S. Securities and Exchange Commission (SEC), the Federal Reserve Board (Federal Reserve or FRB), the Commodity Futures Trading Commission (CFTC) and the Federal Trade Commission (FTC). Regulations will undoubtedly be forthcoming for years to come from these agencies.
It also regulates the appraisal industry and prescribes a joint licensing and registration scheme with the states to regulate appraisal management companies (AMCs), one part of which will require federal registration of most appraisers.
As a risk management issue, requires constant review of new regulations, opinions, and procedures.
For more information visit, Dodd-Frank Act
The foregoing is intended as general information only. Regarding your specific situation, Worldwide ERC® suggests that you consult with your own tax or legal advisor as appropriate.
For reprint information contact: GovernmentRelations@WorldwideERC.org