October 2010 / Volume 8, No. 9

DOES AN EMPLOYEE HAVE AN EXPECTATION OF PRIVACY WHEN TEXTING ON THE EMPLOYER’S EQUIPMENT?

In the recent case of City of Ontario v. Quon, the United States Supreme Court held that the City of Ontario (California) Police Department did not violate the Fourth Amendment rights of a SWAT team member by reviewing his text messages on a Department-issued pager because, even assuming he had a reasonable privacy expectation, the City’s review of his text messages was motivated by a legitimate work-related purpose and was not excessive in scope.  While the Court declined to make a broad pronouncement regarding employee privacy rights in electronic communications using employer-issued equipment, the decision still provides useful guidance for private employers. 

In Quon, the Police Department issued text pagers to its SWAT officers with the caveat that personal use of the pagers was limited to “light personal use”.  After a few of the SWAT officers consistently exceeded the text limit on the pager plan, the police chief ordered a review of the pager transcripts in order to determine why the officers were exceeding their character limit.  Upon review of Officer Quon’s messages, the Department learned that many of them were not work-related and some were sexually explicit.  After Quon was disciplined for his excessive personal use of the pager during work hours, he sued the City, claiming that the review of the text messages constituted an unreasonable search and seizure in violation of his Fourth Amendment rights.  Since the manager in charge of billing on the pager account had told the officers that he would not review their messages if the officers paid the overage charges, Quon argued that this created an expectation of privacy in the messages.

While the Supreme Court did not decide whether the officers had a reasonable expectation of privacy in the text messages, the Court emphasized, in the following language, the importance of a well-crafted and broadly distributed electronic resources policy when defending against an employee’s claim that an employer unlawfully reviewed the employee’s electronic communications:

“[E]mployer policies concerning communications will of course shape the reasonable expectations of their employees, especially to the extent that such policies are clearly communicated”.

In the Quon case, the Court took note of the City’s policy and the extent to which it was distributed and enforced.  The City had a “Computer Usage, Internet and E-mail Policy” that applied to all employees and which stated that the City “reserves the right to monitor and log all network activity including e-mail and internet use, with or without notice,” and warned that “[u]sers should have no expectation of privacy or confidentiality when using these resources.”  Quon signed a statement acknowledging that he had read and understood the computer policy, and the City made it clear to the employees that the policy would be applied to text messages as well as e-mails

The Court concluded that the City and the Police Department had a legitimate interest in ensuring that employees were not being forced to pay out of their own pockets for work-related expenses and, conversely, that the City was not paying for extensive personal communications.  The Court also held the scope of the search to be reasonable and not excessively intrusive because the review was only of two months of messages and the messages sent when Quon was off duty were redacted. 

The Quon decision provides the following guiding principles to the private employer to help reduce potential exposure on privacy-based claims:

  • Assume the employee has an expectation of privacy in the electronic communication or whatever is being searched.
     
  • The company’s electronic resources policy should be well crafted and broadly distributed and should put employees on notice as to how and when the employer will access electronic communications.
     
  • The electronic resources policy should not be limited to e-mail or to communications transmitted through the company’s e-mail server but also through the cell phone provider’s server (through which text messages are typically sent).
     
  • Through policy language and training, avoid a situation where an employee could claim that a management-level employee countermanded corporate policy aimed at defeating employees’ privacy expectations in their electronic communications.
     
  • Adopt a written policy that is signed by all employees. There should be regular training for managers so that they are kept aware of the policies and how to enforce them.
     
  • Make sure any company investigation accomplishes a legitimate business purpose in a manner that is not excessive.  Do not search communications outside of work hours or in places that do not have work-related materials.  If there is any doubt, ask the company’s attorney before conducting any search.

As employees increasingly access personal e-mail accounts using employer- issued equipment and rely more heavily on personal smart phones to conduct company business, the privacy issues confronting private employers (and the courts) will only become more complex.  While even the most comprehensive electronic resources policy may not always win the day for the employer, the above guidelines can go a long way in strengthening the employer’s position in any litigation.

By Norman T. Finkel


2010 ROTH IRA PLANNING OPPORTUNITIES

There is a new opportunity in 2010 to elect to convert a regular individual retirement account (“IRA”) into a Roth IRA, without the income limitation that applied in prior years.  Whether or not a taxpayer should exercise this election requires an analysis of various factors, including a projection of potential individual income tax rates in 2011 and future years.  The conversion of a regular IRA to a Roth IRA triggers current income tax liability, but provides an opportunity to allow the Roth IRA account to grow tax-free and eventually be passed on to the next generation on an income tax-free basis.  For 2010, a Roth conversion can be made this year, but a taxpayer can wait until as late as October 15, 2011, to either reverse the election or to keep the conversion and to report the conversion as 2010 income, or to split the income equally between the years 2011 and 2012.  The conversion can have both income tax and estate tax benefits, and is therefore something that taxpayers should review before the end of 2010.  The following are some of the factors that should be considered with respect to this election.

Tax Rates.  A primary factor is whether to accelerate current income tax liability by making the conversion.  There is an expectation that tax rates will increase in the future, but a current conversion may also move a taxpayer into a higher current tax bracket and decrease certain tax deductions, such as medical expense deductions, tied to adjusted gross income.  Estimated income tax payments for 2010 also have to be considered.

Five Year Deferral of Distributions.  In order for future Roth IRA distributions to be tax and penalty free, there is a five year period during which distributions cannot be made tax free.  The five year period includes the year of the conversion.  However, upon the death of the taxpayer distributions are required to be commenced unless the surviving spouse is the designated beneficiary, as the spouse can elect to treat the Roth IRA as the spouse’s IRA, and continue the deferral of distributions.  Distributions can be made on a tax free basis if they are “qualified distributions” – made after the 5 taxable year deferral period and distributed on or after the date the IRA owner reaches age 59 & ½ or to a beneficiary after the death of the owner.  For example, if a Roth IRA conversion is made in 2010, tax-free distributions could commence in 2015.

Reducing Tax Liability for the Next Generation.  A primary benefit of a Roth IRA conversion is that it allows a taxpayer who has sufficient other assets to reduce his or her taxable estate for estate tax purposes by paying the income tax liability from other non-IRA assets, thereby reducing the taxable estate by the tax paid, and then allowing the Roth IRA fund to grow income tax free with no distributions required until the taxpayer’s death.  The distribution can then be made over a designated beneficiary’s life expectancy on a tax free basis (if the Roth IRA has been in effect for five taxable years).  This makes a Roth IRA a good asset to pass on to grandchildren, who would be able to stretch distributions over a longer period of time.

Re-characterization; Election as to Reporting of Income.  For a 2010 conversion, the Roth IRA conversion can be reversed by October 15, 2011, if it appears that the conversion does not produce the income tax benefit that was expected at the time of conversion (for example, if the value of the Roth IRA decreases substantially), and a determination can also be made if the income resulting from the conversion should be reported in 2010, or allocated equally between 2011 and 2012.  However, care has to be taken to avoid under-payment of estimated taxes for 2010.  If the 2010 Roth IRA conversion is to be reversed, the entire Roth IRA account has to be returned to a regular IRA by October 15, 2011.

Conclusion.  A Roth IRA conversion requires an analysis and projection of a taxpayer’s present and future tax rates and financial situation.  An ideal candidate for a Roth IRA conversion is a person who is approaching the age for required minimum distributions (70 & 1/2), who does not need the funds for support, who can pay the income tax on the conversion from other non-IRA assets, whose income tax bracket is likely to increase in the future, and who will likely have a taxable estate for federal or state estate tax purposes.  Beneficiary designations for Roth IRAs should be coordinated with an individual’s overall estate plan.

By Ronald G. Silbert


Schoenberg Finkel Newman & Rosenberg, LLC (312) 648-2300

This newsletter is not intended to be legal or tax advice and is not a substitute for obtaining legal or tax advice. This Newsletter is deemed to be advertising material by the Illinois Supreme Court.