Facebook, MySpace, YouTube, LinkedIn, Flickr and Twitter — regardless of the name, social media is here to stay. The increased use of social media by employees and employers presents unique opportunities and risks in the employment setting. At all stages of the employment life cycle — recruitment, selection, advancement, separation — the use and misuse of social media must be addressed to avoid employer liability. This has real-world consequences for Oregon municipalities.
A recent change in Internal Revenue Service regulations regarding the tax treatment of cellular telephones or other similar telecommunications equipment provides a serious trap for the unwary city and the unsuspecting employee. Prior to the enactment of the Small Business Jobs Act of 2010, cell phones were considered a fringe benefit, the value of which had to be included in the employee's gross income. Sometimes a specific IRS exclusion applied to exempt the cell phone as an employer-provided fringe benefit.
Gross income has consistently been interpreted by the IRS — a definition supported by the courts — as "all income, from whatever source derived." Section 61(a)(1) of the Internal Revenue Code (the "Code") provides that gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. Therefore, a fringe benefit provided by an employer to an employee is considered income unless it is specifically excluded from gross income.
The Code provides that gross income does not include any fringe benefit that qualifies as a "working condition benefit," defined as any property or services provided to an employee that if paid by an employer would be allowable as a business deduction. (Municipalities are not subject to income taxes, but the principles as to taxability still apply to the employer-employee relationship.) Therefore, the Code allows a deduction for the ordinary and necessary expenses paid or incurred during a taxable year in carrying out any trade or business. But the Code also makes it clear that no deduction is available for personal, living, or family expenses.
The Code also provides that gross income does not include any fringe benefit that qualifies as a de minimis fringe, defined as any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable. But the Code makes it clear that a cash fringe benefit is not excludable as a de minimis fringe.
Many cities may provide cell phones and other telecommunications devices such as iPads, tablets, lap-top computers, etc., for noncompensatory business purposes, or they may reimburse employees for the cost of using their own personal cell phones. Providing cell phones or reimbursement reflects the need of the city to contact the employee at all times for work-related emergencies or to allow the employee contact with city personnel and others when outside the office (for example, police officers, assessors, building inspectors, etc.) and conducting city business. A city will be considered to have provided a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the city's business. But even the reimbursement of an employee's use of his own personal cell phone by the city may give rise to problems. Whatever the reason, the unwary city and the unsuspecting employee given a city-provided cell phone or receiving reimbursement for a personal cell phone may find themselves with unintended consequences.
Under the recently announced IRS interpretation, an employer (i.e., the city) that provides an employee with a cell phone or reimbursement will see this treated by the IRS as a working condition fringe benefit. Further, the IRS will treat the value of the noncompensatory business purposes as excludable from the employee's income as a de minimis fringe.
So far, so good, until Oregon cities consider the application of the Oregon government ethics law (ORS Chapter 244) and this new IRS interpretation. On its face, the IRS has made it easier for a public employee to have and use cell phones for noncompensatory business purposes, but while such IRS easing may avoid inclusion of a working fringe benefit in the employee's gross income, it may still run afoul of Oregon law.
ORS 244.040(1) specifically provides that:
"Except as provided in subsection (2) of this section, a public official may not use or attempt to use official position or office to obtain financial gain or avoidance of financial detriment for the public official, a relative or member of the household of the public official, or any business with which the public official or a relative or member of the household of the public official is associated, if the financial gain or avoidance of financial detriment would not otherwise be available but for the public official's holding of the official position or office."
ORS 244.040(2) provides two exceptions to ORS 244.040(1) above in the employer-employee setting:
"Subsection (1) of this section does not apply to: (a) any part of an official compensation package as determined by the public body that the public official serves; * * * [or] (c) reimbursement of expenses; * * * ."
OAR 199-005-0035(3) provides a definition of "official compensation package":
"An "official compensation package" means the wages and other benefits provided to the public official. To be part of the public official's "official compensation package," the wages and benefits must have been specifically approved by the public body in a formal manner, such as through a union contract, an employment contract, or other adopted personnel policies that apply generally to employees or other public officials. "Official compensation package" also includes the direct payment of a public official's expenses by the public body, in accordance with the public body's policies."
OAR 199-005-0035(4) provides a definition of "reimbursement of expenses":
"The "reimbursement of expenses" means the payment by a public body to a public official serving that public body, of expenses incurred in the conduct of official duties on behalf of the public body. Any such repayment must comply with any applicable laws and policies governing the eligibility of such repayment."
When evaluating the new IRS directive, city representatives should ensure that they have in place appropriate documentation to support that the cell phone provided or the reimbursement allowed falls squarely within the exceptions for official compensation or reimbursement of expenses under the Oregon government ethics law. Municipal employees must remember that the law applies to them personally and that they, not the municipality, are subject to violation. Thus, they should be sure to have appropriate language in their employment contract, in any applicable collective bargaining agreement, or in the city's own policies and procedures.
With a little planning and careful drafting, a municipality can provide cell phones to its employees and public officials that are excludable from the IRS definition of gross income as a fringe benefit that is used for noncompensatory business purposes and that don't run afoul of the Oregon government ethics law. Public officials, including public employees, need to be sure they are properly covered by municipal policies, contracts, or collective bargaining agreements that avoid liability under the Oregon government ethics law. If both the municipality and the public official are successful in this mutual endeavor, they can peacefully coexist in the rapidly evolving social media world.
For more information on this topic, please contact firstname.lastname@example.org or call (888) 598-7070.