The Affordable Care Act – better known as Obamacare – contains numerous provisions that define the relationships between employers and their employees with respect to health care benefits. Among the most critical are the statute’s employer mandates requiring employers with more than 50 employees to offer health insurance coverage to its employees who work 30 hours or more a week or face statutory penalties. As I have previously noted in discussing possible Obamacare-related employer liability issues, the ACA’s mandate creates incentives for employers to try to restructure their workforce to avoid the statute’s requirements. However, as I have also noted, employer actions to restructure their workforces to avoid providing health plan benefits could lead to liability claims under ERISA.
A recent decision from the Southern District of New York shows how an employer’s actions to reduce full-time staff to part-time status — allegedly undertaken in an effort to avoid the health care law’s impact — can lead to ERISA class action claims. The decision also underscores how the affected employees may be able to assert viable ERISA claims.
Maria De Lourdes Parra Marin had worked full time at the Dave & Busters (D&B) restaurant in Times Square. In a meeting with in June 2013, managers of the restaurant told employees that ACA compliance would cost the company as much as $2 million, and in order to avoid these costs, the restaurant planned to reduce the number of full-time employees from more than 100 to approximately 40. The complaint further alleges that these changes were a part of a nationwide effort by the restaurant chain to restructure its workforce, due to the ACA mandates. The plaintiff alleges that after June 1, 2013, her hours were cut to an average of 17.43 per week, resulting in a reduction in pay and the loss of eligibility for medical and vision benefits.
The plaintiffs filed a class action lawsuit against D&B and related entities in the Southern District of New York alleging that the workforce changes represented acts of discrimination in violation of Section 510 of ERISA. The complaint (a copy of which can be found here) purports to be filed on behalf of all persons who were participants in the D&B health plan and whose hours were reduced on or after June 1, 2013.
Section 510 provides in pertinent part that
It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan, this subchapter, section 1201 of this title, or the Welfare and Pension Plans Disclosure Act [29 U.S.C. 301 et seq.], or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan, this subchapter, or the Welfare and Pension Plans Disclosure Act.
The plaintiff’s complaint seeks reinstatement for all affected employees; equitable restitution of all lost wages and benefits; and equitable restitution for the costs the individual class members incurred to secure their own health insurance.
The defendants moved to dismiss the plaintiff’s complaint. The dismissal motion presented the question of whether or not the plaintiff had alleged a legally sufficient claim for relief that her employer’s curtailment of her hours discriminated against her “for the purpose of interfering with the attainment” of a right to which she “may become entitled” under the employee benefit plan of which she was a participant. In seeking dismissal, the defendants argued that an employee has no entitlement, and thus no legally sufficient claim, to benefits not yet accrued.
The February 9, 2016 Ruling
In a February 9, 2016 order (here), Southern District of New York Senior Judge Alvin K. Hellerstein denied the defendants’ motion to dismiss. In denying the motion, Judge Hellerstein noted that the complaint, “fairly read,” alleges that the defendants “intentionally interfered with her current health-care coverage, motivated by [their] concern about future costs.” The plaintiff, Judge Hellerstein said, has “put forward factual allegations that the employer had the specific intent to interfere with her right to health insurance.” The reduction in the plaintiff’s hours “affected her employment status, her pay, and the benefits she had and to which she would be entitled.”
With respect to the defendants’ argument that the plaintiff had no claim for benefits that had not yet accrued, Judge Hellerstein noted that plaintiff alleged that the defendants’ discrimination affected her current benefits, in addition to interfering with her ability to attain future benefit rights. Her claim, Judge Hellerstein noted, “arises from the employer’s unlawful motivation, acting to interfere with either the exercise or the accrual of benefits to which the Plaintiff ‘may become entitled.’”
Accordingly, Judge Hellerstein concluded that the plaintiff had “sufficiently pled that the employer had acted with an ‘unlawful purpose’ when taking the adverse action against her.” The critical element, Judge Hellerstein noted, is “the intent of the employer” – that is, “proving that the employer specifically intended to interfere with benefits.”
It is important to note that there has been no decision here that the employer is in fact liable. Judge Hellerstein’s ruled only that the plaintiff has a viable claim under ERISA. The plaintiff must now prove her allegations, including the critical element, which Judge Hellerstein underscored in his ruling, that the employer acted with the specific intent to interfere with the plaintiff’s benefits. In addition, it should be noted that at this point no class has been certified, either.
Obviously, the indispensable part of the plaintiff’s complaint is her specific allegations concerning the defendants’ motivations. At least according to the plaintiff’s complaint, the defendants held a meeting with their employees (including the plaintiff) in which they allegedly expressly said that the reason the company was making the changes was to avoid expenses associated with the ACA mandate. The complaint also alleges that company representatives made similar statements quoted in media reports that the national chain was making workforce changes to avoid ACA mandated health care costs.
Whether of not the company and the plaintiff’s employer made these statements is of course an issue for proof in the subsequent proceedings in this case. But these allegations underscore one potentially important risk management lesson for employers, which is that statements about the motivations for employment-related changes could be used to support liability claims under ERISA, and so, from the employer’s perspective, the less said about the reasons for workforce changes, the better.
The more important lesson has to do with the simple fact that the plaintiff filed this class action complaint, which the district court found to be legally sufficient. Innumerable other employers will be facing questions about whether or not they should restructure their work force in light of the ACA mandates. As this case shows, plaintiffs affected by workforce changes allegedly motivated to avoid ACA mandates may seek to assert claims under Section 510, at least to the extent they can present allegations that the actions were motivated by an intent to interfere with the plaintiff’s benefits. As this case also makes clear, employers should assume that health care participants will challenge choices made to limit or curtail health care benefits.
The bottom line is that, as I have previously contended, the ACA employer mandates present significant potential liability exposures for employers who make workforce changes because of the mandates. These potential liability exposures raise a number of insurance-related implications. The most important implication has to do with the employers’ fiduciary liability insurance policies. Given the kinds of issues that can arise, this is a good time for policyholders to review the limits of liability under their fiduciary liability policies and to consider whether the limits are sufficient to address prospective claims that might arise from ACA-related issues.
A related issue has to do with employer decisions to eliminate health care benefits. Although not involved in this case, the ACA mandates could drive employers to make a number of changes, including the elimination of benefits altogether. The elimination of benefits could present complicated insurance-related issues. The courts have drawn a distinction between liability arising from actions taking in a fiduciary capacity and action taken in a settlor capacity. Fiduciary liability arises from actions taking in administering employee plans. Settlor liability arises from actions to establish or discontinue employee plans. In the past, fiduciary liability carriers have taken the position that their policies do not extend coverage to settlor liabilities. Currently, many fiduciary liability carriers will upon request agree to endorse their policies to express state that their policies will provide coverage for settlor liability claims (sometime subject to additional underwriting and premiums). In light of the possibility of workplace restructuring kinds of claims, it could be particularly important to ensure that employer’s fiduciary liability insurance programs include settlor liability coverage.