After an economic downturn such as the last two years, with week after week bringing more news of company lay-offs, the following case could have relevance for employers seeking to deal with the myriads of legal issues which can result…
After an economic downturn such as the last two years, with week after week bringing more news of company lay-offs, the following case could have relevance for employers seeking to deal with the myriads of legal issues which can result from such lay-offs: Johnson v. Gore & Associates decided January 23, 2004 by the Ninth Circuit. The case highlights the confusion surrounding the term “lay-off,” and how the use of this term can have significance in determining what terminated employees are entitled to under severance plans and retirement plans.
The Facts: The employer here (the “Employer”) announced that it was closing a plant and repeatedly described to employees that it was a “layoff.” However, the Employer also issued a WARN notice and stated that, due to a “business relocation,” employment with the Employer would be permanently terminated. The plan at issue here was called the “Associates Stock Ownership Plan” and credited service based on the elapsed time method of crediting service, had a five year “cliff” vesting schedule, and had an “employment on the last day” requirement for receiving an allocation of Employer contributions for the year. Employees who lost their job due to the plant closing joined in a class action, seeking credit for an additional year of service. Their benefits had not yet vested because they had worked for the Employer more than four, but less than five years. There was also an additional class of plaintiffs who were vested, but did not share in the Plan contribution for the year because they lost their jobs prior to the last day of the Plan year. The Employer sought a motion for summary judgment which was granted by the district court and affirmed on appeal.
A debate over the “elapsed-time” method of crediting service. Before we glean some lessons for ERISA plan fiduciaries from the case, it is worth noting that the Ninth Circuit ruled in the case that the “elapsed time” regulations do not violate ERISA. (We can all breathe a sigh of relief . . .) Now, I don’t know about you, but I have drafted many, many plans which provide for the “elapsed time” method of crediting service, and never given much thought to the issue of whether or not the regulations governing the drafting of these provisions violate ERISA. Nevertheless, the regulations were the subject of much discussion in the case, which gives a history of the regulations and then holds that they do indeed comply with ERISA.
(Can you imagine the stir that would have been created had the Ninth Circuit ruled that they did violate ERISA, i.e. 27 years after they were promulgated? I suppose it could have been worse than the stir created by the recent IBM case in which a district court held that a cash balance plan violated ERISA.)
For those of you not familiar with this intricate concept of “elapsed time”, the “elapsed time” regulations, initially promulgated by the DOL in 1976, provide for a method of crediting service under a plan that is an alternative to the traditional hours of service method (where employees are credited with a year of service when they work 1,000 hours during a 12-month period.) As the regulations provide, under this alternative method of crediting service, “an employee’s statutory entitlement with respect to eligibility to participate, vesting and benefit accrual is not based upon the actual completion of a specified number of hours of service during a 12-consecutive-month period” but “is determined generally with reference to the total period of time which elapses while the employee is employed (i.e., while the employment relationship exists) with the employer maintaining the plan.” Reg. 1.410(a)-7.
This alternative method set forth in the regulations is designed to enable a plan to lessen the administrative burdens associated with the maintenance of records of an employee’s hours of service, by permitting each employee to be credited with his or her total period of service with the employer, irrespective of the actual hours of service completed in any 12-consecutive-month period. However, under a 5-year cliff vesting schedule (0% vesting for less than 5 years of service, and then 100% vesting after reaching the 5-year mark), the “elapsed time” method can have a harsh result if employees terminate near the end of the fifth year of employment. This is what happened in the case at hand where employees, due to circumstances beyond their control, were suddenly cut-off from reaching the 5-year mark and achieving their goal of 100% vesting. (On the other hand as noted in the case, the “elapsed time” method can actually achieve a more generous result where employees would not otherwise meet the 1,000 hour requirement under an hours-based approach to crediting service, but do receive a year under the “elapsed time” method.)
It is likely this harsh result which has brought the issue to the attention of other circuit courts as noted by the Ninth Circuit:
Other courts have addressed the question of whether the elapsed-time method violates the vesting provisions of ERISA and have upheld the regulation. We agree with the Second Circuit in Swaida, the Seventh Circuit in Coleman v. Interco Inc. Divisions’ Plans, 933 F.2d 550, 552 (7th Circ. 1991), and the Eighth Circuit in Jefferson v. Vickers Inc., 102 F.3d 960, 964 (8th Circ. 1996), and hold that the elapsed-time regulation does not violate ERISA.
(Interesting point to note here: The Swaida case mentioned was against IBM: Swaida v. IBM Ret. Plan, 570 F. Supp. 482 (S.D.N.Y. 1983), aff’d, 728 F.2d 159 (2d Cir. 1984).
Lessons for ERISA Plan Fiduciaries. Regarding lessons for plan fiduciaries, there are many:
(1) Make sure your plan document has the “magic” language of the Firestone case. While it is hard to imagine any plan not now containing this language, after benefits attorneys have hammered away at this point for many years, the Gore case represents one of those few cases where the plan document under review did not contain sufficient language so as to satisfy the requirements of Firestone. (See previous post on the subject here.) As you may recall, if the plan document gives the plan administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan documents, the decisions reached by the plan administrator will not be overturned by a court unless the decision was “arbitrary and capricious.” The court in Gore held that the Plan language did not provide the necessary “discretionary authority” under Firestone and therefore the court went ahead with a “de novo” review of the decision. The “defective” language contained in the Plan was as follows:
The Committee shall administer the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the Participants and their Beneficiaries. The Committee shall establish and maintain Accounts and records to record the interest of each Participant, Inactive Participant, and their respective Beneficiaries in the Plan. The Committee shall make such rules, regulations, interpretations, discussions, and computations as may be necessary. Its decision on all individual matters will be final . . .The Committee shall have all powers which are reasonably necessary to carry out its responsibilities under the Plan. It may act as provided herein and shall give instructions to the Trustee on all matters within its discretion as provided in the Plan and Trust Agreement.
(The court went ahead and upheld the plan fiduciary’s decision in spite of the de novo review.)
(2) In questions of ambiguity or areas needing clarity, seeking the advice of counsel can help to establish that the the plan fiduciaries employed “prudent procedures” in reaching a decision about the issue and can show that the fiduciaries are diligent in seeking to comply with the law. In the Gore case, the plan committee sought the advice of legal counsel on the interpretation of the phrase “lay-off” under the plan, and the court emphasized this advice in upholding the decision of the Plan committee:
The Committee did not ignore the facts and the law when it determined that a “layoff” under this regulation connotes a temporary absence. A memorandum from Plan counsel Brown (Brown Memorandum) to the Committee is clearly concerned with the meaning of the term “layoff” and cites several cases supporting the definition ultimately applied by the Committee. Most importantly, the Plan clearly states in section 21.1 that “The provisions of the Plan shall be construed, administered, and enforced according to the laws of the United State and the State of Delaware.” . . . Accordingly, we cannot say that the Committee’s decision is contrary to fact or law in light of the validity of the elapsed-time regulation and our holding that the term “layoff” in that regulation connotes a temporary absence.
(Of course, it goes without saying that such advice from counsel could also work the other way, showing that plan fiduciaries were “arbitrary and capricious” where the plan fiduciaries, for whatever reason, decide to ignore the advice given, and where such advice then becomes discoverable in a lawsuit.)
(3) Remember that informal discussions among committee members memorialized through emails may eventually be used against the committee members in a later lawsuit. The plaintiffs tried to use an email between Committee members as evidence that Committee members were influenced by a material conflict of interest, thereby meriting a de novo review. The email reflected a conversation that a Committee member had with outside counsel, in which the attorney advised that the term “leave of absence” could be stretched to include the employees who had lost their jobs due to the plant closing. Although the court held there should be a de novo review for other reasons, the case demonstrates how those internal memos can sometimes come back to haunt you. (You can read about another case where a “smoking gun” memo made a difference in a case here.)
(4) Even with “defective” plan language and grey areas of the law where reasonable persons could differ, plan fiduciary decisions will often be upheld by courts where “prudent procedures” were employed in reaching the decision. Here the “prudent procedures” employed by the fiduciaries involved seeking the advice of counsel who advised the fiduciaries regarding interpretation of the plan language, citing several cases supporting the decision reached by the plan fiduciaries.
(Note: My guess is that a “partial termination” and 100% vesting argument was not advanced by the plaintiffs due to the numbers of employees involved.)
UPDATE: There is a follow-up to this post which you can access here.