Month: August 2004

For those of you who could use a little non-ERISA humor for the day, just read this order from Federal District Judge Sam Sparks who had this to say to some lawyers involved in a case before the court:

When the undersigned accepted the appointment from the President of the United States of the posiition now held, he was ready to face the daily practice of law in federal courts with presumably competent lawyers. No one warned the undersigned that in many instances his responsibility would be the same as a person who supervised kindergarten. . . The Court simply wants to scream to these lawyers, “Get a life” or “Do you have any other cases?” or “When is the last time you registered for anger management classes?”

(From David Giacalone)

Law.com has also posted this article about the order: “‘Antagonistic Motions’ Spark Retort From Judge.”

Here’s an excerpt from an interesting article worth reading from Internetnews.com on the topic of how blogs and wikis are beginning to be utilized in the corporate setting: “Blogs: the Marketing Killer“:

The tried and true marketing and PR departments may one day make the endangered species list thanks to a rush of corporate interest in blogs and RSS feeds.

Weblogging — or blogging — is taking social networking to new heights. And with the improvements to the technology, the personal journals are now supplying tens of millions of bits of information every day. Now multi-million dollar corporations looking for cheap and effective ways of getting their message out are using the technology to their advantage.

The TaxGuru has posted a cartoon here which illustrates in humorous fashion how an ERISA section 510 claim* might arise. The caption of the cartoon reads: “I know you’re three weeks away from retirement, but it’s either fire you now or I have to fork out for another gold watch.” Sadly enough, similar sorts of scenarios involving pension and health benefits have been the subject of much litigation as you can read about in this previous post here. I suppose one would argue that in the cartoon, the watch is not really a “benefit” protected by ERISA. However, that issue–when are in-kind benefits covered by ERISA?–reminds me of the well-known “grocery voucher” case decided last year–Musmeci et al. v. Schwegmann Giant Super Markets, Inc. et al.–in which the employer provided regular grocery vouchers to retirees when they retired from the employer with certain age, service, and position. When a qualifying employee retired, the employer would send the retiree a set of four grocery vouchers worth a total of $216 each month. These vouchers were valid for a period of thirty days, redeemable only at stores owned by the employer.

When the employer terminated the grocery voucher program due to financial difficulties and a sale of the business, the retirees sued claiming they were vested in a pension benefit plan under ERISA. The district court held that the voucher program did indeed qualify as a pension benefit plan under ERISA. On appeal, the Fifth Circuit agreed and upheld the district court’s opinion that the CEO and others were liable as fiduciaries of the plan and that the plaintiffs were entitled to monetary relief for benefits denied.

In reaching its decision, this is what the court had to say about in-kind benefits:

To determine whether ERISA applies to the Voucher Plan, we begin our analysis with an examination of the language of the statute itself. ERISA defines an “employee pension benefit” plan as:

any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program . . . provides retirement income to employees. . . 29 U.S.C. § 1002 (2) (A) (i).

The parties agree that [the employer] established a “program.” Thus, the primary issue this court must resolve is whether the vouchers issued pursuant to [the employer’s] Voucher Plan provided the Plaintiffs with “retirement income.”

Neither ERISA’s statutory provisions nor the federal regulations define the term “income.” However, they do not affirmatively require that the pension benefit be paid in cash. Moreover, the Department of Labor (DOL) refused to declare as a general policy whether in-kind benefits are regulated by ERISA. See ERISA Advisory Op. (March 26, 1999), 1999 ERISA LEXIS 11. We have likewise found no controlling case law directly addressing the issue. . .

Even if we were to adopt the plain or ordinary meaning of “income,” our conclusion would be the same. As noted by the Supreme Court in Lukhard v. Reed, the term “income” is commonly understood to mean a “gain or recurrent benefit usually measured in money.” Lukhard v. Reed, 481 U.S. 368, 374 (citing Webster’s Third International Dictionary 1143(1976)). Because the vouchers provided a gain or benefit to . . . employees and could readily be measured in money, they would constitute income as the term is generally understood.

In addition to holding that the voucher program constituted a benefit plan subject to ERISA, the Fifth Circuit affirmed the lower court’s decision that the CEO and other defendants were fiduciaries of the “plan” or voucher program, stating that the term “fiduciary” was to be “liberally construed in keeping with the remedial purposes of ERISA” and that “the term should be defined not only by reference to particular titles, but also by considering the authority which a particular person has or exercises over an employee benefit plan.? The court went on to hold that a fiduciary breach had occurred when the fiduciaries had not fulfilled their statutory duties under ERISA–namely ERISA’s disclosure and reporting obligations, minimum funding requirements, and the requirement that the plans assets be held in trust. The court opined that if the plan had been properly funded, the plaintiffs would have been protected upon a sale of the business.

It is interesting to note here that the court ruled that the retirees’ claims were not covered by the employer’s liability policy since claims were self-insured up to a limit of $250,000. One of the issues in the case was whether this $250,000 amount applied to each individual claim by participants, or to the aggregate claims as a whole. The court ruled that it applied to each individual claim and vacated the lower court’s judgment against the insurance company.

Moral of this story: While the facts of this case were unusual, employers should not make light of those in-kind benefit programs they provide for retirees. They could be subject to ERISA, and those who administer them could be plan fiduciaries personally liable under ERISA for failure to comply with statutory requirements.

*ERISA section 510 provides:

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. It shall be unlawful for any person to discharge, fine, suspend, expel, or discriminate against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to this chapter or the Welfare and Pension Plans Disclosure Act. The provisions of section 1132 of this title shall be applicable in the enforcement of this section.

The DOL has filed an amicus brief (access it here) supporting a petition for en banc rehearing in this case–QualChoice, Inc. v. Rowland–decided by the Sixth Circuit last May. (Thanks to Benefitslink.com for the pointer.) The case involved the common scenario of a health plan advancing money to a participant for medical expenses arising from an accident, with the participant then obtaining a settlement against a third-party tortfeasor, and the health plan seeking reimbursement for the medical expenses under the health plan’s reimbursement provision. The case involves the legal controversy over the Great-West case and what a plan can recover as “appropriate equitable relief” under the Supreme Court’s 2002 decision in Great-West.

The DOL argues in its brief that the Sixth Circuit in QualChoice was wrong in holding “that a fiduciary’s action to enforce a plan reimbursement provision is a legal action, regardless of whether the plan participant or beneficiary recovered from another entity and possesses that recovery in an identifiable fund.” The DOL goes on to state that such a holding is inconsistent with the Supreme Court’s analysis in Great-West. The DOL then emphasizes how the Sixth Circuit’s decision could exacerbate the conflict in the circuit courts over the issue (i.e. the circuit courts are split) and could negatively impact health plans in general:

In addition to being in conflict with the decisions of other circuits and in significant tension with Supreme Court precedent, the panel’s decision is of exceptional importance for other reasons: by reading section 502(a)(3) to disallow enforcement of subrogation provisions because they are grounded in contract, the decision is likely not only to add significantly to the costs borne by ERISA health care plans, but could also prevent participants and fiduciaries from bringing suit under section 502(a)(3) to enforce the terms of the plan.

As of 2002, an estimated 137 million people participated in private sector employer-sponsored health care plans covered by ERISA. Many of these plans contain reimbursement/subrogation provisions. Indeed, in 2000, the largest provider of subrogation services in the United States reported subrogation recoveries that averaged $4.8 million for every one million persons covered by its client. See Healthcare Recoveries, Inc., SEC Form 10K (Mar. 27, 2001). By flatly prohibiting such recoveries, the panel’s decision is likely to have a large economic impact on health care plans in this Circuit, and may lead some employers to respond by dropping or decreasing coverage.

Furthermore, under the logic of the panel’s reasoning that section 502(a)(3) does not allow enforcement of a plan subrogation provision because it is grounded in contract, no attempt to enforce a plan term would be permissible. This reads out of section 502(a)(3) the right to “enforce . . . the terms of the plan.” 29 U.S.C. § 1132(a)(3). Such a construction may have unforeseen consequences on the enforcement of ERISA beyond the subrogation context, and should be avoided under ordinary rules of statutory construction.

It will be very interesting to see how the court responds to the petition for rehearing and whether or not the Supreme Court will eventually step in again to try to make sense out of this very muddled area of the law.

With all of the political debate and media attention over employees losing their jobs due to outsourcing*, it is important to remember the possible exposure to liability that can occur as employers consider the option of outsourcing in its many forms. While time will not permit going into all of the legal exposure that can arise, two such areas of vulnerability that come to mind are as follows:

1. Liability under ERISA. ERISA section 510 prohibits an employer from discharging an employee for the purpose of interfering with the attainment of any right to which the employee may become entitled under an ERISA plan. Courts have held that such practices as terminating employees based on benefits cost to the employer or changing the status of an individual from “employee” to “independent contractor” for such purposes have violated ERISA. What this means is that employers who terminate employees for the wrong reasons can be exposed to section 510 claims from disgruntled employees under ERISA. The issue is particularly relevant in today’s work environment as employers are faced each year with the daunting and reoccurring task of containing benefits costs.

How does the issue apply to employers who outsource work to outside contractors? According to the U.S. Supreme Court in the case of Inter Modal Rail Employees Ass’n v. Atchison, Topeka & Santa Fe Railway Co. , an employer cannot outsource work to a sub-contractor where the purpose of the outsourcing is to interfere with the benefit plan rights of plan participants. The employer in that case outsourced its employees to another company that did not provide equal health and pension benefits, and allegedly did so for the purpose of cutting its own health and pension benefits cost. The court held that the employer could be held liable for violation of section 510 of ERISA.

While it is true that oftentimes it is difficult for employees to prove that an employer terminated an employee for the purpose of interfering with benefits, employees have prevailed in many instances. A well-known example of the type of evidence that can prevail in a section 510 case appears in McLendon v. Continental Can Company, 749 F. Supp. 582 (D.N.J. 1989), aff’d sub nom., McLendon v. Continental Can Co., 908 F.2d 1171 (3d Cir. 1990) in which a sophisticated benefits liability avoidance system was utilized by the employer. Employees were able to show that the employer had devised a computer program which identified employees who were close to meeting the age and service requirements for certain pension benefits so that such employees could then be targeted for termination. The court in McLendon had no trouble in finding that the employer had violated section 510 of ERISA.

Others may recall the recent case of Millsap et al. v. McDonnell Douglas Corporation (read about it here and here) in which plaintiffs achieved a $36 million settlement for claims brought against their employer, alleging that the employer closed one of its plants for purposes of preventing employees from attaining eligibility for benefits under their pension and health care plans. The damaging evidence in that case were memos from the actuaries analyzing the reduction in benefits which would occur if the plant were closed. One such memo prepared by the actuaries (which was apparently not protected by attorney-client privilege) considered “various what if scenarios, analyzing the effect on costs and savings if the company decided to reduce heads.” The kinds of costs analyzed included “pension cost, savings cost, savings plan cost, health care cost, and just direct overhead cost.” According to the court in that case, the employees were only required to show that the employer’s alleged desire to block the attainment of benefits rights was a “determinative factor” in the challenged decision, i.e. the claimant was not required to show that it was the sole reason for closing the plant.

2. Liability under FLSA. A troubling decision for employers that was issued late last year in the Second Circuit (covering New York, Connecticut, Vermont)–Zheng v. Liberty Apparel Co –held that an employer who outsourced certain tasks to a subcontractor in the garment industry was a “joint employer” for Fair Labor Standards Act (“FLSA”) purposes. The case is troubling because most courts in the past had looked to a “control” test to determine whether the contracting company was an employer for purposes of FLSA. However, the court in Zheng held that an employer could be deemed to be a “joint employer” if the employer had “functional control,” but not “formal control,” over the workers. In holding for the plaintiffs in the case and utilizing a factors test , the court stated that “although an entity’s exercise of an employer’s formal prerogatives-hiring and firing, supervising schedules, determining rate and method of payment, and maintaining records-may be sufficient to establish joint employment under the FLSA, it is not necessary to establish joint employment.” (The Zheng factors used by the court were: (1) whether the contracting employer’s premises and equipment were used for the work being done by the employees; (2) whether the subcontractor had a business that could or did shift as a unit from one putative joint employer to another; (3) the extent to which the employees performed a discrete line-job that was integral to the contracting employer’s process of production; (4) whether responsibility under the contracts could pass from one subcontractor to another without material changes; (5) the degree to which the contracting employer or its agents supervised the work being done; and (6) whether the employees worked exclusively or predominantly for the contracting employer.)

In light of the Zheng case and the ripple effect it might have in other districts, all employers, not just those with facilities in New York, Connecticut and Vermont, are being urged to review all of their subcontracting and outsourcing arrangements with counsel and to re-evaluate these arrangements. Given the FLSA’s harsh remedial scheme, the case could have a chilling effect on legitimate outsourcing arrangements which, according to the Zheng court, occupy a “substantial and valuable place” in the way American companies of all sizes do business.

Conclusion: While there are many business reasons for embarking upon a path of outsourcing, the case law demonstrates how, under ERISA, making the decision to outsource for the wrong reasons could come back to haunt the employer. In addition, outsourcing could lead to problems under the FLSA if employers who outsource are deemed to be “joint employers” under the factors cited in Zheng. When considering this option, employers need to be wary that, while outsourcing may save costs, it could also lead to unexpected lawsuits and result in exposure to liability in some circumstances.

(*Outsourcing is the delegation of a business process to an external service provider. The service provider is then responsible for the hiring of employees to accomplish the delegated business process.)

PricewaterhouseCoopers has released its 2003 Securities Litigation Study. The 10b-5 Daily reports on a number of interesting statistics here as follows:

(1) Of the 175 securities class actions filed in 2003, 107 were accounting-related. The primary allegation in accounting-related cases continues to be revenue recognition issues, alleged in over 50% of these cases.

(2) The percentage of cases with union/public pension funds as lead plaintiffs has grown steadily from 1996 (less than 3% of cases) to 2003 (28% of cases).

(3) Average settlement values for all cases settled in 2003 was $23.2 million, up 20% from 2002. There were an increasing number of large settlements, including 6 settlements of more than $100 million.

(4) PwC has begun to track “triple jeopardy” cases, where companies are subject to securities class actions along with SEC and DOJ investigations. There was an all-time high of over 40 of these cases in 2002, but last year saw this number fall to 8 cases (closer to historic norms).

The Study also had this to say about lawsuits against officers and directors:

Chief Executive Officers (“CEOs”) were named as defendants in 98 percent of all cases filed in 2003, up from 94 percent of cases filed in 2002. Chief Financial Officers (“CFOs”) were named as defendants in 86 percent of total cases filed in 2003, while the chairman of the board of directors was named as a defendant in over two-thirds of such cases. Other than not serving at all as a director or officer of an SEC registrant, the safest director or officer positions appear to be general counsel or members of the audit committees of boards of directors – very few cases filed in 2003 named either as defendants in private securities litigation

Also, the Study reports that “the largest numbers of cases filed in 2003 were in the Second and Ninth Federal Circuits, where the litigation epicenters are New York, San Francisco (and the Bay Area), Los Angeles and San Diego.”

Last week, the Wall Street Journal ran this very interesting article entitled “‘Wiki’ May Alter How Employees Work Together.” According to the article, a wiki (the Hawaiian word for “quick”) is a type of Website “that many people can revise, update and append with new information.” The article describes wikis as a “giant bulletin board on an office wall to which employees can pin photos, articles, comments and other things.” Sounds sort of like a collaborative blog, doesn’t it? In fact the article mentions blogs as follows:

Getting average people to think about controlling the Web as comfortably as they might an e-mail or a Word document has not been easy. But the rise in popularity of Web logs known as blogs and other “social software” is changing that. Blogging, say wiki proponents, has revived the idea that a Web site can be an ever-changing organism that can be linked with other Web sites to create a larger and more informative picture. But if the blog is a soloist, a wiki is an orchestra. . .

The article goes on to discuss the enormous potential that the wiki has for the business workplace:

Now, venture capitalists are funding several startups that are attempting to take the idea to a bigger and more lucrative general-business audience. Their goal is to try to solve one of the workplace’s most vexing problems: how to have employees collaborate and communicate better electronically.

Perhaps wiki skills will soon be featured in the 21st century employee’s resume. (That thought reminds me of this comic here from the TaxGuru.) And wouldn’t wikis be a wonderful tool for law firms? Firms could have their own internal wikis on various legal topics so that knowledge could be cataloged and utilized by others in the firm and added to as statutes, regulations and case law change.

By the way, Dave Baker at Benefitslink has started a wiki here which readers can use. I believe if you go here, you can view what readers have posted so far, including this great tool–Free Sites For Keeping Current.

(Apparently, a “bliki” is a cross between a blog and a wiki. Read about it here.)