While everyone knows that outsourcing is here to stay, and that there are legitimate business reasons and advantages to outsourcing, what I have tried to do here is simply to highlight some of the ERISA litigation that has grown out of this trend in outsourcing. The reason I think it is important is that when employers contemplate outsourcing and hire advisers to help them through the process, many times they are not advised of the issues and risks that can arise in the benefits arena. (See previous posts: Outsourcing Can Lead To Costly ERISA Litigation and Outsourcing: Traps for the Unwary.) Another very recent case–Sheckley v. Lincoln National Corporation Employees’ Retirement Plan, Civil No. 04-109-P-C (D. Maine 2005)–provides some further insight into actions that can expose an employer to liability under ERISA in an outsourcing arrangement as well as actions that can, to some extent, reduce an employer’s exposure to liability under ERISA.
Facts: The employer in the case reorganized its information technology organization, and as a result, forty-nine positions were eliminated. In the course of various restructurings, the employer entered into outsourcing agreements. (The court defines outsourcing as “the practice of transferring job functions to third-party vendors who enter into contracts with the employer to provide the services formerly provided by employees.”) The employer notified twenty-six employees in the information technology department, including plaintiff, that their positions were being outsourced to another employer. Outsourced employees were required to apply for their position with the new employer. Apparently, in the process of outsourcing the employees, they were given a benefits summary which indicated that they would be vested in the prior employer’s retirement plan. However, after accepting the position, plaintiff was informed that his retirement account in the prior employer’s plan would not vest.
Section 510 Claims: When the employer responded to an inquiry from plaintiff about the benefits summary he received, the employer stated that it “contained an error about his pension” and that he was not entitled to vesting because his job was not eliminated, but rather “outsourced.” Plaintiff then made a claim and quasi-appealed the decision under the plan’s claims procedures, but to no avail, and then brought suit under ERISA section 510, claiming that the employer had characterized the action taken as “outsourcing” (versus “job elimination”) in order to deprive plaintiff of vesting under the employer’s pension.
A Magistrate Judge had found that, although the amended complaint alleged the necessary intent, the “mischaracterization of the job eliminations affecting [p]laintiff and the Class … [could not] reasonably be construed, even under the favorable standard applicable to motions to dismiss, to allege discrimination against plaintiff and other members of the putative class.” However, the federal district court in Maine disagreed, holding that the allegations were sufficient to state an ERISA section 510 claim, and denied the employer’s motion to dismiss.
Plan Limitation Period: There was another aspect of the case though which illustrates one technique that employers are seeking to use to reduce their exposure to liability under ERISA, and that was a six-month limitation period contained in the Summary Plan Description (“SPD”). The applicable portion of the SPD read as follows, describing a participant’s rights upon denial of a claim after appeal of the claim:
The decision upon review will be final. It will be communicated in writing and contain the specific reason(s) for the decision, will contain references to the pertinent Plan language upon which the decision was based, and will be written in a manner easily understood by the claimant. Claimants will not be entitled to challenge the LNC Benefits Appeals [and] Operations Committee’s determinations in judicial or administrative proceedings without first filing the written request for review and otherwise complying with the claim procedures. If any such judicial or administrative proceeding is undertaken, the evidence presented will be strictly limited to the evidence timely presented to the LNC Benefits Appeals and Operations Committee. In addition, any such judicial or administrative proceeding must be filed within six months after the Committee’s final decision.
The federal district court joined a number of other courts in holding that the plan’s six-month limitation was reasonable and should be enforced. The technique of including such a limitation in a plan document and SPD is normally utilized to seek to overrule statutes of limitation which would otherwise apply to lawsuits challenging a denial of a claim. A number of courts have recognized such limitation periods as being valid and enforceable under ERISA.
Failure to Adhere to Claims Procedures: Finally, an additional aspect of the fiduciaries’ actions in the case which fiduciaries in general should not emulate was the lackadaisical manner in which the claims procedures under the plan were implemented. The court found that the employer had failed to comply with DOL’s claims procedure regulations (29 C.F.R. § 2560.503-1(g) in two respects:
(1) The adverse benefit determination had failed to include a “statement that the claimant [was] entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits”; and
(2) It had also failed to include “a statement of the claimant’s right to bring an action under section 502(a) of the Act.”
Moreover, the court found that the claims procedures of the plan had contemplated a two-step process which involved the initial claim for benefits and then a right to appeal any denial of such claim. However, the fiduciaries had collapsed the process into a single review, in violation of the plan’s own written claims procedures. Even though the court recognized that, in general, failure of fiduciaries to follow the plan’s claims procedures can lead to “serious consequences”, the court surprisingly in this case held that there was no causal connection between the plan’s failure to follow the claims procedures laid out in the SPD and the plaintiff’s failure to file the action before expiration of the plan’s six-month limitation period had run.
No notification of Contractual Limitation: In addition, the court recognized a 9th Circuit case (Mogck v. Unum Life Ins. Co. of Am., 292 F.3d 1025, 1028-29 (9th Cir. 2002) which had held that a contractual time limitation on commencing legal proceedings under ERISA was not enforceable where the beneficiary was not informed in the claim denial, with the language used in the policy, that the contractual time limitation for legal proceedings would begin to run. Here there was no such notification, but again the court held surprisingly that there was no causal connection between a failure to notify the plaintiff of the contractual limitation and the plaintiff’s failure to file the action within the six-month time frame.
Tips for employers and fiduciaries from the case:
(1) Employers who outsource should seek to provide clear and accurate communications to affected employees.
(2) Employers and fiduciaries should make sure that the plan provides written claims procedures and that claims procedures are followed in the claims and appeals process.
(3) Employers should seek advice regarding whether they could utilize contractual limitation periods in their plan documents and SPDs. If they do so, employers and fiduciaries should bear in mind that a contractual limitation period may not be enforceable in a jurisdiction if claimants are not notified of the plan limitation period in an adverse benefit determination.