Guidance for Employers on ERISA Discrimination, Retaliation, and Whistleblower Claims
 

Guidance for Employers on ERISA Discrimination, Retaliation, and Whistleblower Claims

Posted on 04-18-2018

By: Brian M. Murray, Baker & Hostetler LLP

This article discusses aspects of Section 510 of the Employee Retirement Income Security Act (ERISA) (29 U.S.C. § 1140), which prohibits interference with benefits and retaliation for the exercise of rights under ERISA and ERISA employee benefit plans. The prohibition applies to employee pension benefit plans and employee welfare benefit plans, to vested and unvested benefits, and to actions affecting a single individual or multiple individuals. By virtue of Section 510, employees should be able to claim benefits and exercise their rights under the law without fearing their employer’s interference or reprisal.

Competing Principles in Section 510 Litigation

ERISA Section 510 prohibits discrimination (including discharge, fine, suspension, expulsion, or discipline) against any ERISA employee benefit-plan participant or beneficiary, for exercising any right under the provisions of the plan. Section 510 claims lie at the intersection of many well-established and often competing policies. Since these policies are explicitly and implicitly considered by courts at all stages of litigation, you should recognize them to help litigants better frame their legal arguments.

Factors against the Robust Application of Section 510

Several factors weigh against a robust application of Section 510. Historically, the law has not required employers to sponsor employee benefit plans. Outside of the collective bargaining context, if an employer chooses to sponsor a plan, it has broad discretion to establish the plan’s terms and only marginally narrower discretion to amend those terms on a prospective basis. This is particularly true of welfare benefits because, at least prior to health care reform and with the exception of a few Internal Revenue Code limits, the law did not prescribe levels of participation or benefits.

In addition, ERISA itself is indicative of public policy favoring employer-sponsored plans. Courts are often reluctant to Guidance for Employers on ERISA Discrimination, Retaliation, and Whistleblower Claims Brian M. Murray BAKER & HOSTETLER LLP This article discusses aspects of Section 510 of the Employee Retirement Income Security Act (ERISA) (29 U.S.C. § 1140), which prohibits interference with benefits and retaliation for the exercise of rights under ERISA and ERISA employee benefit plans. The prohibition applies to employee pension benefit plans and employee welfare benefit plans, to vested and unvested benefits, and to actions affecting a single individual or multiple individuals. By virtue of Section 510, employees should be able to claim benefits and exercise their rights under the law without fearing their employer’s interference or reprisal. PRACTICE NOTES | Lexis Practice Advisor® Employee Benefits & Executive Compensation www.lexispracticeadvisor.com 59 impose costs and expenses that disincentivize employers from sponsoring plans.

The employment-at-will doctrine is also lurking in the background of many Section 510 cases. This doctrine militates against courts second-guessing employment-related decisions. Federal and state comity is also a consideration since employment relationships are traditionally governed by state law.

Finally, courts recognize societal norms allowing companies to operate their businesses efficiently and to maximize profits. This factor can be particularly important when adverse employment actions are taken to control costs during a downturn in a company’s financial fortunes.

Factors for the Robust Application of Section 510

On the other hand, there are factors favoring a robust application of Section 510. ERISA is the law of the land. Its primary purpose is to ensure that employers’ benefit-related promises are kept. Despite the free hand that employers have in setting the terms of their plans, Congress clearly intended that employers keep the promises they have made.

Moreover, Section 510 is an integral component of the statutory scheme enacted to accomplish this goal. Without Section 510, employers could interfere with employees’ opportunities to obtain promised benefits through adverse employment actions. That would undermine all of ERISA’s participation, vesting, and benefit accrual requirements.

Of course, notions of fundamental fairness to employees require that employers’ benefits-related promises be kept.

Types of Claims under Section 510

Section 510 authorizes:

  • Interference claims
  • Retaliation claims
  • Whistleblower claims

For each type of claim, the alleged unlawful action must be a discharge, fine, suspension, expulsion, discipline, or discrimination. These actions must affect the employment relationship. It is not enough to show that a benefit plan has been changed in a way that disadvantages a participant or merely that a benefit claim was denied.

Interference Claims

Section 510 prohibits adverse employment actions that are taken to interfere with plan participants’ and beneficiaries’ earned or promised benefits. These are the most common types of claims under Section 510.

While the concept of interference claims can be simply stated, complexities arise from the need to analyze specific adverse employment actions taken in the context of complex, multifaceted employment relationships. Plaintiffs must establish that employers specifically intended to interfere with their rights under employee benefit plans or ERISA. In the more common cases that do not involve direct evidence of discrimination, plaintiffs must also establish that their employers’ proffered legitimate reasons for having taken adverse employment actions are merely pretexts for unlawful discrimination.

For example, interference claims might arise due to:

  • A termination of employment shortly before a participant would become vested or qualified to receive supplemental or early retirement benefits under a pension plan
  • A change in employment status (e.g., layoffs, outsourcing positions to a contractor, reclassifying employees as independent contractors or from full-time to parttime) related to workforce restructurings or a company’s financial distress
  • A failure to hire or maintain benefits in connection with a company merger or acquisition
  • A misrepresentation about the possibility of an impending early retirement window program to an employee who terminates employment prior to implementation of the program

Retaliation Claims

Section 510 prohibits adverse employment actions taken against participants and beneficiaries in retaliation for their exercise of rights under an employee benefit plan or ERISA.

For example, a retaliation claim might arise if an employee’s employment is involuntarily terminated after he or she files a claim for reimbursement of substantial medical expenses under a group health plan. For example, in Kross v. Western Electric Co., 701 F.2d 1238, 1242-43 (7th Cir. 1983), a claim that an employer discharged an employee in order to avoid paying medical and dental expenses was found to be cognizable under Section 510.

Whistleblower Claims

Section 510 prohibits adverse employment actions taken against individuals who have given information, have testified, or are about to testify in any inquiry or proceeding related to ERISA. For example, a whistleblower claim might arise if an employee experiences a change in employment status after raising possible violations of law relating to an ERISA plan.

Section 510 also prohibits discrimination against employers contributing to multiemployer plans for exercising rights under ERISA or giving information or testifying in any inquiry or proceeding before Congress relating to ERISA.

Proving Violations of Section 510

Generally, it is very difficult to make and prove a Section 510 claim. To state a Section 510 claim, a plaintiff may show direct evidence that the employer had specific intent to violate ERISA. In the absence of such direct evidence, courts have applied a shifting burden analysis similar to that applied in Title VII employment discrimination cases. For instance, in Dister v. Continental Group, Inc. 859 F.2d 1108, 1111-12 (2d Cir. 1988), the court adopted the burden shifting paradigm of McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973) for discriminatory discharge claims under Section 510.

Elements of a Section 510 Claim

Section 510 is not a model of statutory draftsmanship. In George v. Junior Achievement of Cent. Ind., Inc., 694 F.3d 812 (7th Cir. 2012), the U.S. Court of Appeals for the Seventh Circuit referred to it as “a mess of unpunctuated conjunctions and prepositions.” Due to these shortcomings and the fact that Section 510 allows three types of claims, there is a lack of uniformity in the language courts use when pronouncing the elements of Section 510 claims. Litigants should reference the leading decisions of the relevant circuit court of appeals for the applicable formulation of a Section 510 claim.

Direct Evidence

Plaintiffs may prove their Section 510 claims through the use of direct or indirect evidence. Direct evidence consists of the proverbial smoking gun.

For example, in a case decided by the U.S. Court of Appeals for the Third Circuit, Gavalik v. Continental Can, 812 F.2d 834 (3rd Cir. 1987), an employer systemically laid off employees to prevent them from vesting under its pension plan. This liability avoidance program used a scattergraph to identify and target particular employees tied to unfunded pension liabilities. A liability avoidance tracking system or “red flag” system was put in place to ensure that targeted employees were not inadvertently called back to work. The Third Circuit had no trouble finding that this program was direct evidence of discrimination.

Another example of a case involving direct evidence of discrimination is Lessard v. Applied Risk Mgmt., 307 F.3d 1020 (9th Cir. 2002). In that case, parties to a company asset sale structured the purchase agreement to require employees on leave to return to active, full-time status for their employment to transfer to the buyer after the closing. Other employees’ employment transferred automatically. After finding that the purchase agreement facially discriminated against employees on leaves of absence, the Ninth Circuit Court of Appeals reversed the lower court’s grant of summary judgment for the company on the employees’ Section 510 claims.

Indirect Evidence

If claims are based on indirect evidence, courts apply the familiar burden-shifting paradigm developed in cases under Title VII of the Civil Rights Act of 1964. Initially, plaintiffs must demonstrate, by a preponderance of the evidence, a prima facie case of unlawful discrimination under Section 510 consisting of the following elements:

  • Prohibited conduct. The plaintiff must demonstrate prohibited conduct. Prohibited conduct is a discharge, fine, suspension, expulsion, discipline, or discrimination. These are referred to collectively herein as adverse employment actions. The most common actions are termination of employment and changes in status such as demotions, transfers, or reclassifications.
  • Specific discriminatory intent. Discrimination must be a motivating factor for the adverse employment action; however, discrimination need not be the sole motivating factor. Plaintiffs must show specific evidence, not speculative and conclusory allegations, to prove specific intent. This is the linchpin of all Section 510 claims.
  • Loss of entitled right or benefit under employee benefit plan. Plaintiffs must show a loss of an entitled right or benefit under an employee benefit plan. An entitled right is broader than a vested right because it can encompass rights to future contributions and welfare benefit rights.

If plaintiffs establish a prima facie case, defendants may offer legitimate reasons for taking adverse employment actions, which usually fall into one of the following categories:

  • Employee misconduct
  • Poor job performance
  • Workplace restructuring
  • Economic hardship and reduction of expenses

Finally, plaintiffs must demonstrate that proffered legitimate reasons are pretexts for unlawful discrimination or retaliation. Case law is instructive in determining how to make this showing. The following factors can be relevant, depending on the facts underlying the claims:

  • Strength of the employer’s evidence supporting its proffered legitimate reason for taking adverse employment action. For example, if an employer asserts that an employee was terminated for failure to meet job requirements, a human resources file documenting multiple instances of the employee’s shortcomings can be powerful evidence against a claim of pretext. Also, an employer’s position can be bolstered by showing that it followed established, written policies and procedures. Conversely, an employer’s inconsistent explanations for taking adverse employment actions, demonstrated history of treating an affected group worse than others, or administering punishment that is disproportionate to the alleged offense, may bolster a claim of pretext.
  • Temporal proximity of the exercise of an employee benefit right to the adverse employment action. Close proximity may support a finding of pretext; a significant lapse of time may undermine a claim of pretext.
  • Cost savings to the employer resulting from an adverse employment action. Plaintiffs must show more than an employer’s knowledge of cost savings. Rather, cost savings must be the reason for an adverse employment action. Courts are more likely to find that cost savings have probative value if the alleged discrimination affects a class of individuals rather than a single employee. The size and health of the business can also be factors in determining whether cost savings were truly the motivation for an adverse employment action.
  • Contingencies and the length of time before an individual could enjoy a purportedly wrongfully denied benefit. For example, if an individual would have to work a lengthy period of time to become entitled to supplemental pension benefits or would have to wait a number of years after termination of employment to receive them, courts will be less inclined to find that a proffered reason is a pretext.
  • Treatment of similarly situated individuals. If an employer took no action or less severe action against similarly situated individuals accused of similar actions in the past, that may be used to show that a more severe sanction against an employee, such as termination of employment, was a pretext for unlawful discrimination.
  • Awareness of adverse impact.Awareness of adverse impact. An important consideration is whether the individual who made the decision to take adverse employment action was aware of the plaintiff’s participation in a plan or the implications of the action to the plaintiff’s rights and interests in a plan. An important consideration is whether the individual who made the decision to take adverse employment action was aware of the plaintiff’s participation in a plan or the implications of the action to the plaintiff’s rights and interests in a plan.
  • Unlawful discrimination preventing benefit eligibility. The participant or beneficiary must be eligible for benefits under the terms of a plan in the absence of unlawful discrimination.

Special Issue with Whistleblower Claims

Anti-retaliation provisions exist in a number of federal statutes, declaring unlawful the discharge or discriminatory treatment of employees who file charges alleging that their employers’ actions violate those statutes, or who otherwise initiate or participate, assist, or testify in investigations or proceedings brought under those statutes against their employers. Anti-retaliation provisions are often drafted with sufficient breadth so that they can also be construed as whistleblower provisions that protect the employee who reports violations affecting the employee, as well as other workers or the public.

The federal appeals courts are split about whether unsolicited internal complaints concerning ERISA violations are protected activities under Section 510. The Fifth, Seventh, and Ninth Circuit Courts of Appeals have concluded that these complaints are protected activities, whereas the Second, Third, Fourth, and Sixth Circuit Courts of Appeals have concluded that these complaints are not. The Department of Labor has written amicus curiae briefs consistently urging that informal complaints are protected activities under Section 510.

The split among the courts has developed due to conflicting interpretations of the ambiguous phrases “given information” and “any inquiry or proceeding.” The courts that broadly construe the whistleblower provision interpret these terms to encompass more than the giving of testimony in a formal context. For these courts, protected activity can include informal, oral complaints to a supervisor or human resource administrator. No formal proceeding need be underway at the time of the complaint; the complaint itself can be viewed as the first step of an inquiry or proceeding. These courts reason that any other construction would give employers a perverse incentive to discharge potential whistleblowers because doing so would prevent the occurrence of a formal inquiry or proceeding.

By contrast, the courts that narrowly construe the whistleblower provisions often compare them to the whistleblower provisions of the Fair Labor Standards Act. This comparison tends to result in the courts focusing on whether there is an inquiry or proceeding under the circumstances, regardless of the level of formality involved. Under this analysis, unsolicited internal complaints fall outside the protections of Section 510. If the employer is merely a passive recipient of information, no inquiry (let alone proceeding) can be said to exist. Only the employer can initiate an inquiry— either by asking questions of the employee or conducting a more formal investigation.

Remedies

Depending on the type of adverse employment action involved, affected employees could justifiably seek reinstatement to their positions, back pay, front pay, restitution of forfeited benefits, payment of benefits wrongfully denied, service credit for vesting or entitlement to supplemental benefits, restoration of seniority, and other remedies available in wrongful discharge and discrimination cases.

However, ERISA Section 502 is the exclusive enforcement mechanism for Section 510 claims. As a practical matter, Section 510 claims are brought under ERISA § 502(a)(3) (29 U.S.C. § 1132(a)(3)). Thus, the remedies available to plaintiffs include injunctions and “other appropriate equitable relief,” but generally not monetary damages.

Nevertheless, in Cigna v. Amara, 563 U.S. 421 (2011), the U.S. Supreme Court identified several types of equitable relief that may actually be meaningful to participants and beneficiaries. In addition to injunctions, participants and beneficiaries could seek equitable relief in the form of reformation of a plan’s terms, a surcharge (e.g., an order requiring fiduciaries to abide by the terms of a reformed plan’s terms), and estoppel. The Court described a surcharge as “‘monetary’ compensation for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment.” Cigna v. Amara, 563 U.S. at 441. In effect, the Court provided a roadmap for bringing equitable claims under Section 502(a)(3). Notably, courts have also recognized reinstatement and, in some circumstances, restitution, as equitable remedies in the employee plan context.

Courts have discretion to award reasonable attorney’s fees and costs to either party to an action under ERISA Section 510. A fee claimant need not be a prevailing party to be eligible for attorney’s fees; it is sufficient to have some success on the merits.

Section 510 Litigation Relating to the Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (ACA) dramatically changed the way that health insurance coverage is provided in the United States. Among other things, the ACA requires employers of a certain size to offer health coverage to their full-time employees or be at risk for excise taxes. The ACA may prove to be very fertile ground for Section 510 claims.

Employer Shared Responsibility Provisions of the ACA

The ACA’s shared responsibility provisons apply to applicable large employers, meaning employers with an average or 50 or more full-time employees or full-time equivalents in the preceding calendar year. For this purpose, a full-time employee is a common law employee who averages at least 30 hours of service per week during a month. Part-time employees’ hours are aggregated to create full-time equivalent figures to determine whether the 50-employee threshold has been satisfied and whether an employer is thus subject to the ACA shared responsibility requirements.

Covered employers must either pay or play. That is, if they do not offer minimum essential health care coverage to substantially all of their full-time employees (those who work 30 hours or more on average per week), they may be subject to excise tax penalties. The pay-or-play mandate is sometimes referred to as a free rider surcharge or a free rider penalty.

Predictably, many employers have tried to avoid or minimize their exposure to these excise taxes. Whether employers are trying to avoid being subject to the ACA, or to avoid or minimize excise taxes triggered by failures to make offers of coverage or adequate offers of coverage, the ACA’s structure incentivizes them to take adverse employment actions against their employees. These actions include discharges, reductions in hours to achieve part-time status, and coercive transitions to independent contractor status.

Dave & Buster’s Litigation

The hospitality industry is among the hardest hit by the ACA’s employer shared responsibility mandates. These businesses tend to have large numbers of hardworking but low-paid and unskilled employees. The cost of health coverage provided on ACA-compliant terms can equal or exceed many of these employees’ salaries and wages. Fearing skyrocketing human resource expenses, many hospitality businesses view the ACA as an existential threat and have reacted by taking preemptive measures designed to lessen the ACA’s impact on their businesses. In Marin v. Dave & Buster’s, Inc., 159 F. Supp. 3d 460 (S.D.N.Y. 2016), the employer allegedly violated Section 510 by cutting employee hours to deny them health benefits.

Maria De Lourdes Parra Marin sued her former employer, Dave & Busters, Inc., for discrimination under Section 510. The class action complaint was filed on behalf of approximately 10,000 hourly employees whose hours were allegedly involuntarily reduced, resulting in a loss of coverage under the company’s health plan or an offer of “inferior” health coverage.

The complaint alleged several communications by managers and company executives that could be used to show specific intent under Section 510 and sought “to obtain appropriate equitable relief” for acts of discrimination under Section 510. The class action complaint specifically sought:

  • Reinstatement of employees to their prior full-time positions
  • Restoration of rights to participate in the company’s plan that complies with the requirements of the ACA
  • Being made whole for:
    • Loss of wages and benefits, with interest, from the date of the reduction of hours and benefits
    • Costs of health insurance obtained to replace coverage under the company’s plan
    • Reimbursement for out-of-pocket costs for medical claims to the extent that they would have been paid as if they had continued to participate in the company’s plan
  • Reasonable attorney’s fees and costs

Dave & Buster’s filed a motion to dismiss for failure to state a claim under Section 510. In denying the motion, the court found that the complaint alleged intentional interference with current health care coverage that was motivated by concern about future costs and was supported by factual allegations. The reduction in hours “affected [Ms. Marin’s] employment status, her pay and the benefits she had and to which she would be entitled.” Accordingly, the court concluded that “the complaint states a plausible and legally sufficient claim for relief, including, at this stage, [Ms. Marin’s] claim for lost wages and salary incidental to the reinstatement of benefits.”

Based on what we can discern from the pleadings and the court’s ruling on the motion to dismiss, the plaintiffs will likely attempt to establish their claims on the basis of direct evidence of discrimination under Section 510. Perhaps the company will claim that its fiduciary obligation to its shareholders and disclosure obligations under securities law could not be reconciled with the constraints of Section 510. The subtext of such a claim is that the company should not be singled out for punishment just because it was honest and forthright (perhaps to a fault) about its actions.

On December 1, 2017, the court rejected a proposed settlement of this matter.

Best Practices for Avoiding and Defeating Section 510 Claims

Section 510 has been on the books for over 40 years. An ample body of case law has developed from which we can identify best practices to avoid or defeat Section 510 claims. Happily, most of these best practices comport with best practices that have been advocated by human resources professionals when dealing with employment matters:

  • To the extent possible, separate human resources personnel and functions from ERISA plan administration.
  • Limit human resources personnel’s access to plan-related information (ignorance can be bliss in this context).
  • Maintain clear written employment policies and procedures with sanctions for violations that are commensurate with the severity of the offenses, and apply them consistently.
  • Carefully document workplace incidents, disciplinary measures, performance reviews, etc., over the course of time.
  • Avoid providing different, inconsistent explanations for adverse employment actions.
  • Avoid linking an adverse employment action with any rights under an ERISA plan, so that specific intent to interfere is not manifest (i.e., avoid creating a smoking gun).
  • Allow as brief a period as possible between a final decision to modify benefits (such as offering an early retirement window) and implementation of that modification, and develop a uniform, fiduciary-compliant approach to dealing with benefit-related inquiries during that period.
  • Include employer-friendly provisions in your ERISA plan documents (e.g., expressly acknowledge ERISA status; require exhaustion of claims procedures; and reserve discretionary authority to amend and terminate the plan, construe plan terms, and make findings of fact and other administrative determinations).
  • Consult with labor and employment counsel to develop standard waiver and release of claims language to be signed by departing employees.
  • Conduct exit interviews with departing employees and communicate rights under plans.
  • When contemplating changes to employee benefit plans:
    • Consider how various cohorts of employees will be impacted (e.g., hourly versus salaried, long-term versus short-term).
    • Document legitimate, non-discriminatory business reasons for making the changes (e.g., as part of a multifaceted and business-wide cost-cutting program in response to adverse business conditions).

Brian Murray is a partner at Baker and Hostetler LLP. He has a depth of experience counseling small private companies to large publicly traded corporations on diverse employee benefit and executive compensation matters across a multitude of industries, including pharmaceuticals, food and beverage, and financial services. Brian has also been heavily involved in employee benefits matters in mergers, acquisitions, and dispositions, as well as the consolidation and restructuring of employee benefit plans and arrangements after closings. He wishes to thank Dan McClain, an associate in the Cleveland office of Baker and Hostetler, for his assistance.


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