A recent U.S. Supreme Court case (Inter-Modal Rail Employees Association v. Atchison, Topeka and Santa Fe Railway Company, 1997 U.S. Lexis 2803 (May 12, 1997) protects employees who are fired to save benefit costs.
The Facts
A railroad service company terminated the employment of workers who were responsible for transferring cargo between railcars and trucks and hired an independent company to provide the freight transfer services. Railroad service employees who became employees of the independent company lost the better pension and welfare benefits package of their former employer. A group of employees brought suit claiming that they had been discharged by the railroad service company for the purpose of interfering with their attainment of rights under various ERISA pension and welfare benefit plans and, as a result, that these discharges violated Section 510 of ERISA.
The Law
Section 510 of ERISA states that it is unlawful for an employer to "discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary [of an employee benefit plan] ... for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan."
Lower Court Decisions
The federal district court had dismissed the railroad service employees. ERISA Section 510 claims as to both pension and welfare benefit plans. The Ninth Circuit Court of Appeals reversed the district court.s ruling on pension benefits, but affirmed the dismissal of the Section 510 claim as it applied to welfare benefits. The Ninth Circuit reasoned that welfare benefits are not subject to the vesting and anti-cutback rules that apply to pension plans and, thus, employees have no present right to future, anticipated welfare benefits. Without a present right to welfare benefits, the employees could not bring suit under Section 510 on account of the elimination of benefits. The Ninth Circuit.s holding on welfare benefits conflicted with decisions by the Courts of Appeal in the Fifth, Sixth, Seventh and Eleventh Circuits.
The Supreme Court.s Decision
The Supreme Court reversed the Ninth Circuit.s welfare benefits decision and concluded that while ERISA permits an employer to amend or eliminate a welfare benefit plan without the limitation that a vesting requirement would impose, Section 510 "helps to make promises [of welfare benefits] credible." Employers are obligated to follow the procedures set forth in the plan for plan amendment or termination. The role of Section 510 is to prevent employers from avoiding a plan.s amendment/termination procedure by "informally" amending their plans "one participant at a time;" in other words, by making individual employment decisions with an eye toward rights under a plan. However, an employer does not violate Section 510 when it makes "fundamental business decisions."
Unanswered Questions
The Supreme Court.s decision leaves a number of questions unresolved. First, the railroad service company argued that even if Section 510 does apply to welfare benefits, an employee who has become eligible to receive benefits under the plan has already "attained" rights under the plan and thus cannot have a claim under Section 510. The Supreme Court instructed the Ninth Circuit to evaluate this among other arguments when it again takes up the Section 510 claim on remand. If the Ninth Circuit agrees with the railroad service company.s argument that an employee who has satisfied a welfare benefit plan.s eligibility requirement cannot bring an action under Section 510 then the Supreme Court.s decision may have extremely limited application since welfare benefit plans (health plans, for example) typically do not have extended eligibility requirements.
Second, the Supreme Court indicated that "fundamental business decisions" are not barred by Section 510. Presumably, this means that an employer may decide to close, sell or otherwise transfer a business based on overall cost considerations. Whether those considerations permissibly may include benefit costs and, if so, whether benefit costs permissibly may be a significant, or the most significant, factor are questions yet to be answered.
Finally, Section 510 addresses not only employment terminations but also discrimination against a participant or beneficiary in connection with the individual.s attainment of a right under a plan. In McGann v. H&H Music Company, the Fifth Circuit Court of Appeals held that a Section 510 claim in the context of an employer.s amendment of a health plan to reduce AIDS benefits must be based on a specific intent to discriminate against an individual participant or beneficiary and would not be supported simply by a demonstration that, prompted by a participant.s AIDS claims under a plan, an employer amended the plan to reduce anticipated future costs. 946 F.2d 401 (5th Cir. 1991). Whether such action by an employer is a "fundamental business decision," and thus not a Section 510 violation, under the Supreme Court.s recent analysis, or whether an acknowledged benefit-restricting motivation (as was the case in McGann) tips the balance in favor of a participant under Section 510 will be a later chapter of this unfolding story.
Conclusions
For employers, the lesson of the moment is that Section 510 of ERISA now clearly applies to employers. decisions that eliminate or reduce welfare benefits, and an employee may now claim that an employment termination or other employer decision affecting employment was motivated by the desire to prevent the employee from attaining benefits under a welfare benefit plan. Therefore, an employer selling a business should take care to establish that the "fundamental business decision" was made for non-benefit reasons and to document the decision-making process. Similarly, an employer deciding to outsource certain of its activities or some or all of its employees should take care that pension and welfare benefit costs are not the motivating factor and be prepared to demonstrate, through appropriate documentation, the non-benefit reasons for the outsourcing decision.