Employers should be aware of a recent decision by the U. S. Supreme Court. In Inter-Modal Rail Employees Association v. Atchison, Topeka and Santa Fe Railway Co., the Court has decided that an employer may violate federal law if (a) the employer fires a group of employees, (b) the employer thereafter obtains from an independent contractor the same services previously provided by the terminated employees, and (c) the independent contractor provides lesser retirement or welfare benefits than the employer had been providing to the terminated employees.
The plaintiffs in the case had been employed by a subsidiary of Atchison, Topeka & Santa Fe Railway Co. ("ATSF"). ATSF contracted with In-Terminal Services ("ITS"), an entity apparently unrelated to ATSF, to provide the services previously performed by the plaintiffs. ITS provided fewer retirement and welfare benefits to its employees than had previously been provided to the plaintiffs by the subsidiary. The plaintiffs sued ATSF, the subsidiary and ITS, claiming that they had violated Section 510 of the Employee Retirement Income Security Act of 1974.
Section 510 makes it unlawful to discharge a participant in an employee benefit plan for the purpose of interfering with the attainment of any right to which the participant may become entitled under the plan. This section has typically been invoked in the situation in which an employer has fired an employee shortly before the employee was to become fully vested under the employer's retirement plan. In this case, the plaintiffs alleged that the subsidiary fired the entire group of employees in order to avoid providing them with benefits under the subsidiary's retirement plan, as well as to cut off the plaintiffs' benefits under the subsidiary's welfare plans.
The federal District Court dismissed the plaintiffs' Section 510 claims without holding a trial. The Supreme Court decided that none of the Section 510 claims should have been dismissed, ruling that Section 510 precludes employers from terminating employees in order to avoid providing welfare benefits, just as it precludes interference with retirement benefits.
While an employer can often point to good reasons for terminating an individual employee which do not involve employee benefits, the employer which fires a group of employees and then engages an independent contractor to provide the services previously performed, or the goods previously produced, by the employees may have a higher mountain to climb. In the typical outsourcing situation, the smaller benefits offered by the independent contractor may account for a large part of the cost savings. Employers which move from the use of common law employees to the use of leased employees may also have problems.
Alton L. Knighton, Jr.
Thomas R. Bagby
Mr. Knighton and Mr. Bagby are both Principals with the Firm.
E-mail: knighton@woodsrogers.com
E-mail: bagby@woodsrogers.com