Employers at Risk for Outsourcing to Save on Employee Benefit Costs

Outsourcing work to save on employee benefit costs may become riskier for employers as a result of a recent U.S. Supreme Court decision. In Inter-Modal Rail Employees Association v. Atchison, Topeka and Santa Fe Railway Co., the Supreme Court ruled, in effect, that employees who lost their jobs when the railway outsourced their work to an employer that provided less generous pension and welfare benefits stated a cause of action under Section 5 10 of ERISA for being deprived of the opportunity to have future medical claims covered under the railway's more generous health plan.

A subsidiary of the railway outsourced the "intermodal" work of transferring cargo between trucks and railcars to an independent employer, then terminated those employees who declined to carry on the work as employees of that outside employer. The outside employer's pension and welfare benefits package was less generous than that of the railway subsidiary's.

Former employees of the subsidiary sued under Section 5 10 of ERISA, claiming that the substitution of one employer for another, and the resulting reduction in their benefits, interfered with the attainment of their right to assert future benefit claims under their former employer's more generous benefit plans. Section 5 10 of ERISA makes it unlawful for an employer to:

"discharge, fire, 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 courts dismissed the claim, in whole or in part, because they interpreted Section 510 as applying only to benefit rights which are capable of vesting. The Supreme Court took the case to resolve a conflict among the appellate courts regarding the scope of Section 510.

The Court ruled that Section 5 10 does not distinguish between benefits that vest and those that do not, so it reinstated the claims relating to welfare benefits as well. That ruling is unremarkable as it was consistent with the prevailing weight of prior decisions.

What makes this case significant is what the Supreme Court expressly left for lower courts to resolve. That is to what extent employers may consider benefits-related cost savings when making business decisions about matters such as outsourcing, subcontracting, downsizing and using leased employees or independent contractors, which involve the movement of jobs.

The Supreme Court recognized that, subject to collective bargaining or other contractual obligations, employers have an essentially unfettered right to amend or eliminate welfare benefits by following the plan's amendment procedures. Section 5 10 of ERISA is intended to counterbalance that employer flexibility, said the Court, by ensuring that employers do not circumvent promised plan benefits through eliminating or shifting jobs or other employer action, rather than by the direct process of formally amending its benefit plans. As a result, the focus of litigation in this area is expected to be on the extent to which an employer acted "for the purpose" of reducing its benefit costs and liabilities when making outsourcing or similar decisions that have the effect of reducing or eliminating any benefits provided for a particular job. To the extent that benefits costs are a factor in such decisions, employers could be at risk under ERISA.

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