One of the advantages of using temporary employees is that their employee benefit costs are typically lower, resulting in reduced total employment costs. This advantage can present a problem. If a staffing company takes over an existing workforce from an employer with high employee benefit costs, the affected employees may have a cause of action against the former employer under Section 510 of ERISA. The same problem can arise when a staffing company takes over from a previous staffing company with higher employee benefit costs.
This problem is highlighted by the recent Supreme Court case of Inter-Modal Rail Employees Association v. Atchison, Topeka, and Santa Fe Railway Company, decided May 12, 1997. The case also suggests the solution. If the previous employer amends its employee benefit plans to remove the affected employees from the plans prior to discharging the employees, Section 510 will not apply.
Background
Section 510 of ERISA makes it unlawful to discharge an employee for the purpose of interfering with the attainment of any right to which the employee may become entitled under an employee benefit plan subject to ERISA.
Atchison, Topeka had a wholly-owned subsidiary, Santa Fe Terminal Services, Inc., which was responsible for transferring cargo between railcars and trucks at the Hobart Yard in Los Angeles. In January 1990, Atchison, Topeka entered into a formal Service Agreement with its subsidiary to have it do the same work it had done at the Hobart Yard for the previous 15 years without a contract. Seven weeks later, Atchison, Topeka exercised its right to terminate the new Agreement and opened up the Hobart yard work for competitive bidding.
The In-Terminal Services Division of MiJack Products, Inc., an independent corporation, was the successful bidder, and employees who declined to continue employment with In-Terminal Services were terminated. Workers who continued their employment with In-Terminal Services received fewer pension and welfare benefits because (a) In-Terminal Services was not required to provide benefits under the Railroad Retirement Act, and (b) the collective bargaining agreement with the Teamsters Union provided lower benefits for employees of In-Terminal Services.
The Litigation
An employee association and five employees sued under Section 510 in the Federal District Court for the Central District of California. The District Court dismissed the claims on motion. The Ninth Circuit reversed with respect to pension benefits provided pursuant to the collective bargaining agreement, but affirmed with respect to the welfare benefits and with respect to the pension benefits provided under the Railroad Retirement Act.
The Ninth Circuit affirmed with respect to the Railroad Retirement Act benefits on the ground that the benefits were provided under a governmental plan. The Ninth Circuit affirmed with respect to the welfare benefits on the ground that welfare benefits do not vest. As a result, "employers remain free to unilaterally amend or eliminate [welfare] plans," and "employees have no present 'right' to future, anticipated welfare benefits."
The Supreme Court granted certiorari to resolve a conflict among the Courts of Appeals and reversed the Ninth Circuit with respect to welfare benefits. Justice O'Connor spoke for the unanimous Court. The decision was based on the plain language of Section 510. Justice O'Connor stated that welfare plans may be amended to reduce or eliminate benefits for some or all employees, but only by following the amendment or termination procedures set forth in the plans. The formal amendment processes would be undermined if Section 510 did not apply to welfare benefits because employers could "informally" amend their plans one participant at a time by discharging participants.
Atchison, Topeka argued that the Ninth Circuit's decision should be affirmed because Section 510, when applied to benefits that do not vest, only protects an employee's right to cross the "threshold of eligibility" for welfare benefits. The employees who sued were already eligible to receive welfare benefits at the time of discharge, so they cannot state a claim under Section 510. Justice O'Connor stated that the Ninth Circuit's approach "precluded it from evaluating this argument, and others presented to us, and we see no reason not to allow it the first opportunity to consider these matters on remand." The Supreme Court vacated the judgment of the Ninth Circuit and remanded the case for proceedings consistent with its opinion.
The Next Step
It is not clear what will happen next. The Ninth Circuit might determine that the employees have no cause of action because they were already eligible for the welfare benefits; the Ninth Circuit might remand to the District Court to determine whether Atchison, Topeka acted with the forbidden purpose; or the Ninth Circuit might decide the case on the basis of one or more of the other arguments presented to the Supreme Court.
In particular, Atchison, Topeka argued that Section 510 does not prohibit subcontracting, plant closures, or other fundamental business decisions intended to reduce benefit costs. The National Association of Manufacturers and the Association of American Railroads made the same argument in an amicus brief. The U.S. Department of Labor discussed this point in oral argument and urged the Supreme Court not to decide on this basis because this argument was not considered by the Ninth Circuit or to any significant extent by other Circuit Courts. If this argument is ultimately accepted, this would allow employers to move large groups of employees to temporary services, technical services and staff leasing organizations, without concern about Section 510.
In any event, it is now clear that Section 510 applies to welfare benefits, and it is now clear that excluding the employees from both welfare and pension plans by plan amendments would provide a complete defense to Section 510.