Perhaps it is no surprise that traditional employment litigation tends to rise during periods when the economy falters. However, employers are often unprepared for the resulting surge in benefits litigation under the Employee Retirement Income Security Act ("ERISA") which typically follows an economic downturn. As employers tighten their economic purse strings, often seeking to reduce expensive employee benefits or to cut headcounts, decision-makers should be aware of several pitfalls that may result in potentially damaging lawsuits action at a time when the company can ill-afford the expense. Several of these potentially dangerous areas are detailed below along with suggested tactics that employers can use to minimize the likelihood and costs of employee benefits litigation.
Reductions In Current Benefits
The practice of providing pension benefits to its employees is often one of a company's larger expenses, making such benefits an attractive target for cost-saving cuts in tough economic times. As a threshold matter, ERISA prohibits employers from reducing benefits that have already accrued or vested in the employee. Thus, before making any cuts in benefits, the first step is to carefully examine the plan documents and the summary plan description so as to determine whether the benefits marked for termination have already accrued – or whether the benefits could be reasonably interpreted as having accrued under the plan.
Employers can more readily make cuts where the Plan includes provisions preserving the right to amend certain benefits at any time. For example, if the Plan confers discretion to the employer to cap or modify certain medical benefits at will, the employer can likely limit its exposure, even where the benefits had been vaguely described as "unlimited" or "for life." However, where the Plan contains specific language promising a benefit at a specified amount or for a particular duration, a court would likely interpret the promised benefit as having accrued and therefore subject to ERISA's anti-cutback rule, which would prohibit a plan from eliminating or reducing the benefit. In many cases involving the cutback of a benefit, the core dispute will center around whether the language in the Plan is sufficient to prevent a terminated benefit from vesting. Thus, it is important to consider not only what the employer intended the language to mean, but what meaning the language will be given by an ostensibly-neutral court. Simply knowing which benefits have vested and which may be subject to discretionary cuts can help both in avoiding and defending lawsuits, and in providing ways to reduce short- and long-term expenses.
401(k) Plans
As the current recession has deepened and the stock market continues to decline, many employees have seen the value of their 401(k) plans decrease significantly. Since 401(k) plans represent the primary retirement investment vehicle for most workers, those most harmed by the devaluing of their retirement assets are often looking for someone on whom they can place the blame. The target of their anger is often the fiduciary of their underperforming retirement plan, and the result is often litigation.
Unfortunately for employers, the Supreme Court recently made it much easier for individual employees to bring these suits based on underperforming 401(k) plans. In LaRue v. DeWolff, Boberg & Associates, 128 S. Ct. 1020 (2008), the plaintiff was a former employee and 401(k) participant who instructed his former employer to make certain changes to his retirement investments in his individual account of the employer's defined contribution plan. The employer failed to make the changes, allegedly costing the employee $150,000 in value, and the employee sued under Section 502(a)(3) of ERISA claiming that the employer breached its fiduciary duty to him. Though courts had previously held that suits under 502(a)(3) could only be brought by a class on behalf of the plan as a whole, the Supreme Court held that ERISA authorizes suits by individual participants for fiduciary breaches that impair the value of plan assets in a participant's individual account.
Whether the potential plaintiff is an individual or a class, ERISA authorizes suits against plan fiduciaries for failing to act "prudently" in evaluating and selecting investment options for the plan. Theoretically, fiduciaries can fulfill their responsibilities by following objective procedural requirements, but a beneficiary who has recently lost a large chunk of his retirement investment is likely to question even the most reasonable decisions based purely on the result, and hindsight is 20-20, especially in the eyes of a litigious plaintiff. Clearly, whether a plan fiduciary has selected "imprudent" investments for the plan is a question subject to many interpretations, but successfully defending litigation involving such questions can often be time consuming and expensive. Further, even when the plan is sued only by an individual rather than a class, it will risk setting a dangerous precedent to be followed by its many other employees, which can lead to a lack of leverage in negotiations and make settlement even with a single plaintiff potentially cost-prohibitive.
Avoiding suits by employees over depleted 401(k)s can be difficult, but there are several steps plan fiduciaries can take to minimize risk. Most importantly, fiduciaries should avoid investing in the employer's own stock if possible. Doing so not only creates a perceived conflict of interest in the event that the stock drops in value, but will also result in the fiduciary being charged with the responsibility to ensure that the stock has not been overvalued by the company. Plan fiduciaries should ensure that proper procedures for investing the plan assets are followed, and should make every effort to diversify the plan's investments as broadly as possible to avoid abrupt losses and violent swings. Finally, employers (and, in particular, their board of directors) should exercise caution in appointing and monitoring the fiduciary selected to manage the plan's investments, as failing to do so can provide a basis for a lawsuit against the company, even where the plan is administered by a third-party.
ERISA-Governed Severance Plans
As mass-layoffs and plant closings continue to occur, many lawsuits will be filed over severance packages offered to terminated employees of all levels. To minimize the resources consumed in litigating these battles, and to perhaps avoid litigation all together, employers should consider setting up severance plans governed by ERISA.
Though structuring a severance plan to be covered by ERISA-based severance plan creates an additional administrative expense, the many benefits and protections offered to employers under ERISA often outweigh this cost for many employers. For example, when a severance plan is covered by ERISA, potential plaintiffs are not entitled to a jury trial and cannot recover punitive or emotional damages. If the plan provides for administrative review of claims, employers can also force potential plaintiffs to exhaust administrative remedies before filing suit. ERISA also contains a broad preemptive clause, which is usually sufficient to limit a plaintiff's action only to the recovery of a disputed benefit. Perhaps most importantly, ERISA gives employers a means to remove actions from state court and access to the wide array of precedent already developed under federal law.
In most cases, an employer can control whether ERISA will govern their severance plan. For example, a simple severance payment made in a single lump sum to one or more terminated employees without administrative eligibility determinations will not be covered by ERISA. At the same time, a plan that provides ongoing retirement benefits to large numbers of former employees will almost certainly be covered. In between the two, there are many options. According to the Supreme Court, the key factor that will trigger ERISA coverage is the existence of an "ongoing administrative scheme." While subsequent case law has developed many factors that may be considered within this context on a case-by-case basis, there are several steps an employer can take to ensure that its severance plan is covered, including drafting a plan document and summary plan description listing eligibility requirements, filing the appropriate government reports, and adhering to ERISA's notice and disclosure requirements.
Regardless of whether an employer seeks to have its severance plan covered by ERISA, it must take precautions when developing its severance arrangements (including employment contracts and individual severance agreements) to ensure that its desired legal framework will govern potential claims by unhappy employees.
Employers seeking methods for reducing costs by avoiding some of the pitfalls listed above or by leveraging the benefits of ERISA coverage should consult with counsel, which can assist in finding a cost-effective strategy for managing all types of employee benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
