Terminating
Employees on Disability Leave During
Sale of
Business Poses Legal Risk
Last
year, the Ninth Circuit Court of Appeals issued a ruling involving the
Employee Retirement Income Security Act of 1974 (ERSISA) that has broad
implications and is beginning to be tested elsewhere. In Lessard v. Applied Risk Management, 307
F.3d 1020 (9th Cir. 2002), the Ninth Circuit held that two companies
violated ERISA section 510 where, pursuant to an asset purchase agreement,
the buyer hired all of the seller's active employees and provided them with
health insurance coverage, but did not hire the seller's employees on
extended leave of absence on the date of the asset purchase.
Background of the Case
The
plaintiff in this case, Denise Lessard, was an
employee of Applied Risk Management (ARM) who was out on a workers'
compensation leave because of a work-related spinal injury. She remained a
participant in the company's health plan.
In
connection with ARM's sales of assets to MMI
Companies (MMI), the agreement stated that all active ARM employees would
automatically be transferred to, and become participants in, MMI's group health plan. Six non-active ARM employees (Lessard and five others) would be eligible for
employment and participation in MMI's group
health plan only upon return to active employment. ARM's
group health plan was terminated in connection with the asset sale, and
therefore, ARM's employees who were not
transferred to MMI, including Lessard, lost their
medical coverage. The other employees included one additional employee on
workers' compensation leave, two employees on pregnancy leave, and an
employee on leave to prepare for the bar exam.
Lessard sued ARM and MMI under the Americans
with Disabilities Act and section 510 of ERISA. The district court
dismissed both claims, but the Ninth Circuit reversed on the section 510
claim.
Section 510
Section
510 of ERISA generally prohibits employers from interfering with a health
plan participant's rights. Section 510 provides
It
shall be unlawful for any person to discharge, fine, suspend, expel,
discipline, or discriminate against a participant or beneficiary (a) for
exercising any right to which he is entitled under the provisions of an
employee benefit plan or ERISA or (b) for the purpose of interfering with
the attainment of any right to which such participant may become entitled
under the plan or ERISA.
The
usual case that section 510 protects against is when an employer terminates
an employee on the eve of his or her pension benefit vesting.
The Ninth Circuit's Decision
The
Ninth Circuit held that "section 510 is violated when an employer
selects for presumptive termination and denial of benefits specifically
those employees presently on medical or disability leave." The court
explained that the effect of the agreement of sale was to presumptively
discharge individuals on extended disability leave until they complied with
the express condition that they return to active employment.
The
Ninth Circuit rejected the argument that there was no showing of a specific
intent to interfere with Lessard's benefit
rights. The court found that the agreement of sale constituted "direct
proof" of the "employer's discriminatory intent." The court
also rejected the companies' argument that they were not liable because
they had the right to terminate benefit plans as part of a corporate reorganization
and had the right to make fundamental business decisions. The court noted
that while the seller could have transferred all employees to the buyer
subject to a reduction in benefits for all employees, the buyer and seller
were not permitted to exclude a select group based on health-related
reasons.
Surprising Decision
The
decision was surprising because the actions taken by the companies in the
asset purchase agreement are common. The prospective purchaser generally
only wants to hire those individuals who are able to perform services for
the purchaser. The seller wants the purchaser to take as many of its
employees as possible, but understands the purchaser's desire to hire
employees who are active, willing and ready to work. In fact, ARM could
have simply fired all of its employees and let the purchaser make
individual discretionary decisions with respect to whether to hire each of
its former employees - - an act which would certainly have had a negative
impact on more employees.
Moreover,
Section 510 does not apply to hiring decisions. The buyer in an asset sale
is making hiring decisions and generally should not be required to hire
individuals who are unavailable to work. If ARM had simply terminated all
its employees, active and inactive, and let the purchaser decide whom to
hire, the situation would have been no better for Lessard
and the other employees on extended absences.
The
Court also made the assumption, without citation, that there was "no
question" that if there had been no asset sale ARM could not have retained
its plan yet terminated the benefits of its employees on long-term leaves
of absence. However, this is also a common practice. Many employers with
long-term disability plans terminate disabled workers, ending their medical
coverage, but maintaining their salary benefit. This happens as a result of
rising medical costs for the employer. In fact, a study last year by Mercer
Human Resource Consulting found that about half of U.S. firms
terminate employees either as soon as they go on long-term disability
status or at a set time thereafter.
Case Sends A Strong Warning
The
case is a strong warning. The court's harsh view of the transaction is
demonstrated by the concurring judge's characterization of it as a
"ploy to dump workers on long-term disability." The judge added
that "the lawyers who papered this transaction should have advised
against it and the clients should have heeded the warning. One hopes,
perhaps in vain, that future lawyers and clients will know better."
The court refused to see the case as a give and take negotiation between
the parties.
The
case is beginning to be played out in other courts. Recently, the Wall
Street Journal reported a new case in Massachusetts, Ferrari v. Polaroid, which was filed July 7, 2003. The case
involved a company that fell into bankruptcy before selling most of its
assets. Several employees who were on long-term disability were told that
they would not be employees of the new company and would not have their
medical, dental and life insurance premiums paid for by the new firm. The
employees sued claiming violation of ERISA and hope to rely on Lessard.
Employers
considering merger, sales or acquisitions must carefully structure the
employee benefits aspect of the transaction with Lessard in mind. The best
option is to negotiate for buyers to take over all of the seller's
employees (active and inactive). If not, sellers might be better off making
no agreement at all with respect to the hiring or non-hiring of such employees,
but rather terminate all its employees and let the purchaser decide on an
individual basis whom to hire.
These
are difficult decisions for employers. The worker and the company are both
in a delicate position with the worker facing difficult health issues and
the company facing rising medical bills and how to handle the burden. One
proactive approach is to adopt an express policy providing that employment
and employee benefits will end if an employee remains on inactive status
for a stated period of time, generally no sooner than one to two years.
These employees should be allowed the right to reapply with some
preference. Benefit plans would also need to be amended to incorporate this
language. This approach may reduce the number of lawsuits.
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