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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

But spinning off a company to jettison an older workforce with its pricey employee benefits plans, if done improperly, may constitute breach of fiduciary duty under ERISA. Moreover, rearranging a workforce so as to avoid paying promised benefits may violate another provision of ERISA, which prohibits the interference with the exercise or attainment of any right to which a person is entitled under a plan or ERISA.

The Supreme Court’s decision in Intermodal Rail Employees Association is particularly instructive. There, the employer (Oldco) wanted to maintain a subsidiary’s (Oldco Sub’s) existing unionized workforce but jettison costly employee benefit plans.

Oldco decided to do this by putting Oldco Sub’s work out to competitive bidding. An unrelated third party (Newco) was the successful bidder. Newco hired Oldco Sub’s employees. However, Newco ‘s benefit package was less generous than Oldco Sub’s.

Newco employees then sued Oldco, Oldco Sub, and Newco for cheating them out of the better benefits they had under Oldco Sub’s employee benefit plans.

While workforce restructuring is often a necessary practice by companies faced with concerns about their financial viability, ERISA makes it unlawful to “discharge, fine, 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.”

Put simply, an employer is not allowed to manipulate an employee’s terms and conditions of employment if the purpose is to cheat the employee out of promised employee benefits.

The Ninth Circuit Court of Appeals had ruled that ERISA [section] 510 protected the retirement benefits of the former Oldco Sub employees but did not protect their rights to health, dental, vision, and other welfare benefits.

Sandra Day O’Connor, writing for a unanimous Supreme Court, disagreed, stating that Congress’s use of the word “plan” in Section 510 evidenced a congressional intent to protect an employee’s rights to both retirement and welfare benefits. Justice O’Connor explained that although employers may properly amend, modify, or terminate welfare benefit plans at any time, this does not mean an employer has unlimited powers:

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