Relief for Fiduciary Breach?

A Seventh Circuit panel that included Judge Easterbrook recently invited an ERISA plaintiff to seek "make-whole" relief against a fiduciary in McDonald v. Household International, Inc. This has been a vexing issue for plan participants since the Supreme Court's decision in Great-West, which many courts have interpreted to limit severely the kind of relief a participant may obtain from fiduciaries and others.

Mr. McDonald started working for his employer on November 19, 2001. His health insurance coverage was supposed to be effective as of December 19. For some reason, this did not occur. After December 19, he repeatedly tried to get a prescription filled for blood pressure medicine. Each time he was told that he did not have insurance coverage. Because he could not afford to pay for the drugs himself, he went without them from December 19 to January 15, 2002. He pleaded with his employer and the HMO to fix the problem but nothing happened. On January 15, he suffered a "catastrophic stroke." Subsequently, he and his wife filed the lawsuit, which raised a variety of state negligence and contract claims, but no ERISA claims. The McDonalds obviously hoped to avoid ERISA's limitations on available relief.

Naturally, all of their claims were preempted by ERISA. Judge Wood, however, writing for the court, suggested that the McDonalds take a look at Justice Ginsburg's concurring opinion in Davila:

where she drew attention to the Government's suggestion that ERISA "as currently written and interpreted, may allo[w] at least some form of 'make-whole' relief against a breaching fiduciary in light of the general availability of such relief in equity at the time of the divided bench."

Mr. McDonald should have been covered by a health plan and should have been able to obtain his medicine, which likely would have prevented his stroke. Either the employer or the HMO dropped the ball. The McDonalds are now burdened with presumably massive medical expenses. Yet, since the Supreme Court issued its decision in Great-West, many courts would rule that the McDonalds have no right under ERISA to monetary relief from any party, fiduciary or not.

It is settled law that ERISA prevents participants from receiving tort-type compensation for pain and suffering. However, the McDonalds should be able to recover from a breaching fiduciary monetary compensation at least equal to their medical bills. Three judges from the Seventh Circuit seem to believe that the issue is worth exploring further, at a minimum.

The Department of Labor is pressing courts to rethink the assumption that monetary payments from a fiduciary to a participant can never qualify as equitable relief. A recent brief on that point is here.

Federal Judge Agrees: Nine Is Greater Than Four

As discussed in an earlier post, a federal judge was taking a second look at her decision barring the EEOC from publishing regulations that would permit employers to coordinate retiree health care benefits with Medicare eligibility. The EEOC contended that the Supreme Court's decision in Brand X confirmed the EEOC's authority to issue the challenged regulations, despite the Third Circuit's Erie County decision that the ADEA prohibited benefit plans from reducing medical benefit coverage when retirees became eligible for Medicare.

Yesterday, the judge reversed her previous decision and upheld the EEOC's proposed regulations. The judge ruled that Brand X:

dramatically altered the respective roles of courts and agencies under Chevron. Brand X held that a court's interpretation of a statute only bars an agency from interpreting that statute differently from the court if the court has determined the only permissible meaning of the statute. . . .Because the Third Circuit's Erie County decision did not determine the only permissible meaning of the relevant provisions of the ADEA, under Brand X, I am not bound by Erie County in reviewing the EEOC's regulation.

In other words, because Section 4 did not specifically cover retiree benefits, there was room for an interpretation that such benefits were not covered. Writing on a "clean slate," the court agreed with the EEOC that under Section 9, the EEOC had the "flexibility to decide whether retiree benefits are covered by the Act at all." Given that broad authority, the EEOC was allowed "to interpret the ADEA to cover retiree benefits generally, while exempting the practice of Medicare coordination of health benefits."

Nine is greater than four, after all.

The court's decision is here.

Off Payroll Employees Ineligible for Benefits

What is the benefit status of off-payroll workers? That was the question in Edes v. Verizon Communications, Inc., a recent decision from the First Circuit. The short answer is that the worker's benefit status depends on the language of the benefit plans at issue. The Edes plaintiffs were hired directly by GTE but received their paychecks from one of two payroll agencies. In all other respects the plaintiffs were indistinguishable from employees who received paychecks from GTE. Nevertheless, because the plan excluded workers who were not "paid directly" by the employer, the plaintiffs lost their claims under Section 502(a)(1)(B).

Given the plan language as described in the decision, the result was not surprising in light of similar decisions from other courts. But the plaintiffs also had a claim under Section 510, which prohibits employers from discriminating against "participants" for the purpose of interfering with their right to attain benefits. The plaintiffs argued that GTE should have moved them to the GTE payroll after they were hired but instead, deliberately kept them off payroll for the purpose of excluding them from GTE's benefit plans.

The court avoided a decision on the merits because it found that the Section 510 claim was time-barred. But if the claim was timely what might be the outcome? Plaintiffs argument is intriguing, but, in my view, not a winner.

Under ERISA, a "participant" is any "employee" of the employer who becomes eligible for benefits. The Supreme Court previously ruled that the term "employee" as used in ERISA means any common-law employee of the employer. The Edes plaintiffs likely were GTE's common-law employees if the facts as alleged in the complaint were true and, therefore, may have become benefit eligible if they were on the GTE payroll. So, the argument goes, GTE's failure to move them to the payroll discriminated against the plaintiff class.

If that's the argument, how does it square with the general principle that an employer's plan design decisions are not subject to ERISA? For example, employers are permitted to create separate plans for salaried and union personnel, with different benefits, so why not two (or more) classes of worker, common-law or otherwise. Moreover, the Third Circuit has held that Section 510 does not apply to hiring decisions. So, if GTE could hire the Edes plaintiffs into non-benefit positions, why would GTE later have an obligation to move them to the payroll so that they could become benefit eligible?

Recall that in the Supreme Court's Inter Modal decision, the Court stated:

But in the case where an employer acts with a purpose that triggers the protection of §510, any tension that might exist between an employer's power to amend the plan and a participant's rights under §510 is the product of a careful balance of competing interests, and is most surely not the type of "absurd or glaringly unjust" result . . . that would warrant departure from the plain language of §510.

The Supreme Court was acknowledging the tension between Section 510 and the employer's right to amend benefit plans -- in certain instances, an employer's decision-making may be subject to Section 510 constraints. The Edes plaintiffs, however, go farther. In Inter Modal, the issue was whether Section 510 applied to discharged employees who had not vested in certain "welfare" (e.g. non-pension) benefits. But in Inter Modal, there was no question that the plaintiffs were employees of the defendant employer, at least until they were fired.

In other words, before the Inter Modal plaintiffs were fired, they were eligible to receive, or would become eligible to receive, certain benefits. The employer had promised to provide the benefits to its existing employees (who were recognized as such) and Section 510 "helps make such promises credible." By contrast, in Edes, GTE never promised the plaintiffs any benefits because, from day one, they were off-payroll.

There are other theories that could support the claims of off-payroll employees, but Section 510 does not appear to help those individuals who never were on the employer's payroll.

Overtime Pay for Stockbrokers

As reported in the New York Times today, Merrill Lynch agreed to pay $37 million to settle an overtime pay case involving up to 3000 California stockbrokers. Financial industry employees are perceived generally to be exempt from overtime rules, but that is not necessarily true. The FLSA overtime exemptions are based on a two part duties and salary test. If both tests are satisfied, the employee is exempt from overtime. If only one test is met, the employee must be paid overtime.

The new "Fair Pay" regulations provide:

Employees in the financial services industry generally meet the duties requirements of the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer's income, assets, investments or debts; determining which financial products best meet the customer's needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer's financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

So one area of uncertainty is whether the broker's "primary duty" is selling financial products.

The salary basis test requires that employees receive a minimum salary of $455 per week. While the salary can be paid on a bi-weekly or monthly basis, a pure commission arrangement does not qualify. Apparently, the Merrill Lynch brokers may not have received this guaranteed salary.

Merrill Lynch also contended that the brokers were exempt from overtime rules because they were employed in a retail business (e.g. selling stock to individual customers). However, the regulations specifically exclude "stock or commodity" brokers from the exemption for retail businesses. In other words, stockbrokers must be paid overtime pay unless they meet the duties and salary test.

Comment: The new "Fair Pay" regulations went into effect in August of 2004. The old rules, however, were similar enough to the new "Fair Pay" rules that brokers who were improperly classified as exempt before August 2004 likely remain entitled to overtime pay under the new rules.