Court reaffirms employees' benefits rights
Court reaffirms employees’ benefits rights
Employers cannot discharge workers simply to reduce benefits costs, a May 1997 Supreme Court ruling found.
The case, Inter-Modal Rail Employees vs. Atchison, Topeka & Santa Fe Railway, clarified federal benefits protection under section 510 of the Employee Income and Retirement Act (ERISA).
"ERISA was set up specifically to prevent things like this from happening," explains Ken McDonnell, MA, research analyst for Washington, DC-based Employee Benefits Research Institute. "The way a traditional defined benefits plan works is if an employee has been with you for 25 years, that 25th year becomes a magic point at which [retirement] benefits accrual shoots up tremendously; it can even double." (ERISA, McDonnell explains, affects all private employers except churches, and all state, local, and federal government employers.)
In addition, he notes, older employees often incur greater health care expenses another reason some employers might wish to replace them with younger employees. Prior to the passage of ERISA, says McDonnell, once employees became fully vested, some employers would try to "get rid of them" so they wouldn’t have to pay those costly benefits.
A new twist
The Intermodal case, however, added a new twist to the "costly employee" scenario. The case was filed by former employees of Santa Fe Terminal Services of Los Angeles, who transferred cargo between railcars and trucks at a rail yard. In 1990, Santa Fe’s parent, the Atchison, Topeka & Santa Fe Railway, opened the yard work to competitive bidding. When another company won the contract, Santa Fe workers were faced with the option of working for the new company which offered reduced benefits or being laid off. The workers charged that contracting out the work was a way for Santa Fe to get out of providing benefits it had promised under a collective-bargaining agreement and the court agreed.
"The original holding was pretty straight forward; if an employee is fired because of high health care costs, he can bring suit," notes Mary Ellen Signorelli, JD, LLM, staff attorney with the Washington, DC-based American Association of Retired Persons (AARP), which filed a brief supporting the workers.
"The important issue [in this case] is sub- contracting out whole sections of a company [to save benefit costs]. The employer argued that any subcontracting out can never be a violation of 510, but the court said there could be incidents where subcontracting does violate section 510."
Not just age discrimination
Signorelli notes that all employees, not just "seniors," are guaranteed the protection offered by 510 and employees of all ages are vulnerable to "benefits discrimination." For example, she points out, low-birth-weight babies account for some of the most expensive "one-time" health care costs.
"There have been cases where employees have been fired because they had a sick child or a sick wife who was incurring high health care costs," she notes. "But the courts have said you basically can’t fire someone for high utilization of benefits."
Her advice to any employer even thinking about circumventing section 510 through the "subcontracting" strategy? "Don’t leave a smoking gun."
Employers wishing to avoid even the appearance of discrimination should base any downsizing decisions on business considerations other than human resource or personnel issues, she adds.
"If [employers] rely on factors other than employee benefits [costs and salaries] if they rely on better service, faster turnaround time, and other issues that are strictly product- or business-related, this would be the absolutely safest way to go," she says. "As soon as you get into issues like, It will be cheaper because benefits are high, it always raises a potential [legal] issue. Unfortunately, business often is not that black and white."
[Editor’s Note: For more information on employee benefits, contact: Ken McDonnell, Employee Benefits Research Institute, 2121 K Street NW, Suite 600, Washington, DC 20037. Telephone: (202) 775-6342. Fax: (202) 775-6312. E-mail: [email protected].]
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