Benefits and the Total Compensation Package

This article from CNN.com–“The Hidden Costs of Changing Jobs“–provides the following statement about the cost of benefits as it relates to an employee’s total compensation:

According to the Congressional Budget Office Special Studies Division, benefits represent anywhere from 24 to 50 percent of an employee’s total compensation package. And the plan offerings and value vary greatly from company to company based on the deal the organization negotiates with insurance carriers as well as the percentage of costs it chooses to pass along to employees.

When it comes to health insurance, for example, even among major companies the percentage of total costs employers pay ranges between 70 percent and 100 percent. Meaning your health care costs can vary from $150 to $2,000 from employer to employer.

Pension Deficit Disorder

Interesting article here from the Financial Times on how proposals for pension reform are having an effect on the bond market: “A case of pension deficit disorder.”

Outsourcing Can Lead To Costly ERISA Litigation: How One Employer Prevailed

Many employers are continuing the trend of outsourcing certain services or functions by subcontracting with a third party. However, the process of outsourcing often ends in terminations of employment which can give rise to lawsuits and claims under ERISA and other areas of the law.* A recent 8th Circuit case–Dallas D. Register, et. al. v. Honeywell Federal Manufacturing & Technologies, LLC, 2005 WL 367319 (8th Cir. 2005)–illustrates the exposure to lawsuits that outsourcing can bring under section 510 of ERISA. That provision prohibits an employer from discharging an employee for the purpose of interfering with the attainment of any right to which the employee may become entitled under an ERISA plan.

Oftentimes, employers will transfer the affected employees to a third party contractor so that employees continue their jobs, but end up working for a different employer. Many times, employees end up with “lesser” benefits in the process, i.e. higher health care premiums or less favorable health care benefits, lower pension and retirement benefits, and/or less attractive fringe benefits. If it can be shown that an employer’s desire to reduce benefits cost was a “determinative factor” in the decision to outsource, the employer could be exposed to liability under ERISA.

The Register case illustrates the type of situation which can give rise to a long drawn-out lawsuit under ERISA, but also demonstrates how one employer was able to defeat such claims in the end. The case is also instructive because it shows that, no matter how many extraordinary measures an employer may take to try to be fair to employees and to avoid such claims, an employer can still end up battling the claims in court.

The facts of the case, as set forth in the opinion, are as follows:

Honeywell, the original employer (a government contractor referred to as “GC”), managed and operated a plant for the Department of Energy (“DOE”). GC’s contract with DOE provided that the government paid all management and operation costs at the plant, including employee compensation and benefit costs, and GC received an incentive fee based on performance and other awards. Apparently, GC became dissatisfied with the performance of its facilities and utilities engineering groups which were responsible for onsite construction projects and facilities, and hired a consultant who identified the group as a potentially weak area which GC might want to consider outsourcing to improve quality.

In 2001, the facilities and utilities engineering functions were outsourced to Facilities and Engineering Services (“FES”), a subsidiary of the new employer (“Employer “) which had been created for this purpose. Several employees asked to be transferred to other positions within GC to avoid being outsourced, but GC placed restrictions on such transfers in order to ensure continuity of operations after the work was outsourced. GC then terminated the nine employees (who brought the suit) along with 46 others and all were offered employment at FES. The nine employees accepted the employment with FES and remained at their same desks at the GC facility and performed the same functions as they had when they worked for GC.

Regarding benefits, GC had a pension plan while the Employer did not. However, GC amended its pension plan to allow affected employees who were reaching a retirement milestone to receive an unpaid “bridge” leave of absence so they could reach the milestone. In addition, GC worked with the Employer to design a compensation and benefits package for the outsourced employees. The FES salary for each of the nine was equal to or greater than the salary received at GC, and FES employees were eligible for bonuses that were not available from GC. In addition, the Employer created two additional defined contribution plans for the FES employees. GC also commissioned a study of its benefits package compared to the one at FES. The first study indicated that the value of the FES package would be approximately 90% of GC’s. The Employer then enhanced the FES benefit package in response, with the result that the FES package was valued at 95% of GC’s or 105% if possible bonuses were considered.

So why did the employees sue? They claimed that they lost their right to future benefit accruals and their retiree medical benefits as a result of the outsourcing, and alleged that both DOE and GC benefited financially from the change. They pointed to DOE’s Annual Report on Contractor Work Force Restructuring which stated that employees had been outsourced from the GC plant and that the workforce restructuring produced savings for the government in salary and benefits from the outsourced positions in the amount of $5.7 million. The employees claimed that GC shared in any savings the government experienced by reducing costs, including employee benefits.

In an ERISA section 510 case, to overcome a showing of a section 510 violation, the employer must articulate a legitimate, nondiscriminatory reason for the outsourcing. If the employer does so, the burden shifts back to the employees to prove that the employer’s proffered reason was pretextual. In this case, the district court had opined that the employees showed that one of the two business reasons offered by GC for the outsourcing were pretextual, but the other was held not to be pretextual, so that the employer prevailed.

On appeal, the Court upheld the lower court’s finding that GC’s reasons for the outsourcing were legitimate and nondiscriminatory. GC had stated that its main reason for the outsourcing was “to maintain its contract with DOE.” The employees argued that GC’s restrictions on the internal transfers were evidence of pretext, but GC “produced evidence that the restrictions were put in place to ensure continuity of operations” and that it had “amended its pension plan to allow twenty-six of the fifty-five outsourced employees to reach a retirement milestone.” The Court cited the fact that GC had worked with the Employer to create a benefits package for the outsourced employees at FES that included higher salaries, the opportunity to earn bonuses, and two defined contribution plans funded by DOE. The Court also cited the study which was performed showing that the package was only 90% of GC’s and that it was enhanced to make it comparable or even better than GC’s if bonuses were included in the calculation.

Comment: It is obvious in this case that the plaintiffs thought they had a “smoking gun” in the DOE’s Annual Report discussed above, i.e. that the outsourcing had saved millions of dollar in costs, including benefits cost. However, here the employer was able to show legitimate business reasons for the outsourcing which were held not to be pretextual due to the many efforts on the part of the employer to provide comparable benefits.

More on outsourcing here and in this previous post–Outsourcing: Traps for the Unwary.

*The recent case of Millsap et al. v. McDonnell Douglas Corporation, 2003 WL 21277124 (N.D.Okla. 2003), resulted in a $36 million settlement for employees involved in a plant closing where employees alleged that the plant closing occurred as a result of the employer’s motivation to reduce benefits cost. Read about the case here and here.

Outsourcing Can Lead To Costly ERISA Litigation: How One Employer Prevailed

Many employers are continuing the trend of outsourcing certain services or functions by subcontracting with a third party. However, the process of outsourcing often ends in terminations of employment which can give rise to lawsuits and claims under ERISA and other areas of the law.* A recent 8th Circuit case–Dallas D. Register, et. al. v. Honeywell Federal Manufacturing & Technologies, LLC, 2005 WL 367319 (8th Cir. 2005)–illustrates the exposure to lawsuits that outsourcing can bring under section 510 of ERISA. That provision prohibits an employer from discharging an employee for the purpose of interfering with the attainment of any right to which the employee may become entitled under an ERISA plan.

Oftentimes, employers will transfer the affected employees to a third party contractor so that employees continue their jobs, but end up working for a different employer. Many times, employees end up with “lesser” benefits in the process, i.e. higher health care premiums or less favorable health care benefits, lower pension and retirement benefits, and/or less attractive fringe benefits. If it can be shown that an employer’s desire to reduce benefits cost was a “determinative factor” in the decision to outsource, the employer could be exposed to liability under ERISA.

The Register case illustrates the type of situation which can give rise to a long drawn-out lawsuit under ERISA, but also demonstrates how one employer was able to defeat such claims in the end. The case is also instructive because it shows that, no matter how many extraordinary measures an employer may take to try to be fair to employees and to avoid such claims, an employer can still end up battling the claims in court.

The facts of the case, as set forth in the opinion, are as follows:

Honeywell, the original employer (a government contractor referred to as “GC”), managed and operated a plant for the Department of Energy (“DOE”). GC’s contract with DOE provided that the government paid all management and operation costs at the plant, including employee compensation and benefit costs, and GC received an incentive fee based on performance and other awards. Apparently, GC became dissatisfied with the performance of its facilities and utilities engineering groups which were responsible for onsite construction projects and facilities, and hired a consultant who identified the group as a potentially weak area which GC might want to consider outsourcing to improve quality.

In 2001, the facilities and utilities engineering functions were outsourced to Facilities and Engineering Services (“FES”), a subsidiary of the new employer (“Employer “) which had been created for this purpose. Several employees asked to be transferred to other positions within GC to avoid being outsourced, but GC placed restrictions on such transfers in order to ensure continuity of operations after the work was outsourced. GC then terminated the nine employees (who brought the suit) along with 46 others and all were offered employment at FES. The nine employees accepted the employment with FES and remained at their same desks at the GC facility and performed the same functions as they had when they worked for GC.

Regarding benefits, GC had a pension plan while the Employer did not. However, GC amended its pension plan to allow affected employees who were reaching a retirement milestone to receive an unpaid “bridge” leave of absence so they could reach the milestone. In addition, GC worked with the Employer to design a compensation and benefits package for the outsourced employees. The FES salary for each of the nine was equal to or greater than the salary received at GC, and FES employees were eligible for bonuses that were not available from GC. In addition, the Employer created two additional defined contribution plans for the FES employees. GC also commissioned a study of its benefits package compared to the one at FES. The first study indicated that the value of the FES package would be approximately 90% of GC’s. The Employer then enhanced the FES benefit package in response, with the result that the FES package was valued at 95% of GC’s or 105% if possible bonuses were considered.

So why did the employees sue? They claimed that they lost their right to future benefit accruals and their retiree medical benefits as a result of the outsourcing, and alleged that both DOE and GC benefited financially from the change. They pointed to DOE’s Annual Report on Contractor Work Force Restructuring which stated that employees had been outsourced from the GC plant and that the workforce restructuring produced savings for the government in salary and benefits from the outsourced positions in the amount of $5.7 million. The employees claimed that GC shared in any savings the government experienced by reducing costs, including employee benefits.

In an ERISA section 510 case, to overcome a showing of a section 510 violation, the employer must articulate a legitimate, nondiscriminatory reason for the outsourcing. If the employer does so, the burden shifts back to the employees to prove that the employer’s proffered reason was pretextual. In this case, the district court had opined that the employees showed that one of the two business reasons offered by GC for the outsourcing were pretextual, but the other was held not to be pretextual, so that the employer prevailed.

On appeal, the Court upheld the lower court’s finding that GC’s reasons for the outsourcing were legitimate and nondiscriminatory. GC had stated that its main reason for the outsourcing was “to maintain its contract with DOE.” The employees argued that GC’s restrictions on the internal transfers were evidence of pretext, but GC “produced evidence that the restrictions were put in place to ensure continuity of operations” and that it had “amended its pension plan to allow twenty-six of the fifty-five outsourced employees to reach a retirement milestone.” The Court cited the fact that GC had worked with the Employer to create a benefits package for the outsourced employees at FES that included higher salaries, the opportunity to earn bonuses, and two defined contribution plans funded by DOE. The Court also cited the study which was performed showing that the package was only 90% of GC’s and that it was enhanced to make it comparable or even better than GC’s if bonuses were included in the calculation.

Comment: It is obvious in this case that the plaintiffs thought they had a “smoking gun” in the DOE’s Annual Report discussed above, i.e. that the outsourcing had saved millions of dollar in costs, including benefits cost. However, here the employer was able to show legitimate business reasons for the outsourcing which were held not to be pretextual due to the many efforts on the part of the employer to provide comparable benefits.

More on outsourcing here and in this previous post–Outsourcing: Traps for the Unwary.

*The recent case of Millsap et al. v. McDonnell Douglas Corporation, 2003 WL 21277124 (N.D.Okla. 2003), resulted in a $36 million settlement for employees involved in a plant closing where employees alleged that the plant closing occurred as a result of the employer’s motivation to reduce benefits cost. Read about the case here and here.

Seventh Circuit: No Fourth Amendment Claim For Psychological Testing

If you enjoy reading opinions by Seventh Circuit Judge Richard Posner, don’t miss this one issued last week–Kristin A. Greenawalt v. Indiana Department of Corrections et al. Judge Posner defines the issue being decided in the case as follows:

Two years after Kristin Greenawalt was hired by the Indiana Department of Corrections as a research analyst, she was told that to keep her job she would have to submit to a psychological examination. The record, limited as it is to the complaint, is silent on the reason for so belated a demand. But she complied and later brought this suit under 42 U.S.C. § 1983 against the Department and two of its officials (whom she sued in their individual capacity)—her immediate supervisor and the official who had ordered her to take the test. She claimed that the test, which lasted two hours and inquired into details of her personal life, constituted an unreasonable search in violation of her Fourth Amendment right to be free from unreasonable searches and seizures. Also, invoking the supplemental jurisdiction of the district court, 28 U.S.C. § 1367, she claimed that whether or not the test was a search, requiring her to take it if she wanted to keep her job both invaded her privacy and deliberately inflicted emotional distress on her, and so violated Indiana’s common law of torts. She asked for damages plus an injunction that would require the defendants to expunge the results of the test from her personnel file.

The Court ends up holding that the Fourth Amendment should not “be interpreted to reach the putting of questions to a person, even when the questions are skillfully designed to elicit what most people would regard as highly personal private information.” However, the Court goes on to note that the plaintiff is not remediless:

Our conclusion that the plaintiff has not stated a Fourth Amendment claim does not leave people in her position remediless—or indeed leave her remediless. States are free to protect privacy more comprehensively than the Fourth Amendment commands; and Greenawalt is free to continue to press her state-law claims in state court, where they belong.

The Court goes on to state that perhaps “it could even be argued that the administration by public officers of a particularly intrusive, and gratuitously humiliating, psychological test is a deprivation, without due process of law, of an interest in privacy that is an aspect of the liberty protected by the due process clauses of the Fifth and Fourteenth Amendments.”

Speech Emphasizes IRS Enforcement Focus

Steven Miller, IRS commissioner for Tax Exempt and Government Entities (TE/GE) made some interesting comments during a January 28th speech before the Los Angeles Benefits Conference. He began his speech with a statement that he had come to discuss “how the Employee Plans office of TE/GE needs to change in order to ensure that the IRS is effective in the future in its mission of promoting and protecting retirement benefits.” Here are some excerpts from his speech, capturing some of his thoughts on how the IRS will seek to bolster its enforcement programs:

1. “In my mind, we need to rebalance our efforts with the goal of establishing a prominent IRS enforcement presence in the benefits community. And we need to do it at once. . . [W]e need to be involved with a vigorous enforcement program because we are finding increasing numbers of abusive transactions in every segment of the TE/GE community – every segment! . . [T]he EP community has not been immune to the lure of the huckster or the promoter.”

2. “I am sorry to say that when we look at the current universe of 30 or so listed transactions, fully half of them involve, in one form or another, an entity that is a TE/GE customer. This is a real concern. Some within the benefits community have played an unfortunate role – certain municipal pension plans acting as accommodation parties, Sub-S ESOPs, 401(k) plans, and 412(i) plans have all been involved in listed transactions.”

3. “Paul Shultz and Michael Julianelle discussed the impact that the GUST amendments had on our examination program. In 1999, we performed 14,066 employee plans exams. By 2003, that figure had fallen to 6,119 exams. That figure is less than half of what it should be, even for a modest examination program. In response to this trend, we committed ourselves to rebuilding our examination capability, and we already have made an impressive start. We will conduct 11,000 exams this year, and 12,500 next year. In short, we are returning to the field of play.”

4. “Nonetheless, because of decisions made at the very top of the IRS, TE/GE is hiring this year, and we have a generous budget increase. Part of this increase will go to EP Examinations. We are going to hire 55 new EP agents this year. In addition, we will be building the EP compliance unit. The goal of this unit is to expand our compliance presence with a “soft contact” approach in such areas as pension underfunding and follow-up on voluntary compliance agreements. In the long term, we expect the unit to conduct correspondence examinations and to support our efforts to attack abusive tax schemes.”

5. “Circular 230 continues to contain an exclusion from some of the tax shelter opinion rules for pension opinions. But lawyers, CPAs and actuaries who practice before us are still bound to the high standards contained in other parts of Circular 230 that apply to tax advice and practice.”

6. “There is one other issue I would like to discuss in the area of professional responsibility. Lawyers, accountants and actuaries are covered by our practice rules, but there are many professionals in the EP community who are responsible for maintaining plans, and ensuring their compliance, but who are not covered by IRS practice rules. That situation presents the question of whether this gap in the practice regime represents a barrier to compliance and to our ability to enforce the rules. I think that it does. Our Tax Exempt and Government Entities Advisory Committee, a group of outside experts whom we depend on for stakeholder input, has a project underway that speaks directly to this issue. Should we expand the list of those who may practice before the Service to others, for example to third party administrators? If the answer is yes, then how should the IRS regulate their practice? The advisory committee report is due to us in the spring.”

Q & A Session With Authors of Circular 230

From the TaxProfBlog:

Lee A. Sheppard has published Shelter Penalties: Or Else What? Part 3, also available on the Tax Analysts web site as Doc 2005-3055, 2005 TNT 30-5.

The article in Q & A format reports on a session of the ABA Section of Taxation meeting in San Diego on January 22 where the authors of Circular 230 answered questions about it.

More about Circular 230 here.

<![CDATA[Law Review Note Discusses Impact of the Miller case]]>

Matthew Vansuch, a 3L at the University of Akron School of Law, has written a very interesting note for the Akron Law Review, discussing the impact of the U.S. Supreme Court case of Kentucky Association of Health Plans, Inc. v. Miller. The note is entitled “Not Just Old Wine in New Bottles: Kentucky Association of Health Plans, Inc. v. Miller Bottles a New Test for State Regulation of Insurance.” As you may recall, the Miller case changed the test for determining whether a state law is deemed to be a law “which regulates insurance” under the ERISA “savings clause” to the following two-prong test: (1) the state law must be directed specifically directed toward entities engaged in insurance, and (2) the state law must substantially affect the risk pooling arrangement between the insurer and the insured. The article contains a noteworthy observation about how federal district courts since Miller have been “sluggish” in coming to an understanding of the perceived “differences between the common sense-McCarran-Ferguson test and the Miller test.” Vansuch argues that “Miller is a new blend of wine fermented from a different batch of grapes than those used in the bottling of the casks of old, unlabeled wine barrels that confused everyone, including the Supreme Court.” He further argues that Miller’s two-part test is a “clean break,” and “not merely the old McCarran-Ferguson grapes recycled into Miller’s vintage.”

Read more about ERISA preemption in previous posts which you can access here.

<![CDATA[Law Review Article Discusses Impact of the Miller case]]>

Matthew Vansuch, a 3L at the University of Akron School of Law, has written a very interesting note for the Akron Law Review, discussing the impact of the U.S. Supreme Court case of Kentucky Association of Health Plans, Inc. v. Miller. The note is entitled “Not Just Old Wine in New Bottles: Kentucky Association of Health Plans, Inc. v. Miller Bottles a New Test for State Regulation of Insurance.” As you may recall, the Miller case changed the test for determining whether a state law is deemed to be a law “which regulates insurance” under the ERISA “savings clause” to the following two-prong test: (1) the state law must be directed specifically directed toward entities engaged in insurance, and (2) the state law must substantially affect the risk pooling arrangement between the insurer and the insured. The article contains an interesting observation about how federal district courts since Miller have been “sluggish” in coming to an understanding of the perceived “differences between the common sense-McCarran-Ferguson test and the Miller test.” Vansuch argues that “Miller is a new blend of wine fermented from a different batch of grapes than those used in the bottling of the casks of old, unlabeled wine barrels that confused everyone, including the Supreme Court.” He further argues that Miller’s two-part test is a “clean break,” and “not merely the old McCarran-Ferguson grapes recycled into Miller’s vintage.”

Read more about ERISA preemption in previous posts which you can access here.

Social Security Database Relating to Private Pension Benefits

Did you know that the Social Security Administration keeps a database of individuals who have been identified by the Internal Revenue Service as having qualified for pension benefits under private retirement plans? The database is maintained by SSA pursuant to the requirements of ERISA. You can access information about the database here.