Labor and Employment Bulletin

Labor and Employment Bulletin

Publications

Contributors

Obligations To Provide Continued Health Insurance Coverage To Terminated Employees

Most employers are familiar with their obligations under the federal Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") to provide eligible employees with continued access to health insurance coverage following the termination of employment. However, under Massachusetts law, employers also have concurrent, and in some cases additional, obligations to provide an employee with access to continued health, dental and disability coverage following the employee's departure from employment. This article will briefly summarize an employer's obligations under COBRA and Massachusetts law on continued health insurance coverage following the termination of employment.

COBRA

Under COBRA, employers who employ more than 20 employees and who offer health insurance coverage have an obligation to provide an employee and his or her family the opportunity to purchase continued health insurance coverage following the termination of employment. COBRA only requires that employers offer the former employee the opportunity to purchase continued health insurance coverage for a 60-day period after the employee has received notice of his or her right to elect COBRA continuation coverage. In most employee termination situations, excluding terminations for gross misconduct, the employer must offer the employee and qualified beneficiaries a minimum of 18 months' continued coverage at the employee's own cost. In certain cases involving disability, death or divorce, the employee or the employee's family may be entitled under COBRA to purchase coverage for an extended period of time.

Massachusetts State Law

Massachusetts law also requires in most cases that an employee have the opportunity to continued health, dental and disability coverage following the termination of his or her employment. In some cases the coverage provided by State law is identical to that provided by COBRA. In other cases, the employee may be entitled to insurance coverage which is in addition to that provided by COBRA. In cases where a former employee is eligible for continuation of insurance coverage under two or more Massachusetts benefits laws, the separate State benefits do not run concurrently and the person is entitled to all applicable benefits, one after the other.

Any Termination of Employment (Including Voluntary Departures)

Applies to:

  • commercial insurers and preferred provider arrangements ("PPAs") insured by commercial insurers.

Does not apply to employers who obtain coverage from:

  • Blue Cross/Blue Shield or Blue Cross/Blue Shield-insured PPAs.
  • Health maintenance organizations ("HMO") or HMO-insured PPAs.

Any Massachusetts employee who leaves his or her job for any reason and who is covered by a plan associated with a commercial insurer has a right to continued access to insurance coverage for 31 days following the termination of employment. During this 31-day period employee/employer contributions to insurance premiums remain unchanged. Thus, an employee whose employer pays for 100% of the employee's premiums under a commercial insurance plan or PPA is entitled to 31 days of continued insurance coverage.

Involuntary Termination

Applies to employers who obtain coverage from:

  • Commercial insurers and PPAs insured by commercial insurers:
  • Blue Cross/Blue Shield or Blue Cross/Blue Shield-insured PPAs.

Does not apply to employers who obtain coverage through:

  • HMOs or HMO-insured PPAs.
If an employee is involuntarily terminated for any reason, in addition to any rights to receive the 31-day continuation of health, dental and disability coverages (described previously under Any Termination of Employment), the employee may, unless his or her insurance coverage was through an HMO or an HMO-insured PPA, purchase at his or her own expense, health, disability and dental coverage for 39 weeks. The 39-week period described in this section commences after any right to 31 days of coverage described above expires. The employee must elect continued coverage within 30 days after receiving notice of layoff. This coverage runs concurrently with any rights an employee has under COBRA to purchase insurance at his or her own expense.

Job Losses As A Result Of Plant Closings

Applies to employers who obtain coverage from:

  • commercial insurers and PPAs insured by commercial insurers;
  • Blue Cross/Blue Shield or Blue Cross/Blue Shield-insured PPAs;
  • health maintenance organizations or HMO-insured PPAs.

In addition to 31 days of coverage (described previously under Any Termination of Employment), an employee who is terminated as a result of a plant closing has the right to 90 days continued health coverage at the same employer/employee contribution rate as was in place prior to the employee's termination. For employees whose employers have obtained coverage through commercial insurers and their PPAs, the 90-day benefit commences after the 31-day benefit described above is exhausted. Thus, employees whose health coverage was obtained by their employer through a commercial insurer or commercially insured PPA and who lose their jobs as a result of a plant closing are eligible for a total of 121 days of coverage after termination. By contrast, employees whose employers have obtained insurance coverage through Blue Cross/Blue Shield or an HMO and who lose their job as a result of a plant closing have a right to only 90 days of continued insurance coverage at the employer/employee contribution rate schedule in place before the notice of layoff.

In addition to the above-described coverage, an employee whose employment is terminated as a result of a plant closing also has a right to 39 weeks of continuation of health coverage at his or her own cost following the expiration of the above-described 90-day period. This 39-week period runs concurrently with the COBRA continuation period described above.

Internal Revenue Service Rules That Job Bias Awards Are Non-Taxable

The Internal Revenue Service recently ruled that damage awards for intentional discrimination under Title VII and the Americans with Disabilities Act are non-taxable, even if the award is for back pay.

The IRS distinguished its ruling from the holding in U.S. v. Burke, a 1992 United States Supreme Court decision, which endorsed the federal government's contention that a Title VII settlement represents back wages which would have been taxable had no discrimination occurred. The Court noted that if an award is to be considered non-taxable, it must redress a tort-like personal injury. However, the Supreme Court limited its decision in Burke to the pre-1991 version of Title VII. Title VII was amended by the Civil Rights Act of 1991 to allow jury trials and compensatory and punitive damage awards. The IRS ruling noted that because Title VII now provides a tort-like remedy, a settlement or award will be considered non-taxable.

This ruling may have significant implications as it affects the economic value of an award or settlement to the employee, as well as impacting the employer's obligation to make appropriate withholding deductions. Therefore, the ruling may benefit both plaintiff employees and defendant employers. Employees will obviously reap the benefit of a non-taxable award or settlement. However, because plaintiffs will now be able to place a higher, more exact valuation on settlement offers, employers may also benefit. In addition, employers will no longer have any withholding obligations regarding an award or settlement.

The ruling did not address damage awards under the Age Discrimination in Employment Act, which the IRS has previously found subject to taxation.

Changes to Retiree Health Care Benefits Held Invalid

In two widely watched federal cases with implications for all companies seeking to control health care expenses, employers were found to have violated the Employee Retirement Income Security Act (ERISA) when they sought to modify retiree health care benefits.

In Schoonejongen v. Curtiss-Wright Corp., the United States Court of Appeals for the Third Circuit upheld a $2 million judgment against Curtiss-Wright after it terminated health care benefits to certain retirees. The company argued that it had consistently reserved its right at any time to modify or amend, in whole or in part, any or all of the provisions of the plan. The Court held that reserving the right to modify a plan did not alone give the company the right to change retiree benefits. An employer must have also established and followed procedures for making benefit modifications.

Under ERISA, every plan must provide a procedure for amending a plan and for identifying the persons who have such authority. The Court found that a simple reservation of right does not fulfill the requirements regarding amending a plan. In this case, the absence of an amendment procedure rendered the termination of benefits invalid. However, the Court noted that the company could terminate retiree health care benefits by the adoption of a legally effective amendment to the plan. Such procedures could be adopted by formal action of those who have final management authority over the plan.

Examining a related issue, the United States District Court for the District of Eastern Michigan barred General Motors from making 50,000 early retirees and their spouses pay for a portion of their health care coverage. In Sprague v. General Motors Corp., the Court held that General Motors violated ERISA when it began charging early retirees for a portion of their health care benefits. The Court noted that the plaintiffs had been induced to accept early retirement by a promise of lifetime health care, and GM was therefore contractually obligated to continue the benefit.

GM argued that its summary plan descriptions and other plan documents had always contained a "reservation of right" clause which permitted the company to modify health care benefits. The Court noted that although interpretation of an employee benefit plan must begin with an examination of plan documents, a court may review other relevant materials. In this case, because GM made repeated assurances regarding free lifetime health benefits to early retirees, the Court found that the plaintiffs had reasonably believed that the terms of their special early retirement were not covered by the summary plan descriptions.

An employer seeking to preserve its right to modify health care benefits may not solely rely on a reservation of rights clause in its summary plan descriptions or other plan documents. Instead, an employer should carefully review its summary plan descriptions, plan documents and other materials to ensure that, in addition to a general reservation of rights clause, it has established complete procedures for amending its plans and for identifying the persons who have such authority. Thereafter, any modifications to a plan should follow the procedures established in the plan documents. In addition, an employer must use care when making any representations regarding the nature of benefits to employees considering early retirement.

Supreme Court Clarifies Hostile Environment Standard

In Harris v. Forklift Systems, Inc., the Supreme Court clarified the nature of a "hostile work environment" under Title VII of the Civil Rights Act.

The Court resolved a conflict among the different Circuits by ruling that an employee has an actionable claim for hostile environment harassment even when the conduct complained of has not resulted in serious psychological injury. Reaffirming its earlier decision in Meritor Savings Bank v. Vinson, the Court stated that a workplace permeated with discriminatory conduct sufficient "to alter the conditions of the victim's employment" violates Title VII, regardless of whether such conduct causes tangible psychological injury.

It is important to note that the test for hostile environment harassment has both an objective and a subjective component. Conduct that does not create an objectively hostile environment, i.e., an environment that a "reasonable person" would find abusive or hostile, does not implicate Title VII. (The Supreme Court did not define "reasonable person" in its opinion, but the EEOC's recent enforcement guidance on the case takes the position that the standard includes the "victim's perspective"). Likewise, Title VII is not implicated when an employee does not subjectively find the environment hostile, because in such a situation there is no actual alteration of the conditions of employment.

Although there is no precise test for determining whether an environment is hostile or abusive, the Court suggested looking at several factors to aid such a determination. These include the severity and frequency of the discriminatory conduct, whether the conduct is physically threatening or humiliating, and whether it unreasonably interferes with an employee's work.

Given the broad scope of what may be deemed a hostile environment under Harris, employers should carefully monitor the workplace environment to avoid problematic situations, and should have policies in place to respond swiftly if problems do arise.

Non-Competition Clause Ruling

The Massachusetts Superior Court recently refused to enforce a non-competition agreement where an employer was unable to show that its former employee was using confidential information in her new job with a competitor.

In Danieli & O'Keefe Associates v. Braverman, the court held that because the employer did not prove that the defendant possessed "knowledge of any trade secrets or confidential information" which would provide her new employer with a competitive advantage, she was free to remain in her new job. The court's decision was heavily influenced by two factors: (1) most of the defendant's knowledge, skills and experience had been acquired prior to her employment with the plaintiff and (2) the information gleaned during her employment with the plaintiff was public.

The defendant in this case had worked as a conference registration manager for two other companies prior to her employment with the plaintiff, during which time she acquired computer skills, experience with drafting promotional materials, and other knowledge of the business.

When she went to work for the plaintiff, the defendant's duties involved registration processing and included developing data bases of conference attendees, processing conference fee payments, and developing scripts for employees working at conference registration desks. The plaintiff claimed that such duties were confidential, involving allegedly "secret" information such as registration form formats and scripts. The court noted, however, that all of the forms were included within brochures mailed to thousands of conference attendees, and that the scripts were read to anyone who called for information. Further, the identity of the attendees was given to conference exhibitors.

The court ruled for the defendant, based upon the theory that an employee may carry away general skills or knowledge from one employer to another. It noted that the defendant had not discussed her former employer's operations or the identity of its clients with her new employer. Further, it found that plaintiff had not proved that the allegedly confidential information involved trade secrets or information which would provide the new employer with a competitive advantage.

Employers should be aware that standard non-compete agreements cannot prevent employees from taking their general knowledge of a business and putting that knowledge to work for a competitor. The burden will be on the former employer to prove that information taken away is truly a trade secret and not already public. Ordinary competition cannot be restrained.

In another recent Superior Court non-competition case, Opti-Copy Inc. v. Dalpe, a jury found that an employer's suit against a company that had hired two former employees was an abuse of process and violated Massachusetts' consumer protection law.

While the employer claimed that its former employees and their new company had appropriated its customer lists, the jury found that the allegations were groundless and that the former employer had brought the suit only to gain a competitive advantage over a rival business. Because the jury found that the plaintiff employer had engaged in unfair trade practices by knowingly or willfully filing a groundless suit, the defendants received double damages of more than one million dollars.

Again, this case shows that ordinary competition cannot be restrained. An employer seeking to impose any kind of competitive restraint should consider carefully the merits of its case before doing so.

Recent Changes To Massachusetts Workplace Laws

During the last legislative session, Massachusetts law was amended to increase the remedies available to employees who allege that their employers violated state wage payment statutes.

The legislature created a new civil cause of action for a broad category of wage cases. Prior to these amendments, the only manner in which many wage statutes could be enforced was through criminal proceedings initiated by the Department of Labor and Industries. The new private right of action provides employees with an alternative means of obtaining unpaid wages and benefits.

New procedures have been established for individuals seeking to bring claims against employers involving the nonpayment of wages, failure to pay the prevailing wage, and certain other wage violations. Within three years of a violation, an aggrieved individual must file a complaint with the attorney general. After 90 days have elapsed, a civil action may then be brought to obtain injunctive relief and any other damages, including treble damages for any loss of wages or benefits. A prevailing plaintiff may also be entitled to recover the costs of litigation and reasonable attorney fees.

Legislation also changed the manner in which individuals may seek compensation for violations of minimum wage and overtime law. Although prior law provided both civil and criminal procedures for recovery of these wages, the statutes were amended to allow for the recovery of treble damages in a civil action. Employees pursuing their civil remedies need not exhaust administrative remedies by filing with the attorney general or waiting for the requisite 90-day period.

In addition, legislation was enacted expanding the presumption that a person performing a service is deemed to be an employee rather than an independent contractor. This presumption, which had previously applied only to the nonpayment of wages, was extended to include essentially all wage and benefit issues. Therefore, employers should review the employment status of individuals considered to be independent contractors to ensure that they are properly classified.

Plaintiff in Sex Discrimination Case Entitled to Trial By Jury

In Dalis v. Buyer Advertising, Inc., the Supreme Judicial Court of Massachusetts held that claims of sex discrimination, wage discrimination based on gender, violations of the Equal Rights Act and the Maternity Leave Act all warrant trial by jury. The plaintiff in Dalis claimed that she was discharged from her employment because she was pregnant. She filed a complaint against her employer, Buyer Advertising, Inc. alleging the above-mentioned violations.

Under Article 15 of the Massachusetts Declaration of Rights, trial by jury is available "in all controversies concerning property, and in all suits between two or more persons . . ." Article 15 provides an exception where jury trial is not available. The exception applies when a court of equity would have exercised jurisdiction over the cause of action in 1780 -- at the time when the Massachusetts Constitution was adopted.

The court decided that the plaintiff's claims of sex discrimination, wage discrimination based on gender and violation of the Equal Rights Act warrant trial by jury because these claims are analogous to torts and contracts actions which traditionally have been treated as actions at law. Moreover, the court ruled that the plaintiff's Maternity Leave Act claim warrants a jury trial even though a successful plaintiff would be entitled to both legal and equitable relief under this Act. The court's opinion seemed to be influenced by the importance of jury trials in the American legal system. The court described the jury as "the sacred method for resolving disputes."

Equivocal Termination Letter Does Not Trigger Statute Of Limitations In Discriminatory Termination Action

In Wheatley v. American Telephone & Telegraph, the Massachusetts Supreme Judicial Court held that an employer does not trigger the statute of limitations for a discriminatory termination action if it sends an employee an equivocal termination letter.

The plaintiff in Wheatley alleged that the defendant had terminated him because of his age. On September 10, 1990, the plaintiff received a letter from the defendant advising him that he would be terminated on November 30, 1990, if he were unable to secure another position with AT&T by that date. On April 24, 1991, the plaintiff filed his complaint. The defendant moved for summary judgment on the basis that the plaintiff failed to comply with the relevant period of limitations.

The statute of limitations for a discriminatory termination claim is six months. However, federal courts have differed as to when the limitations period begins to run. The court in Wheatley decided that under whichever standard applied, the defendant's motion for summary judgment should be denied.

Some federal courts hold that the statutory period for complaining of a discriminatory termination does not begin to run until the employee has sufficient notice of termination. The court held that the September 10th letter did not constitute sufficient notice since the defendant held out the possibility of other employment within the company.

Other federal courts have ruled that the limitations period does not start to run until the employee knows of should know that he or she has been or will be replaced by a person outside the protected age group. Because the plaintiff alleged that he was never informed that following his termination, his duties would be reassigned to younger employees, the court found that the limitations period was not triggered under this standard. The defendant's motion for summary judgment was denied.

Health Plan Can Be Held Liable As Employer Under the Americans with Disabilities Act

The Court of Appeals for the First Circuit in Carparts Distribution Center, Inc. v. Automotive Wholesaler's Association of New England, Inc. held that an employee might be able to sue the health plan in which his employer is a participant under Title I of the Americans with Disabilities Act ("ADA") for discriminating against him on the basis of his having AIDS. The Court reasoned that the term "employer" under Title I should be given an expansive interpretation.

The Plaintiff, an employee of Carparts, was diagnosed with the HIV virus in May 1986. In March 1991, he was diagnosed as suffering from AIDS and he died on January 17, 1993. Carparts had been a participant in Automotive Wholesalers Association, a self-funded medical reimbursement plan. The plaintiff was enrolled in the plan since 1977.

On a number of occasions during and after 1989, the plaintiff submitted claims for HIV or AIDS related illnesses. In October 1990, the Plan informed its members that it intended to amend the Plan in order to limit benefits for AIDS related illnesses to $25,000, effective January 1, 1991. Benefits were otherwise afforded in the amount of $1 million. The plaintiff alleged that the cap on AIDS related expenses was instituted in response to the plaintiff's illness and in breach of the ADA.

The First Circuit held that the health plan might qualify as an employer under Title I of the ADA and be subject to its ban against discrimination under a number of theories. If the health plan existed for the sole purpose of enabling the employer to delegate responsibilities to provide health insurance for its employees, the plan may be deemed an employer. Moreover, the health plan could be considered an employer if it was an agent of Carparts acting on Carparts' behalf in providing and administering employee health benefits. The First Circuit reversed the trial court's dismissal of the Title I ADA claim and remanded the case for further consideration in light of its broad interpretation of the term "employer".

Contributors