EEOC Examines Criminal Background Checks

The Washington Post reports that the United States Equal Employment Opportunity Commission ("EEOC") is holding a hearing today on whether arrest and conviction records are a hiring barrier for minorities. According to the Post article, an increasing number of employers are seeking background checks out of security concerns. Federal policy currently prevents companies from using criminal records to screen out job applicants unless the criminal conduct is job related. The EEOC and other anti-discrimination advocates argue that because African Americans and Hispanics have higher rates of arrest and convictions than whites, they could suffer discrimination if companies do blanket criminal background checks that eliminate them from consideration for a job. The article also reports that credit background checks, which are permitted under federal law, are not up for reconsideration. See www.washingtonpost.com for the full article.

Employers Cutting Workplace Benefits

There is an interesting article in today's Chicago Tribune on the decline of workplace benefits. According to the article, traditional pension plans, paid family leave, and even the company picnic are all on the decline, as employers have significantly cut many of the benefits they offer to workers over the past five years. Here is a look at the workplace perks that have significantly declined since 2007. Some of the traditional workplace perks that have declined over the past few years include:

Traditional (i.e., defined benefit) pension plans. Traditional pensions were offered at 40 percent of the companies surveyed in 2007. Now just 22 percent of firms provide access to a retirement plan that guarantees payments for life.

Retiree health care coverage. The proportion of companies offering retiree health insurance declined from 35 percent in 2007 to 25 percent in 2011.

Long-term care insurance. Just over a quarter of employers provide long-term care insurance for workers, down from 46 percent in 2007.

HMOs. The number of companies with HMOs decreased from 48 percent in 2007 to 33 percent today.

Paid family leave. A third of companies offered paid family leave in 2007, but now only a quarter of companies provide paid time off for births, deaths, and other significant family events.

Adoption assistance. Adoption assistance is another waning employer benefit, with just 8 percent of companies helping with adoption costs, down from 20 percent five years ago.

Professional development opportunities. While nearly all (96 percent) companies paid for professional development opportunities in 2007, only 87 percent will in 2011.
Life insurance for dependents. About half (55 percent) of companies provide life insurance for children and other dependents, down from 65 percent in 2007

Incentive bonus plans. Incentive bonus plans for high-level employees are down 10 percentage points since 2007.

Casual dress day. Only about half (55 percent) of employers say they encourage or allow employees to dress casually one day per week, down from 66 percent in 2007. Legal assistance. One in five companies provides legal assistance or services to workers, down from a third of employers five years ago.

The company picnic. Only about half (55 percent) of firms scheduled a company picnic in 2011, down from 64 percent in 2007.

See http://www.chicagotribune.com/features/tribu/ct-tribu-benefits-disappearing-story,0,7928170.story for the full article.

Supreme Court Issues Significant ERISA Remedies Decision

In CIGNA Corp. v. Amara, the United States Supreme Court vacated a federal district court's decision that had ordered CIGNA Corp. to reform its cash balance pension plan to remedy the company's violations of its ERISA notice obligations. In so ruling, the Court had cause to interpret two frequently litigated sections of ERISA - Sections 502(a)(1)(B) and Section 502(a)(3).

By way of background, in February 2008, the U.S. District Court for the District of Connecticut ruled that CIGNA violated ERISA's notice and disclosure requirements when it issued SPDs and summaries of material modifications that did not explain that participants' benefits would be subject to “wear away." In June 2008, the District Court issued a decision addressing the remedies available to the participants for CIGNA's violation of the notice and disclosure requirements of ERISA. The District Court specifically said that the remedies would fall under ERISA Section 502(a)(1)(B), and the court shied away from determining whether the remedies would qualify as equitable remedies under Section 502(a)(3). The district court said the participants were “likely harmed” by the SPDs' failure to mention that benefits would be subject to “wear away” and rejected CIGNA's contention that the participants needed to show they detrimentally relied on the SPDs. In October 2009, the U.S. Court of Appeals for the Second Circuit affirmed the lower court's decision without giving an explanation for its rationale. CIGNA then filed a petition for Supreme Court review, urging the high court to adopt a detrimental reliance standard. The Supreme Court granted review of the case and heard oral arguments last November.

Once the case reached the Supreme Court, CIGNA argued that the only remedy available to the participants for a deficient SPD would be under the equitable remedies provision of ERISA Section 502(a)(3). Thus, CIGNA argued that the District Court's remedies decision should be vacated because it was premised on ERISA Section 502(a)(1)(B). The Supreme Court accepted this argument and ruled that it was an error for the District Court to base its remedies on Section 502(a)(1)(B). According to the Court, although Section 502(a)(1)(B) allows courts to enforce the “terms of the plan,” nothing in Section 502(a)(1)(B) grants district courts the power to change plan terms. Interpreting Section 502(a)(1)(B), the unanimous Court held that the District Court erred when it issued remedies under this provision of ERISA. According to the Court, Section 502(a)(1)(B) cannot be used to enforce the terms of summary plan descriptions, as SPDs do not qualify as “plan terms.”

The Court’s decision did not stop there, a fact that has created a fair amount of controversy in the legal community. The Court went on to find that while Section 502(a)(1)(B) did not authorize the relief issued by the District Court, ERISA Section 502(a)(3)‘s equitable remedies provision conceivably could provide a source of relief. Cigna had argued that, in order for the participants to obtain relief under Section 502(a)(3) for SPD disclosure violations, they had to demonstrate detrimental reliance. The Supreme Court rejected this argument – sort of – stating that ERISA sets out no particular standard for determining whether participants have been harmed by a faulty SPD. According to the Court, although courts of equity traditionally required a plaintiff to prove detrimental reliance when they brought estoppel claims, equity courts did not insist upon a showing of detrimental reliance in other cases that would be analogous to the participants' case against CIGNA. The Court went on to state that other types of equitable remedies, such as surcharge, only required a showing of actual harm. “[A]ctual harm may sometimes consist of detrimental reliance, but it might also come from the loss of a right protected by ERISA or its trust-law antecedents. In the present case, it is not difficult to imagine how the failure to provide proper summary information, in violation of the statute, injured employees even if they did not themselves act in reliance on summary documents—which they might not themselves have seen—for they may have thought fellow employees, or informal workplace discussion, would have let them know if, say, plan charges would likely prove harmful. We doubt that Congress would have wanted to bar those employees from relief.” The Court said that for the plan participants to obtain relief for CIGNA's violations of ERISA's SPD disclosure requirements, they would need to show that they were actually harmed by the violation, but they would not need to prove detrimental reliance.

Justices Scalia and Thomas joined in the Court's decision, stating they agreed with the court that Section 502(a)(1)(B) does not authorize relief for misrepresentations in SPDs. But the two justices said the Court should have gone no further than to find that Section 502(a)(1)(B) provided no remedy. “Nothing else needs to be said to dispose of this case. The District Court based the relief it awarded upon ERISA §502(a)(1)(B), and that provision alone,” Scalia wrote. Scalia asserted that it was not the Court’s usual practice to decide issues that a lower court did not decide. Here, the District Court did not decide whether remedies would be available under Section 502(a)(3) and thus the Supreme Court should not have delved into that issue. Scalia said the Supreme Court had “guessed” that the District Court would have issued remedies under both Section 502(a)(1)(B) and 502(a)(3) had the District Court not been hesitant about the availability of equitable remedies under Section 502(a)(3). “This speculation upon speculation hardly renders our discussion of §502(a)(3) relevant to the decision below; it is utterly irrelevant.” Scalia also said that the Court’s discussion of the Section 502(a)(3) remedies was “purely dicta” and would not be binding on the Supreme Court in future cases, or on the District Court on remand. “The District Court need not read any of it—and, indeed, if it takes our suggestions to heart, we may very well reverse.”

Employers Should Take Care When Using Unpaid Interns

In a world where the United States’ economy is attempting to recover from a recession and the work force is saturated, some for-profit entities may receive inquiries from individuals about working for them as unpaid interns. For-profit entities should be aware that allowing individuals to work unpaid internships may run afoul of the Fair Labor Standards Act (“FLSA”) if not done pursuant to the narrow exclusion to the FLSA carved out by the Supreme Court.

By way of background, the FLSA places on employers the requirement of paying to all individuals they employ minimum and overtime wages. Accordingly, if an individual is an employee of the employer the FLSA applies. The FLSA defines broadly the term “employ” to include “‘to suffer or permit to work’ and . . . defines ‘employee’ as ‘any individual employed by an employer.’” Walling v. Portland Terminal Co., 330 U.S. 148, 152 (1947) (quoting 29 U.S.C. § 214 (3)(g)). Conceivably then, all unpaid internship could fall under such a broad definition. The Supreme Court has instructed, however, that the FLSA “was obviously not intended to stamp all persons as employees who, without any express or implied compensation agreement, might work for their own advantage on the premises of another.” Id. In other words, the FLSA “cannot be interpreted so as to make a person whose work serves only his own interest an employee of another person who gives him aid and instruction.” Id. Thus, for-profit entities are not subject to the requirements of the FLSA when they hire an intern whose work serves their own interest and only receives aid and instruction from the for-profit entity.

For-profit entities should note that the exclusion is not dependent on statements by individuals and/or the for-profit entities that the individual is working on a “volunteer” basis. As the Supreme Court has stated, “[i]f an exception to the [FLSA] were carved out for employees willing to testify that they performed work ‘voluntarily,’ employers might be able to use superior bargaining power to coerce employees to make such assertions, or to waive their protections under the [FLSA].” Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 302 (1985). So when does the exclusion apply to unpaid internships?

Recently, the Wage and Hour Division of the DOL established the following test to assist for-profit entities in making the determination of whether the exclusion applies to individuals working unpaid internships. If all of the following criteria apply, the trainee or students are not employees within meaning of the Act:
1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2. The internship experience is for the benefit of the intern;
3. The intern does not displace regular employees, but works under close supervision of existing staff;
4. The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5. The intern is not necessarily entitled to a job at the conclusion of the internship; and
6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship. (Internship Programs Under The Fair Labor Standards Act).

The test is essentially one of “economic reality” that should be employed on a case by case basis. See Tony & Susan Alamo Found., 471 U.S. at 301.

In sum, for-profit entities should be careful when considering whether to allow an individual to work an unpaid internship. Failure to adequately consider the “economic reality” of the relationship between the intern and the for-profit entity prior to the commencement of the relationship could result in unintended losses for the employer.

Supreme Court Issues Potentially Signficant ERISA Decision

In CIGNA Corp. v. Amara, --- U.S. ----, 2011 U.S. LEXIS 3540, 50 EB Cases (BNA) 2569 (2011), CIGNA Corporation changed the pension plan for its employees. The employees challenged the change on the ground that “CIGNA had failed to give proper notice of changes to their benefits, particularly because the new plan in certain respects provided them with less generous benefits.” The District Court sided with the employees and ordered that the new plan be reformed finding legal authority to do so in Section 502(a)(1)(B). The Second Court affirmed the District Court’s decision and the parties appealed to the Supreme Court. The Supreme Court granted certiorari on one issue, “whether a showing of ‘likely harm’ is sufficient to entitle plan participants to recover benefits based on faulty disclosures.”

Before reaching the question on which it granted certiorari, the Supreme Court considered, based on CIGNA’s briefing, whether Section 502(a)(1)(B) authorized the relief the District Court awarded. The Supreme Court held that it does not. Rather than stopping there, the Court went on to state, in dicta, that the relief the District Court awarded could be provided under Section 502(a)(3). The Supreme Court reasoned that the relief provided by the District Court closely resembles three other traditional equitable remedies: reformation; equitable estoppel; and surcharge. Importantly, the Supreme Court opined that surcharge was a form of monetary compensation for a loss resulting from a trustee’s breach of duty, or to prevent the trustee’s unjust enrichment. The further stated, “insofar as award of make-whole relief is concerned, the fact that the defendant in this case, unlike the defendant in Mertens, is analogous to a trustee makes a critical difference.” Nevertheless, the Supreme Court remanded the case to the District Court to revisit its determination of an appropriate remedy for the violations of ERISA it identified.

Justice Thomas joined Justice Scalia in concurring in the judgment. Justice Scalia emphasized, however, that neither the District Court nor the parties to the case squarely addressed whether relief was available under 502(a)(3). Thus, Justice Scalia reasoned, “[t]he Court’s discussion of the relief available under [Section] 502(a)(3) and Mertens is purely dicta, binding upon neither us nor the District Court. The District Court need not read any of it—and, indeed, if it takes our suggestions to heart, we may very well reverse.” The Supreme Court’s decision, therefore, places in doubt what relief is available under 502(a)(3) and exactly under what circumstances. These issues will likely be clarified by the lower courts in the time to come.

Another Ruling in the YRCW Stock-Drop Litigation

The U.S. District Court for the District of Kansas issued another ruling last Friday in In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 2:09-cv-02593-JWL-JPO (April 15, 2011 ) that we recently reported on. Specifically, the District Court ruled that ERISA’s fiduciary safe harbor provision, Section 404(c), does not relieve fiduciaries of liability if they assemble an imprudent menu of plan investments. Section 404(c) provides a defense to a breach of fiduciary duty claim if the loss caused by the breach resulted from a plan participant's exercise of control over his or her investments. The plaintiffs in the case filed a motion to strike several of the defendants' asserted affirmative defenses. In their motion to strike the Section 404(c) defense, the plaintiffs cited to the U.S. Court of Appeals for the Seventh Circuit's recent decision in Howell v. Motorola Inc., 663 F.3d 552 (7th Cir. 2011), where the Seventh Circuit adopted the DOL’s view that Section 404(c) does not immunize plan fiduciaries that make imprudent investment selections. The YRC defendants attempted to downplay the significance of Howell by saying the Seventh Circuit's discussion of Section 404(c) was mere dicta. The defendants also argued that even if the Section 404(c) discussion in Howell was not dicta, it extended only to the “selection” of investment options, not the decision to continue offering an investment once it is selected. The District Court rejected the defendants’ arguments stating that (1) the Seventh Circuit's decision regarding Section 404(c) was not dicta and, (2) the Howell opinion “is in no way limited” to the selection of investment options. According to the District Court, “[t]he opinion expressly references the decision ‘to continue offering a particular investment vehicle'—allegations which are clearly encompassed in the Amended Complaint—and the rationale offered by the Seventh Circuit clearly applies to decisions from the initial selection decision to other decisions relating to the investment menu offered under the Plan.” The District Court also rejected the defendants' argument that the court should follow the lead of a minority of federal courts, including the U.S. Court of Appeals for the Fifth Circuit, that have declined to give effect to the DOL’s interpretation of Section 404(c). The District Court noted its belief that, if confronted with this issue, the U.S. Court of Appeals for the Tenth Circuit would conclude, like the Seventh Circuit, that Section 404(c) does not insulate a fiduciary from liability for assembling an imprudent investment menu.

Federal Court Grants Class Certification in YRC Worldwide "Stock-Drop" Litigation

The United States District Court for the District of Kansas has certified a class of approximately 17,000 YRC Worldwide Inc. (“YRCW”) employees who invested their retirement plan accounts in YRCW stock, and allegedly saw a decline in their accounts balances as the value of the shares plunged. See In re YRC Worldwide Inc. ERISA Litigation, D. Kan., No. 2:09-cv-02593-JWL-JPO (4/6/11). The class certification ruling comes approximately five months after the District court denied YRCW’s motion to dismiss the stock-drop lawsuit filed by employees who claimed the stock should have been taken out of YRCW’s 401(k) plan.

The decision is significant because it provides support for the minority view that the "Moench “presumption of prudence" discussed in our prior blog entries can be overcome at the pleading stage. As we have noted, the Moench presumption more frequently than not prevents plaintiffs from getting to the discovery phase of litigation – as plaintiffs typically cannot, or do not, allege enough facts in their complaint to show that they can rebut the presumption.

The YRCW case involved some interesting class-action stock-drop defense arguments. By way of background, the plaintiffs alleged that the fiduciaries YRCW’s 401(k) plan breached fiduciary duties under ERISA when they continued to invest in YRCW's stock even as the stock price plummeted. The plaintiffs alleged that YRCW’s stock dropped from a high of $25.96 per share in October 2007 to a low of 45 cents per share in March 2010. The fiduciary defendants offered several arguments as to why the court should not certify the lawsuit as a class action. One argument was that the typicality requirement for class certification could not be met in this stock-drop case, where there was no allegation that the fiduciaries failed to make “full disclosure” about YRCW’s financial struggles. [In most of the stock-drop cases, there are two allegations of wrongdoing on the part of ERISA fiduciaries. First, plaintiffs typically allege that plan fiduciaries breached their duty of prudence under Section 404(a) of ERISA by continuing to invest in company stock, even after the stock price spiraled downward. Second, plaintiffs frequently assert that the fiduciaries made misrepresentations or failed to disclose material information about the company's finances, and that had they known this information, the plaintiffs/participants which would have taken other action.] In the YRCW case, there was no allegation that YRCW had not made full disclosure to the participants about the performance YRWC, and the defendants argued that in the absence of a disclosure claim, class certification was inappropriate because the District would need to examine the prudence claim by looking at participants' individual investment choices. The District Court rejected this argument, stating that it could find no legal authority to support the YRCW fiduciaries' position. According to the District Court, “courts presented with both prudence claims and communications claims consistently treat those claims as entirely distinct such that the alleged misrepresentations or nondisclosures appear to have no bearing whatsoever on the prudence claim.”

The District Court also rejected the defendants’ argument that Section 404(c) of ERISA (which provides a defense to a breach of fiduciary duty claim if the loss caused by the breach resulted from a participant's exercise of control over his or her investments). The District Court also rejected the defendants’ argument that the Supreme Court’s 2008 LaRue decision brought an end to class certifications under Federal Rule of Civil Procedure 23(b)(1)(B) for ERISA fiduciary breach claims brought by defined contribution pension plan participants. [Many defendants in stock drop cases have argued that LaRue casts doubt on whether fiduciary breach claims brought under Section 502(a)(2) of ERISA are suitable for class action treatment given that the Supreme Court found in LaRue that individuals can bring their own claims.] According to the District Court, nothing in LaRue prevents class certification under Rule 23(b)(1)(B) of ERISA breach actions brought under ERISA Section 502(a)(2).