Applying the federal COBRA subsidy to Ohio’s Mini-COBRA law

As I’ve previously reported, the federal stimulus bill, enacted last month, requires employers to provide a 65% subsidy of COBRA premiums for employees involuntarily separated. As I’ve also previously reported, Ohio has its own “mini-COBRA” for small employers with between 10 and 19 employees.

Do not assume, however, that merely because COBRA does not apply to small businesses that the subsidy also does not apply to small businesses. The federal stimulus bill specifically provides for COBRA premium assistance to former employees covered under state continuation coverage law such as Ohio’s mini-COBRA.

Just like its federal counterpart, small employers covered by Ohio’s mini-COBRA are not obligated to pay any portion of the premium. The former employee will pay 35% of the premium and employer will claim the payroll tax credit from the IRS for the 65% of the premium not paid by the former employee.

There are, however, three key differences between the subsidy under COBRA versus Ohio’s mini-COBRA.

1. Although the federal subsidy lasts for 9 months, Ohio continuation coverage, and therefore the subsidy obligation, only extends for 6 months.

2. To be eligible for the subsidy under COBRA, an employee need only have been involuntarily terminated for a reason other than gross misconduct. To be eligible for the subsidy under Ohio’s mini-COBRA, the employee must have been involuntarily terminated and: (i) continuously insured for the 3 months prior to the termination; (ii) eligible for unemployment; and (iii) not covered or eligible for Medicare or any other group health coverage.

3. Under COBRA, the federal subsidy is retroactive to September 1, 2008. In comparison, Ohio’s mini-COBRA only covers terminations that occur on or after February 17, 2009. Both subsidies expire at the end of this year.

The Ohio Department of Insurance has published a model COBRA notice for small employers to use.

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Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus.

For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or jth@kjk.com.

New COBRA notices now available

Sometimes information just moves quickly to keep up with. The Department of Labor has just published the new COBRA notices, making my post of just a couple of house ago now partly obsolete. The notices are available here, from the DOL’s website.

Thanks to Michael Moore from the Pennsylvania Labor & Employment Blog, who saw my post from this earlier this morning and gave me the heads up.

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Presented by Kohrman Jackson & Krantz, with offices in Cleveland and Columbus.

For more information, contact Jon Hyman, a partner in our Labor & Employment group, at (216) 736-7226 or jth@kjk.com.

Department of Labor posts wealth of information on new COBRA subsidy

As I’ve previously reported, the American Recovery and Reinvestment Bill of 2009, commonly known as President Obama’s economic stimulus bill, provides for a nine-month 65% subsidy of the COBRA premiums for involuntarily terminated employees. The Department of Labor has updated its website with lots of information for employer and employees on the subsidy: FAQS, flyers, posters, and other COBRA-related resources. Missing, however, is the one resource that would be the most useful to employers: a model form to provide to terminated employees. The DOL does say that it “is actively working to issue additional guidance regarding the COBRA premium reductions.” Perhaps it will issue the model COBRA notice along with this additional guidance. When the DOL gets around to publishing the model notice, I will be sure to post a link.

Stimulus Bill to provide for subsidized COBRA coverage for laid-off employees

COBRA provides workers and their families who lose health benefits the right to choose to continue group health benefits provided by their group health plan for up to 18 months. Historically, the cost of COBRA continuation coverage is borne 100% by the employee. Tomorrow in Denver, President Obama will sign into law the American Recovery and Reinvestment Bill of 2009, commonly known as the economic stimulus bill. This law will alter employers’ COBRA obligations by providing for subsidized COBRA premiums by employers.

The law will provide for a 65% subsidy of certain employees’ COBRA premiums for nine months. The subsidy will be available to any employee involuntarily terminated (except those severed because of gross misconduct, to whom COBRA does not apply) from employment between September 1, 2008, and December 31, 2009. The employer will pay 65% of the COBRA coverage premium, which would then be applied as a credit against payroll taxes. The employee would remain responsible for the other 35% of the COBRA premiums. Employers will have to amend their COBRA notices to include information about the availability of this subsidy.

Importantly, this subsidy is to be applied retroactively. Employees who were involuntarily terminated on or after September 1, 2008, but before the enactment of the stimulus bill, and who did not previously elect COBRA coverage, must be given an additional 60-day window to elect COBRA and benefit from the subsidy. If an employee elects COBRA after receiving the new notice, coverage would begin on February 17, not on the date of the actual termination.

Companies with 20 or more employees (COBRA’s coverage limit) must heed these changes. COBRA notices need to be amended for the remainder of 2009, and any employee involuntarily severed between September 1, 2008, and February 17, 2009, will have to be re-noticed to advise of the subsidy.

Take care in submitting health insurance applications

In Medical Mutual of Ohio v. k. Amelia Enterprises (6th Circuit 12/2/08), the 6th Circuit dismissed a claim brought by Medical Mutual against an employee, his employer, and the employer’s CFO after the insurance company discovered that the employee had failed to disclose his son’s pre-existing condition on his insurance application. The Court dismissed the claims because Medical Mutual had not timely filed them within the statute of limitations.

Even though Medical Mutual’s late filing of the claims let the employer and its CFO off the hook, an important lesson can still be learned from the genesis of this case. Like all group insurance applications, Medical Mutual required k. Amelia employees to complete Medical History Questionnaires as a condition of coverage by the group health insurance plan. k. Amelia’s CFO signed the Group Application, which included the Medical History Questionnaires. Medical Mutual terminated the employee’s coverage and sued for prior paid benefits after it discovered that the employee had not disclosed his son’s pre-existing hemophilia.

The employer should not be liable unless it knew or should have known that an employee had submitted false information. The question for k. Amelia is whether it knew of the son’s hemophilia when it submitted the questionnaire. If it had such knowledge, for example, through the processing of a prior health insurance application or through an employee’s use of FMLA leave for the excluded condition, then it could be on the hook for the misrepresentation. An employer should not be required, though, to independently verify each and every employee’s insurance applications for veracity and completeness. An employer should be entitled to rely on its employees’ honesty, unless it knows or has reason to know that false or misleading information has been submitted.

The lesson for employers is not to blindly submit an insurance application without first reviewing the information provided by employees. If an employee submits information that an employer knows or should know is false, the employer has a duty not to submit the application without correcting or removing the information. A little due diligence on the front end could save a company years of litigation on the back end.

Are there legal risks with smoking bans?

I had the privilege of speaking last week at the COSE 2008 Small Business Conference. I received a question on the legality of workplace policies that prohibit employees from smoking at all – during the work day, off work, anywhere, any time. As The Cincinnati Enquirer reports, there is a definite trend of businesses refusing to employ smokers. Companies view these policies are part of wellness programs that are used to control health insurance costs. Often, the programs not only prohibit smoking, but offer programs to smokers to aid in their efforts to quit:

Taking the employee wellness program to another level, a local company is refusing to hire smokers unless they enter a program to help them quit.

USI, the insurance and financial services company located downtown, started the program this year. The program applies only to new employees, who are tested when they are hired.

"We decided not to hire smokers because they add additional expense to our health plan and our ongoing operation," said Dennis Curran, chief human resources officer for USI's Midwestern region….

Nationally, the Scotts Miracle-Gro lawn-care company and the Cleveland Clinic have started similar programs. Locally, the Hamilton County Public Health agency also doesn't hire smokers.

29 states and the District of Columbia have so-called “smoker protection” laws – laws that elevate smokers to a protected class, making it illegal to discriminate against an employee because he or she smokes. Ohio is not such a state. Thus, in Ohio, there is nothing per se illegal about making employment decisions based on one’s status as a smoker.

As far as I know, this type of smoking ban has never been tested in an Ohio court. I have three thoughts, though, of possible laws that could be implicated by a blanket smoking prohibition:

1. The ADA: The ADA and its Ohio counterpart protect “addiction” as a disability. For example, a company cannot terminate an employee because that employee has a record of drug or alcohol addiction, or is perceived as a drug addict. There is a potential claim out there that employees who are addicted to nicotine are protected by the ADA. However, to be legally disabled under the ADA, it is not enough to simply suffer from some affliction. That affliction must substantially limit a major life activity. While a smoker is often addicted to nicotine, I fail to see how that addiction could be a disability protected by the ADA.

2. ERISA: Section 510 of ERISA prohibits employment actions taken with the specific intent of interfering with an employee’s ERISA benefits. Section 510, however, generally does not apply when the loss of benefits is a consequence of, but not a motivating factor behind, a termination of employment. There are lots of reasons why an employer may not want smokers in the workplace – the odor and the frequent smoke breaks are two reasons in addition to the added health costs. Moreover, the employee is not being hired because of an intent to interfere with health benefits, but the loss of benefits is coincident to the loss of employment. In other words, I think this claim has some sex appeal to it, but ultimately will fail on its merits.

3. Privacy: Ohio has no law the specifically protects employees in their private, off-duty conduct. For the same reasons that drug testing is legal, smoking inquiries should also be legal. The remedy for an employee who does not want to answer questions about smoking habits, or have a smoking panel included in a workplace drug test, is to look for employment elsewhere.

I think there should be little risk in enacting a workplace smoke-out, but these legal theories are untested. For small and mid-sized businesses then, the question becomes if you want to be the business that get such a policy challenged. There is nothing wrong with taking aggressive HR positions and testing the bounds of permissible policies. Make no mistake, though, it is not a questions of if a terminated employee will challenge such a policy, but when, and you better be prepared to defend the policy in court. In other words, as a small or medium-sized employer, are you better off taking a risk and implementing even a relatively safe policy such as an employee smoking ban, or letting larger, richer businesses test the bounds of the law and follow their lead when a court upholds the policy as lawful?

Employers go 2 out of 4 at the Supreme Court today

The Supreme Court this morning released a quartet of opinions that impact employers. Continuing this Court's somewhat surprising trend, the employer came out on the winning end of only half of these cases.

In MetLife v. Glenn, the Court ruled that the fact that a claim administrator of an ERISA plan also funds the plan benefits is a "conflict of interest" that must be weighed in a judicial review of the administrator's benefit determination. I have always been troubled by benefit plans that both pay benefits and make the decision whether to pay. To the extent that such plans will no longer have the protection of the arbitrary and capricious standard upon judicial review of their decisions, I applaud the Court's decision.

In Kentucky Retirement Systems v. EEOC, the Court ruled that a benefit plan's use of age as a potential factor in the distribution of retirement benefits to disabled workers does not establish a prima facie case of age discrimination. For the background on this case, see Supreme Court considers use of age as factor in disability retirement benefits. I think the Court got it partially right. It seems to me that retirement eligibility is a proxy for age, but the employer in this case did not use the factor arbitrarily or discriminatorily.

In Meacham v. Knolls Atomic Power Laboratory, the Court ruled that when an employee alleges disparate impact under the ADEA, the employer bears the burden of persuasion on the "reasonable factors other than age" defense. Again, I think the Court got this right. If the employer is raising the defense, the employer should have the burden of proving it.

Finally, in Chamber of Commerce v. Brown, the Court ruled that federal labor law prohibits state from regulating or limiting an employer's right to speak out about labor union organizing by their employees.

[Hat-tip: SCOTUSblog]

Wal-Mart lawsuit for reimbursement of medical costs illustrates important HR issue

Wal-Mart is at the center of a huge public relationship mess after it has asked a former employee to reimburse most of the $470,000 its health plan paid for medical costs following a traffic accident. CNN.com has the details:

[Debbie] Shank suffered severe brain damage after a traffic accident nearly eight years ago that robbed her of much of her short-term memory and left her in a wheelchair and living in a nursing home.

It was the beginning of a series of battles -- both personal and legal -- that loomed for Shank and her family. One of their biggest was with Wal-Mart's health plan.

Eight years ago, Shank was stocking shelves for the retail giant and signed up for Wal-Mart's health and benefits plan.

Two years after the accident, Shank and her husband, Jim, were awarded about $1 million in a lawsuit against the trucking company involved in the crash. After legal fees were paid, $417,000 was placed in a trust to pay for Debbie Shank's long-term care.

Wal-Mart had paid out about $470,000 for Shank's medical expenses and later sued for the same amount. However, the court ruled it can only recoup what is left in the family's trust.

The Shanks didn't notice in the fine print of Wal-Mart's health plan policy that the company has the right to recoup medical expenses if an employee collects damages in a lawsuit.

Just because your company is legally entitled to do something does not mean that it should. Take the FMLA as an example. Section 104(c)(2) of the FMLA provides that if an employee fails to return from an FMLA leave of absence for less than 30 days, and for a reason other than the continuation, recurrence, or onset of a serious health condition or some other circumstance beyond the employee's control, the employer may recover any premiums that it paid to maintain group health coverage for the employee during the period of FMLA leave.

Is it a good idea to exercise this right? Consider the new mom who decides after her FMLA leave expires to stay at home with her newborn. That decision will absolutely leave the employer in the lurch. The employer might want to do something to send a message to other employees not to take advantage of the FMLA by taking the time off and then choosing not to return. But consider: 1) mechanically, how do you go about exercising this right; and 2) what negative message does it send if you go to court to collect this money? Keep in mind, even if you have written authorization from an employee to make certain paycheck deductions for sums owed, FMLA leave is unpaid. By the end of an employee's leave, there almost certainly will not be any pay left from which you will be able to make a deduction.

Take a look at some of the comments posted on CNN.com to its story:

Although this is a very stupid thing for a company that makes Billions to do, this doesn't surprise me really. Our society has migrated away from action based on morals and ethics to one that is only concerned about the letter of the law.

One of the most unconscionable things I have ever seen. Another reason to hate Wal-Mart and to never spend another cent there... I'd rather pay double somewhere else than help support a company capable of something like this.

Hey Wal-Mart why don't you just send your attorneys to the lady's house and dump her out of her wheelchair???

Before you decide to seek reimbursement from a former employee, think long and hard about the effect on your current employees, and whether it's good for your business to have them bringing these types of resentments against your business into the workplace.

An update on this story is available.

Supreme Court permits ERISA claim based on 401(k) losses

In a significant decision, the Supreme Court has decided that ERISA permits an employee to sue the plan fiduciary (often the employer) because of a fiduciary breach that resulted in individual losses to a 401(k) plan. In our unstable economy, this decision is bad news for employers and a boon for the plaintiffs' bar, as employees have the green light to sue for losses to their retirement accounts, even if they directed the accounts.

As for analysis, I'll leave the heavy lifting to others:

• SCOTUS Wiki, which has a summary of the case.
• SCOTUS Blog, which has a copy of the opinion.
• Workplace Prof Blog, for some analsysis.
• John Phillips' Word on Employment Law, for some more analysis.

Health insurance audits poised as a trend for 2008

Does anyone remember the episode of the Drew Carey Show where Drew's dog needed a hip replacement? Drew couldn't afford it, so he claimed his dog as his gay husband to get coverage under his employer's medical plan. I was reminded of it Saturday morning when reading the front page of the Cleveland Plain Dealer's business section, which had an article on employer audits to verify health insurance dependents. The article reports that to control rising insurance costs, more and more companies are auditing their health plans and requiring employees to prove (via marriage and birth certificates) the status of claimed dependents. It cites Chrysler as an example, which found 20,000 ineligible dependents saving the company millions of dollars.

Maybe I'm missing something here, but isn't this fraud? Do we want employees working for us who willfully steal by claiming false dependents? Today's unqualified dependent could be tomorrow's embezzlement. Isn't this covered by our employee handbooks, which should have a policy that states that theft is grounds for immediate discharge? But, at the same time, can Chrysler continue to build cars if it has to terminate 20,000 employees? Could you survive if you had to immediately terminate a percentage of your workforce? You could pick one or several employees to set an example, but then you run the risk of being scrutinized under the discrimination laws for who you selected and did not select.

Maybe the best way to handle this problem is to write it directly into your employee handbook. Change your termination policy to clearly state that claiming an unqualified dependent for company benefits is considered theft and subject to discipline up to and including termination. That way, expectations are established on the front end, and employees will have less of reason to cry foul if they are terminated for this type of insurance fraud.

Mind your (mis)represenations - part 3

The Sixth Circuit has recently published two opinions on the issue of employer misrepresentations under ERISA and COBRA: Thurman v. Pfizer, Inc. (reported here) and Thomas v. Miller (reported here). The latter expressly recognizes a claim for equitable estoppel under COBRA. The former holds that ERISA does not preempt a state law misrepresentation claim when the misrepresentation relates to the benefits provided by ERISA-governed plan. Last week, the First Circuit (which covers federal courts in Maine, Massachusetts, New Hampshire, Rhode Island, and Puerto Rico), in Zipperer v. Raytheon Co., reached the opposite result, and held that ERISA does preempt state law claims of negligence, equitable estoppel, and negligent misrepresentation stemming from an erroneous estimate of retirement benefits that led to an employee's voluntary early retirement.

Factually, Zipperer is no different that Thurman. Both deal with an improper calculation of retirement benefits, albeit at different stages (acceptance of employment versus retirement). In both cases the employee took action in direct reliance upon that calculation. And yet, the cases reach the exact opposite conclusion. The Zipperer court certainly seems to get the better of the argument. ERISA preempts any state law causes of action that "relate to" an ERISA plan, because Congress has determined that employee benefit plans need uniform administration. As the magistrate judge concluded in the case below in Zipperer:

Allowing a cause of action to proceed for the negligence in making the representation or the negligence in maintaining and transferring the pertinent records amounts to an alternative enforcement mechanism to enforce (or estop the employer from denying) extra-contractual benefits. Such claims inevitably and directly conflict with the carefully chosen and carefully limited remedies provided under ERISA.... Regardless of the label of the state law claims, in essence they seek extracontractual benefits not authorized by the terms of the Plan. Such an end run around the carefully crafted benefits Raytheon chose to provide amounts to an attempt to authorize remedies beyond those provided by the Plan.

In other words, a claim that alleges misrepresentation about benefits owed under an ERISA plan must relate to that plan. While I understand the Sixth Circuit's concern about holding employers to their representations, the issue is not whether an employer can escape liability at all, but whether liability will be imposed under state law or ERISA.

Regardless of whether the claim must be brought under state law or ERISA, the lesson for employers does not change: companies must judiciously select their words when talking to employees about benefits or other terms and conditions of employment, and misrepresentations should be avoided at all costs.

Sixth Circuit holds that estoppel can bind a small employer to provide COBRA coverage

COBRA generally requires that group health plans sponsored by employers with 20 or more employees offer employees and their families the opportunity for a temporary extension of health coverage (called continuation coverage) at the employees' costs upon a job loss or other defined event. A small business should not assume, however, that merely because it has less than 20 employees that COBRA can never apply.

In Thomas v. Miller, the Sixth Circuit today held that an employer with fewer than 20 employees can be equitably estopped from arguing that it is not covered by COBRA. In Thomas, the employer unquestionably had less than 20 employees at all times during Thomas's employment. It did not offer Thomas COBRA coverage after her termination, even though it had previously such coverage to another employee. When she suffered several post-employment strokes, Thomas sued her former employer, claiming that it had failed to offer COBRA coverage to her, as it had done for another former employee. The Sixth Circuit recognized that estoppel can bind a small employer to provide COBRA coverage even if the employer falls outside of the threshold size. Thomas's claim ultimately failed because her employer had not made an representations to her:

In order for a party to employ equitable estoppel against another party, the following elements must be satisfied. First, the party to be estopped must have used “conduct or language amounting to a representation of material fact.” Second, that party must have been aware of the true facts. Third, that party must have had an intention that the representation be acted on, or have conducted himself in such a way toward the party asserting estoppel that the latter had a right to believe that the former’s conduct was so intended. Fourth, the party asserting estoppel must have been unaware of the true facts. Finally, the party asserting estoppel must have detrimentally and justifiably relied on the representation.

No one ever represented to Thomas that she would be eligible for COBRA coverage. She merely assumed that fact by eavesdropping in their small office: "Without more, inferences drawn by a party from overheard conversations about another employee do not amount to representations to or about the overhearing party." Also, because Thomas only overheard the conversations of others, the employer harbored no intent for her to rely upon any statements.

Although Thomas could not prove her right to COBRA coverage based on the specific facts of her case, Thomas v. Miller nevertheless underscores a point made in an earlier blog post: misrepresentations will come back to bite you, and companies must judiciously select their words when talking to employees about benefits.

A Cautionary Hiring Tale

In May 2004, Pfizer hired Dr. Dale Thurman as a veterinary pathologist. Thruman claims that prior to hiring, Pfizer's recruiting manager, Ruth Butts, orally told him that under the company's pension plan, he would be eligible for retirement at age 62 with a full pension benefit of $3,100 per month. Relying on that statement, Thurman quit his job in Ohio and moved to Michigan for the position at Pfizer. Shortly after he started working, Pfizer informed Thurman in writing that the pension calculation Butts gave him was incorrect, and the actual benefit amount would be $816 per month, a sizeable difference. And, like any disgruntled employee, he took his dispute to court, suing Pfizer for fraud and misreprentation. Pfizer defended the lawsuit, asserting that because the claims relate to its pension plan, the claims are exclusively governed by ERISA and the state law claims are preempted. The District Court agreed and dismissed the doctor's complaint.

In Thurman v. Pfizer, Inc., however, the Sixth Circuit disagreed, and in the proceed provided some cautionary language for employers in making representations during the hiring process. Critically, because Thurman sought damages based on what he lost by quitting his old job (i.e., lost of stock options, salary, benefits, and moving expenses) and not damages incurred by relying on Butts' representation (i.e., the higher pension benefit), the remedy sought was not plan-related and therefore the state law claims did not implicate ERISA. According to the Sixth Circuit, the claims were garden variety mispresentation claims that were too far attentuated from the Plan to invoke ERISA or its preemption provision:

What we have here is simply a case of a person who left his old employer based on promises made by his new employer. These promises could have concerned anything — for example, an increase in wages, more vacation days, or free parking. Here, these promises just so happened to concern retirement benefits. We see no reason to bind employers to some promises used to induce acceptance of an employment offer, but give them a "get out of jail free card" when their promises concern the scope of a plan governed by ERISA.

The Court then admonished employers to be more carful in what they tell applicants, and advised that a company will not be able to hide behind ERISA if a misreprentation made during the hiring process causes the applicant to rely to his or her detriment in accpeting the position:

We simply hold that employers who misrepresent certain benefits provided by ERISA-governed plans to prospective employees cannot later use preemption as an end-run around liability for fraudulent or innocent misrepresentations. If adhering to promises regarding ERISA-governed plans proves too cumbersome for employers, then during the recruitment process, those employers must simply be more careful before informing potential employees of the ERISA-governed benefits to which they might be entitled. This is a duty created by state law, with which we see little basis for federal law to interfere.