In response to the Affordable Care Act’s (ACA) 30-hour threshold for employee coverage, many employers, including retailers and restaurants, considered cutting employee hours to avoid offering health insurance. At that time, legal advisors cautioned that changing employee schedules to reduce the number of full-time employees and avoid ACA liability might violate the Employee Retirement Income Security Act (ERISA). Dave & Buster’s’ recent $7.4 million proposed settlement with a class of employees whose hours were cut should serve as a cautionary reminder to employers who have cut or who are considering cutting employee hours to avoid the ACA employer mandate. Employers should be aware that additional litigation is likely.
The ACA employer mandate requires employers who employ on average 50 or more full-time employees to either offer ACA-compliant health coverage to their full-time employees or pay penalties to the IRS. The ACA defines full-time employees as those who regularly work at least 30 hours per week. The employees in the Dave & Buster’s case alleged that their hours were reduced below the 30-hour threshold in order to cut costs associated with this mandate and, as a result, employees who previously worked full-time schedules lost both their full-time status and their health care coverage.
On December 7, 2018, a federal court judge tentatively approved settlement of a class action lawsuit filed by Dave & Buster’s employees who claimed their hours were cut in violation of ERISA. The case, Marin v. Dave & Busters, Inc. et al., filed in 2015, is the first to involve an ERISA claim against an employer for reducing an employee’s hours in order to avoid the ACA employer mandate. The employees alleged that Dave & Buster’s violated ERISA Section 510, which makes it unlawful to retaliate or discriminate against a participant for exercising any right to which he or she is entitled under the provisions of an employee benefit plan or for the purpose of interfering with the attainment of any right to which the participant may become entitled under the plan. Specifically, the employees claimed that Dave & Buster’s discriminated against them “for the purpose of interfering with the attainment” of their right to health coverage under the health plan because they were covered under the restaurant’s health insurance plan prior to the enactment of the ACA. The employees’ claim that managers told employees their hours would be cut to avoid the ACA weighed heavily in favor of the class.
Despite Dave & Buster’s efforts to dismiss the lawsuit, the court allowed the claims to continue, finding enough evidence to support the class’s claims that the restaurant acted with an unlawful purpose in cutting employee hours. Fast forward to 2018 and the litigation continued. On December 7, the court gave preliminary approval to Dave & Buster’s $7.4 million proposed settlement, which also bars Dave & Buster’s management from taking adverse employment actions against employees for the purpose of denying them health coverage. A hearing is scheduled for May 9, 2019, to determine if the settlement will be formally approved.
What should employers do now?
The size of the proposed settlement should dissuade employers from cutting employee hours to avoid ACA obligations. Although pending litigation throws the future of the ACA into question and raises uncertainty about enforcement, the ACA remains in effect for the time being and employers should assume that the IRS will continue to enforce the ACA. Employers are therefore advised to carefully review and document any changes to employee work schedules, ensure that reductions in employee hours are made for legitimate business purposes, and avoid making comments that indicate that employee scheduling is predicated on avoiding the ACA employer mandate. Employers who may have already made such changes in employee schedules should consult with legal counsel to consider any steps that should be taken to avoid liability.