Limiting Employees’ Hours to Dodge the ACA’s Employer Mandate Could Violate ERISA

by Cozen O'Connor

In a move that brings many employers’ fears closer to fruition, a federal district court recently ruled that an employee may proceed with a class action lawsuit alleging that her employer violated the Employee Retirement Income Security Act (ERISA) when it reduced employees’ hours to avoid incurring increased costs under the Affordable Care Act (ACA). The case, styled Marin v. Dave & Busters, Inc. et al., could be a watershed one, and employers would be wise to watch it closely.

Underlying the case is the “employer mandate” set out in the ACA, which requires that all businesses with 50 or more full-time equivalent (FTE) employees provide health insurance to at least 95 percent of their full-time employees or pay a monthly fee. In June 2013, amusement chain Dave & Busters reduced the number of FTE employees at its Times Square store by reducing the number of hours employees were scheduled to work, according to the Marin complaint. This was done in an effort to reduce the costs the company would incur under the ACA’s employer mandate beginning in 2015, the plaintiff alleged. Significantly, before the reduction, the plaintiff had been covered under the company’s health insurance plan, which qualifies as an employee welfare benefit plan under ERISA.

The plaintiff alleged that in reducing employees’ hours in this way, Dave & Busters violated Section 510 of ERISA, which makes it “unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan …” The plaintiff’s theory — advanced on behalf of a proposed class estimated to comprise 10,000 members — is that the curtailment of her working hours constituted discrimination against her “for the purpose of interfering with the attainment” of her right to health coverage under the employee benefit plan.

In support of this theory, the plaintiff alleged that Dave & Busters specifically intended to interfere with her right to health insurance. The complaint states that the company’s general manager and assistant general manager claimed during meetings that the ACA would cost the company 2 million dollars and that it was reducing the number of full-time employees in an effort to reduce those costs. The complaint further alleges that this plan was executed on a nationwide scale, resulting in employees’ losing their full-time status, suffering reduced pay, and losing their eligibility for medical and vision benefits.

Dave and Busters moved to dismiss the complaint, arguing that:

  1. Because neither ERISA nor the ACA gives an employee the right to ACA-compliant health coverage, the plaintiff could not meet her burden of showing that the company took any action “for the purpose of interfering with the attainment of any statutory right”;
  2. Plaintiff failed to state a claim to the extent that she sought “to impose liability based on an alleged deprivation of coverage under an ACA-compliant health plan that did not exist at the time of the challenged reduction”;
  3. The complaint alleges only that the company reduced employees’ hours in 2013 to avoid incurring expenses under the ACA’s employer mandate beginning in 2015, with no allegation that the company did so for the purpose of depriving employees of then-existing benefits. Therefore, Dave & Busters argued, the complaint fails to plead a key element of a claim under Section 510 — specific intent to interfere with existing benefits; and
  4. The complaint fails as a matter of law for want of alleged facts “showing that plaintiff (or any putative class member) was ‘targeted’ for adverse employment action based on any ERISA-related characteristic distinguishing her from employees whose hours were not reduced.”

After full briefing, oral argument, and supplemental briefing, the U.S. District Court for the Southern District of New York focused on the argument that an employee is not “entitled” to benefits not yet accrued, and that a “plaintiff must show more than ‘lost opportunity to accrue additional benefits’ to sustain a [Section] 510 claim.” The problem with that argument, the court said, is that the complaint does not merely allege lost opportunity to attain benefits in the future. Rather, “[t]he complaint, fairly read, alleges that Defendants intentionally interfered with [Plaintiff’s] current health care coverage, motivated by Defendants’ concern about future costs that would become associated with the plant’s health care coverage.” The court found this sufficient to overcome the motion to dismiss.

The Take-Away for Employers

This case should serve as a reminder to employers that, absent any concrete legislative or judicial guidance, they must engage in a careful analysis to determine which of the following options makes the most sense given their particular circumstances:

  1. Follow the employer mandate, and accept the associated costs.
  2. Reject the mandate, and accept the penalty fees. While the financial exposure attendant to this option may be significant, it is predictable and finite.
  3. Adjust their employee welfare benefit plans in an attempt to eliminate any contention that employees are entitled to health insurance thereunder. While this option could throw up a road block against claims like the one presented in Marin, it carries its own set of uncertainties.
  4. Adjust their staffing approach to reduce the number of FTE employees covered by the mandate. As Marin illustrates, though, this option carries potentially significant litigation risk.

For many employers, these options read like a menu of spoiled food. Unfortunately, for the time being, employers must balance the amount of expense they are willing to incur against the degree of risk they are willing to bear, and make a choice they can stomach. Moreover, if the last option is the preferred course of action, it is important to instruct management that publicly blaming the reduction in hours on the ACA or “Obamacare” could be used against the employer in an eventual lawsuit under ERISA.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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