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WASHINGTON-The Supreme Court is opening the door to lawsuits against employers by fired or laid-off employees who charge that their dismissal was motivated to prevent them from receiving health care and other employee benefits.
The justices ruled that a section in the Employee Retirement Income Security Act that bars employers from discharging or discriminating against employees to prevent them from receiving benefits applies to all types of employee benefit plans.
The unanimous decision overturned a 9th U.S. Circuit Court of Appeals ruling that held the intent of Section 510 of ERISA was only limited to pension plans in which participant's benefits vest after a certain number of years of service.
"Had Congress intended to confine Section 510's protection to 'vested' rights, it could have easily substituted the term 'pension plan' for 'plan' or the term 'non-forfeitable' right for 'any right.' But Section 510 draws no distinction between those rights that 'vest' under ERISA and those that do not," wrote Justice Sandra Day O'Connor for the Supreme Court's reversal.
The decision involved employees of a railway unit who lost their jobs when their parent company terminated a labor agreement and opened up to competitive bidding the jobs the employees performed. The company that won the bidding offered lower pension and welfare benefits to workers.
The Supreme Court decision now returns the case to a lower court to determine if the company's action was illegal in light of the court's opinion.
Benefit experts agree that the high court's decision clarifies thescope of Section 510. The provision has been cited by federal prosecutors and plaintiffs' attorneys in suits charging that employers had fired employees just before the workers would have vested in their pension benefits.
In the wake of the Supreme Court decision, suits charging dismissal or discrimination of employees to prevent them from obtaining benefits would not be "knocked out of the box" just because the actions dealt with benefits that do not vest, noted Fred Rumack, director of taxes and legal services for Buck Consultants Inc. in New York.
"The court is clearly saying that Section 510 applies to welfare plans," adds Pam Scott, a principal with The Kwasha Lipton Group in Fort Lee, N.J.
While the Supreme Court decision clarifies that Section 510's reach goes beyond pension plans, less clear is the type of employer actions that would violate the law.
"Will employers lose every case" where they take actions in which employees lose benefits? asked Seth Tievsky, a partner with Ernst & Young L.L.P. in Washington. "Absolutely not. But we would be kidding ourselves if we didn't think that this decision isn't going to trigger a lot more litigation," he added.
Indeed, Mr. Tievsky predicts that a consequence of the decision will be suits against employers that have aggressively moved to outsource traditional corporate functions.
"Outsourcing could be ripe for litigation where a primary motivation was benefit cost savings," Mr. Tievsky added.
A critical defense-one in fact suggested by the Supreme Court-will be employers' motivations in decisions that result in employees losing benefits.
The protection of Section 510, the court suggests, would not apply when there are "fundamental business decisions" for corporate actions that resulted in employees losing their jobs and their rights to benefits.
For example, under this fundamental business test, an employer could defend its decision to outsource certain jobs on the grounds that it wanted to concentrate on its core business, rather than those job functions, said Henry Saveth, a principal at A. Foster Higgins & Co. Inc. in New York.
"The key question will be: 'Is a change being made to circumvent or prevent the promise of benefits, or is it being made for valid business reasons?" Mr. Saveth said.
"Courts will look at the purpose of the transaction and decide whether the purpose was to interfere with benefits or whether there was a legitimate business purpose" for the change, concurred Bill Boies, a partner with the law firm of McDermott, Will & Emery in Chicago.
Plaintiffs alleging violations of ERISA, though, are only entitled to recover the amount of benefits lost, not compensatory or punitive damages.
While the decision broadens the scope of Section 510, the ruling in no way prevents employers from reducing or terminating health care and other benefit plans as long as companies follow plan procedures.
Congress' decision in not setting vesting standards for health and other welfare plans was no accident, the Supreme Court noted.
Giving employers the flexibility to amend or terminate non-pension plans "encourages them to offer more generous benefits at the outset since they are free to reduce benefits should economic conditions sour," the Supreme Court said.
The case involved former employees of Santa Fe Terminal Services Inc., a subsidiary of The Atchison, Topeka & Santa Fe Railway Co. that was responsible for transferring cargo between rail cars and trucks at ATSF's Hobart Yard in Los Angeles.
In 1990, ATSF opened the Hobart Yard work to competitive bidding. In-Terminal Services Inc. was the successful bidder, and Santa Fe employees who declined to continue working with ITS, which provided smaller pension and welfare benefits than ATSF, were let go.
The discharged employees sued the three companies and charged that the transfer of work from STSF to In-Terminal Services was done with the express purpose of denying them pension and welfare benefits, to which they were entitled under a collective bargaining agreement.
The 9th Circuit in San Francisco said Section 510 of ERISA gave the dismissed employees the right to sue only for pension benefits, but not for other employee benefits.
Inter-Modal Rail Employees Assn. et al. vs. Atchison, Topeka and Santa Fe Railway Co. et al., U.S. Supreme Court, No. 96-491.