Cutting worker hours to avoid ACA penalties may violate ERISA

Cutting worker hours to avoid ACA penalties may violate ERISA

The District Court for the Southern District of New York recently turned down a motion to dismiss from the national restaurant chain Dave & Buster’s in a case where a group of employees sued the company for allegedly cutting employee hours to less than 30 hours/week to avoid offering health insurance under the Affordable Care Act.

In the class action, the named plaintiff, Dave & Buster’s employee Maria De Lourdes Parra Marin, claimed her employer announced that compliance with the ACA would require a cut in hours to reduce the number of full-time employees from 100 to 40 for the purpose of avoiding $2 million in additional health insurance costs. After the employer mandate took effect, she alleges her hours were in fact cut, she lost full-time status, and her insurance was cancelled.

Employer Mandate

The employer mandate under the ACA requires employers who employ 50 or more “full-time equivalents” to offer affordable minimum-value coverage to full-time employees and their dependents or pay a penalty if any of their full-time employees (working over 30 hours/week) receive federal premium assistance to purchase individual coverage in the health insurance marketplace.

While an employer who reduces employee hours would not violate any specific provision of the ACA, Dave & Buster’s employees are pursuing their claim under ERISA.

“Under Section 510 of ERISA, an employer cannot intentionally interfere with an employee’s right to benefits,” says Lorie Maring an attorney with the Atlanta office of Fisher & Phillips LLP. “What the plaintiffs are claiming is that by reducing their hours, the company was intentionally interfering with their right to receive health insurance.”

“Under Section 510 of ERISA, an employer cannot intentionally interfere with an employee’s right to benefits.”

Maring agrees that basing a lawsuit for reduced hours on Section 510 is a novel approach. However, she says if the employees are successful, they will be entitled to equitable relief under Section 502 which could mean payment of the value of healthcare benefits they would have received as full-time employees plus other monetary relief.

“Lawyers and advisers have been telling companies that it’s one thing to make hiring decisions to bring in part-time employees, but to do wide-scale transitions of your workforce from full- to part-time is potentially problematic,” Maring says.

“One of the key issues is that Dave & Buster’s employees were already covered under a health insurance policy so when their hours were reduced they also lost their medical coverage,” she notes. “If they weren’t already covered under a health plan they might not have a section 510 claim under ERISA because they would be arguing a right to some future benefit they are not already entitled to.”

Maring says that few of her clients, if any, have been reducing employee hours to get around the employer mandate. “It may make sense in the hospitality or restaurant industry where there is considerable turnover, but otherwise as a business model for most organizations it’s just not worth trying to manage that many part-time employees,” she says.

Nevertheless, she acknowledges that everybody is watching the Dave & Buster’s case with a great deal of trepidation. “I’d be surprised if this case isn’t settled at some stage, but if it is litigated on the merits, with various appeals, it could be several years until we see a final decision,” she says.

How can companies stay out of trouble?

Adam C. Solander and Elizabeth Bradley, associates in the Washington law firm Epstein Becker Green PC, writing a recent article on Law360, recommend that employers centralize their communications around benefits issues so the organization has a single consistent voice. “Creating a centralized communications plan includes training at all levels of management on the unified message about workforce management to avoid the release of any conflicting statements to the media,” they say.

Maring, meanwhile, tells her employer-clients to be very careful how they communicate with employees and how they present any changes in hours or position.