Wisconsin Lawyer: May Companies Reduce Employee Hours to Avoid ObamaCare? ERISA Implications of the Affordable Care Act:

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    May Companies Reduce Employee Hours to Avoid ObamaCare? ERISA Implications of the Affordable Care Act

    Some employers may consider reducing employees’ hours to get around the “full-time” label and accompanying Affordable Care Act requirements. Such activity might prompt legal challenges from affected employees. Despite surface inconsistencies, the ACA and ERISA’s protection of employee benefits can be harmonized by employers seeking to avoid being covered by the ACA’s employer mandate.

    Nick J. Welle & William L. Brown

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    Clock and numbersBeginning in 2015, many large employers will be required, pursuant to the Patient Protection and Affordable Care Act (the ACA), to offer affordable, valuable health coverage to their full-time employees or risk paying a penalty.1 This “employer mandate” is among the most controversial of the ACA’s provisions. To avoid additional expenses, some employers might consider reducing employees’ hours to get around the “full-time” label and accompanying ACA requirements. Such activity could prompt legal challenges from affected employees.

    The Employee Retirement Income Security Act of 1974 (ERISA) is the primary federal law regulating employer-sponsored benefit plans. ERISA section 510 prohibits employers from interfering with the attainment of any benefits that a participating employee is entitled to, or may become entitled to, under a group plan.2

    Reading ERISA section 510 in conjunction with the ACA makes clear that employers potentially expose themselves to liability by reducing employee hours to avoid the employer mandate.


    Large employers are those that employ an average of at least 50 full-time employees or full-time equivalents.3 Full-time employees are those who work, on average (with respect to any month), at least 30 hours per week. 4 Full-time equivalents are calculated by dividing the total number of hours part-time employees work per month by 120.5

    Possible Employer Liability

    Section 510 prohibits an employer from discriminating against any employee for “exercising any right to which he [or she] is entitled” under an employer-sponsored plan or from “interfering with the attainment of any right to which such participant may become entitled under this plan.”6 The purpose of this section is to prevent employers “from taking actions that might cut off or interfere with a participant’s ability to collect present or future benefits.”7 This can include a future right to payment for medical expenses under an employer’s group health plan.8

    For example, this section protects employees on employer health plans who routinely incur significant medical expenses as a result of chronic health conditions. Section 510 prohibits employers from terminating these employees for the purpose of avoiding the payment of future medical expenses, or increased premiums, under a group plan.9

    Legal analysts are exploring whether section 510 prohibits employers from reducing employees to part-time status in an attempt to avoid the employer mandate. Some construe section 510, coupled with the ACA, to mean that employers cannot interfere with the future right to health care coverage for all full-time employees. If true, employers could face legal consequences if they reduce hours. At this point, however, there is no direct guidance from the courts on this issue.

    Certainly, section 510 protects employment relationships from disruptions designed to frustrate the vesting of future benefit rights.10 Typically these claims involve termination, but courts have held that similar conduct, such as reclassifying employees to independent-
    contractor status, can violate section 510.11

    Maintaining a Claim under ERISA Section 510

    To recover under section 510, a plaintiff must establish “(1) prohibited employer conduct (2) taken for the purpose of interfering (3) with the attainment of any right to which the employee may become entitled.”12 Courts have required the employee to demonstrate that the employer made a conscious decision to interfere with the employee’s attainment of benefits.13

    The employee’s level of proof differs throughout the federal judicial circuits. The majority of circuits, including the Seventh Circuit, require plaintiffs to show that the employer’s “specific intent” was to interfere with the attainment of benefits.14 Specific intent imposes a very high standard. It requires that the “defendant knowingly did an act that the law forbids, purposely intending to violate the law.”15 The Seventh Circuit explains it as an “illicit motivation” to “frustrate … [the] … enjoyment of benefit rights.”16

    Employer Defenses

    Fundamental Business Decision. The U.S. Supreme Court has held that an employer is insulated from liability by showing that it acted in furtherance of a “fundamental business decision.”17 An employer’s desire to control costs, generally, might shield an employer from liability.18 A company is not liable for a reduction in benefits incidental to a legitimate business decision.19

    Examples in the Seventh Circuit have included termination for documented performance deficiencies;20 a plant closing based on increasing foreign competition and decreasing product demand;21 termination applying the terms of a neutral, nondiscriminatory employment policy;22 and the sale of several unprofitable divisions of a business.23

    Plan Amendment. An employer’s amendment of a plan cannot be challenged under section 510 because plan amendments do not affect the participants’ employment status.24 For instance, an employer repeatedly amending the terms of a plan to preclude coverage for an employee immediately before the employee is eligible for benefits is not prohibited by section 510 because it is not an action taken against the employment situation itself.25 Employers are generally free under ERISA to adopt, modify, or terminate plans, so long as the amendment is made in accordance with formal procedures set forth in the plan.26

    Employment Relationship Intact. Some cases suggest that reducing hours might not be actionable conduct under section 510.27 Minor employment modifications, such as compensation reductions, might not be sufficient to warrant section 510 protection.28 The section itself refers only to “discharge, fine, suspend, expel, discipline, or discriminate.”29 Although some words provide room for interpretation, reduction in hours is not specifically referred to. The Fifth Circuit found no violation when an employer retained an employee so as to avoid payment of severance benefits, finding that there “must be some unscrupulous conduct or intentional act (such as harassment or nefarious inducement to stay) on the part of the employer.”30

    Procedural Issues and Remedies

    Exhausting Administrative Remedies. Circuits are split on whether plaintiffs must exhaust administrative remedies before bringing section 510 claims. Employees should know that exhaustion of administrative remedies may be required before filing suit.31 In the Seventh Circuit, exhaustion of administrative remedies is required absent exceptional circumstances.32

    Nick J. Wellecom Nw Kasieta Nick J. Welle, U.W. 2010 magna cum laude, is an attorney at Kasieta Legal Group LLC, Madison. His practice includes commercial, employment, insurance, ERISA, trade secret, and negligence matters. He is a published author and has presented on litigation, employment, and ERISA topics. He also is a volunteer and board member for several nonprofit organizations.

    William L. (Bill) BrownWilliam L. (Bill) Brown, U.W. 2011, is also with the firm. His practice includes civil litigation, business formation, personal injury, and education law. He is on the board of the State Bar’s Civil Rights and Individual Liberties Section. He also volunteers with Big Brothers Big Sisters of Dane County and is on the board of YMCA Camp MacLean in Burlington.

    Statutes of Limitation. The statute of limitation in an ERISA action is governed by the most analogous state law.33 Several circuits have held section 510 is comparable to state laws concerning employment discrimination or wrongful termination.34 In Wisconsin, the time limit could be as short as 300 days given the exhaustion requirement.35

    Venue. Federal courts have exclusive jurisdiction in most ERISA cases.36 Venue is appropriate where the plan is administered, the breach took place, or a defendant resides or may be found.37

    Burden of Proof. In situations in which no direct evidence is offered, courts apply a three-step burden-shifting analysis similar to that used in Title VII employment discrimination actions.38 First, the employee must establish a prima facie case by showing “(1) prohibited employer conduct (2) taken for the purpose of interfering (3) with the attainment of any right to which the [plaintiff] may become entitled.”39 In response, the employer may articulate a legitimate, nondiscriminatory reason for the action taken.40 After the employer presents its defense, the burden reverts to the employee to establish that the asserted reason is pretextual and the employer was actually motivated by the specific intent to avoid providing a benefit.41

    Damages. Generally, only equitable relief is available under section 510.42 This includes reinstatement, restitution, or injunctive relief.43 Although the complete effect is uncertain at this time, a recent U.S. Supreme Court decision, Cigna Corp. v. Amara, might have expanded equitable relief to include plan reformation and monetary damages.44 Historically, however, monetary damages, including back pay and compensatory damages, were not available.45 Courts may award reasonable attorney fees to the prevailing party.46

    Advice to Employees

    Section 510 claims are unlikely to result in a remedy for employees who are placed on part-time status. Attorneys representing employees should, nonetheless, assess the possibility of section 510 liability and advise clients accordingly.

    Employees who suspect their employers are preparing to reduce their hours or modify plans to avoid ACA compliance should carefully document key events. Attorneys for employees must be prepared to refute alleged legitimate business decisions. Counsel should advise clients to try to obtain the employer’s purported reasons for relevant decisions in writing. Employees should begin to gather, consistent with workplace rules, evidence contradicting the employer’s assertions.

    For example, employees should attempt to obtain historical and current information concerning staffing costs, benefit costs, company profits, the number of part-time and full-time employees, the company’s position on market trends, and the like. This information might assist in negating employer claims that staff reductions were financial imperatives. In case the employer alleges demotion pursuant to workplace policy, employees should also gather all applicable employment contracts and manuals.

    Attorneys representing employees face serious challenges with these claims. The law is presently unclear and there is no certainty of recovery. It is likely that appellate courts will clarify rights in the first generation of section 510 ACA-related claims. Governmental agencies, such as the U.S. Department of Labor, might issue technical guidance to clarify this murky area of the law. Attorneys should be aware that not much is known presently about the likelihood of success, and the law could change drastically moving forward.

    Implementation of the employer mandate likely will be stressful for employers and employees. Prudent employees can use this occasion to learn more about their respective plans and the protections available. Employees have a right to view plan documents and should exercise this right.

    The prospect of section 510 providing substantial protections to employees is bleak, but employees should be wary of pundits predicting national reduction of hours. It is far too early to accurately predict the effects of the employer mandate.

    Advice to Employers

    Attorneys representing employers should advise them that they have wide discretion to modify their plans. Employers typically cannot be held liable under section 510 for reduced or eliminated benefits resulting from proper amendment of plans. Section 510 is triggered only by adverse changes in employment circumstances. Attorneys should counsel employers to consider plan amendments in anticipation of the ACA mandate.

    If an employer modifies a plan document, the drafter should consider avoiding inclusion of ACA language in the revised plan. For instance, if an employer modifies a plan to offer coverage only to those employees working 30 hours or more per week, and subsequently reduces employees’ hours to avoid coverage, the employer might increase exposure to section 510 liability. Instead, plan drafters could limit coverage to specifically designated positions. These positions would be those that the employer expects to be full time. This makes an employee’s job title, not the employee’s hours of service, the qualifying requirement.

    Nothing in the ACA prohibits employers from making staffing decisions based on legitimate business interests. If an employer intends to make such a change, counsel should advise the employer to document reasons for doing so. The burden on the employee is quite high; thus, an employer might be able to avoid litigation by simply documenting the business justification for the decision.

    Attorneys should counsel employers that communications may be discoverable. Employee-plaintiffs in ERISA actions can obtain internal and external email correspondence concerning employer motives for staff reductions. Employers should treat every email and letter as an eventual exhibit. Employers should avoid public statements on staff reductions until a firm position is established.

    Employers might avoid liability by maintaining all current employee hours while hiring part-time employees in the future. With this approach, new employees have no expectation of coverage, eliminating section 510 liability.

    If an employer believes that a switch to part-time employees is necessary, despite these liability concerns, it is prudent to act promptly. The employer mandate will not be implemented until 2015. The timing of the decision can be used as evidence. Employers who act soon on restructuring plans will have several months of “average-hour” data as validation for part-time classifications.


    Section 510 claims stemming from the ACA have not yet come before the courts. The employer mandate has been delayed until 2015, with further delays for those employers with fewer than 100 full-time employees. After that date,47 there likely will be litigation involving employer reductions of employee hours allegedly to avoid compliance with the ACA.

    There are few answers at this point. The courts could approach this complicated issue several ways. Given current law, however, it is likely that employees will have a difficult time successfully asserting section 510 claims based on reductions of hours. The burden of proof is high: employers need only point to a fundamental business reason for their decisions. In our post-recession economy, finding such a reason will not be difficult for many businesses.

    At this early stage, employers and employees alike should be aware of the employer mandate and possible ERISA implications.


    1 ACA §§ 1511-1515; I.R.C. § 4980H.

    2 29 U.S.C. § 1140.

    3 I.R.C. § 4980H; ACA § 1513.

    4 I.R.C. § 4980H; ACA § 1513.

    5 I.R.C. § 4980H; ACA § 1513.

    6 29 U.S.C. § 1140.

    7 Tolle v. Carroll Touch Inc., 977 F.2d 1129, 1134 (7th Cir. 1992).

    8 See generally Kross v. Western Elec. Co., 701 F.2d 1238 (7th Cir. 1982).

    9 Tolle, 977 F.2d at 1139.

    10 Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 143 (1990).

    11 Seaman v. Arvida Realty Sales, 985 F.2d 543, 547 (11th Cir. 1993); Gitlitz v. Compagnie Nationale Air Fr., 129 F.3d 554, 559 (11th Cir. 1997).

    12 Gavalik v. Continental Can Co., 812 F.2d 834, 852 (3d Cir. 1987).

    13 Turner v. Schering-Plough Corp., 901 F.2d 335, 347 (3d Cir. 1990).

    14 See, e.g., Teumer v. General Motors Corp., 34 F.3d 542, 550 (7th Cir. 1994).

    15 Asprino v. Independent Blue Cross/Pennsylvania Blue Shield, No. 96-7788, 1997 WL 634522, at * 5 (E.D. Pa. Oct. 16, 1997).

    16 Teumer, 34 F.3d at 550.

    17 See Inter-Modal Rail Emps. Ass’n v. Topeka & Santa Fe Ry., 520 U.S. 510 (1997).

    18 Id.

    19 See Clark v. Coats & Clark Inc., 990 F.2d 1217, 1223 (11th Cir. 1993).

    20 Dishinger v. Sun Process Converting, 870 F. Supp. 814, 818 (N.D. Ill. 1994).

    21 Deeming v. American Standard Inc., 905 F.2d 1124, 1127 (7th Cir. 1990).

    22 Honegger v. Wickes Furniture Co., 1995 U.S. Dist. LEXIS 15620, at * 14 (N.D. Ill. 1995).

    23 Feinberg v. Rand McNally & Co. Supplemental Pension Plan, 2009 U.S. Dist. LEXIS 67348, at * 12 (N.D. Ill. 2009) (citing Blaw Knox Retirement Income Plan v. White Consol. Indus., 998 F.2d 1185 (3d Cir. 1993)).

    24 Haberern v. Kaupp Vascular Surgeons Ltd. Defined Benefit Pension Plan, 24 F.3d 1491, 1503 (3d Cir. 1994).

    25 McGrath v. Auto-Body North Shore Inc., 7 F.3d 665, 668-69 (7th Cir. 1993).

    26 Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995).

    27 Feret v. CoreStates Fin. Corp., No. 97-6759, 1998 WL 426560, at * 3 (E.D. Pa. July 27, 1998); Stout v. Bethlehem Steel Corp., 957 F. Supp. 673, 694 (E.D. Pa. 1997).

    28 See generally Haberern, 24 F.3d 1491.

    29 29 U.S.C. § 1140.

    30 Bodine v. Emplrs. Cas. Co., 352 F.3d 245, 250 (5th Cir. 2003).

    31 Coomer v. Bethesda Hosp. Inc., 370 F.3d 499, 505 (6th Cir. 2004); Chailland v. Brown & Root Inc., 45 F.3d 947, 950–51 (5th Cir. 1995).

    32 Zhou v. Guardian Life Ins. Co. of Am., 295 F.3d 677, 679 (7th Cir. 2002).

    33 See, e.g., Tolle, 977 F.2d at 1137.

    34 Id. at 1138.

    35 Wis. Stat. § 111.39(1).

    36 29 U.S.C. § 1132(e)(1).

    37 29 U.S.C. § 1132(e)(2).

    38 Clark, 990 F.2d at 1224.

    39 Gavalik, 812 F.2d at 852.

    40 Id. at 853.

    41 Id.

    42 Mertens v. Hewitt Assocs., 508 U.S. 248, 255 (1993); Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 209-10 (2002).

    43 Mertens, 508 U.S. at 255; Knudson, 534U.S. at 209-10; Lorillard v. Pons, 434 U.S. 575, 583 n.11 (1978).

    44 Cigna Corp. v. Amara, 131 S. Ct. 1866, 1879-81 (2011).

    45 See, e.g., Mertens, 508 U.S. at 255-56; Eichorn v. AT&T, 484 F.3d 644, 656 (3d. Cir. 2007).

    46 29 U.S.C. § 1132(g)(1).

    47 This article was last updated on April 1, 2014. There likely will be further delays or modifications to the law in the future.

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