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Gerrymandering Hours To Avoid The Obamacare Mandate

The Connecticut Law Tribune

July 19, 2013

Employers can breathe easier; the Obama Administration announced on July 2 that the penalty and reporting provisions of the employer shared responsibility portion of the Affordable Care Act (ACA) will be delayed one year.

The employer shared responsibility provisions were slated to take effect on January 1, 2014, but are delayed now until January 1, 2015. The announced reason for the delay is to provide businesses a “transition year” and to allow time to simplify the requirements; it also gives extra time for the administration to implement these provisions and ensure that this transition is successful. This follows the announcement on April 1, 2013, of a delay in the implementation of the Small Business Health Options Program (SHOP) and may indicate that other provisions of ACA will also be delayed (though no other provisions like the individual mandate have yet been delayed). There are some concerns that President Barack Obama does not have the power to change the implementation date since ACA is quite clear on the implementation date — but it remains to be seen if anyone will challenge this.

An obvious upside of this delay is that employers have more time to consult their health insurers, legal teams, and human resources professionals to prepare for the mandate (all of whom will also have time to become better-versed in the legislation). But an interesting downside is that individuals will have an extra year to learn how to use the exchanges and this could cost employers as the penalties are based, in part, on employee use of the exchanges.

During this extra year, employers may try to restructure/reduce their workforces such that they have fewer full-time employees working to whom they must provide health care insurance. Such strategies must be approached with great caution.

We know that “large employers,” meaning those employing 50 or more full-time equivalent employees, must provide what the federal government has decided is affordable and quality health insurance to full-time workers or face penalties. There are two key issues here: Does the employer have 50 full-time equivalents? And do these employees average at least 30 hours of service per week? Some employers are planning to reduce their workforce below 50 full-time equivalents or reduce the hours below 30 and this is where the problem arises.

Gerrymandering these numbers may run afoul of a seldom-used provision of the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that regulates employee benefit plans, including health plans. While ERISA does not require employers to offer certain benefits nor set the level of benefits, ERISA does not allow employees to make some employment decision, such as layoffs or reducing hours, for the specific purpose of preventing an employee from either getting those benefits in the first place or maintaining them.

Under Section 510 of ERISA, 29 U.S.C. § 1140, “[i]t shall be 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 . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan . . .”

The key for an employee to establish a violation under this section is the employer’s “specific intent” to interfere with employee benefit rights.

There have been many cases where employers have violated this section by maintaining internal or secret policies which prevent employees from becoming eligible for benefits just as they approach the threshold for entitlement, e.g., the employee is about to vest in a pension plan or other benefit. In one case, an employer maintained a policy where employees were laid-off in accordance with a plan developed by the company for the specific purpose of avoiding its liability for pension benefits.

In McLendon v. Continental Can Co., 908 F.2d 1171 (3d Cir. 1990), the employer had a liability avoidance program which tracked employees and recommended lay-offs for employees just as they approached pension eligibility. The scheme was an elaborate system, including a computer tracking system, that set forth the details of how to eliminate employees about to accrue the benefit while sheltering employees whose benefits had already accrued. The court found that the avoidance of pension liability was the motivating force in the employer’s decisions and therefore was unlawful.

So how do ERISA and this case relate to Obamacare? Here is the rub. Employers may mistakenly think they could avoid liability by doing any of the following: decide internally that no employees will be working 30 or more hours each week; monitor the hours of all employees and change the scheduling parameters to keep employees under 30 hours a week; hire temporary workers; change all full-time employees to part-time; change assignments; not award additional hours; send employees home as they approach 30 hours per week, etc. These employers may be violating ERISA by making decisions that are based solely on avoidance of benefits liability and not on a legitimate reason like decrease in customer demand. Since the Affordable Care Act and all of the attendant regulations are brand new, we do not know how the Department of Labor or the courts will respond to challenges under ERISA.

So what kind of liability do employer’s face for using “secret policies?” Although Section 510 of ERISA does not directly provide any penalties for its violation, Section 502(a)(3) of ERISA provides that either the Department of Labor or affected employees or beneficiaries can bring actions to enforce it. Consequently, employers should be careful not to engage in activities that would provide the basis for a lawsuit which could grow into a class action.

Of course, nothing in ERISA or the health care law prohibits an employer from hiring a part-time worker, where it is clearly understood that his or her employment is for less than 30 hours a week. The danger arises from the manipulation of employees’ hours.

With this warning in mind, be sure to carefully review policies relevant to these new obligations, especially if there is any hint of employer manipulation which will result in employees not qualifying for benefits under ACA. Good luck and continue to monitor the coming changes; there is still a lot of time for the government to change its mind on how this law will be implemented.