How the ACA, ERISA §510, and FLSA §18C Interact

How the Affordable Care Act, ERISA Section 510, and FLSA Section 18C Interact
 

The final shared responsibility regulations made some small (but critical changes) that could negatively impact employers that do not get proper advice regarding their plan design. An Affordable Care Act attorney should be consulted to create a solution that best fits your workforce. Please contact me at rmoulder@moulderlaw.com for more details.

The Affordable Care Act (ACA) has attracted legal challenges from its inception.  The ACA will inevitably produce two more legal challenges, under ERISA §510 and §18C of the Fair Labor Standards Act of 1938 (FLSA). Among other things, ERISA §510 makes it unlawful for a person (a term which encompasses corporations and partnerships) to interfere with the attainment of any right a participant may become entitled to under a plan.  Some have speculated ERISA §510 prevents a common strategy many companies are exploring to minimize the cost of the Play or Pay Mandate.

The strategy is simple.  The Play or Pay Mandate only applies to full-time employees (those employees who average 30 or more hours of service per week).  If an employee accumulates less than 30 hours of service per week, the employer does not have to worry about the employee for the Play or Pay Mandate.  However, if the employee works more than 30 hours a week, the employer must offer the employee minimum essential coverage or pay a $2,000 penalty for each full-time employee.  Many employers have discussed a strategy of limiting a certain segment of their workforce’s hours of service to less than 30 hours per week so that segment of employees will not count for purposes of the Play or Pay Mandate.  The hotly debated issue is whether this strategy violates ERISA §510.

Although the topic has garnered far less attention FLSA §18C, which was added by the ACA, was also adopted to protect employees.  This could pose more problems to an employer implementing the strategy discussed in the paragraph above.  Among other things, §18C prohibits an employer from discriminating against an employee with respect to his/her compensation, terms, conditions or other privileges of employment because the employee received a premium tax credit.

The rest of the paper explores these issues.  For simplicity the paper first discusses whether an ERISA §510 claim would be viable against an employer that does not offer a health plan to any employees.  The paper then examines whether an ERISA §510 claim would be viable against an employer that offers coverage to some, but not all employees.  The paper concludes by discussing the issues FLSA §18C presents for an employer regardless of whether the employer is sponsoring a plan.

The Employer with No Plan

The ACA does not require an employer to offer full-time employees health coverage.  Instead, it gives an employer the option of offering its full-time employees minimum essential coverage or risk paying a penalty.  An employer that adopts no plan is choosing to risk paying the penalty associated with the Play or Pay Mandate.  If an employer plans to limit a segment of its workforce’s hours of service to less than 30 hours per week, the strategy would not violate ERISA §510.  ERISA §510 only protects a participant that is in a plan.  With an employer sponsoring no plan, ERISA §510 would offer no protection to any employee.

The Employer with a Plan

As mentioned above, the ACA does not require an employer to offer full-time employees health coverage.  Instead, it gives an employer the option of offering its full-time employees minimum essential coverage or risk paying a penalty.  Similarly, ERISA does not require an employer to offer any employee health coverage and gives an employer the broad power to adopt, modify and terminate a health plan at any time and for any reason (see Curtis-Wright Corp. v. Schoonejongen, 514 U.S. 73 (1995)).  Importantly, when an employer makes a fundamental business decision and adopts, amends or terminates a health plan, such action is not barred by ERISA §510 (see Ingersoll-Rand Co. v. McClendon 498 U.S. 133 (1990)).

With these principles established, it appears even after the ACA, an employer is free to select which employees it covers, if any, in a health plan it adopts.  Additionally, if there is an existing plan, an employer is free to amend the plan as part of a fundamental business decision.  However, if a plan does not define a participant properly, an ERISA §510 is more likely to be actionable.

One danger is an employer will define a participant in its plan as a full-time employee as defined by the ACA.  On its face this strategy appears sound as the employer will offer all of its full-time employees coverage.  The problem with this strategy is it leaves the employer more susceptible to an ERISA §510 claim.  If a participant in the plan is defined solely based on an employee’s hours of service, the reduction of any employee’s hours of service below the participant threshold would be in direct conflict with the ERISA §510 language of an employer being unable to interfere with the attainment of any right under a plan.

To protect against a possible ERISA §510 claim an employer should define a participant in the plan not based on an employee’s hours of service, but rather on an employee’s job title.  By making an employee’s job title a qualifying requirement to participate in the health plan, the employee’s eligibility for coverage will not be predicated on the employee’s hours of service.  Thus, an employer reducing an employee’s hours of service will not in any way be interfering with the attainment of any right under the plan.

An employer must make sure the employees that do not have a job title covered by the plan, do not accumulate the requisite hours of service to be considered full-time employees under the ACA.  If an employer does not follow this critical step, the employer could be in the dreadful position of failing the 95 percent rule and paying a portion of the premiums for part of its workforce while still paying a penalty for the Play or Pay Mandate.

Additionally, the employer must make sure it is in compliance with the 90-day waiting period limitation.  An employer needs to be careful about how the employer selects the job titles that will be covered by the plan to ensure compliance with the 90-day waiting period limitation.  An employer should not have a system where employees are promoted to a position covered by the health plan after working X number of hours, days or years as this could violate the 90-day waiting period limitation.

FLSA §18C

If an employer properly follows the procedures set forth above, an employer will place itself in a better position for a potential ERISA §510 claim.  However, an employer restricting an employee’s hours of service to less than 30 hours per week also has to consider whether the reduction in hours strategy violates FLSA §18C.  The first issue would be whether a reduction in an employee’s hours is protected by the phrase “compensation, terms, conditions or other privileges of employment.”

The similar phrase “compensation, terms, conditions, or privileges of employment” is used in Title VII of the Civil Rights Act of 1964 and has been interpreted broadly by the courts.  However, the issue of limiting a segment of the workforce’s hours of service has never been brought before any court.  In Hinshon, a case interpreting Title VII, the Supreme Court explained that the contractual relationship of employment defined the “terms, conditions, or privileges of employment”  (See Hinshon v. King & Spaulding 467 U.S. 69 (1984)). Furthermore, the Court took an expansive view of a contractual relationship explaining:

An employer may provide its employees with many benefits that it is under no obligation to furnish by any express or implied contract. Such a benefit, though not a contractual right of employment, may qualify as a “privilege” of employment under Title VII. A benefit that is part and parcel of the employment relationship may not be doled out in a discriminatory fashion, even if the employer would be free under the employment contract simply not to provide the benefit at all.

In light of Hinshon, an employee who will not be covered by the employer’s plan should have an employment contract that explicitly states that the employee’s hours of service will be restricted to less than 30 hours per week (if an employee is electing to use a safe harbor measurement method, the language in the contract will need to be amended to comply with those rules) and that the employee is an at-will employee.  What is still troubling is the language in Hinshon that says an employer may be restricted from taking action in a manner that is otherwise permissible.  By having an employment contract with these provisions the employer will be in the best position as it relates to the Hinshon decision.

The Supreme Court further explained in Meritor, another case interpreting Title VII, that the phrase “terms, conditions, or privileges of employment” was intended to be viewed expansively to protect against discrimination  (see Meritor Savings Bank v. Vinson 477 U.S. 57 (1986)).  The danger for an employer is courts may take an expansive view of the almost identical phrase “compensation, terms, conditions or other privileges of employment” used by FLSA §18C.  If a court does take an expansive view, the phrase could be interpreted to protect an employee from having their hours of service reduced.  If that is the case, the employer would need to be prepared to defend itself from a potential discrimination suit.

FLSA §18C applies the procedures and burdens of proof set forth in §2087(b) of title 15 of the United States Code.  Accordingly, the employee would begin with the burden of proof.  The employee would have to demonstrate that the employee receiving a premium tax credit was a contributing factor in the employer’s decision to reduce the employee’s hours of service.  If the employee can make a prima facie case, the employer has to demonstrate by clear and convincing evidence that the employer would have reduced the employee’s hours of service regardless of whether the employee received a premium tax credit.  The problem for an employee making such a claim is an employer will never know which specific employee is receiving a premium tax credit so even making a prima facie case will be challenging for an employee.

Beginning in 2014, PPACA §1411(e)(4)(B)(iii) requires the Secretary to notify an employer of each employee who is eligible for a premium tax credit.  While Notice 2013-45 delayed the Play or Pay Mandate until 2015, the premium tax credit program will begin as scheduled in 2014.  This means an employer will be receiving notices of employees eligible for the government’s premium tax credit program in 2014.  However, FLSA §18C requires that the discriminatory action be taken as a result of an employee who received a premium tax credit.  It is not enough simply that the employer knows that the employee is eligible to receive a premium tax credit for a claim under FLSA §18C.

The earliest an employer could know that one of the eligible employees actually received a premium tax credit is 2015 when the Play or Pay Mandate becomes effective.  Even then, an employer will not be aware of which employee (or employees) triggered the Play or Pay Mandate penalty by receiving a premium tax credit.  On its face, §18C requires the employer to be taking the discriminatory action as a result of an employee who received a premium tax credit.  The notice an employer will receive under §1411(e)(4)(B)(iii) will only inform an employer which employees are eligible to receive a premium tax credit.  An employer will never have knowledge of which employee received a premium tax credit.  As a result of the employer’s lack of knowledge on which employee is receiving a premium tax credit, the reduction in hours strategy would not violate FLSA §18C.  A plain reading of FLSA §18C will not even allow an employee to even shift the burden to the employer.

Proceeding for the sake of argument, assuming the employee is able to clear all of the hurdles discussed above, the burden would then shift to the employer.  The employer would have to demonstrate by clear and convincing evidence that the employer would have reduced the employee’s hours of service even if the employee would not have received the premium tax credit.  Each full-time employee eligible for the premium tax credit program will potentially cost the employer the employer’s share of the premiums for the employee’s minimum essential coverage or the $2,000 penalty per full-time employee.  By reducing a segment of the workforce’s hours of service to less than 30 hours per week, the employer will be significantly reducing the cost of doing business by reducing its full-time employee count.  Regardless of whether an employee received a premium tax credit, the mere cost associated with full-time employees under the Play or Pay Mandate is the driving force behind the employer’s reduction in the employee’s hours.

Conclusion

This will all undoubtedly be flushed out through litigation.  Some employers are going to go through with the reduction in hours strategy because their profit margin is too thin.  Likewise, the class action possibilities with the potential to receive back pay will lead plaintiff attorneys to try their hand at ERISA §510 and FLSA §18C claims.

An employer wishing to utilize the reduction in hours strategy under the ACA should be aware of the possible consequence.  Additionally, the safeguards discussed in this paper should be in place to add protection from potential litigation.

It is unlikely a court would hold an employer liable under ERISA §510 or FLSA §18C for reducing an employee’s hours of service below 30 hours per week.  The implications would be to staggering as an employee receiving (or maybe just being eligible for) a premium tax credit, would be entitled to 30 hours of service per week.  The ACA does not require employers to hire employees for 30 hours a week so courts should not jump to such a conclusion.

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