Children’s Social Security Disability Benefits Paid For A Parent’s Disability May Reduce Benefits Under Employer Plan, Circuit Finds

May 31, 2012 | Appeals | Employment & Labor | Insurance Coverage

The plaintiffs in this case sued to recover benefits under the long term disability benefit plans that were maintained by their former employers, Aviall, Inc., and Perkins Coie, respectively, and that were issued by the Prudential Insurance Company of America. The plans provided for a reduction of disability benefits if a disabled employee also received federal disability benefits under the Social Security Act, as both of these plaintiffs did. The plaintiffs agreed that some reduction of their plan benefits was correct, but they disputed the correct calculation of the reduction.

Under the Aviall long term disability plan, gross monthly long term disability benefit amounts were to be reduced by “deductible sources of income.” The Aviall plan listed eight types of deductible sources of income, one of which was: “The amount that you, your spouse and children receive or are entitled to receive as loss of time disability payments because of your disability under . . . the United States Social Security Act.” Likewise, the circuit court noted, under the Perkins Coie long term disability plan, long term disability benefits were subject to deductions of certain sources of income. The deductible amount was “equal to the total amount of payments or benefits which for that Calendar Month or part of a Calendar Month are Periodic Benefits . . . payable to you or to your spouse or children based on your work and earnings[.]” There were five categories of deductible “Periodic Benefits” under the Perkins Coie plan, one of which was: “Loss of time disability benefits payable under or by reason of . . . the United States Social Security Act as amended from time to time.”

Pursuant to these provisions, Prudential offset from the plaintiffs’ monthly long term disability benefit payments the amount that each plaintiff’s household was awarded in primary and dependent Social Security disability benefits.

The plaintiffs agreed that their own primary Social Security disability benefits could be used as offsets as “loss of time disability” benefits. They contended, however, that the Social Security benefits provided to their children by reason of their disability did not constitute “loss of time disability” benefits, so that Prudential’s use of their children’s Social Security payments to offset their plan disability benefits violated the plans. Essentially, they argued, the purpose of Social Security payments to a dependent child of a disabled parent was not to replace the income that the household had lost as a result of the parent’s inability to work. Rather, they contended, the purpose was to provide additional “support” for the child.  The phrase “loss of time” was a term of art, the plaintiffs argued, meaning “loss of business time connected with the insured’s occupation.”

The district court granted the defendants’ motion to dismiss the complaint, holding that the children’s Social Security benefits based on their parents’ total disability counted as “loss of time disability” benefits, and the plaintiffs appealed to the U.S. Court of Appeals for the Seventh Circuit.

In affirming the district court’s decision, the circuit court first found that neither the Aviall nor the Perkins Coie plan language on the offset was ambiguous. It then ruled that, in its view, the “only reasonable interpretation” of the applicable language was that when a disabled employee’s dependent children received Social Security payments by reason of a parent-employee’s disability, those benefits were disability benefits based on the employee’s “loss of time.” The offsets as calculated by Prudential, the circuit court decided, therefore were permissible under these plans.[Schultz v. Aviall, Inc., 670 F.3d 834 (7th Cir. 2012).]

Comment: Other courts that have considered this issue also have found that dependent children’s Social Security benefits were subject to offset under nearly identical policy language that referred to “loss of income.” See, e.g., Mayhew v. Hartford Life & Accident Ins. Co., 2011 U.S. Dist. Lexis 122286 (N.D. Cal. Oct. 21, 2011) (denying insured’s motion to dismiss plan’s counterclaim because dependent Social Security disability benefits could be offset against insured’s long term disability benefits pursuant to policy language permitting offset of “loss of income” benefits paid to insured or insured’s family under Social Security Act); Fortune v. Group Long Term Disability Plan for Employees of Keyspan Corp., 588 F. Supp. 2d 339 (E.D.N.Y. 2008) (denying insured’s motion to amend complaint as futile because plan’s language offsetting “loss of income” benefits provided to insured or her family because of the insured’s disability would permit offset of dependent Social Security disability benefits), aff’d, 391 Fed. Appx. 74 (2d Cir. 2010); Pennell v. Hartford Life & Accident Ins. Co., 2010 U.S. Dist. Lexis 4695 (N.D. Ohio Jan. 21, 2010) (same); Kennedy v. Hartford Ins. Co., 2009 U.S. Dist. Lexis 86027 (E.D.N.Y. Sept. 21, 2009) (same), aff’d, 402 Fed. Appx. 610 (2d Cir. 2010).  The Seventh Circuit in the Schultz case found no meaningful basis on which to distinguish the phrase “loss of income” interpreted in these cases from the phrase “loss of time” used in the plans in Schultz.

It should be noted that the U.S. Court of Appeals for the Third Circuit decided that claimants’ benefits could not be offset by amounts their children received in one case, In re Unisys Corp. v. Long-Term Disability Plan ERISA Litigation, 97 F.3d 710 (3d Cir. 1996). That case is distinguishable, however, because the disability policy in that case provided that offsets would apply only to Social Security benefits received by the claimants and was silent on Social Security disability benefits received by dependent children.

Treating Underlying Disorders Did Not Make Plaintiff’s Subsequent Heart Failure A Pre-Existing Condition, Court Determines

In September 2009, the plaintiff in this case was diagnosed with congestive heart failure. In December 2009, doctors performed surgery on the plaintiff to install an implantable cardioverted defibrillator (“ICD”) or pacemaker. The plaintiff asserted that this heart condition and the pacemaker rendered him disabled from working and he filed a claim for long term disability benefits under his company’s long term disability plan.

The policy took effect with respect to the plaintiff either in November 2008 or January 2009. The applicable provisions of the plan provided that if an employee received treatment for a condition within three months of the policy taking effect, then it was considered a pre-existing condition and long term disability coverage was not available. The three month period before the effective date of the policy was called the “look-back period.” The policy stated that an employee had a pre-existing condition when applying for coverage if the employee “received medical treatment, consultation, care or services including diagnostic measures, or took prescribed drugs or medicines in the 3 months just prior to your effective date of coverage[.]”

Unum Life Insurance Company of America, which had issued the policy to the plaintiff’s employer, denied the plaintiff’s claim on the ground that he had a preexisting condition. It reasoned that during the look-back period, the plaintiff had been treated for “hypertension and hypercholesterolemia. The use of aspirin was also evident during this time period. The medication management evident during the look-back period, combined with a known history of [coronary artery disease ‘CAD’] is consistent with the management of CAD.”

Similarly, Unum’s appeals unit concluded that: “While [the plaintiff] was not treated for heart failure during the look back periods, treatment of hypertension and [high cholesterol] in a patient who has a history of coronary bypass surgery and the use of aspirin for its antiplatelet effect, he was clearly receiving treatment for underlying coronary disease.”

After exhausting his administrative remedies, the plaintiff filed suit alleging that he was entitled to long term disability benefits. The parties moved for summary judgment. The district court ruled in favor of the plaintiff, finding that Unum’s decision denying benefits was “an abuse of discretion,” that is, that it was “absent reason” and “not supported by substantial evidence.”

The district court pointed out that, during the look-back period, the plaintiff was taking high cholesterol medicine and hypertension medication and evidently had been taking daily aspirin since heart bypass surgery in 1999, and that these facts were relied on in Unum’s various reviews of the plaintiff’s claim to justify denial of his claim. The district court stated, however, that the plaintiff did not assert that he was disabled from high cholesterol, hypertension, or the effects of the heart bypass surgery he had in 1999. Rather, he asserted that he had become disabled by September 2009, approximately nine months after the effective date of his coverage. At that time, the plaintiff’s doctor diagnosed him with congestive heart failure, and upon his doctor’s recommendation the plaintiff had a pacemaker implanted. In the district court’s view, nothing in the record suggested that the plaintiff was treated for congestive heart failure in the three-month look-back period. In fact, the district court continued, the doctor reviewing the records for Unum indicated that the plaintiff was not treated for congestive heart failure during the look-back period.

The district court explained that the issue was whether treating disorders that could lead to another disorder was actually treating the second disorder. The district court ruled that taking steps to prevent a disorder was not the equivalent of treating that disorder. Although the plaintiff may have had an undiagnosed heart problem during the look-back period, the court concluded, the plan did not define “pre-existing” in terms of whether evidence existed that the plaintiff had the condition during the look-back period, but whether the plaintiff was treated for the condition during the look-back period. [Lafferty v. Unum Life Ins. Co. of America, 2012 U.S. Dist. Lexis 25956 (M.D. Pa. Feb. 29, 2012).]

Employee Unable to Work Overtime Is Not Disabled Under ADA

The plaintiff in this case began working for Corning Incorporated as a maintenance engineer in 1989. He worked rotating 12 hour shifts and alternated two weeks of day shifts with two weeks of night shifts. The plaintiff’s work schedule was typical for Corning, which sought to promote efficiency and continuity across a 24 hour production process by limiting its work force primarily to two 12 hour shifts and by rotating employees between daytime and nighttime schedules.

In May 2002, the plaintiff was on leave from his position with Corning because of abdominal problems when he had a heart attack, which resulted in an additional period of absence. The plaintiff returned to work with Corning in September 2002 to his rotating 12 hour shifts, but he experienced further cardiac difficulties and treatment that required additional periods of absence. The plaintiff took additional leave in November 2003 because of complaints of fatigue.

The plaintiff advised Corning in February 2004 that he was prepared to return to work but provided a physician’s statement that he was limited to working no longer than eight hours per day. Because the plaintiff, according to his treating physician, was capable of working a normal eight hour day and 40 hour week, Corning took the position that he was not disabled under the Americans with Disabilities Act. The plaintiff did not return to his 12 hour rotating shift and, instead, applied for long term disability benefits with Corning’s disability carrier. He also filed a charge of discrimination in May 2004 with the Equal Employment Opportunity Commission (“EEOC”), alleging that Corning had failed to provide him with a “reasonable accommodation” since his effort to return to work on February 16, 2004.

The plaintiff was granted long term disability benefits in May 2004 but those benefits were terminated effective October 1, 2004 because the plaintiff was capable of working a normal 40 hour work week and there existed maintenance engineer positions that did not require overtime work. Subsequent to the termination of his long term disability benefits, the plaintiff renewed his efforts to return to work.

On December 30, 2004, the EEOC issued a determination that there was “reasonable cause” to believe that the plaintiff’s rights under the ADA had been violated by Corning. Then, on January 18, 2005, one of the plaintiff’s treating physicians indicated that he could return to work up to 10 hours per day, four days per week, but made no provision for overtime. Another health care provider for the plaintiff forwarded Corning a new medical certificate dated April 28, 2005, indicating that he was capable of working 10 hours per day plus a “moderate” amount of overtime. Ultimately, Corning created a new position that was limited to day shift work of eight hours per day plus overtime. The plaintiff was hired for this position and returned to work with Corning on August 13, 2005.

In the lawsuit he filed against Corning, the plaintiff asserted that his inability to work more than eight hours per day and rotate day/night shifts as a result of physical impairments rendered him disabled under the ADA. He further asserted that Corning had violated the ADA by failing to provide him with a “reasonable accommodation” for his disability. Corning responded that, because the plaintiff was physically able to work a normal 40 hour work week and had not demonstrated that his impairments significantly restricted the class of jobs or a broad range of jobs available to him, he could not establish that he had a “substantial” limitation upon which to base a claim of disability under the ADA. After the district court granted summary judgment to Corning, the plaintiff appealed to the U.S. Court of Appeals for the Fourth Circuit.

In affirming the district court’s decision, the circuit court explained that the ADA prohibits any covered employer from discriminating against “a qualified individual with a disability because of the disability . . . in regard to . . . hiring, advancement, or discharge” of the employee or “other terms, conditions and privileges of employment.” It added that the ADA defines a “qualified individual with a disability” as “an individual with a disability who, with or without reasonable accommodation, can perform the essential functions of the employment position,” and it defines “disability” as “a physical or mental impairment that substantially limits one or more major life activities of such individual.”

The circuit court continued by noting that, under the standard applicable to this case, the plaintiff also had to show that any impairment “substantially limits” one or more major life activities. In the context of the ability to work, the plaintiff would have to show that the impairment “significantly restricted . . . the ability to perform either a class of jobs or a broad range of jobs in various classes as compared to the average person having comparable training, skills and abilities.” Further, the “inability to perform a single, particular job does not constitute a substantial limitation in the major life activity of working.”

The circuit court noted that the uncontested facts established that the primary impediment to the plaintiff’s return to work was his inability to perform overtime work. From February 2004 forward, he was consistently cleared to work a normal eight hour day and/or a 40 hour week. The circuit court then stated that, assuming that the plaintiff’s alleged inability to work could constitute a “major life activity,” the issue was whether the plaintiff’s ability to work was “substantially limit[ed]” where he was capable of working 40 hours per week but was unable to perform overtime work due to his impairments. The Fourth Circuit then ruled that an inability to work overtime did not constitute a “substantial” limitation on a major life activity under the ADA. Accordingly, it affirmed the district court’s decision. [Boitnott v. Corning Inc., 669 F.3d 172 (4th Cir. 2012).]

Comment: Other circuit courts that have addressed the issue also have held that an employee under the ADA is not “substantially” limited if he or she is capable of performing a 40 hour work week but is incapable of performing overtime due to an impairment. See Bialko v. Quaker Oats Co., 434 Fed. Appx. 139 (3d Cir. 2011); Cotter v. Ajilon Servs., Inc., 287 F.3d 593 (6th Cir. 2002); Miller v. Sw. Bell Tel. Co., No. 01-21318 (5th Cir. Oct. 7, 2002); Kellogg v. Union Pac. R. R. Co., 233 F.3d 1083 (8th Cir. 2000); Taylor v. Nimock’s Oil Co., 214 F.3d 957 (8th Cir. 2000); Tardie v. Rehab. Hosp. of Rhode Island, 168 F.3d 538 (1st Cir. 1999); Berg v. Norand Corp., 169 F.3d 1140 (8th Cir. 1999).

Employer Not Liable To Employee For Complying With IRS Notice Of Levy

While the plaintiff in this case was working for Encore Senior Living, LLC, the Internal Revenue Service sent Encore a wage garnishment letter and a notice of levy. The documents stated that the levy against the plaintiff “attache[d] the taxpayer’s take-home pay,” and that the plaintiff was “not entitled to the exemptions” under Section 6334(a)(9) of the Internal Revenue Code. The notice of levy stated that the exemptions referred to by Section 6334 were not allowed because of other income that the plaintiff and her husband received. The notice of levy added that whatever was normally paid to the plaintiff “should be remitted to the Internal Revenue Service.” After listing the amount owed, the notice of levy further stated:

This levy requires you to turn over to us: (1) this taxpayer’s wages and salary that have been earned but not paid, as well as wages and salary earned in the future until this levy is released, and (2) this taxpayer’s other income that you have now or for which you are obligated.

Encore subsequently garnished the plaintiff’s entire “take home pay,” vacation time, and “money allocated for healthcare.” In so doing, the plaintiff contended, Encore ignored the IRS’s schedule for wage garnishment, and she received no compensation for the work she performed in violation of state and federal law. The plaintiff then sued Encore, alleging, among other things, violation of the federal and California minimum wage laws.

Encore moved to dismiss the plaintiff’s complaint, asserting that the plaintiff’s vacation time and “money allocated for healthcare” were “wages” that could be garnished and that federal law immunized Encore from any liability arising out of its compliance with an IRS notice of levy.

In its decision granting Encore’s motion, the court first found that”vacation time” was wages under California law. It observed that vacation pay was simply a form of deferred compensation and was in effect, additional wages for services performed.  It also ruled that “money allocated for healthcare” was wages, too, and decided that Encore therefore had not garnished the plaintiff’s wages improperly by including those funds.

The court next turned to Encore’s argument that it was entitled to immunity under federal law for garnishing the plaintiff’s wages pursuant to the IRS notice of levy.  The court pointed out that federal law provides a third party that complies with a notice of levy with an “absolute defense against any subsequent claim by a delinquent taxpayer or any other person.”  Here, Encore complied with the notice of levy and garnished the plaintiff’s pay in accordance with the notice. Encore therefore was statutorily immune from “any subsequent claim” arising out of its actions; thus, the court ruled, the plaintiff could not maintain her claims against Encore.

The court also rejected the plaintiff’s argument that Encore had a duty as the plaintiff’s employer to “inquire as to the validity of the IRS request,” including the provision in the notice stating the plaintiff did not qualify for any exemptions, simply ruling that Encore “had no such obligation.” As the court explained, once the IRS served a notice of levy on Encore, it had a legal obligation to turn over to the IRS the plaintiff’s income and it could not challenge the validity of the levy.

Indeed, where, as in this case, a notice of levy states that “no amount of the taxpayer’s wages, salary, or other income is exempt from levy,” an employer “may rely on such notification in paying over amounts pursuant to the levy.” Hence, the court concluded, Encore was entitled to rely on the IRS’s determination that the plaintiff did not qualify for an exemption. The court therefore dismissed the plaintiff’s complaint, with prejudice. [Said v. Encore Senior Living LLC, 2012 U.S. Dist. Lexis 23944 (C.D. Cal. Feb. 24, 2012).]

Circuit Court Finds “Striking” Difference In Pay For Male, Female Business Managers

In 2001, Acosta Sales and Marketing, a food broker that represents producers that seek to sell to supermarkets and other bulk purchasers, hired the plaintiff as one of its business managers for its midwest operations. After resigning in 2007, the plaintiff sued Acosta, claiming, among other things, that Acosta paid women less than men for the same work in violation of Title VII of the Civil Rights Act of 1964 and the federal Equal Pay Act. The district court granted summary judgment in favor of Acosta, and the plaintiff appealed to the U.S. Court of Appeals for the Seventh Circuit.

In reversing the district court’s decision, the circuit court explained that “[e]ven a dollar’s difference based on sex” violated federal law – and it found that the plaintiff had established “much larger differences.” Some men in the same job classification, doing the same work under the same conditions, received more than twice her pay, the Seventh Circuit noted. The accompanying table reflected the differences. 

Business

Starting

Starting

2007 or

Manager

Year

Salary

Final Salary

Male

1998

$91,000.08

$122,004.00

No. 1

 

 

 

Male

2000

$95,000.00

$101,921.00

No. 2

 

 

 

Male No. 3

2004

$85,000.01

$99,500.11

Male No. 4

2001

$94,999.99

$97,635.55

Male No. 5

2006

$93,000.00

$93,000.00

Male No. 6

1998

$69,448.56

$81,502.73

Male

2002

$77,182.51

$79,881.10

No. 7

 

 

 

Male No. 8

1998

$72,799.92

$79,598.69

Male

1998

$63,000.00

$72,375.05

No. 9

 

 

 

Female

2001

$38,666.64

$60,399.62

No. 1

 

 

 

Male No.10

2007

$60,000.00

$60,000.00

Male

2005

$40,000.01

$60,000.00

No. 11

 

 

 

Male No. 12

2007

$55,000.00

$55,000.00

Female

2005

$40,000.01

$52,299.77

No. 2

 

 

 

Female No. 3

2001

$40,000.01

$46,850.23

Female

2005

$45,000.00

$46,350.00

No. 4

 

 

 

Female

2007

$42,500.64

$42,500.64

No. 5

 

 

 

Female No. 6

2007

$40,000.42

$40,000.42

Female

2001

$64,000.01

$37,752.00

No. 7

 

 

 

Female No. 8

2001

$38,092.01

$26,624.00

           
The circuit court declared that the difference between men and women was “striking” because all of the men were paid more than all but one of the women—and that one woman achieved her $60,000 salary only after six years on the job, while men exceeded the $60,000 line faster.

As the circuit court explained, “business manager” was a sales job and the pay of many salespersons is strongly influenced by customers’ purchases. It added, however, that Acosta did not contend that the difference in business managers’ pay could be accounted for by the volume of sales; indeed, Acosta conceded that the plaintiff was one of its most successful sales executives, on a par with the highest paid male business manager, who was paid almost three times as much.

Rather, Acosta contended that education and experience accounted for the men’s salaries and that all the men had college degrees but that the plaintiff did not. The circuit court acknowledged that education and experience often increase the pay that employers offer, and that Acosta had to match or exceed what other companies would pay to hire a capable staff. Moreover, the circuit court declared, neither Title VII nor the Equal Pay Act required that employers ignore the compensation that workers could receive in other jobs, which the Equal Pay Act referred to as a “factor other than sex.”

The circuit court continued, however, that the district court erred when it found that it was enough for Acosta to articulate education and experience as potentially explanatory variables without proving that they actually accounted for the difference; the district court decided that the plaintiff had to show that Acosta’s explanation was a pretext for discrimination. The circuit court explained that that was not appropriate under the Equal Pay Act.

As the circuit court explained, an employee’s only burden under the Equal Pay Act is to show a difference in pay for “equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions.” An employer asserting that the difference is the result of a “factor other than sex” must present this contention as an affirmative defense – and the proponent of an affirmative defense has the burdens of both production and persuasion.

The circuit court pointed out that even if education and experience (which implied greater pay at other firms, with which Acosta was competing for talent) explained some or even all of the difference in the starting salaries reflected in the table, there was “no reason” they should explain increases in pay while a person was employed by Acosta. Changes in salary at most companies depend on how well a person performs at work, the appellate court noted. If men arrived at Acosta with higher salaries because of education, but men and women were equally good on the job, women should get more rapid raises after employment and the salaries should tend to converge, according to the circuit court.

Then, the circuit court pointed to the difference between the starting salary column in the table and the 2007 or final salary column. Men received substantially greater increases in pay. Salaries did not converge after business managers began work; they diverged, it found. The plaintiff worked at Acosta for six years, and her salary rose by less than $7,000; the salary of one male worker, by contrast, rose more than $14,000 in three years. Another male had been hired at $40,000, the same as the plaintiff’s starting wage, but within two years his salary was at $60,000, while in six years the plaintiff never topped $50,000. According to the circuit court, these numbers “can’t be explained by education and experience at the time of hire, which should matter less as years pass on the job.” The circuit court conceded that differences in the rate of change might be explained by different on-the-job performance, but it emphasized that the plaintiff was one of Acosta’s top producers yet was not rewarded accordingly.

The circuit court also noted that Acosta’s national management set pay scales that were supposed to constrain the discretion of the regional general managers. In 2007, the pay scale for business managers ran from $51,600 to $88,400 a year, with a target median of $73,700. The plaintiff and all but one of the other women were paid less than the low end of the scale, and all were paid less than the target median. Five men were paid more than the top end of the scale, and seven received more than the target median. Acosta had no explanation for how men’s salaries had become so far out of line, or why women were not paid even the minimum, the circuit court added. The plaintiff, however, had an explanation – sex discrimination – and, it concluded, a reasonable juror could conclude that she was right.

Thus, the Seventh Circuit decided, the plaintiff’s claim under the Equal Pay Act had to be returned to the district court for a trial at which Acosta would have to prove, and not just assert, that education and experience accounted for the differences. The appellate court added that the plaintiff’s Title VII claim also had to be tried because the plaintiff had has produced evidence that would permit a trier of fact to conclude that Acosta’s explanations were “smokescreens.” [King v. Acosta Sales and Marketing, Inc., 2012 U.S. App. Lexis 5156 (7th Cir. March 13, 2012).]

Reprinted with permission from the June 2012 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

Related Publications


Legal updates and news delivered to your inbox