Deducting Balances Due on Company-Guaranteed Credit Cards from Employees’ Final Paychecks Did Not Violate FLSA, Circuit Court Rules

April 30, 2014 | Appeals | Employment & Labor | Insurance Coverage

The plaintiffs in this case sued their former employer, Costco Wholesale Corporation, under the federal Fair Labor Standards Act (FLSA) and the California Labor Code, alleging that Costco improperly had withheld wages from their final paychecks to repay the undisputed outstanding balances due on their company-guaranteed credit cards.

After a bench trial in which the trial court granted judgment in favor of Costco, the plaintiffs appealed to the U.S. Court of Appeals for the Ninth Circuit, contending that the trial court had erred by permitting the credit-card deductions to be applied to their accrued vacation and sick pay.

The Ninth Circuit affirmed, finding that the trial court had not erred in concluding that the plaintiffs had failed to prove that Costco had violated the FLSA’s minimum wage and overtime provisions. The circuit court first stated that the FLSA does not require that employers pay all remaining vacation and sick pay to employees upon termination. It then observed that the sum of vacation and sick pay for each plaintiff exceeded the amount that Costco had deducted under the credit card agreement, and the plaintiffs’ hourly wages exceeded the law’s overtime and minimum wage requirements. Therefore, the circuit court decided, the trial court correctly had decided that the credit card deductions did not effect a violation of the FLSA’s overtime and minimum wage requirements.

The circuit court reached the same conclusion with respect to the plaintiffs’ claim under the California Labor Code. It explained that before Costco had issued each plaintiff a credit card, each plaintiff had signed an agreement authorizing Costco to deduct the total remaining balance on his or her credit card from his or her final paycheck upon separation of employment from Costco. The circuit court declared that, “[h]aving elected to receive some of [their] compensation in the form of [credit card balances],” the plaintiffs could not assert that they “should have been paid in cash that portion of [their] compensation [that they] elected to receive [in the form of credit card balances].” 

Therefore, the circuit court concluded, Costco had not run afoul of the California Labor Code because no earned, unpaid wages remained outstanding upon termination, according to the terms of the plaintiffs’ agreements with Costco. [Ward v. Costco Wholesale Corp., 2014 U.S. App. Lexis 450 (9th Cir. Jan. 9, 2014).]

Plan Administrator Could Properly Reject Retiree’s Request to Change Beneficiary after Payments Had Begun, Circuit Decides

In June 1998, shortly before retiring, the plaintiff in this case – who had worked for more than 30 years for New York University Medical Center – executed a pension application form to commence his pension payments.  The plaintiff elected a joint and 50 percent survivor pension and designated a person as his beneficiary. He subsequently retired and commenced receiving his pension payments.  Shortly thereafter, plaintiff married and, on September 21, 2009, he requested that his prior designation of beneficiary be revoked in favor of his wife.

The request was denied, with the benefit manager explaining that, under the plan, once payments had begun, a participant was precluded from changing his or her beneficiary because the beneficiary’s age was “used to calculate the annuities to be paid to the participant and the beneficiary.”

The plan administrator affirmed the benefit manager’s decision, and the plaintiff and his wife sued. The trial court rejected the plaintiffs’ arguments, and they appealed to the U.S. Court of Appeals for the Second Circuit. The plaintiffs argued that the plan administrator lacked the discretionary authority to deny the request for a change in beneficiary under the plan and that, even if the plan administrator had that authority, the denial of the change of beneficiary request was arbitrary and capricious.

The Second Circuit affirmed the trial court’s decision. The circuit court first determined that, in denying the change-of-beneficiary request, the plan administrator “was plainly exercising” the authority delegated to it to construe the terms of the plan.  The plan provided that the plan administrator had “complete authority, in its sole and absolute discretion, to construe and interpret the terms of the Plan and the Trust Agreement (and any related documents and underlying policies) including without limitation, the authority to determine … Participants’ and beneficiaries’ eligibility for, and amount of, benefits due under the Plan.”

The circuit court concluded by ruling that the plan administrator had “reasonably construed” the plan to preclude participants from changing their designated beneficiaries after the commencement of pension payments, because, among other reasons, the amount of monthly annuity payments under the plan were set based in part on the age of the beneficiary at the time payments commenced. [Sipajlo v. NYU Hospitals Center, 2014 U.S. App. Lexis 1521 (2d Cir. Jan. 27, 2014).]

Court Refuses to Dismiss Insurer’s Counterclaim against Plan Participant Seeking to Recover Overpayment of Long Term Disability Benefits

The plaintiff was a participant in the United Parcel Service (UPS) long term disability plan, which was funded by a group policy issued to UPS by Aetna Life Insurance Company. The plaintiff received monthly long term disability benefits for 24 months.

On September 6, 2012, Aetna notified the plaintiff that his benefits would end on September 19, 2012. The plaintiff subsequently was approved for Social Security disability benefits and approved to receive disability benefit payments under an employee pension plan.

The plaintiff sued Aetna, alleging that it had breached the policy when it denied his request for long term disability benefits after September 19, 2012. In response, Aetna counterclaimed, alleging that the plaintiff had been overpaid long term disability benefits under the policy from September 9, 2010 to September 19, 2012 because of his receipt of “Other Income Benefits,” which were defined in the policy as including Social Security, workers’ compensation and pension benefits. Aetna sought “reimbursement, restitution, constructive trust, and/or equitable liens to recover the amount of the overpayment, as well as any offsets against any future benefits, if any, and/or any other appropriate equitable and/or legal relief” until the plaintiff satisfied the alleged overpayment amount.

The plaintiff asked the court to dismiss the counterclaim, but the court denied his motion. In its decision, the court explained that the policy stated that the plaintiff’s long term disability benefits would be reduced by the amount he received of Social Security benefits, workers’ compensation benefits or settlement, and disability pension benefits. Moreover, the court continued, the plan also stated that the plan was entitled to repayment of any overpayment made to the plaintiff due to his receipt of these other benefits. Therefore, the court found, Aetna was entitled to assert its counterclaim against the plaintiff.

The court also rejected the plaintiff’s argument that Aetna’s counterclaim should be dismissed because the Social Security Act’s anti-assignment provision was a bar to Aetna’s recovery of Social Security benefits from him. The court explained that a claim for reimbursement of overpaid long term disability benefits was permitted where the relief sought was the amount of the overpayment, not the garnishment or attachment of Social Security benefits. Aetna was not seeking reimbursement from any future Social Security benefits, but only was seeking money already in the plaintiff’s possession, the court observed. Accordingly, it found that dismissal of Aetna’s counterclaim was not warranted on this ground.

Finally, the court rejected the plaintiff’s contention that Aetna’s counterclaim had to be dismissed because the anti-alienation provision in the Employee Retirement Income Security Act of 1974 (ERISA) prohibited Aetna from garnishing his pension. The court found that Aetna was seeking recovery of any overpayment that had occurred as a result of any receipt of a workers’ compensation settlement or a pension award, not an assignment, attachment, or garnishment of those benefits. [Smithson v. Aetna Life Ins. Co., 2014 U.S. Dist. Lexis 11207 (E.D. Ky. Jan 30, 2014).]

Court Finds Policy’s Three Year Time Limit Barred Suit Seeking Long Term Disability Benefits

In February 2009, the plaintiff in this case, an employee of Bank of America (BOA), requested a short term disability (STD) leave starting on February 6, 2009. Aetna Life Insurance Company, the claims administrator for BOA’s STD plan, approved the plaintiff’s claim for STD benefits effective February 6, 2009. The plaintiff received STD benefits for the maximum period of 182 days, to August 7, 2009.

In November 2010, the plaintiff applied for long term disability (LTD) benefits under BOA’s employee welfare benefit plan. On December 21, 2010, Aetna determined that the plaintiff did not meet the plan’s definition of disability. The plaintiff administratively appealed the adverse determination, but Aetna upheld its initial adverse benefit determination in a letter dated February 9, 2012. That letter advised the plaintiff that its decision was final and not subject to further appeal, but that he had the right to file a civil action under ERISA.

On February 8, 2013, the plaintiff sued Aetna, alleging that he was entitled to LTD benefits. Aetna moved for summary judgment, arguing that the plaintiff’s claim for LTD benefits was time-barred.

The court granted Aetna’s motion. The court explained that the plaintiff’s disability period had begun on February 6, 2009 and that he was eligible to receive STD benefits under the BOA STD plan for a maximum of 182 days, i.e., until August 7, 2009. That period also was the applicable “elimination period” under the plan, the court added.

Pursuant to the plan, the court continued, the deadline for filing a claim for LTD benefits was 90 days after the end of the elimination period – in this case, November 5, 2009. Finally, the court observed, the plan stated that no legal action could be brought to recover any benefit after three years from the deadline for filing claims – in this case, November 5, 2012.

Accordingly, the court ruled, the plaintiff’s action was time-barred: his deadline to bring legal action was November 5, 2012, but he had brought his action on February 8, 2013. The court acknowledged that the time for the plaintiff to bring his lawsuit had begun to run on November 5, 2009 – before his cause of action had accrued on February 9, 2012 (the date of Aetna’s letter upholding the initial adverse benefit determination). The court concluded, however, that the plaintiff was left with approximately nine months – from February 9, 2012 to November 5, 2012 – to bring legal action, which it said was “not an unreasonably short period of time within which to file suit.” [Tuminello v. Aetna Life Ins. Co., 2014 U.S. Dist. Lexis 20964 (S.D.N.Y. Feb. 14, 2014).]

Denial Letters Did Not Have to Reference Plan’s Limitations Period for Suing, Court Decides

The plaintiff, an employee of American Airlines, Inc., applied for, and was approved for, long term disability benefits under American’s long term disability plan. On August 19, 2008, he was informed by the company that it was terminating his long term disability benefits because it had determined that his medical condition no longer constituted a “total disability” under the plan. The plaintiff appealed the decision, but the company denied the appeal by letter dated August 17, 2009.

The plaintiff sued the plan on July 17, 2013, which moved to dismiss on the ground that the plaintiff’s lawsuit was barred by the plan’s two year limitations period. The plaintiff argued, among other things, that the plan’s limitations period should not be enforced. He contended that although the company twice denied his claim for continued long term disability benefits, in neither of the denial letters did it inform him that the plan contained a contractual limitation on the time that he had to bring a federal court lawsuit.

The court rejected that argument and granted the defendants’ motion to dismiss.  First, it held that the plan’s two year limitations period was reasonable.  Then, the court rejected the plaintiff’s argument that the company was required to disclose the plan’s limitations period in the denial letters it sent to him. The court pointed out that the plan contained the limitations period and that the summary plan description informed participants that once they had exhausted their administrative claim and appeal procedures, they could “only bring suit in a federal district court if [they] file [their] action or suit within two years of the date after the adverse benefit determination is made on final appeal.”

Moreover, the court said, ERISA did not require that the company supply notice of the plan’s contractual limitations period for filing a civil action under ERISA, but only required that a plan administrator include in the denial letter a “statement of the claimant’s right to bring a civil action under section 502(a) of [ERISA] following an adverse benefit determination on review.”

Therefore, the court concluded that the plan had no obligation to separately inform the plaintiff of the limitations period in its denial letters. [Freeman v. American Airlines, Inc. Long Term Disability Plan, 2014 U.S. Dist. Lexis 22131 (C.D. Cal. Feb. 20, 2014).]

Court Rules that Employer Was Not Liable for Withholding Discretionary Bonus

On behalf of an employee of the Chubb Group of Insurance Companies, the Commissioner of the Connecticut Department of Labor pursued an action under Connecticut law against Chubb for its alleged retention of wages due the employee. The district court held that the commissioner failed to state a valid claim. The district court reasoned that the payments withheld constituted a discretionary bonus and, under Connecticut law, that those payments were not wages.

The employee argued on appeal that the bonus fell within the statutory definition of wages and that, therefore, he had stated a claim against Chubb.

The U.S. Court of Appeals for the Second Circuit affirmed the district court’s decision. The circuit court explained that the classification of a compensation provision as wages under Connecticut law required the satisfaction of three factors:

  1. the award of compensation must be non-discretionary;
  2. the amount of the compensation must be non-discretionary; and
  3. the amount of the bonus must be dependent on the employee’s performance.

In this case, the circuit court observed, the Chubb plan authorized a designated committee to “reduce or eliminate” any award under the plan. The plan also provided that the amount of any award could be based, in part, on whether the business had met certain performance goals such as those set for “combined loss and expense ratio,” “earnings or net income per share or operating income per share,” “operating efficiency,” and the like. The court also stated that, under the “express and unambiguous terms” of the Chubb plan, the amount of any award was based not solely on an individual’s performance but rather on the performance of Chubb, its subsidiaries, affiliates, or any internal operating units and divisions. Therefore, the circuit court found that any bonus awarded under the plan was “discretionary as to both whether an award [was] to be made in the first instance and the amount of such award.”

Accordingly, the circuit court agreed with the district court that the payments did not constitute wages for purposes of Connecticut law. [McMahon v. Chubb Group of Insurance Companies, 2014 U.S. App. Lexis 2012 (2d Cir. Feb. 3, 2014).

Absence of COBRA Notice to Ex-Employee Did Not Merit a Civil Penalty Where She Had Received Free Health Insurance

The plaintiff in this case began working at Mercy Medical Center in 2007 before transitioning to become an employee of Trinity Health Corporation in July 2010. Trinity Health provides its employees and their families with benefits, including participation in an employer-sponsored group health plan. The plaintiff enrolled in the plan with Blue Cross Blue Shield of Michigan with an effective date of July 11, 2010. The plaintiff’s husband and son also were enrolled in the plan.

The plaintiff went on leave under the Family and Medical Leave Act of 1993 (FMLA) beginning in December 2010. Her FMLA leave expired on March 2, 2011 and she transitioned to short term disability leave at that time. Her short term disability leave expired on June 8, 2011.

The plaintiff applied for and received long term disability benefits from July 6, 2011 to October 2011 from Trinity Health’s long term disability benefits provider under a reservation of rights. On October 11, 2011, Trinity Health’s long term disability benefits provider denied the plaintiff’s claim for long term disability benefits and notified the plaintiff of its decision.

The plaintiff’s termination of employment date should have been June 8, 2011, the last date on which she was qualified for disability benefits and considered an employee of Trinity Health. At the time the plaintiff was denied long term disability benefits in October 2011, however, an error was made and the plaintiff’s termination was not processed.

In late April 2012, it was discovered that the plaintiff had not been terminated in the Trinity Health system. On April 27, 2012, Trinity Health entered the plaintiff’s termination in its system, effective June 8, 2011. Trinity Health also terminated the benefits of her husband and son effective January 1, 2012, and Trinity Health notified Blue Cross of this termination.

Although the Trinity Health system indicated a “COBRA Term Sent Date” of May 8, 2012, a COBRA notice was not sent when the plaintiff’s termination was processed. On June 8, 2012, the plaintiff received a letter from Blue Cross that her family’s health care coverage had ended on January 1, 2012.

When Trinity Health became aware of the family’s benefits situation, to assist the family in switching to the plaintiff’s husband’s employer’s plan, Trinity Health provided the plaintiff with a letter in which it explained that the plaintiff had not been given notice of the termination of her health coverage prior to June 8, 2012. The plaintiff and her family were able to join a Humana insurance health care plan offered through the plaintiff’s husband’s employer, Menards, Inc., with an effective date of June 1, 2012.

By the time the plaintiff’s benefits termination had been communicated to Blue Cross in May 2012, the plaintiff and her family had continued to be covered by Blue Cross and had received benefits through April 2012. Even though plaintiff had not paid for health insurance coverage since June 2011, Blue Cross did not deny any claims submitted by the plaintiff and her family based on the termination of coverage until May 1, 2012; it also did not seek a refund from any medical provider for any of the family’s claims covered by Blue Cross between January 1, 2012 and April 30, 2012. The plaintiff and her family had $1,307 in medical claims denied by Blue Cross beginning on May 1, 2012.

The plaintiff and her family sued Trinity Health, seeking statutory damages of $110 per day for Trinity Health’s failure to timely notify them of their right to continuing health care coverage under COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1986).

Trinity Health moved for summary judgment. It conceded that it had not sent the plaintiff and her family any COBRA notification immediately following the plaintiff’s termination but argued that a civil penalty was unwarranted because the family had received approximately 11 months of free health insurance coverage and the value of this free coverage far exceeded the $1,307 in medical claims incurred by the family before they could obtain medical coverage through Menards’ group plan. 

The court granted Trinity Health’s motion.  It noted that the statutory penalty was to be implemented “in the court’s discretion” and reasoned that the plaintiff and her family had received free health insurance coverage for a substantial period, and that because they were able to obtain health care coverage through the Menards’ plan beginning on June 1, 2012, they were without coverage for only one month. Because the family’s benefit of receiving extended free health care coverage far outweighed their claimed damages from the lack of COBRA notice, the plaintiff and her family already were in a better position than they would have been in but for the COBRA notice violation, the court stated. Thus, the court concluded, imposing a civil penalty against Trinity Health would not serve the purposes of COBRA. [Cole v. Trinity Health Corp., 2014 U.S. Dist. Lexis 7047 (N.D. Iowa Jan. 21, 2014).]

Appeals Court Affirms Judgment against Former Employee Who Was “Currently” Addicted on Date of Her Constructive Discharge

Claiming that she was forced to resign her position as a clerk at a high school on December 16, 2009 because of a disability, the plaintiff in this case sued her former employer, the Houston Independent School District (HISD), complaining of unlawful discrimination under the Texas Commission on Human Rights Act (TCHRA). Specifically, the plaintiff alleged that she had been constructively terminated “on the fact that she had just been released from an in-patient medical treatment facility” and “due to her alleged abuse of prescription medication.”

HISD moved for summary judgment, arguing that the plaintiff was not disabled under the TCHRA because the TCHRA expressly excluded addiction from the definition of disability. The plaintiff responded that the exclusion should not apply, claiming that she was not “currently” addicted on December 16, 2009, the date of her constructive termination.

The trial court granted summary judgment to HISD. The plaintiff appealed, and the Texas Court of Appeals affirmed.

In its decision, the appellate court explained that the TCHRA prohibited an employer from discharging or discriminating against an employee on the basis of disability, among other classifications. “Disability” was a defined term under the TCHRA, the appellate court continued, noting that, with respect to an individual, it was defined as “a mental or physical impairment that substantially limits at least one major life activity of that individual, a record of such an impairment, or being regarded as having such an impairment.”  The appellate court then pointed out that the TCHRA specifically excluded from this definition, “a current condition of addiction to the use of alcohol, a drug, an illegal substance, or a federally controlled substance.” 

It explained that the Texas legislature had enacted the TCHRA with the express purpose to “provide for the execution of the policies embodied in Title I of the Americans with Disabilities Act of 1990 and its subsequent amendments.”  It then observed that the exclusions under the TCHRA and the Americans with Disabilities Act were similar in both their wording and their effect, and that the purpose of both provisions was to limit the coverage of persons who might otherwise receive protections because of their addictions.  Referencing federal law, the appellate court then construed a “current condition of addiction” as a condition of addiction that was sufficiently recent to justify the employer’s reasonable belief that the addiction remained an ongoing problem. 

With this in mind, the appellate court determined that the evidence had “conclusively established” that the plaintiff, who had been admitted to the hospital on December 10, 2009 with a diagnosis of “opiate dependency” and discharged on December 15, 2009, had suffered from an opiate addiction in the days and weeks preceding her resignation. Even if the plaintiff were free from addiction on December 16, 2009, the day of her resignation, that was “[s]uch a short period of abstinence, particularly following such a severe drug problem,” that it did not remove from HISD’s mind a reasonable belief that the drug use remained a problem. Therefore, as a matter of law, it ruled, the plaintiff’s addiction was sufficiently recent at the time of her purported termination for HISD to reasonably believe that her addiction was ongoing and interfering with the essential duties of her job. [Melendez v. Houston Independent School District, 2013 Tex. App. Lexis 14765 (Tex. Ct.App. Dec. 5, 2013).]

Reprinted with permission from the May 2014 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

Related Publications

Legal updates and news delivered to your inbox