Employer’s Claims Against Ex-Employee May Not Be Set-Off Against Her FLSA Claims Against Employer

February 28, 2011 | Insurance Coverage

When the plaintiff in this case was laid off from her job at PepsiAmericas, Inc. (Pepsi), she entered into a severance agreement under which she agreed not to file “any complaints, charges, lawsuits, or any other claims against the Company arising out of the employment relationship and/or termination of employment.” In return, Pepsi agreed to provide the plaintiff with a severance package that included various benefits to which she was not otherwise entitled.

Notwithstanding the severance agreement, the plaintiff filed suit against Pepsi seeking to recover unpaid overtime wages allegedly due her under the Fair Labor Standards Act (FLSA). Pepsi moved for summary judgment, arguing, among other things, that it was entitled to set-off damages for breach of the severance agreement in the event the plaintiff prevailed at trial. The district court found in Pepsi’s favor on its right to set-off.

Pepsi thereafter moved to dismiss the case for lack of subject matter jurisdiction, arguing that the plaintiff’s FLSA claim was moot because the value of damages she could recover at trial, assuming full recovery, was less than the set-off to which Pepsi was entitled. After accounting for unpaid overtime wages and liquidated damages, the district court found that the plaintiff’s maximum potential recovery at trial ($19,320) was less than the set-off to which Pepsi was entitled ($22,997). The district court therefore granted Pepsi’s motion to dismiss, and the plaintiff appealed to the U.S. Court of Appeals for the Fifth Circuit.

In its decision, the appellate court noted that, generally speaking, courts have been hesitant to permit an employer to file counterclaims in an FLSA suit for money the employer claims the employee owes it, or for damages the employee’s allegedly tortious conduct caused. Indeed, the appellate court continued, it has ruled that “set-offs and counterclaims are inappropriate in any case brought to enforce the FLSA’s minimum wage and overtime provisions.” In the Fifth Circuit’s view, “[t]he only economic feud contemplated by the FLSA involves the employer’s obedience to minimum wage and overtime standards. To clutter [FLSA] proceedings with the minutiae of other employer-employee relationships would be antithetical to the purpose of the Act.”

The circuit court rejected Pepsi’s argument that set-offs should be allowed in FLSA cases so long as they did not result in sub-minimum wages, noting that it disfavored set-offs “unless the money being set-off can be considered wages that the employer pre-paid to the plaintiff-employee.” This case did not fit that limited exception, the Fifth Circuit concluded, because the money and benefits Pepsi paid to the plaintiff under the severance agreement were not wage payments, advance or otherwise, and, indeed, “they were not related to her labors at all.” [Martin v. PepsiAmericas, Inc., 2010 U.S. App. Lexis 26288 (5th Cir. Dec. 28, 2010).]

 LTD Plan Administrator Not Bound By Social Security Administration Disability Decision

After the plaintiff in this case was involved in an automobile accident in April 2006, his physician found that he was suffering from post-traumatic stress syndrome. The plaintiff received six months of short term disability (STD) benefits, the maximum period permitted under his employer’s STD insurance plan. Effective October 16, 2006, the plaintiff began receiving long term disability (LTD) benefits under his employer’s LTD insurance plan. The LTD plan provided that a person was eligible to receive benefits for a 12 month period as long as the person’s medical condition prevented the person from performing the material duties of his or her own occupation.  After the 12 month period had elapsed, a person was eligible to continue receiving benefits only if the person’s medical condition prevented the person from performing the duties of any occupation.  The LTD plan also contained a 24 month maximum period for payment of benefits where the person’s disability was the result of a mental or nervous condition.

In December 2008, Liberty Life sent the plaintiff a letter advising him that his LTD benefits could not be continued beyond January 15, 2009 based on its determination that he was no longer eligible for benefits. Among the reasons Liberty Life gave for discontinuing benefits was that the plaintiff was no longer suffering from a verifiable physical condition that would prevent him from performing the duties of any occupation and that he had exhausted the 24 month period for benefits caused by a mental or nervous condition.

Liberty Life rejected the plaintiff’s administrative appeal, but he subsequently obtained a “Fully Favorable” decision on his application for Social Security disability benefits.  The plaintiff then brought suit against Liberty Mutual, arguing, among other things, that the Social Security decision finding him to be disabled meant that Liberty Life’s decision denying him LTD should be reversed.

The court was not persuaded by the plaintiff’s arguments. As the court explained, a determination that a person met the Social Security Administration’s standards for disability benefits did not make the person automatically entitled to benefits under an ERISA plan, because the plan’s disability criteria might differ from the Social Security Administration’s.

Moreover, the court added, the plaintiff did not dispute that the basis for Liberty Life’s discontinuation of the plaintiff’s LTD benefits was a finding that he was no longer so disabled that he could not perform “any occupation” under the terms of the LTD plan. As the court noted, Liberty Life had found, based on the medical records submitted by the plaintiff’s physicians and by the physicians employed by Liberty Life to assess the plaintiff’s condition, that the plaintiff no longer had any physical disability sufficient to keep him from performing “any occupation.” Liberty Life’s decision stated that, based on his physical limitations, his education and his experience, the plaintiff could perform jobs within the “sedentary to light physical demand” category, including Sales Representative (Outside), Sales Representative (Inside), Sales Records Clerk, and Customer Services Representative (Telephonic). In the court’s view, this was consistent with Social Security’s finding, which determined that the plaintiff had the physical functional capacity to do light work.

The court found that the difference between the two determinations was that the Social Security determination of disability took the plaintiff’s mental disability into account in determining total disability, which Liberty Life’s plan did not, because the LTD plan only provided benefits for 24 months to a beneficiary whose disability was based on a mental or nervous condition – and because Liberty Life already had paid benefits to the plaintiff based on his post-traumatic stress disorder for 24 months.

Finally, the court rejected the plaintiff’s claim that his post-traumatic stress disorder had an organic origin, which would make it physical in nature and thus qualified for continued LTD benefits under the plan, noting that there was “no factual record” to support this. In the absence of any evidence in the administrative record that the disability suffered by the plaintiff was organic in origin, the court ruled that it seemed “clear” that Liberty Life’s decision was “the result of a deliberate, principled reasoning process” supported by substantial evidence. [Mansoob v. Liberty Mutual, 2010 U.S. Dist. Lexis 123846 (E.D. Mich. Nov. 23, 2010).]

 Widow Not Entitled To AD&D Benefits Following Husband’s Death After Surgery

Anthony Sellers worked at Time Warner Cable Company and participated in Time Warner’s ERISA-governed employee welfare benefit plan, which included an accidental death and dismemberment (AD&D) insurance policy. On September 15, 2005, he tore a tendon in his knee while performing training exercises at work. Sellers underwent surgery to repair the torn tendon on September 29, 2005. During that surgery, his surgeon inserted a metal wire in his knee to assist in the healing process. Prior to the surgery, his surgeon explained that she likely would remove the wire four to six months after surgery.

On April 3, 2006, Sellers saw his surgeon for a follow-up appointment. Because he was not having any knee pain at that time, the surgeon decided not to remove the wire until symptoms occurred. Sellers saw his surgeon for another office visit later that spring, at which time he complained that his knee was swelling. The surgeon recommended that he undergo surgery to remove the wire after x-rays revealed that it had broken into three pieces. On November 16, 2006, Sellers had surgery to remove the broken wire.

Nine days later, on November 25, 2006, Sellers died from what an autopsy determined to be acute pulmonary embolism with infarct, due to immobilization following the wire removal.

In March 2007, Sellers’ widow submitted a claim for benefits under the AD&D policy to the plan administrator, Zurich American Insurance Company. The accidental death provisions of the policy provided that benefits were due “[i]f injury to a Covered Person results in Loss of Life . . . within 365 days of the accident.” The policy defined “injury” as “an accidental bodily injury which is a direct result, independent of all other causes of a hazard set forth in the ‘Description of Hazards.'”  The policy did not define “accident,” or “accidental.” Instead, it granted Zurich “discretionary authority to determine eligibility for benefits and to construe the terms of the plan.” Expressly excluded from coverage under the policy were deaths caused by “illness[,] . . . sickness, disease, bodily infirmity or medical or surgical treatment thereof, or bacterial or viral infection, regardless of how contracted.”

Given these provisions, Zurich denied the claim. To the extent that Sellers’ death could be traced to the September 15, 2005 knee injury, Zurich concluded that his widow was not entitled to benefits because the accident had occurred more than 365 days before Sellers’ death. Zurich rejected the argument that the wire breakage constituted an “accidental bodily injury,” reasoning that such medical device failures were not accidents under the policy.

After exhausting her internal appeals, Sellers’ widow brought suit against Zurich to recover death benefits. The parties moved for summary judgment and the district court found that Zurich had failed to support its conclusion, with adequate findings and reasoning, that the break in the wire was not an accident under the policy. The district court therefore remanded the case to Zurich for a new determination of the plaintiff’s claim.

Upon reconsideration, Zurich again denied the claim, concluding that the wire breakage was not an accidental injury under the policy. In reaching that conclusion, Zurich defined the term “accident” as an “unexpected event[ ] of a fortuitous nature.” Relying on the statement in Sellers’ surgeon’s notes that “the wire has broken, which in many degrees, is expected,” Zurich concluded the wire breakage could not be considered accidental because it was expected. The plaintiff appealed, contending that where a patient died as a result of surgery that was necessitated by an accident, the patient’s death was accidental. In particular, the plaintiff contended that Sellers underwent the November 2006 surgery because of the wire break – which, she argued, was an accident – and thus his death should be deemed accidental. Zurich responded by maintaining that the wire break was not an accident.

The district court granted summary judgment in favor of Zurich, concluding that Zurich’s decision denying her claim because the wire break was expected was reasonable. She appealed to the U.S. Court of Appeals for the Seventh Circuit.

In its decision, the circuit court explained that the question was whether Zurich’s interpretation of the term “accident,” as used in the plan, had “rational support in the record.” It then decided that Zurich’s determination that the wire break was not an accident because it was expected was “not reasonable.” The circuit court reasoned that Zurich had interpreted the term “accident” as an event that Sellers’ surgeon would consider to be “unexpected” or “fortuitous.” However, the Seventh Circuit decided, Zurich had erred by applying the definition of “accident” from the point of view of a medical professional, rather than “a person of average intelligence and experience” in Sellers’ shoes. By failing to interpret the plan as a person of average intelligence and experience would, “Zurich acted arbitrarily and capriciously.”

Despite this finding, the circuit court did not rule for the plaintiff. It reasoned that the fact that the wire might break was a risk associated with the original operation, as evidenced by the fact that Sellers’ surgeon expected it might break. Therefore, to the extent that the breaking of the wire was an injury, it was a result of the first surgery. Further, the circuit court found that the wire breakage was an injury due to medical treatment and that injuries “resulting from medical treatment” were not accidents as that term was used in AD&D policies. It concluded that to the extent that Sellers’ death could be traced to any accidental injury, it was to the September 2005 injury. However, because that injury predated his death by more than 365 days, the plaintiff was not entitled to benefits under the AD&D policy. [Sellers v. Zurich American Ins. Co., 2010 U.S. App. Lexis 24682 (7th Cir. Dec. 3, 2010).]

Administrator Did Not Violate Its Fiduciary Duty To Plan, Circuit Court Rules

Blue Cross Blue Shield of Michigan (BCBSM), a non-profit health care corporation that provides a number of health care services to employers and individuals, offers three forms of health-care coverage: a traditional open-access plan, a preferred provider (PPO) plan, and a health maintenance organization (HMO) that BCBSM operates through a subsidiary, Blue Care Network. In many cases, BCBSM offers insured health care coverage, for which an employer or individual pays a fixed premium and BCBSM bears the risk that actual expenses will exceed that premium. BCBSM also administers self-insured plans, providing services for a fee, and the plan then reimburses BCBSM for actual medical expenses. In that situation, the plan bears the risk that medical expenses will exceed expectations. For each of its coverage options, BCBSM negotiates rates with Michigan health-care providers such as doctors and hospitals. There are separate rates negotiated with health care providers for each of its three coverage options – the traditional plan, the PPO plan, and the HMO – but rates are standard within each category.

In January 1996, Flagstar Bank entered into a contract with BCBSM under which BCBSM agreed to provide claims-processing and other administrative services for the Flagstar Plan in return for a fee. Prior to 2004, the rates paid to health care providers by BCBSM’s traditional and PPO plans were lower than the rates paid by the HMO to many health care providers. Beginning around 2004, in an effort to increase the HMO’s competitiveness and to simplify pricing structures, BCBSM negotiated a series of letters of understanding with various hospitals that altered these preexisting rate agreements. Typically, these agreements were structured to equalize the rates paid by the HMO with those paid by the PPO plan. BCBSM agreed to make the rate adjustments budget-neutral for the health-care providers by increasing the PPO and traditional plan rates to make up for the decrease in the HMO rates. Some of these rate adjustments were retroactive to the beginning of the year in which they were negotiated.

The plaintiff in this case, a practicing attorney, was a beneficiary of the Flagstar Bank Group Health Plan through his wife’s participation as a Flagstar Bank employee. He claimed that BCBSM had violated its fiduciary duty under its contract with Flagstar Bank by agreeing to increase its traditional and PPO plan rates in exchange for decreases in the HMO rates. The district court concluded that BCBSM was not acting as a fiduciary for the Flagstar Bank plan when it negotiated the rate adjustments, and it rejected the plaintiff’s claims. The plaintiff appealed to the U.S. Court of Appeals for the Sixth Circuit.

The circuit court pointed out in its decision that ERISA has strict fiduciary duty provisions. However, it continued, those standards apply only when an individual or entity is acting as a fiduciary, and it agreed with the district court that BCBSM was not acting as a fiduciary for the Flagstar Bank plan when it negotiated the rate adjustments.

As the circuit court explained, BCBSM acted as a fiduciary as the administrator and claims-processing agent for the plan by, for instance, making discretionary eligibility determinations. But a party is subject to fiduciary liability under ERISA only when the party is acting as a fiduciary (that is, is performing a fiduciary function) when taking the action subject to complaint. For purposes of this case, therefore, BCBSM’s liability depended on whether BCBSM was a fiduciary in its second capacity: as a distributor of health care services, negotiating discounted rates for such services and passing the savings along to Flagstar Bank. The appellate court then concluded, as did the district court, that BCBSM was not acting as a fiduciary with respect to the Flagstar plan when it negotiated the challenged rate changes, principally because those business dealings were not directly associated with the Flagstar Bank plan but were generally applicable to a broad range of health care consumers.

The appellate court concluded that a contrary analysis – one saddling BCBSM with the fiduciary obligation to negotiate Flagstar-Plan-specific rates – would be self-defeating. It observed that BCBSM was continuously in the process of re-negotiating prices for its three health care coverage options and, thus, had to continuously determine how much of that market power to allocate to achieving discounted prices for each of these options. It concluded that if BCBSM would be required to negotiate solely on a plan-by-plan basis, as a practical matter its economic advantage in the market would be destroyed, damaging its ability to do business on a system-wide basis, ultimately to the Flagstar Plan beneficiaries’ disadvantage. [DeLuca v. Blue Cross Blue Shield of Michigan, 2010 U.S. App. Lexis 24998 (6th Cir. Dec. 8, 2010).]

 Employee’s Primary Duties Were Management, Despite Limited Time Involved In Management

In this case, the plaintiff was employed as site manager at Hess Corporation’s store in Lancaster County, Pennsylvania. Her responsibilities included supervision of other employees, scheduling of employees, delegating duties to site employees, recruiting, hiring, and training. She also was responsible for the site’s overall profitability, maintenance, and safety. She spent 85 percent of her time operating the cash register and approximately one-half hour to one hour per day on management responsibilities. She worked approximately 70 hours per week and was compensated at an annual salary of $34,000. She was not paid for overtime work.

The plaintiff alleged that the denial of overtime pay for the hours she worked in excess of 40 hours per week violated the Fair Labor Standards Act. She claimed that, because she did not spend at least 60 percent of her time performing executive duties, she did not qualify for the FLSA’s administrative employee exemption. That exemption provides that any person employed in a bona fide executive, administrative, or professional capacity is exempt from the FLSA’s mandatory overtime compensation provision.

The district court rejected the plaintiff’s argument that she had to spend a minimum of 60 percent of her time on managerial duties to qualify as an executive and explained that the Secretary of Labor has promulgated qualitative factors to be used in evaluating whether an employee qualified as an executive. Considering these factors, the district court concluded that the plaintiff was a bona fide executive employee. She appealed to the U.S. Court of Appeals for the Third Circuit, arguing that the district court had erred by finding that she was a bona fide “management” employee when she spent at least 85 percent of her work day performing non-exempt duties.

The Third Circuit affirmed the district court’s decision. In its view, the district court had properly found that the Labor Department regulations set forth a qualitative, not quantitative, test for whether an employee is a bona fide executive. Under this multi-factor test, the circuit court continued, the primary factor was not the most time-intensive of an employee’s functions but instead the “principal, main, major or most important” duty performed by the employee, regardless of how much time the employee devoted to it. Under this qualitative test, the Third Circuit ruled, the plaintiff qualified as an exempt executive employee. It explained that the plaintiff was the sole manager of the Lancaster site and was held accountable for the profit and loss at the site; she was subject to minimal supervision but fully responsible for the supervision of several employees whom she hired, trained, and fired; and she was making 40 percent more than the hourly-wage employees at the site. Although the plaintiff spent a large amount of her time operating the cash register, a non-exempt activity, the circuit court ruled that a qualitative assessment of her responsibilities demonstrated that her primary duty was management. Thus, it concluded, she was not entitled to overtime compensation under the FLSA. [Soehnle v. Hess Corp., 2010 U.S. App. Lexis 22768 (3rd Cir. Nov. 1, 2010).]

Reprinted with permission from the March 2011 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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