From the Courts

Private Settlements of FLSA Claims Require Court or DOL Approval, Second Circuit Rules

The plaintiff in this case worked at both Freeport Pancake House, Inc., and W.P.S. Industries, Inc. (together, Freeport Pancake House) as a restaurant server and manager over the course of several years. In August 2012, the plaintiff sued Freeport Pancake House, seeking to recover overtime wages, liquidated damages, and attorneys’ fees under the federal Fair Labor Standards Act (FLSA) and under New York labor law. The plaintiff also alleged that he had been demoted, and ultimately fired, for complaining about Freeport Pancake House’s failure to pay him and other employees the required overtime wage.

The plaintiff sought back pay, front pay in lieu of reinstatement, and damages for the unlawful retaliation. Freeport Pancake House denied the plaintiff’s allegations.

The parties agreed on a private settlement of the plaintiff’s action. The parties then filed a joint stipulation and order of dismissal with prejudice with the U.S. District Court for the Eastern District of New York.

The district court declined to accept the stipulation as submitted, concluding that the plaintiff could not agree to a private settlement of his FLSA claims without either the approval of the district court itself or the supervision of the U.S. Department of Labor (DOL). The district court directed the parties to file a copy of the settlement agreement on the public docket and to show cause why the proposed settlement reflected a “reasonable compromise” of disputed issues rather than a mere waiver of statutory rights brought about by “an employer’s overreaching.”

The district court further ordered the parties to show cause by providing the court with additional information in the form of affidavits or other documentary evidence explaining why the proposed settlement was fair and reasonable.

Rather than disclose the terms of their settlement, the parties instead asked the district court to stay further proceedings and to certify to the U.S. Court of Appeals for the Second Circuit the question of whether FLSA actions were an exception to the general rule in federal court that parties may stipulate to the dismissal of an action without the involvement of the court. The district court stayed the case and certified the question to the Second Circuit.

The Second Circuit affirmed the district court’s decision, ruling that “stipulated dismissals settling FLSA claims with prejudice require the approval of the district court or the DOL to take effect.” The circuit court concluded that that was required even where the employees were represented by counsel. [Cheeks v. Freeport Pancake House, Inc., 2015 U.S. App. Lexis 13815 (2d Cir. Aug. 7, 2015).]

After Describing Standard for Reviewing Plan Administrator’s Decision, Circuit Upholds Ruling

The plaintiff in this case sued her employer, American Airlines, Inc., and the American Airlines Pension Benefits Administration Committee (PBAC) under the Employment Retirement Income Security Act of 1974 (ERISA). The plaintiff sought a refund of insurance premiums from American’s group life and health benefits plan that she paid for medical coverage of her daughter on the ground that the coverage had erroneously been reinstated upon the plaintiff’s return to work from a four-year leave of absence.

The U.S. District Court for the Southern District of Florida ruled in favor of the defendants, and the plaintiff appealed to the U.S. Court of Appeals for the Eleventh Circuit.

The circuit court affirmed the district court’s decision, rejecting the plaintiff’s argument that the district court had erred in granting summary judgment in favor of the defendants.

The circuit court explained that, although ERISA does not provide any standards for reviewing a plan administrator’s determination, it had developed the following six-part test:

(1) A court should apply a de novo standard to determine whether the claim administrator’s benefits-denial decision was “wrong” (that is, whether the court disagreed with the administrator’s decision); if it was not “wrong,” then the court should end the inquiry and affirm the claim administrator’s decision. (2) If the administrator’s decision in fact was de novo wrong, then the court should determine whether the administrator was vested with discretion in reviewing claims; if not, the court should end the judicial inquiry and reverse the administrator’s decision. (3) If the administrator’s decision was de novo wrong, and the administrator was vested with discretion in reviewing claims, then the court should determine whether “reasonable” grounds supported the decision (in other words, the court should review the administrator’s decision under the more deferential “arbitrary and capricious” standard than the de novo standard). (4) If no reasonable grounds existed for the administrator’s decision, then the court should end the inquiry and reverse the administrator’s decision; if reasonable grounds existed, then the court should determine if the administrator operated under a conflict of interest. (5) If there was no conflict, then the court should end the inquiry and affirm the administrator’s decision. (6) If there was a conflict, the conflict merely should be a factor for the court to take into account when determining whether the administrator’s decision was arbitrary and capricious.

In this case, the circuit court said, its inquiry ended after application of the first prong of the test because, based on the record available to the PBAC, its decision that the plaintiff was not entitled to a refund was not de novo wrong. The Eleventh Circuit observed that the plan guidelines required the plaintiff to file a life event requesting that her daughter’s medical coverage be waived within 60 days of her return to work. Because she failed to make this request after she returned to work in 2010, the benefits she had in place prior to her 2006 leave-of-absence, which included medical coverage for herself and her daughter, were automatically reinstated.

Moreover, the circuit court continued, the plan guidelines provided that benefit elections made during a leave-of-absence only applied for the duration of the leave-of-absence. Thus, although the plaintiff waived medical coverage in February 2011 during her second leave-of-absence, which commenced in January 2011, that waiver only applied to the duration of that second leave and, when she returned to work in March 2011, the benefits that she had in place prior to that leave automatically were reinstated.

In short, the Eleventh Circuit concluded, the PBAC’s decision was based on the explicit terms of the plan guidelines and was not de novo wrong. Accordingly, the district court had not erred by granting summary judgment to American Airlines and the PBAC. [Lesnick-Oakes v. American Airlines, Inc., 2015 U.S. App. Lexis 12769 (11th Cir. July 24, 2015).]

Circuit Rejects Plaintiff’s Claims for Penalties and Attorneys’ Fees Based on Failure to Receive Plan Documents

In this case, the plaintiff sued Smile Brands, Inc., and Hartford Life and Accident Insurance Company for statutory penalties and attorney’s fees under the Employment Retirement Income Security Act of 1974 (ERISA), alleging that they had not supplied her with certain required plan documents. The U.S. District Court for the Middle District of Florida ruled in favor of the defendants, and the plaintiff appealed to the U.S. Court of Appeals for the Eleventh Circuit.

The circuit court affirmed.

In its decision, the Eleventh Circuit explained that ERISA authorizes district courts to impose a daily penalty on any plan administrator that “fails or refuses to comply with a request for information which such administrator is required . . . to supply to a participant or a beneficiary.” Specifically, the circuit court continued, ERISA requires a plan administrator to furnish the following upon request: “the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established and operated.”

The circuit court then observed that, under ERISA, a plan administrator is either “the person specifically so designated by the terms of the instrument under which the plan is operated” or a company acting as a plan administrator. Here, the Eleventh Circuit noted, Smile Brands’ long term disability plan “expressly identified” Smile Brands as the plan administrator – not Hartford, which was a third-party claims administrator. Moreover, the circuit court continued, Hartford also was not the de facto administrator given that Smile Brands retained the authority to make final decisions on appeal from Hartford. Thus, Hartford was not the plan administrator, either in name or in fact, and was not subject to statutory penalties for failing to furnish the plaintiff with plan documents, the circuit court ruled.

The Eleventh Circuit also upheld the district court’s decision refusing to impose statutory penalties on Smile Brands. It found that the plaintiff had contacted Smile Brands and had received the relevant plan documents no later than February 29, 2012. When the plaintiff’s benefits were subsequently terminated, she requested the documents again. This time, however, the plaintiff directed her request to Hartford and not to Smile Brands. According to the circuit court, Hartford provided the plaintiff with an outdated address for Smile Brands, which was the same address listed in the plan documents. The circuit court added that although counsel for the plaintiff had successfully contacted Smile Brands at its correct address several times, the plaintiff sought to obtain plan documents this second time from Smile Brands by letter addressed to the outdated address listed in the summary plan description, and her letter was returned as undeliverable. Accordingly, the Eleventh Circuit ruled, Smile Brands had “no knowledge” that the plaintiff was attempting to obtain the same plan documents she had received in 2012 until it was sued in 2014.

The circuit court found that there was no evidence that Smile Brands had refused or had failed to provide the plaintiff with the relevant documents, which already were in her possession. Given these facts, it ruled, the district court had not erred in denying disclosure penalties against Smile Brands.

Finally, the Eleventh Circuit concluded that because the plaintiff had not succeeded on the merits of her claims against Hartford or Smile Brands, she was not entitled to attorneys’ fees under ERISA. [Smiley v. Hartford Life and Accident Ins. Co., 2015 U.S. App. Lexis 12334 (11th Cir. July 17, 2015).]

Obstetrician Who Could No Longer Perform Surgery, But Who Could Perform Other Duties, Was Not Entitled to Total Disability Benefits

In 2001, the plaintiff, a board-certified obstetrician/gynecologist, joined Western OB/GYN in Waconia, Minnesota. Her practice included the full range of OB/GYN services, including deliveries, surgeries, routine examinations, counseling, and cancer screenings.

On May 16, 2012, the plaintiff, who had epilepsy, experienced a syncope episode while performing surgery, which caused her to lose consciousness. She eventually returned to work with restrictions, including having another surgeon present during all surgical procedures. On September 14, 2012, the restrictions were lifted.

In early November 2012, the plaintiff experienced a second syncope episode, after which her physician advised her that she could no longer safely perform deliveries or surgical procedures. The plaintiff did not return to work at Western OB/GYN.

The plaintiff submitted a claim for total disability benefits with The Northwestern Mutual Life Insurance Company.  The plaintiff’s policy provided both total disability and partial disability benefits.

Northwestern Mutual requested the plaintiff’s billing records for the preceding year and for the seven-and-one-half months after the first episode in order to evaluate the extent of her disability. After reviewing the “current procedure terminology” (CPT) codes associated with the plaintiff’s billing records, Northwestern Mutual determined that the plaintiff’s non-surgical gynecologic duties accounted for 63 percent of her pre-disability duties (and 33 percent of the related charges), and that she still was able to perform those duties. Accordingly, Northwestern Mutual denied the plaintiff’s claim for total disability benefits, but commenced paying her partial disability benefits.

The plaintiff sued Northwestern Mutual, seeking a declaration that she was entitled to total disability benefits. She asserted that her inability to perform surgeries, deliver babies, cover call, and perform obstetrics-related work rendered her totally disabled as defined by the policy.

The trial court granted summary judgment in favor of Northwestern Mutual, concluding that “[u]nder no reasonable interpretation of the policy and this record, can the broad constellation of duties that [the plaintiff] continues to be able to perform be considered non-principal duties of an OB/GYN.” The plaintiff appealed.

The Minnesota appellate court affirmed the trial court’s decision.

The appellate court found that the policy provided that an insured was “totally disabled” when the insured was unable to perform the “principal duties” of his or her occupation. The appellate court also noted that the policy provided that an insured was “partially disabled” when the insured was not able “to perform one or more principal duties which accounted for at least 20% of the time [the insured] spent at [the insured’s] occupation before the disability started.” Read together, the appellate court said, these provisions meant that an insured might have more than one principal duty and that an insured was not totally disabled when the insured still could perform at least one of his or her principal duties.

The appellate court was not persuaded by the plaintiff’s argument that office work was secondary to the principal duties of an OB/GYN and that she did not consider non-surgical gynecologic work a principal duty because a physician could not maintain a viable practice providing only such services. The appellate court reasoned that the insurance policy did not condition entitlement to total disability benefits on an insured’s employability. In other words, the appellate court said, the relevant inquiry was not whether the plaintiff was unable to maintain a practice, but rather whether she was unable to perform any of the principal duties of an OB/GYN.

The appellate court then ruled that although delivering babies and performing surgery unquestionably were principal duties of an OB/GYN, they were “not the only principal duties.” It concluded that the fact that the plaintiff still could provide services that comprised 42 percent of her production before the onset of her disability established that she was “not totally disabled.” [Hansen v. Northwestern Mutual Life Ins. Co., 2015 Minn. App. Unpub. Lexis 740 (Minn. Ct.App. Aug. 3, 2015).]

Circuit Court Rejects Decision Finding No Successor Liability on Company that Purchased Assets of Union Employer

In August 2009, ManWeb Services, Inc., an Indianapolis-based company that performs engineering, construction, and installation-related services, entered into an asset purchase agreement (APA) with Tiernan & Hoover, another Indianapolis-based electrical contractor that performed engineering, construction, and service for cold storage facilities.

Unlike ManWeb, a non-union employer, Tiernan & Hoover was party to a collective bargaining agreement (CBA) with IBEW Local 481 Union, in accordance with which it made contributions to the Indiana Electrical Pension Benefit Plan, a multiemployer pension fund.

As a result of the asset purchase, Tiernan & Hoover ceased operations and no longer had an obligation to contribute to the plan. Although ManWeb continued to do the same type of work in the jurisdiction of the CBA for which contributions were previously required of Tiernan & Hoover, ManWeb did not make any contributions to the plan following its purchase of Tiernan & Hoover’s assets.

On February 24, 2010, counsel for the plan sent a letter addressed to Tiernan & Hoover’s former Indianapolis address, indicating that the plan had determined that the company had effectuated a complete withdrawal from the plan in August 2009 and that, pursuant to Section 4202 of the Employee Retirement Income Security Act of 1974 (ERISA), the plan had assessed withdrawal liability against Tiernan & Hoover. The letter indicated that Tiernan & Hoover owed $661,978 in withdrawal liability.

Pursuant to a mail forwarding instruction, the letter was forwarded to ManWeb’s address in Indianapolis, where it was received and signed for by a ManWeb employee. No payments were ever made to satisfy this liability and the assessment against Tiernan & Hoover became due and owing after its failure to request review and initiate arbitration within the statutory deadline.

As a result of Tiernan & Hoover’s failure to make withdrawal payments, the plan filed a collection action in federal court against Tiernan & Hoover. The plan added ManWeb as a defendant under a theory of successor liability. At the close of discovery, the parties filed cross-motions for summary judgment. The district court granted the plan’s motion in part, finding that Tiernan & Hoover had waived its right to dispute the assessment of withdrawal liability by failing to initiate arbitration proceedings and, therefore, owed the full amount of the assessment. However, with respect to the plan’s claim of successor liability against ManWeb, the district court held that ManWeb was not liable to the plan and it granted ManWeb’s motion for judgment as a matter of law.

The plan appealed to the U.S. Court of Appeals for the Seventh Circuit, which reversed the district court’s decision.

The circuit court first found that ManWeb had notice of Tiernan & Hoover’s contingent withdrawal liability. It noted that, prior to finalizing the purchase of Tiernan & Hoover’s assets, ManWeb had conducted pre-purchase negotiations, had performed the due diligence necessary to evaluate the asset sale, and its key decision-makers had been “aware of Tiernan & Hoover’s union obligations and shared concerns related to unfunded pension plan liabilities.”

The circuit court also pointed out that Tiernan & Hoover’s contingent withdrawal liability was explicitly included in the APA through reference to and attachment of Tiernan & Hoover’s financial statements and balance sheets for the years 2006 and 2007. These documents, the Seventh Circuit continued, were turned over to ManWeb as part of ManWeb’s pre-purchase due diligence and expressly stated that Tiernan & Hoover “contributes to various multi-employer, union-sponsored pension plans” and that, as such, Tiernan & Hoover was subject to certain liabilities imposed by ERISA and the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), including “the share of the plan’s unfunded vested liabilities allocable to [Tiernan & Hoover] upon withdrawal from the union or termination of the plan for which [Tiernan & Hoover] may be contingently liable.”

The Seventh Circuit also explained that the APA included an “Excluded Liabilities” clause that provided that ManWeb was not obligated to assume and did not agree to assume any liability or obligation “arising out of or related to union related activities, including without limitation pension obligations,” or “under any Benefit Plan” (a term that was defined in the agreement to include each “Pension Plan and Multiemployer Plan of Seller”). These sections of the APA, coupled with ManWeb’s knowledge of unfunded pension liabilities, established that ManWeb “had sufficient pre-acquisition notice of Tiernan & Hoover’s contingent withdrawal liability to satisfy the federal successor liability notice requirement,” according to the Seventh Circuit.

Then, the Seventh Circuit decided that imposing successor liability on ManWeb was equitable, given that ManWeb had sought to protect itself against liability. The circuit court noted that ManWeb had obtained indemnification “from, against and in respect of any and all losses, liabilities . . . and expenses whatsoever . . . that may be incurred by [Tiernan & Hoover] from or by reason of . . . any inaccuracy or representation or breach of warranty made by [Tiernan & Hoover] in this Agreement . . . [and] the Excluded Liabilities.” Moreover, the Seventh Circuit continued, ManWeb, having knowledge of Tiernan & Hoover’s potential withdrawal liability, could have required Tiernan & Hoover to obtain an estimate of its withdrawal liability in order to negotiate a lower purchase price.

Accordingly, the circuit court reversed the district court’s grant of judgment as a matter of law to ManWeb and its denial of summary judgment to the plan. [Tsareff v. ManWeb Services, Inc., 2015 U.S. App. Lexis 12924 (7th Cir. July 29, 2015).]

Reprinted with permission from the November 2015 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.