Employee Benefit Plan Review – From the Courts – March 2016

March 1, 2016 | Insurance Coverage

Fourth Circuit Rules that Employee Handbook’s Arbitration Provision Was Unenforceable

The plaintiff in this case began working for Prime Communications, L.P., an authorized retailer of AT&T wireless communication devices and services, in October 2009 as a “solutions specialist” in a retail store in Fuquay-Varina, North Carolina. As a solutions specialist, the plaintiff sold merchandise and cell-phone service plans, among other things. In February 2010, she was promoted to store manager of a retail store in Raleigh, North Carolina.

As a solutions specialist, the plaintiff received hourly wages, which were paid biweekly, and was paid a variable commission based on the gross profit of individual sales that she made. As a store manager she received a salary, which was paid biweekly, and was paid a variable commission based on the gross profits of the store, which was sometimes referred to as a bonus.

The plaintiff sued Prime Communications in February 2012 under the federal Fair Labor Standards Act (FLSA), alleging that Prime Communications had deprived her of lawful wages in violation of the FLSA. More particularly, she alleged that Prime Communications had incorrectly calculated her commissions and bonuses and had failed to pay her overtime pay, even though she had worked more than 40 hours per week.

Relying on an arbitration provision contained in its employee handbook (the Handbook), Prime Communications filed a motion to compel arbitration. The Handbook committed “all employment issues” first to an internal dispute resolution process, then to mediation, and finally to arbitration. It provided that employees “waived all rights to bring a lawsuit and to a jury trial regarding any dispute,” including claims under the FLSA.

The U.S. District Court for the Eastern District of North Carolina denied Prime Communications’ motion, concluding that it had not provided sufficient evidence that the plaintiff had agreed to arbitration. The district court held that the plaintiff’s mere receipt of the Handbook and her continued work for Prime Communications after receiving it were insufficient evidence of the plaintiff’s agreement to the Handbook’s arbitration provision.

In response to Prime Communications’ argument that its routine requirement for employees to execute a form acknowledging receipt of the Handbook was sufficient evidence of the plaintiff’s agreement, the district court noted that Prime Communications “ha[d] been unable to produce any signed acknowledgment form signed by [the plaintiff]” and, therefore, found the argument “untenable.”

About two months later, Prime Communications located a copy of the acknowledgment form that the plaintiff had signed and asked the district court to reconsider its ruling denying arbitration. The form stated:

I understand that I am responsible for reviewing the Prime Communications Employee Handbook.

* * *

I understand that the Prime Communications’ Employee Handbook is not a contract of employment and does not change the employment-at-will status of employees. Moreover, no provision should be construed to create any bindery [sic] promises or contractual obligations between the Company and the employees (management or non-management).

* * *

By my signature below, I acknowledge, understand, accept, and agree to comply with the information contained in the Employment Handbook. I acknowledge that I will review and read the Company Handbook and that I have the opportunity to ask my Manager questions about the Handbook. I further acknowledge that I fully understand or will make sure that I do understand the contents there of, as they relate to my employment with Prime Communications. I understand that the information contained in the Handbook are guidelines only and are in no way to be interpreted as a contract.

The district court refused to change its position, reasoning that the acknowledgment form explicitly stated that the Handbook did “not create a contract.”

Prime Communications appealed to the U.S. Court of Appeals for the Fourth Circuit, challenging the district court’s order denying its renewed motion to compel arbitration. Prime Communications contended that the district court had erred in refusing to compel arbitration because the plaintiff had “agreed to arbitrate all disputes relating to her employment by affirmatively assenting to the provisions of Prime’s Employee Handbook, which include[d] a dispute resolution provision requiring arbitration.” It argued that the arbitration provision of the Handbook was binding under the Federal Arbitration Act (FAA) and that, under existing case law, arbitration should be favored and, therefore, “any doubts must be resolved in favor of arbitration as a matter of federal law.”

The plaintiff responded by pointing to the express language of her signed acknowledgment form, which denied that any provisions in the Handbook created a contract. She asserted that, “where a signed acknowledgment page repeatedly states that no provisions in the Handbook are contractual,” the Handbook could not be found to have created a contract. She argued that the acknowledgment form did not exempt the Handbook’s arbitration provision from the acknowledgment form’s explicit statements disclaiming that the Handbook established any binding obligations.

The circuit court affirmed the district court’s decision.

In its ruling, the circuit court found that the parties had not entered into a contract to commit employment disputes to arbitration. It observed that the acknowledgment form provided that the terms of the Handbook, including its arbitration provision, were “guidelines only” that did “not create any binding commitments.” Moreover, the circuit court continued, the acknowledgment form that Prime Communications had drafted and that the plaintiff had signed “expressly disclaimed any implied agreement to be contractually bound by any terms” in the Handbook.

Therefore, the Fourth Circuit found, any implied assent that might have been created by the plaintiff’s receipt and review of the Handbook and by her continued employment “was nullified by the express agreement of the parties not to be bound by any of the Handbook’s terms.” [Lorenzo v. Prime Communications, L.P., 806 F.3d 777 (4th Cir. 2015).]

Circuit Court Upholds Plan Administrator’s Decision to Prorate Bonuses Earned in Year Preceding Disability Over 12 Months

In this case, the plaintiff was covered by a long-term disability insurance policy issued by Hartford Life and Accident Insurance Company to Cadence Design Systems, Inc., where the plaintiff was employed as a software architect before becoming disabled.

The plaintiff submitted a long-term disability claim to Hartford in August 1995. On April 1, 1996, Hartford approved the claim, finding that as of May 13, 1995, the plaintiff was totally disabled from performing his job due to a repetitive stress injury.

Hartford calculated the plaintiff’s monthly benefit as $3,801.95, or 70 percent of a pre-disability monthly income of $5,431.35. This figure did not include any of the plaintiff’s bonus income.

In August 1995, Cadence awarded the plaintiff an “MBO/Key Contributor Bonus” of $5,964.78. Under Cadence’s “Key Contributor Bonus Plan,” the amount of this bonus was determined based on the plaintiff’s work “for the period January 1, 1995 to June 30, 1995.”

On February 14, 2001, the plaintiff wrote to Hartford and requested that it include all the bonuses he had earned prior to becoming disabled – among them the MBO/Key Contributor Bonus – in its calculation of his pre-disability monthly income. He requested that the MBO/Key Contributor Bonus be prorated over the six-month period in which he had earned it.

When Hartford did not respond, the plaintiff filed a complaint with the California Department of Insurance (the Department). Thereafter, the Department wrote to Hartford and demanded that it investigate the plaintiff’s claim that his benefit had been incorrectly calculated and inform the plaintiff in writing of the results within 21 days.

Hartford responded to the plaintiff and explained that it had recalculated his monthly benefit to include the bonuses he had received in the year before he had become disabled, and that he would receive a monthly benefit of $3,989.10, based on a monthly rate of basic earnings of $5,698.95. Hartford also paid the plaintiff corresponding retroactive benefits, with 10 percent interest. In recalculating the plaintiff’s monthly benefit, however, Hartford did not include the several bonuses that the plaintiff had earned in the year preceding the onset of his disability, but had not received until after he had become disabled, among them the MBO/Key Contributor Bonus.

The plaintiff wrote to Hartford requesting that all the bonuses he had earned in the 12 months before he had become disabled be included in the calculation of his “Monthly Rate of Basic Earnings.” Hartford reviewed his file and agreed to include the MBO/Key Contributor Bonus and one other bonus that the plaintiff had received in August 1995. Hartford recalculated the plaintiff’s monthly benefit to be $4,460.36 and paid him retroactive benefits, together with interest commencing on the day when the plaintiff first disputed Hartford’s recalculation of his benefits.

As part of this calculation, Hartford averaged the plaintiff’s MBO/Key Contributor Bonus over 12 months.

The plaintiff again wrote to Hartford, arguing that the MBO/Key Contributor Bonus should be averaged over the six-month period in which he had earned it. In response, Hartford explained that “unless otherwise specified in the policy, bonuses are averaged over a twelve month time period.”

The plaintiff sued Hartford, alleging that it had abused its discretion in calculating his monthly rate of benefits under the plan by improperly prorating his MBO/Key Contributor Bonus over a 12 month, rather than a six month, period. The U.S. District Court for the Northern District of California rejected his argument, and the plaintiff appealed to the U.S. Court of Appeals for the Ninth Circuit.

The circuit court affirmed the district court’s decision.

The circuit court explained that, under the policy, the plaintiff was entitled to receive a monthly benefit equal to 70 percent of his pre-disability monthly income. The circuit court added that pre-disability monthly income was determined by calculating “Monthly Rate of Basic Earnings,” defined as “regular monthly pay, including bonuses” at “the rate in effect on your last day as an Active Full-time Employee before becoming Disabled.” The Ninth Circuit found that definition to be ambiguous as applied to bonuses, because the plan did not set out any methodology of accounting for bonuses in calculating the “Monthly Rate of Basic Earnings” – that is, it did not state exactly how to prorate a bonus to get a proper “rate in effect.”

The circuit court observed that the plan conferred discretion on Hartford, the plan administrator “to determine eligibility for benefits or to construe the terms of a plan.” It pointed out that Hartford had a policy to prorate any bonuses earned in the year preceding a disability over 12 months, which was consistent with how the plan dealt with other variable income sources, such as commissions. Hartford followed this policy with respect to the plaintiff’s bonus, and nothing suggested that the plaintiff had been singled out for unfair treatment according to such an internal policy, according to the circuit court.

The circuit court concluded that Hartford’s “uniform application of that interpretation” did not constitute an abuse of its discretion and it upheld the district court’s ruling rejecting the plaintiff’s challenge to Hartford’s decision. [Powell v. Hartford Life and Accident Ins. Co., 2015 U.S. App. Lexis 19785 (9th Cir. Nov. 13, 2015).]

Plaintiff Was Not Entitled to “Recurrent Disability” Benefits, Circuit Court Finds

The plaintiff in this case began practicing with Greater Cincinnati Gastroenterology Associates Physicians, Inc. (GCGA) in 1983. In 1998, GCGA purchased group disability insurance for its doctors through Union Central Life Insurance Company. The master policy for the plan described benefits for employees “in Active Full-Time Employment.”

In May 2002, while covered under the policy, the plaintiff underwent surgery for prostate cancer. He experienced several serious complications from this surgery, which forced him to reduce his workload at GCGA significantly, from 75 to 80 hours per week to about 30 to 40 hours per week. As a result, the plaintiff lost income due to fewer hours billed and he filed a claim for benefits under the policy.

Union Central initially declined the plaintiff’s claim, finding that he did not qualify for total disability benefits because his work schedule indicated his ability after surgery “to perform the material and substantial duties of [his] Own Occupation on an Active Full-Time basis.”  Further, Union Central found that the plaintiff did not qualify for “Residual Disability” because he had no lost income through 2002.

After an administrative appeal by the plaintiff, Union Central reversed its decision and in August 2003 began paying him benefits under the plan’s Residual Disability option. Union Central reached this result after receiving fuller information on the plaintiff’s earnings in 2002. Based on this new information, Union Central concluded that the plaintiff had “returned to work on a full time basis” in June 2002 but was earning less than 80 percent of his “Average Monthly Earnings,” which was one of the criteria for eligibility for Residual Disability benefits.

Union Central continued to pay the plaintiff under the Residual Disability option through 2007, all the while updating its information and adjusting his monthly payment as prescribed in the policy. Then, in November 2008, Union Central sent the plaintiff a letter claiming that he had been overpaid by nearly half a million dollars from August 2002 until July 2008; the previous calculations of his current-to-historical earnings ratio, Union Central explained, had been “incorrect based on standard accounting methods and the provisions of your policy.” The letter noted that the plaintiff’s future benefits would be applied against the overpayment. Eventually, Union Central terminated the plaintiff’s benefits effective April 9, 2011, on the ground that the plaintiff was no longer residually disabled as defined in the policy.

The plaintiff sued Union Central for benefits he said he was entitled to receive but that Union Central had not paid. In its ruling, the district court noted that the termination provision of the policy stated that monthly benefits will terminate on the date that “Current Monthly Earnings” exceed 80 percent of the insured’s “Indexed Average Monthly Earnings,” and that the plaintiff’s Current Monthly Earnings exceeded the 80 percent threshold “on numerous occasions, the earliest being in December 2002.”

The plaintiff contended that he was entitled to benefits thereafter in reliance on the Recurrent Disability provision of the policy.

The district court disagreed with the plaintiff’s contention that the policy’s “Recurrent Disability” provision had “revived his eligibility to receive residual disability benefits.” The district court interpreted that provision as reinstating benefits only if “the participant . . . first return[ed] to work full time.” The district court concluded that “full time” effectively meant the number of hours the plaintiff had worked before his surgery – that is, 70 to 80 hours per week. It rejected the plaintiff’s argument that “full time” should be read to mean the 30 hours per week mentioned in the Active Full Employment definition in the policy.

The plaintiff appealed to the U.S. Court of Appeals for the Sixth Circuit, which affirmed, agreeing with the district court that a plan participant must return to work full time for the Recurrent Disability provision to become operative.

The circuit court found that the plaintiff did not satisfy the Recurrent Disability provision because he could not show two distinct periods of Residual Disability separated by a return to work on a full-time basis. The plaintiff, the circuit court ruled, would have had to resume working at pre-disability levels, which for him meant 70 to 80 hours per week.

The Sixth Circuit conceded that the policy did not define the phrase “full-time basis” but said that the ordinary meaning of “full time” was, as indicated in one dictionary, “employed for or working the amount of time considered customary or standard.” To an ordinary person, the circuit court added, the “customary or standard” amount of time in this context was “likely the average hours of gastroenterologists generally.”

Here, the circuit court concluded, the plaintiff worked “significantly fewer hours than his fellow gastroenterologists at GCGA, and he certainly did not perform surgical duties to the degree of his colleagues.”

Union Central, therefore, was entitled to judgment on the plaintiff’s claim, the circuit court concluded. [Safdi v. Covered Employer’s Long Term Disability Plan under the Union Central Employee Security Benefit Trust, 2015 U.S. App. Lexis 20611 (6th Cir. Nov. 24, 2015).]

FLSA Did Not Apply to Plaintiff’s Work Assignments at Phoenix House

The plaintiff in this case agreed to participate in an in-patient drug treatment program in lieu of a prison sentence. He alleged that he was “mandated” by a New York court to Phoenix House for 18 to 24 months. After completing the in-patient treatment, the plaintiff said that he also was required to “work on the books” and attend six months of outpatient services, upon completion of which the charges against him would be dismissed. If he violated the terms of the agreement, however, he “could be sentenced to the prison term agreed on by [him] and the court.”

The plaintiff said that he arrived at Phoenix House on July 28, 2009 to begin a 30-day orientation program. He alleged that, during orientation, residents of Phoenix House were required to work two eight-hour shifts on Saturday and Sunday and that, after orientation, the residents were required to work six eight-hour shifts a week. The residents were not paid for these shifts, the plaintiff said.

He contended that he spoke to a Phoenix House employee about that and he was told that work was part of the treatment program.

The plaintiff claimed that, because the alternative to the program was “going to jail, no ifs, ands, or buts about it,” he initially agreed to perform his work duties. Soon after starting his work duties, the plaintiff wrote a letter of complaint to the New York State Office of Alcohol and Substance Abuse Services regarding the work requirement at Phoenix House. The reply he received, however, allegedly told him, in sum and substance, to “do the job function.”

In mid-January 2010, the plaintiff refused to continue working at Phoenix House. The plaintiff asserted that he was told he could comply with the rules of the treatment program or choose to “go to jail.”

The plaintiff sued Phoenix House, alleging that the work he performed while receiving in-patient substance abuse treatment there deprived him of the fair pay to which he was entitled under the federal Fair Labor Standards Act (FLSA).

After Phoenix House moved to dismiss the plaintiff’s action, the court granted its motion, ruling that the plaintiff did not qualify as a covered “employee” under the FLSA.

The court explained that the FLSA required the payment of minimum and overtime wages to anyone who qualified as an “employee” within the meaning of the statute. The court ruled, however, that the plaintiff did “not qualify as a covered employee” because he had not agreed to participate in the Phoenix House treatment program for the purpose of receiving monetary compensation. Rather, the court said, the plaintiff had agreed to participate in the program to resolve the criminal charges against him.

Furthermore, the court added, although the plaintiff contended that it was Phoenix House and not he who benefited from the work assignments, he acknowledged that had he successfully completed the program, the charges against him would have been dismissed without a prison sentence. In the court’s view, the “principle benefit” of the plaintiff’s participation in the program was to him and his assertions to the contrary were “implausible.”

The court said that it found further support for its conclusion in the general rule that the FLSA did “not apply to prison inmates” in circumstances in which their labor provided services to the prison, whether or not the work was “voluntary.” The court said that although the plaintiff in this case was not a prison inmate, as with the relationship between inmates and the prisons where they were incarcerated, the relationship between the plaintiff and Phoenix House was “not one of employment.” Rather, the court concluded, the plaintiff’s work assignments were “designed to train and rehabilitate” and his “labor [did] not compete with private employers.” [Vaughn v. Phoenix Houses of New York, Inc., 2015 U.S. Dist. Lexis 129275 (S.D.N.Y. Sept. 25, 2015).]

Reprinted with permission from the March 2016 issue of the Employee Benefit Plan Review – From the Courts.  All rights reserved.

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