From the Courts

December 1, 2014 | Appeals | Insurance Coverage

Company Is Sanctioned for Failing to Issue a Timely “Litigation Hold” in ERISA Cases

Foot Locker, Inc., was sued on June 23, 2006 and again on November 30, 2006 with respect to the conversion of its retirement plan from a “defined benefit” pension plan to a “cash balance” plan.

The June 23, 2006 complaint alleged that Foot Locker had misled its employees and had violated the Employee Retirement Income Security Act of 1974 (ERISA) through concealing the “wear-away” effect caused by the conversion, by which certain older plan participants would have their retirement benefits frozen and would accrue no new benefits unless and until their cash balance caught up to and exceeded their frozen benefits. This lawsuit was dismissed voluntarily on September 25, 2006.

The November 30, 2006 complaint alleged that Foot Locker had miscalculated pension benefits under the cash balance plan. On February 12, 2007, this lawsuit also was dismissed voluntarily. Despite the filing of these lawsuits, Foot Locker did not issue a litigation hold on the relevant subject when these lawsuits were filed.

On February 23, 2007, the plaintiff who had filed the November 30, 2006 lawsuit against Foot Locker again sued the company, asserting claims that also stemmed from the conversion of Foot Locker’s retirement plan. In this lawsuit, the plaintiff filed a motion requesting that the court sanction Foot Locker for failing to issue a “litigation hold” until October 8, 2009. Foot Locker opposed the plaintiff’s motion.

The court granted the plaintiff’s motion for sanctions. In its decision, the court explained that anyone who anticipated being a party or who was a party to a lawsuit must “not destroy unique, relevant evidence” that might be useful to an adversary. A party was obligated to preserve evidence, the court said, when the party had notice that the evidence was relevant to litigation or when it should have known that the evidence might be relevant to future litigation.

The court then found that Foot Locker “should have issued a litigation hold in June or July 2006,” that “years” had passed “before a litigation hold relating to the relevant subject matter was put in place,” and that, during this period, “relevant documents were destroyed.” The court declared that “141 relevant boxes” had been lost or destroyed between June 2006 and October 2009, and that, according to those boxes’ ID slips’ descriptions, they contained documents relating to a “Cash Balance Plan Presentation,” “Mercer CB+ 401(k),” “Video – the coolest number 401(k),” “Meeting H.R.,” “Pension Plan R[etirement] I[nvestment] C[ommittee],” “Benefit Comparisons – 1999,” and “H.R. Confidential Info.”

Foot Locker’s failure to issue a timely “litigation hold” to preserve evidence had been “inadvertent,” the court ruled. It added, however, that Foot Locker also had been “negligent.” Given that finding, the court examined whether the plaintiff had demonstrated that the destroyed evidence would have been favorable to him. The court ruled that he had done so because notes that accompanied the creation of the plan – but that were missing – were, at a minimum, relevant to the plaintiff’s claims and, indeed, “would have been favorable to [the plaintiff’s] claims.”

The court concluded that because Foot Locker had been under an obligation to preserve evidence, yet negligently had failed to implement a timely litigation hold and negligently had destroyed documents that likely were relevant to the litigation, a sanction was appropriate. It then ruled that because the case involved simple negligence rather than gross negligence or bad faith, the sanction should be an “adverse inference” that the missing evidence could have or would have been favorable to the plaintiff. The adverse inference would be beneficial to the plaintiff in the litigation over his claims and, therefore, would penalize Foot Locker for its failure to have implemented a litigation hold. [Osberg v. Foot Locker, Inc., 2014 U.S. Dist. Lexis 104538 (S.D.N.Y. July 25, 2014).]

Circuit Court Affirms Dismissal of Overtime and “Gap Time” Claims under the FLSA

In this case, nurses and other patient-care professionals alleged that their employers had engaged in systemic underpayment to them by maintaining three unlawful timekeeping and pay policies in violation of the federal Fair Labor Standards Act (FLSA).

First, the plaintiffs contended, under the employers’ “Meal Break Deduction Policy,” the employers’ timekeeping system automatically deducted 30 minutes of pay daily for meal breaks without ensuring that the employees actually received a break. Second, they alleged, under the employers’ “Unpaid Pre- and Post-Schedule Work Policy,” the employers prohibited the plaintiffs from recording time worked outside of their scheduled shifts. Third, they asserted, under the employers’ “Unpaid Training Policy,” the employers did not pay employees for time they spent at “compensable” training sessions.

The plaintiffs alleged that because of these policies, they had not been paid for all of the hours they had worked. The district court dismissed the plaintiffs’ FLSA claims. It first ruled that the plaintiffs’ overtime claim was factually inadequate, reasoning that, “[t]he abundance of allegations notwithstanding,” the plaintiffs had “failed to allege a single specific instance in which a named [p]laintiff worked overtime and was not compensated for this time.” It also ruled that the FLSA did not permit the plaintiffs to recover for hours they asserted that they had worked but for which they had not been compensated below the 40 hour weekly threshold – otherwise known as “gap time.” (Gap time refers to time that is not covered by the overtime provisions of the FLSA because it does not exceed the overtime limit, and to time that is not covered by the minimum wage provisions because, even though it is uncompensated, the employees still are being paid a minimum wage when their salaries are averaged across their actual time worked. In other words, “gap time” is non-overtime hours worked for which an employee is not compensated. Because an employee has a sufficiently high hourly rate, when all compensated and non-compensated hours are divided into the weekly pay, the employee’s average hourly pay still exceeds the FLSA minimum.)

The plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit.

The Third Circuit affirmed. In its decision, the circuit court first acknowledged that the level of detail necessary to plead an FLSA overtime claim had “divided courts around the country.” Some courts, it said, have required plaintiffs to allege approximately the number of hours they worked for which wages had not been received, while other courts have adopted a more “lenient” approach, holding that an FLSA complaint would survive a motion to dismiss so long as it alleged that the employee had worked more than 40 hours in a week and had not received overtime compensation.

Here, the Third Circuit took a “middle ground” approach. It noted that each plaintiff in this case had alleged that he or she “typically” had worked shifts totaling between 32 and 40 hours per week and further had alleged that he or she “frequently” had worked extra time. The circuit court pointed out that the plaintiffs asserted that because they had alleged that they had “typically worked full time, or very close to it” and “also worked several hours of unpaid work each week,” it was “certainly plausible that at least some of the uncompensated work was performed during weeks when the plaintiffs[‘] total work time was more than [40] hours.” The Third Circuit disagreed.

The Third Circuit observed that none of the plaintiffs had alleged a “single workweek” in which he or she had worked at least 40 hours and also had worked uncompensated time in excess of 40 hours. It added that of the four plaintiffs who had alleged that they “typically” had worked at least 40 hours per week, in addition to extra hours “frequently” worked during meal breaks or outside of their scheduled shifts, none said that she in fact had worked extra hours during a typical (that is, a 40 hour) week. Therefore, the circuit court concluded, their allegations were “insufficient.”

The circuit court specifically stated that it was not holding that a plaintiff had to identify the “exact dates and times” that he or she worked overtime. Indeed, it declared, a plaintiff’s claim that he or she “typically” worked 40 hours per week, worked extra hours during such a 40-hour week, and was not compensated for extra hours beyond 40 hours he or she worked during one or more of those 40-hour weeks, would be sufficient to defeat a motion to dismiss at the pleading stage. The circuit court concluded, however, that in this case, there was no such allegation, and the district court properly had dismissed the plaintiffs’ FLSA claims.

The Third Circuit then rejected the plaintiffs’ challenge to the district court’s determination that they could not recover for “gap time” – the uncompensated hours they allegedly worked that fell “between the minimum wage and the overtime provisions of the FLSA.” The Third Circuit explained that courts “widely agree” that there was no cause of action under the FLSA for “pure” gap time wages – that is, wages for unpaid work during pay periods without overtime.

The Third Circuit then agreed with those courts and ruled that pure “gap time claims” – straight time wages for unpaid work during pay periods without overtime – were not cognizable under the FLSA, which requires payment of minimum wages and overtime wages only. Thus, the district court correctly had determined that, to the extent that the plaintiffs sought recovery under the FLSA for hours worked but not compensated below the 40-hour weekly threshold, the FLSA did “not provide [them] the remedy they seek.”

The Third Circuit pointed out that some courts have recognized as viable gap time claims by an employee who exceeded the overtime threshold but whose employment contract did not compensate him or her for all non-overtime hours (so-called, “overtime gap time”). It concluded, however, that it did not have to decide whether the plaintiffs’ gap time claims might constitute claims for “overtime gap time” because the plaintiffs had not plausibly alleged that they had worked overtime in any given week. [Davis v. Abington Memorial Hospital, 2014 U.S. App. Lexis 16472 (3d Cir. Aug. 26, 2014).]

Circuit Court Rules that “Maxiflex” Work Schedule May Be Reasonable Accommodation for Employee’s Disability

Beginning in 1997, the plaintiff in this case worked as a budget analyst in the Administrative Programs Branch of the Budget Division within the U.S. Department of Agriculture’s Rural Development Mission Area. She suffered from depression, which worsened in late 2003 and early 2004, and her deteriorating condition made it difficult for her to maintain her normal work schedule. On some days, the plaintiff woke up too sick to work until the afternoon, when her condition improved; on other days, she was able to work in the morning but not in the afternoon. As a result, she was out of the office a significant amount of time in the first 10 weeks of 2004.

The plaintiff was able to perform all of her job duties and to complete all of her work by using leave for hours missed during her normal duty schedule, and then working additional unscheduled hours without pay. For example, she said, she would start work at 5:00 a.m. one day, or work until 10:00 or 11:00 p.m. the next.

On March 2, 2004, the plaintiff emailed her supervisor, apologizing for her erratic leave and explaining that she was under a doctor’s care for a relapse of her chronic depression. The plaintiff’s supervisor replied that, if the plaintiff’s condition required “special accommodations” and could impact her “normal duty schedule,” she should provide “medical documentation.” The plaintiff responded with a letter from her physician explaining that she suffered from “chronic depression, anxiety and insomnia” and requesting “a flexible work schedule … to assist her with her medical treatment.” The plaintiff understood the request for a “flexible work schedule” to mean the ability to come to work late or to work late hours if her depression so required, much as she had been doing over the preceding months.

The plaintiff’s request for a flexible schedule as an accommodation for her disability was denied. The plaintiff was asked to submit further “medical documentation” by April 16th to demonstrate “the existence of [her] medical condition and the necessity for the [requested] changes in duty location and hours of duty.” The plaintiff, however, was unable to get her physician to submit further medical documentation in time to meet that 10-day deadline.

On April 23, the plaintiff felt unwell but went to work (arriving late) because she needed to finish a project. She said that she planned to stay late, without any additional compensation, to ensure the project’s timely completion, but that her supervisors refused to allow her to work past 6:00 p.m.

The plaintiff said that she was angered and frustrated by the refusal to permit her to complete her work as she previously had been allowed, and she went home. During the next month, her physician communicated with her supervisors. In addition, the plaintiff sought permission “to telecommute on a part-time schedule,” which was denied. The plaintiff subsequently applied for permanent disability retirement, and her retirement took effect in January 2005.

After exhausting her administrative remedies, the plaintiff sued the Secretary of Agriculture, in his official capacity, in the U.S. District Court for the District of Columbia, alleging that the refusal to provide reasonable accommodations for her disability had violated the federal Rehabilitation Act. The district court ruled that the “maxiflex” work schedule that the plaintiff had requested was unreasonable as a matter of law. (The U.S. Office of Personnel Management, Handbook on Alternative Work Schedules, states that a “maxiflex schedule” is one “that contains core hours on fewer than 10 workdays in the biweekly pay period and in which a full-time employee has a basic work requirement of 80 hours for the biweekly pay period, but in which an employee may vary the number of hours worked on a given workday or the number of hours each week within the limits established for the organization.”)

The plaintiff appealed to the U.S. Court of Appeals for the District of Columbia Circuit. The circuit court reversed, finding that the “maxiflex” schedule that the plaintiff had requested could be a “reasonable” accommodation within the meaning of the Rehabilitation Act for her position as a budget analyst.

The circuit court explained that determining whether a particular type of accommodation was reasonable commonly was a “contextual and fact-specific” inquiry because the “contours and demands of an employment position and the capacities of a workplace can vary materially from employer to employer.” The circuit court added that technological advances and the “evolving nature” of the workplace have contributed to “the facilitative options available to employers.” Thus, the circuit court declared, it was “rare that any particular type of accommodation” would be “categorically unreasonable” as a matter of law.

The circuit court then rejected the district court’s conclusion that the “ability to work a regular and predictable schedule” was, “as a matter of law, an essential element of any job.” It stated that although the appropriateness of flexible working hours as an accommodation in any given case would have to be established, “nothing in the Rehabilitation Act takes such a schedule off the table as a matter of law.” Indeed, the circuit court stated, it was “[q]uite the opposite,” given that the Rehabilitation Act, through its incorporation of the Americans with Disabilities Act’s standards, was explicit that a “reasonable accommodation” could include “job restructuring” and “part-time or modified work schedules.”

Accordingly, the circuit court concluded, the district court’s holding that an “open-ended” or maxiflex schedule was “unreasonable as a matter of law,” was incorrect. The circuit court added that whether a maxiflex or other flexible workplace schedule was a reasonable accommodation for a given employee in a given position was a case-by-case factual inquiry, not a foreordained legal conclusion. The circuit court then remanded the case for a determination of whether the plaintiff’s request would have enabled her to perform the essential functions of her position without undue hardship to the department. [Solomon v. Vilsack, 763 F.3d 1 (D.C. Cir. 2014).]

Comment: Other courts also have recognized that “[p]hysical presence at or by a specific time is not, as a matter of law, an essential function of all employment.” McMillan v. City of New York, 711 F.3d 120 (2d Cir. 2013) (emphasis added). Instead, “penetrating factual analysis” was required to determine whether a rigid on-site schedule is an essential function of the job in question. Id.; see also Ward v. Massachusetts Health Research Inst., Inc., 209 F.3d 29 (1st Cir. 2000) (employer must specifically prove that “a regular and reliable schedule” is an essential element of a position, which “requires a fact-intensive inquiry”).

Circuit Court Affirms Dismissal of Plaintiff’s Lawsuit for Long-Term Disability Benefits as Filed Too Late

On May 12, 2007, the plaintiff in this case, who had worked as a registered nurse for about 30 years, asserted that she had become unable to perform her occupational duties due to bilateral knee osteoarthritis, right ankle post-traumatic osteoarthritis, anxiety, and depression. The plaintiff said that she remained disabled until November 12, 2007, satisfying the six-month elimination period required for her to become eligible to receive long-term disability (LTD) benefits.

In a letter dated November 15, 2007, the plan administrator, Unum Life Insurance Company of America, informed the plaintiff that it had approved her claim for disability benefits. Unum informed the plaintiff that it found her eligible for 12 months of benefits at that time because she was “limited from performing the material and substantial duties of [her] regular occupation due to [her] sickness or injury.” (Emphasis supplied.) In that same letter, Unum informed the plaintiff that, “[a]fter 24 months of payments, you are disabled when Unum determines that due to the same sickness or injury, you are unable to perform the duties of any gainful occupation for which you are reasonably fitted by education, training or experience.”  (Emphasis supplied.) The letter also informed the plaintiff of Unum’s contractually reserved right to request proof of continuing disability.

In the fall of 2008, Unum approved the plaintiff’s eligibility for disability benefits for an additional 12 months. Throughout the 24 month period, Unum sent the plaintiff several written requests for proof of continuing disability.

In the fall of 2009, Unum decided not to continue the plaintiff’s LTD benefits, finding that the plaintiff’s medical records indicated that she could work as a triage nurse or nurse case manager. The plaintiff exhausted Unum’s internal administrative appeal process on July 20, 2010, when Unum issued its final decision denying the plaintiff’s LTD benefits.

On March 30, 2011, the plaintiff sued Unum, seeking a reversal of its decision denying her benefits. The parties both filed dispositive motions, and the district court granted Unum’s motion, finding that the plaintiff’s case was contractually time-barred by the three-year contractual limitation in the LTD plan. The plaintiff appealed to the U.S. Court of Appeals for the Sixth Circuit, arguing, first, that each of Unum’s written requests for proof of continuing disability had reset the three-year contractual limitations period, and, second, that the different standard of disability Unum employed after 24 months had reset the contractual limitations period.

The circuit court affirmed the district court’s decision. In its opinion, the circuit court explained that the plan provided that a plan participant could bring a lawsuit regarding a claim “up to 3 years from the time proof of claim is required.” The circuit court also pointed out that the U.S. Supreme Court recently had held, in Heimeshoff v. Hartford Life & Accident Ins. Co., 134 S. Ct. 604 (2013), that a plan participant and a plan could agree by contract to a particular limitations period, even one that started to run before the cause of action accrued, as long as the period was reasonable.

Here, the circuit court continued, the plaintiff alleged that her disability had begun on May 12, 2007 and that she had satisfied the plan’s six-month elimination period by remaining continuously disabled until November 12, 2007. The circuit court added that Unum required proof of disability no later than 90 days after the six-month elimination period. Thus, the circuit court reasoned, the plaintiff had to file a proof of claim by February 8, 2008 and the contractual limitations period to bring a lawsuit expired three years later, on February 8, 2011 (which was more than six months after Unum’s internal appellate review of the plaintiff’s claim had concluded on July 20, 2010). The circuit court pointed out that the plaintiff had filed her action on March 30, 2011, missing the filing deadline by about 50 days.

The circuit court next rejected the plaintiff’s contention that because Unum had used a different standard of disability in denying her benefits after 24 months, she was entitled to a one-year extension under the policy to file a proof of claim. The circuit court found that the option in the plan for a one-year extension related to the impossibility of showing proof of a claim at the time a claimant initially claimed disability, not at a subsequent time when Unum required proof of continuing disability.

Finally, the circuit court also rejected the plaintiff’s contention that each of Unum’s written requests for proof of continuing disability had reset the three-year contractual limitations period. In the circuit court’s opinion, this argument mischaracterized Unum’s requests for proof of continuing disability “as requests for proof of new claims.” The circuit court noted that Unum’s initial November 2007 letter granting the plaintiff benefits had informed the plaintiff of Unum’s contractually reserved right to request proof of continuing disability. Because each new request for proof of continuing disability “pertained to a single continuous claim of disability, not new individual claims of disability,” the circuit court concluded that Unum’s written requests for proof of continuing disability had not reset the three-year contractual limitations period. [Russell v. Catholic Healthcare Partners Employee Long Term Disability Plan, 2014 U.S. App. Lexis 15766 (6th Cir. Aug. 14, 2014).]

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

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