HR Management & Compliance

Employment Benefits: New High Court Ruling May Create Hidden Risk When Terminating Employees And Outsourcing Work

It’s not uncommon for employers to lay off workers and then outsource their job responsibilities to save money on employee benefits and other expenses. But now, a new U.S. Supreme Court ruling has exposed some serious hidden risks in this and similar practices.

Employees’ Benefits Reduced

Santa Fe Terminal Services, a subsidiary of The Atchison, Topeka and Santa Fe Railway Co., was under contract with the railway to do work at its rail yard in Los Angeles. The railway, however, terminated the agreement and transferred the work to In-Terminal Services, an independent company.

Some Santa Fe employees went to work for In-Terminal, and those who chose not to were laid off.

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In-Terminal provided the workers with fewer pension and welfare benefits than Santa Fe.

The employees sued both their new and former employers. They claimed that Santa Fe transferred their work to In-Terminal to avoid paying expensive pension and welfare benefits. The workers argued that this was a violation of the federal Employee Retirement Income Security Act (ERISA), which makes it illegal to fire, discipline, or discriminate against employees in order to interfere with their right to receive employee benefits, including pensions and medical insurance.

Illegal Interference With Benefits

The U.S. Supreme Court agreed. It explained that employers have broad rights to change or eliminate employee benefits by following formal plan amendment procedures. However, you can’t reduce, change or eliminate vested or unvested benefits-including pension and health and welfare benefits-by firing workers.

What This Means To You

The Supreme Court’s ruling makes it clear that you can’t fire employees to avoid paying for their benefits. The Court did say, however, that it’s permissible to make fundamental business decisions so long as your purpose is not to interfere with benefits.

The problem is the court didn’t provide any guidance on where the line between legal and illegal conduct will be drawn. For example, actions such as laying off workers, using employee leasing arrangements, or cutting work hours will frequently affect your benefits expenditures. But this may be only one of several reasons for your decision. For now, it’s unclear how the courts would evaluate a claim that you violated ERISA by taking such action.

How To Avoid Trouble

There will likely be more new lawsuits filed by employees who claim that a layoff, for example, was an illegal attempt to cut their benefits. Until these issues are resolved by the courts, here’s what you can do:


  1. Follow formal plan amendment procedures. If your main concern is reducing benefit costs, Kathleen Meagher, a partner with the law firm of Landels, Ripley & Diamond, says that in many cases you can change or eliminate benefits by amending your plan. If you’re covered by a collective bargaining agreement, you’ll have to bargain with the union over any changes.


  2. Don’t take action against employees to avoid paying benefits. It’s illegal to make employment decisions for the purpose of depriving employees of benefits, vested or not. To defend yourself if you do get sued, it’s important to document the legitimate business reasons for your decisions. For example, if you’re laying off workers or shifting them to part-time, don’t focus on the high cost of benefits as your motivator. Instead, Mary Roberts, a partner with the law firm of Corbett & Kane, says that you should concentrate on reasons that aren’t tied to benefits, such as lack of work or declining profits.


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