Benefits, HR Policies & Procedures

Firing Employees for Gross Misconduct: How Is COBRA Coverage Affected?

Employers should tread carefully when deciding not to offer COBRA continuation coverage due to “gross misconduct,” as a recent court case reminds. Here, a federal district court in Ohio held that a former employee’s conviction due to a sex offense, which led to his employment termination, was not yet enough to deny COBRA coverage due to a gross misconduct finding, baring further evidence that the offense had a “substantial nexus” to the workplace.

This opinion (Shrimpton v. Quest Diagnostics Inc., Case No. 1:10CV513 (N.D. Ohio, July 1, 2011)) just denied the employer’s summary judgment motion, so further proceedings will likely occur, but it provides a good opportunity to recap the COBRA rules on gross misconduct:

  • When an employee is terminated due to gross misconduct, the termination is not considered a COBRA qualifying event, and an employer does not have to offer COBRA continuation coverage to the ex-employee — or the covered spouse or dependent children.
  • Neither the COBRA statute, COBRA’s legislative history nor the IRS’ final COBRA regulations specifically define the term “gross misconduct,” so courts have taken the lead.
  • Employers must determine whether their gross misconduct definition meets the standards found in existing legislative, regulatory and legal developments.
  • However, an employer may decide not to apply the gross misconduct exception.

As the Shrimpton court points out, courts facing a gross misconduct analysis have generally used a two-part test under which the conduct in question must:

  1. Be intentional, wanton, willful, deliberate or reckless, or performed with deliberate indifference to an employer’s interests.
  2. Have a “substantial nexus” to the workplace. A substantial nexus has been found to exist when the conduct directly involved either the employer, a fellow employee or a current or former client.

The problem so far in Shrimpton is that the employer has not yet provided sufficient evidence that the employee’s conviction, which related to activities that occurred outside of the workplace, was connected enough to the workplace to be gross misconduct for COBRA purposes. And just saying it’s an embarrassment to the company or other employees were uncomfortable was not deemed sufficient for a conclusive gross misconduct finding at this stage.

There’s more to come on this case in Mandated Health Benefits — The COBRA Guide, but here are some tips on steps to take before denying COBRA coverage due to gross misconduct:

  • Carefully analyze whether the conduct in question is in fact, gross misconduct, based on established federal and state legislative, regulatory and legal principles.
  • Understand that if the employee resigns because of a gross misconduct situation, even by mutual agreement, it is unlikely that the employer can enforce COBRA’s gross misconduct rule, unless the agreement stipulates or the surrounding facts clearly indicate that the gross misconduct exception applies.
  • Realize that a gross misconduct determination made after a termination of employment may weaken a case for denying COBRA coverage due to gross misconduct.
  • Once a proper gross misconduct determination is made, send notice to the ex-employee that he or she is being denied COBRA coverage due to gross misconduct.
  • Give the ex-employee an opportunity to have the plan administrator’s determination reviewed.
  • Keep detailed records of the process used to determine gross misconduct, and any notices or correspondence to the ex-employee.