Benefits and Compensation

COBRA: Gross Misconduct Determinations Aren’t Always a Piece of Cake

A recent court opinion from the 9th Circuit U.S. Court of Appeals—which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington—highlights the perils of not offering Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage to a former employee on the basis that the employee was terminated due to gross misconduct.

terminationThe issue of whether gross misconduct actually existed is often litigated and if a court rules in favor of the former employee, the employer could be subject to penalties and other liability for failing to properly make an offer of COBRA coverage. Therefore, employers and plan administrators should use caution when making gross misconduct determinations.

Background

In general, a covered employee is entitled to elect COBRA coverage if he or she loses coverage following a termination from employment or a reduction in hours. However, if an employee is terminated for gross misconduct, the termination of employment is not considered a qualifying event under COBRA, and an employer is not required to offer COBRA coverage to the former employee.

Additionally, the employer can also choose not to offer COBRA coverage to the spouse and dependents who lose coverage as a result of the employee’s termination. Of course, an employer can (and many do) ignore the gross misconduct exception and offer COBRA coverage following any termination from employment that results in a loss of coverage.

Neither the COBRA statute, the legislative history nor the IRS final regulations specifically define the term “gross misconduct.”  One federal agency, the Office of Personnel Management (OPM), has issued some guidance on the definition of gross misconduct.  Under the OPM’s regulations, gross misconduct is defined as:

A flagrant and extreme transgression of law or established rule of action for which an employee is separated and concerning which a judicial or administrative finding of gross misconduct has been made.

In the absence of material agency guidance, courts have taken the lead in determining whether gross misconduct is present given a particular set of circumstances. Often, courts look to state unemployment insurance laws for guidance and although the courts differ in their analysis in some respects, the following principles are key:

  1. The action of the employee must be affirmative and willful—ordinary negligence is not enough to support a gross misconduct determination.
  2. A substantial deviation from the standards and obligations set forth in employer policies can be enough to support a gross misconduct determination.
  3. The presence of criminal conduct is not necessary to support a gross misconduct determination.

Mayes v. WinCo – Was there Gross Misconduct?

In Mayes v. WinCo, a long-time employee of a supermarket was terminated after she instructed an employee to take a stale cake from the bakery for overnight employees to eat. Facts indicated that the practice of taking stale cakes for employee consumption was commonplace, and that the terminated employee had no indication that adverse employment action would occur as the result of the action.

Facts also indicated that the terminated employee faced employment-related discrimination and her superiors desired to have to her replaced. The employee was terminated based on theft and dishonesty, which was listed as an action that could result in termination under the employer’s policies.

The employer also declined to offer the employee or her seven dependents COBRA coverage on the basis that she was terminated for gross misconduct. The employee sued, claiming employment discrimination and failure to comply with COBRA requirements. The district court upheld the employer’s termination and gross misconduct determination.

However, the 9th Circuit reversed, claiming that sufficient facts were present to allow the former employee’s discrimination claims to proceed in litigation. The appellate court did not directly address the gross misconduct determination, but it explained that if the employee was terminated for discriminatory reasons, as opposed to theft and dishonestly, the gross misconduct determination would not likely be able to stand.

Mayes highlights the fact that gross misconduct determinations are no cake walk. The employer in Mayes likely assumed that it had a reasonable basis for denying COBRA coverage, but there is always a risk that a court could come to a different conclusion. When that determination is made by a court, months and perhaps years, would have gone by without a proper offer of COBRA coverage. During this time, penalties and possible claims liability could accumulate to a significant sum.

Best Practices for Gross Misconduct Determinations

At first blush, whether gross misconduct exists may seem like an easy analysis. However, under the crust are multiple layers of analysis that employers and plan administrators should conduct before denying COBRA coverage due to gross misconduct. Below are steps that plan administrators should take.

  • Carefully analyze whether the conduct in questions 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 former employee that he or she is being denied COBRA coverage due to gross misconduct. That way, if the employer is wrong, it will still have provided some notice of COBRA rights to the former employee and may be able to avoid the imposition of notice penalties.
  • Give the former employee an opportunity to have the plan administrator’s determination reviewed. Under the Employee Retirement Income Security Act (ERISA), plan participants are entitled to a review of a benefit denial claim. Although it is unclear how this rule applies in a gross misconduct situation, the administrator’s defense in applying the gross misconduct exception might be strengthened if it allowed the employee a chance to prove that the claimed bad behavior did not really occur. Note that this review is not necessarily the same as a challenge of the employer’s decision to terminate the employee; rather, it is solely a review of the plan administrator’s decision that the gross misconduct exception applied.
  • Keep detailed records of the process used to determine gross misconduct, and any notices or correspondence to the ex-employee.

Of course, any time a gross misconduct determination is being made, plan administrators should consult with counsel and other plan advisors.

Damian MyersDamian Myers is an Associate in Proskauer Rose LLP’s Employee Benefits, Executive Compensation, and ERISA Litigation Practice Center, resident in the Wash­ington, D.C. office. He is a contributor to Thompson’s Mandated Health Benefits—The COBRA Guide, and is a contributing author to the 5th edition of The New Health Care Reform Law—What Employers Need to Know (A Q&A Guide).