Benefits and Compensation

Employer’s Suspect Gross Misconduct Finding and Imprecise Notice Format Mean COBRA Claim Proceeds

The gross misconduct exception under COBRA means that if an employee’s employment is terminated due to gross misconduct, continuation coverage does not have to be offered to the terminated employee or the terminated employee’s family. One of the many tricky aspects of administering the gross misconduct rule is that the decision should be made at the time of the termination. If the gross misconduct rule is used as a defense to a failure to notify of a qualifying event, a court might be more skeptical of the position.

Source: Rabbitti / shutterstock

An employer/plan administrator argued that a covered spouse was ineligible for COBRA coverage because her spouse was terminated for gross misconduct, despite the fact that he was sent an election notice. And even if she were so entitled, it provided sufficient rights by mailing an election notice only to the terminated spouse. In rejecting the employer’s summary judgment motion, a federal district court in Iowa held that the employer’s records threw doubt on its “ex post facto determination of gross misconduct.” The court also noted that COBRA rules require COBRA notices to be addressed to both the covered employee and the spouse. The case is Higareda v. Tyson Foods, 2020 U.S. Dist. LEXIS 224776 (S.D. Iowa, October 6, 2020).

Facts of the Case

Tyson Foods employed Yolanda Higareda and her husband Victor Higareda. Victor covered Yolanda as a spouse under Tyson’s group health plan. In his plan enrollment forms, Victor indicated that he and Yolanda lived together and provided a P.O. Box address. In her employment application, Yolanda provided a residential address. However, she also used the same P.O. Box as an address.

Note: When two employees are working at the same employer, the issue arises on whether they should maintain separate single employee coverages or be joined as a family unit, with one classified as a dependent of the other. In this case, Victor and Yolanda were not initially covered as separate single employees. Yolanda was designated as a spouse/dependent under Victor’s name.

On February 11, 2019, Tyson terminated Victor’s employment. Victor signed a disciplinary letter stating his discharge was for “intentionally thr[owing] a bone across[ ] the line hitting a co-worker on the hand”; however, he maintained that the bone-throwing incident never happened.

The next day, Tyson, which was also the plan administrator, sent a COBRA election notice—only addressed to and naming Victor—to Victor’s P.O. Box. An enclosed enrollment form provided that both he and his dependents were entitled to COBRA coverage. Victor never enrolled in COBRA coverage.

Yolanda went on medical leave between February 12 and 22, 2019. Upon her return, she discussed her health coverage with the Human Resources (HR) department in light of Victor’s termination. She informed HR that she wanted health coverage as an employee rather than as a spouse. She alleged that she was first told her surgery was covered under Victor’s plan, but the next day, HR said that was incorrect because Victor’s coverage lapsed. HR did not mention any COBRA rights for Victor or Yolanda.

Yolanda sued Tyson, arguing that it failed to provide her with a COBRA election notice following Victor’s termination and that as a result, she incurred more than $27,000 in unreimbursed medical expenses.

In this step of the litigation, Tyson moved for summary judgment, contending that Yolanda and Victor were ineligible for COBRA coverage because Victor was terminated from employment due to his gross misconduct. Alternatively, Tyson argued that even if Yolanda were eligible for COBRA coverage, she was provided with a sufficient COBRA notice. For her part, Yolanda countered that how the notice was provided was deficient because it was only addressed to Victor.

Gross Misconduct Evidence Lacking

The court noted that the COBRA statute does not define gross misconduct; therefore, courts have stepped in. Generally, courts agree gross misconduct involves more than mere negligence and isolated lapses in judgment. The court noted two pertinent COBRA cases in which gross misconduct was found:

  • An employee confronted a coworker, used a racial slur, and threw an apple at a window to draw the attention of coworkers (Nakisa v. Cont’l Airlines).
  • When an intoxicated employee crashed an employer-provided vehicle (Collins v. Aggreko, Inc.; both cases are in ¶1900 of the Guide).

Tyson provided no evidence showing that its policies or plans defined gross misconduct. It did refer to Nakisa to argue that throwing an item at a coworker amounts to gross misconduct. The court noted, however, that in Nakisa, the employee also confronted the coworker and used a racial slur, but Tyson alleged no facts regarding Victor’s conduct other than the alleged bone throwing. Yolanda also pointed out that Victor claimed the incident did not occur.

Most problematic for the court were Tyson’s own records, which showed that the company did in fact offer Victor and his family COBRA coverage. Tyson contended that it made the gross misconduct determination after the notice was provided (and in response to Yolanda’s claim for COBRA coverage). However, the court noted that “Such ex post facto determination of gross misconduct, after the employee has been notified that [ ]he experienced a qualifying event and is eligible for continuation coverage” undermined Tyson’s position.

Tyson provided no other evidence showing it interpreted Victor’s conduct as gross misconduct. Therefore, the findings pointed to conflicting evidence that could lead a reasonable jury to conclude the incident did not rise to the level of gross misconduct, according to the court. Thus, it denied summary judgment on this ground.

Note: Here is one consequence of covering Victor and Yolanda as part of one family unit. Had each been covered as a separate employee, Yolanda’s coverage never would have been impacted by Victor’s termination. However, by being covered as a family unit, if Victor’s termination of employment were due to gross misconduct, coverage could be denied for Victor and Yolanda.

Sufficiency of the Notice Questionable

Case law has found a good-faith attempt to comply with a reasonable interpretation of the COBRA statute is sufficient to determine whether a plan administrator met COBRA’s notice obligations. Within the 8th U.S. Circuit Court of Appeals, such a standard is judged by whether “the administrator has sent the notice by means reasonably calculated to reach the recipient.” The 8th Circuit has also held that each qualified beneficiary is entitled to his or her own COBRA election notice—separate from the covered employee’s. In meeting this rule, though, notice regulations from the U.S. Department of Labor (DOL) permit employers and plan administrators to send a single notice addressed to both a covered employee and a covered spouse if they live together at the same address. See ¶1314 of the Guide for more information.

“This regulation is not incongruous with the Eighth Circuit’s good-faith standard for determining whether notice is sufficient,” the Higareda court noted. “By addressing the notice to both the covered employee and the covered spouse, the employer provides notice reasonably calculated to inform the employee and the beneficiary spouse of their rights under COBRA.”

Tyson contended it met this standard by sending the COBRA notice and form to the P.O. Box that was provided by both Yolanda and Victor. Although the notice was only addressed to Victor, the content of the notice included Yolanda’s name in the “Dependent Information” section of the enrollment form, which should have sufficiently notified Yolanda of her COBRA rights.

The court rejected this reasoning, finding that focusing on the contents of the notice overlooked the manner of the notice. Focusing on the content would require the court to assume that Yolanda opens or accesses Victor’s mail in order to determine that this manner of notification was acceptable.

The court noted that the DOL rules do not specifically require separate notices for spouses living at the same address. However, they do require the notice to be addressed to both the employee and the spouse.

Accordingly, the court determined that a reasonable jury could find sending a single notice addressed only to Victor, even if sent to a P.O. Box also used by Yolanda, was not reasonably calculated to ensure she received an election notice. Therefore, the court denied summary judgment on this ground, as well.

Conclusion

Even though the Higareda case did not reach a final verdict, there are three interesting and important takeaways for plan administrators.

  1. In applying the gross misconduct exception, employers and plan administrators should think about it ahead of time. If it is to be applied, have the standards for “gross misconduct” been communicated to employees (perhaps through employment rules of conduct)? If the gross misconduct exception is applied in an ad hoc manner, a court is likely going to be less receptive to applying the exception. Similarly, if the gross misconduct rule is applied after the fact as a defense to some other COBRA notice violation (i.e., “I didn’t have to provide timely notice because the employee was terminated for gross misconduct”), a court is also going to be skeptical. Therefore, clear rules and clear application of rules are the best ways to defend a failure to offer COBRA coverage.
  2. Understand the implications of applying the gross misconduct exception. Employers and plan administrators wishing to apply the gross misconduct exception should bear in mind that if it applies, a qualifying event did not occur, and all qualified beneficiaries related to the terminated employee will lose COBRA coverage. It is worth thinking about that before a final decision to use the gross misconduct exception is applied.
  3. When it comes to COBRA notification procedures, plan administrators should make sure to follow the technical rules. For example, if a single notice is intended to apply to all qualified beneficiaries in a single family, the outside envelope sending the notice should be clear that it is being sent to the covered employee and related qualified beneficiaries. Ideally, the envelope would be addressed by name to each qualified beneficiary; however, the DOL guidance does not necessarily require that type of addressing.

When courts evaluate COBRA notice cases, they will look at the technicalities to make sure that notices were properly sent and properly addressed. Note that courts also contend that COBRA does not require that a plan administrator prove that qualified beneficiaries actually received their notices. It is sufficient compliance for a plan administrator to prove that they were sent to the affected qualified beneficiaries in a manner calculated to be received (e.g., first-class mail to the last known address is sufficient).