Recent Legal Changes Add to Employees' Rights and Benefits in a Reduction-in-Force

This Advisor column was originally published in April 2009.

The severe budgetary constraints faced by most public employers this year have forced some to implement a reduction-in-force to reduce expenditures. Many more may feel compelled to follow that path in the year to come. A recent legislative enactment involving COBRA benefits and a court decision addressing an employee’s due process rights in a layoff situation add to the obligations employers have in conjunction with layoffs. Layoffs always carry the potential for legal challenge by the impacted employees. Adding these requirements to your layoff checklist will help ensure that you’re in a good position to respond to any challenges.

Subsidy of Employee COBRA Healthcare Continuation Premiums

As part of the American Recovery and Reinvestment Act of 2009 (also known as “the Stimulus Package”), employees who were involuntarily terminated between September 1, 2008, and December 31, 2009, and who elect COBRA healthcare continuation are entitled to a government subsidy for the cost of COBRA premiums for themselves and their eligible dependents for up to nine months.

How will this affect employers? The new requirements create primarily an administrative burden with respect to any employees who have been or will be involuntarily terminated any time on or after September 1, 2008, through December 31, 2009. Under existing COBRA rules, laid-off employees may elect COBRA continuation coverage following termination of their employment, provided that they pay the full cost of the premiums for that coverage plus 2% extra to cover the administrative costs. The continuation period is generally 18 months. Under the new law, the federal government will subsidize 65 percent of the COBRA premium cost for up to nine months; the individual would still be responsible for paying 35 percent of the premium. To facilitate this subsidy, where COBRA is elected, the employer must pay 65 percent of the premium up front. It can then deduct the premium amounts it paid from its federal payroll taxes or obtain a direct reimbursement from the federal government (more on that below). The immediate impact on the employer is the need to figure out who is eligible for this subsidy and notify those individuals of their rights, as well as the up-front cost of the subsidy.

Who is eligible? An employer must first identify any individuals who may be eligible for the COBRA subsidy. That includes those who were laid off (or otherwise terminated involuntarily, other than those discharged for gross misconduct) on or after September 1 of last year, whether they elected COBRA coverage or not. The subsidy is phased out for those earning over $125,000 per year, or $250,000 if married.

What notice must employers provide to eligible employees? Notices will need to go out to eligible individuals who were terminated after September 1, 2008, explaining the COBRA subsidy, and offering them a new 60-day period in which to elect COBRA. Even if these former employees did not elect COBRA initially, or elected but allowed coverage to lapse, they are entitled to start coverage now. The U.S. Department of Labor was given 30 days to develop “model” notices for employers and plan administrators to use, so those should be available shortly. Employers or third-party administrators have 60 days from the law's passage on February 17, or by April 18, 2009, to get the new notices out.

In addition to notifying individuals who are eligible already, employers will need to include with future COBRA notices information about the availability of the subsidy. Again, model notices should be available soon for this purpose.

Retroactivity issues. The subsidy requirement takes effect March 1, 2009. It is retroactive in the sense that employees laid off back to September 1, 2008, are eligible for the subsidy; but the subsidy itself is not retroactive. In other words, if an employee was laid off last October and elected COBRA coverage, that employee is eligible for the subsidy for a nine-month period; but the subsidy only applies prospectively from March 1, 2009 and for nine months thereafter. You do not have to go back and reimburse that former employee for 65 percent of the premiums paid in November, December, January, etc. The law also contemplates that plans and employers may not be able to get notices out in time to apply the subsidy effective March 1 (hence the 60-day window to get notices out). If eligible individuals pay the full COBRA premium for March and/or April before the new notices go out, however, the employer must either refund to the individual the 65-percent subsidy paid for March and/or April to the individual or credit the subsidy against the individual's future COBRA premiums.

If an employer is already paying part or all of a COBRA premium for an eligible employee, such as part of a severance or termination program, the 65-percent reduction is calculated based on the reduced amount paid by the employee, not the full cost of covering the individual. In other words, if an employer agreed to pay the full COBRA premium on behalf of an eligible employee, no reimbursement is available from the federal government because there is no employee payment to subsidize.

How long does the subsidy last for an individual? Although the subsidy is available for a maximum of nine months, it can end sooner in individual circumstances. The following are events that may end an individual’s eligibility:

• Expiration of the maximum COBRA continuation coverage period, as the law did not extend the period;
• The individual becomes eligible for (1) coverage under another group health plan; (2) Medicare; or
• The individual stops paying his or her portion of the premium.

Option to offer different coverage. Under regular COBRA rules, a terminated employee is typically only entitled to the type of coverage he/she had at the time of separation. The new law permits (but does not require) employers to offer a less expensive health plan option if one is available, and if the plan meets specified minimum coverage criteria. This is presumably to reduce the cost to the employee and the federal government (since the government is ultimately picking up 65 percent of the premium). If an employer elects to offer different coverage options, it must provide notice to the eligible individuals. They then have 90 days to make an election change. The different coverage must also be offered to active employees at the time the election is made.

How does the employer obtain reimbursement from Uncle Sam? Reimbursement will be in the form of a tax credit against your periodic future deposits for wage withholdings and FICA payroll taxes. To the extent that an employer's claims for COBRA subsidy payments exceed the amount of those payroll taxes and withholdings, the employer is entitled to a direct payment from the federal government. The law provides that any entity seeking reimbursement (whether in the form of a tax credit or direct payment) will need to submit a report to the Treasury Department. The law does not yet specify the details and timing of these reports, and says that the reports must be submitted “at such time and in such manner” as the Secretary of the Treasury may require. However, the law provides that required reporting may include (1) an attestation of the involuntary termination of employment for employees for whom reimbursement is sought; (2) the amount of payroll taxes offset for the reporting period and an estimate for the next reporting period; and (3) a report containing the taxpayer identification numbers for all covered employees, the amount of COBRA premium assistance provided to each covered employee and qualified beneficiary, and a designation with respect to each covered employee as to whether the COBRA premium assistance provided is for individual or family coverage.

Ninth Circuit Holds That a Public Employee is Entitled to a Loudermill Hearing in Certain Layoff Situations

Public employers are well aware that they generally must provide certain “due process” to employees who have a property interest in continued employment (e.g., through a “just cause” requirement) before terminating their employment. The employee must, at minimum, be given notice about the proposed decision and an opportunity to be heard before making the final decision, and the employee is entitled to some form of post-termination process. These rights are often referred to as “Loudermill rights,” after a U.S. Supreme Court case that established the standards of due process in such situations. Employers have generally understood that a layoff decision does not entail a similar Loudermill pre-termination right (absent a policy or agreement providing for such process). A recent decision by the Ninth Circuit Court of Appeals, which has jurisdiction over Washington State, extends the Loudermillright to an employee selected for layoff – at least in some circumstances.

Facts: Edward Levine was a property manager for the City of Alameda. After he was told he was going to be laid off, Levine asked for a pre-termination hearing because he believed his selection was pretext for a personality conflict. The Human Resources Director responded that he was not entitled to a pre-termination hearing under his union contract because he was being laid off rather than discharged for cause. She offered to meet with Levine to discuss layoff procedures and retirement benefits. After Levine’s employment was terminated, he filed a lawsuit in federal court in which he claimed that the City violated his due process rights under the Fourteenth Amendment to the U.S. Constitution.

Court Rulings: The trial court agreed with Levine, concluding that his due process rights were violated, and that he was entitled to a full evidentiary hearing before a neutral third party. On appeal, the Ninth Circuit affirmed the trial court’s decision. The appeals court agreed that Levine had a property interest in his continued employment, and that he was thus entitled to a hearing before his layoff to allow him to present his side of the story. The court observed that neither the offer to meet to discuss layoff procedures nor a random five-minute encounter between Levine and the Director gave him a “meaningful opportunity to respond to the layoff decision.”

The appeals court further concluded that, because Levine’s due process rights were violated, it was not improper for the trial court to order a full evidentiary hearing to remedy the violation. The court advised that “[t]he Supreme Court has held that an employee with a property interest is entitled to a limited pretermination hearing which is to be followed by a more comprehensive public post-termination hearing.” Finally, the court concluded that it was not improper for the trial court to order that the hearing must be before a neutral third party, since anyone working for the City would not be sufficiently neutral after the extensive litigation between the City and Levine.

Bottom-line for employers: Does this mean that you need to provide a pre-termination opportunity for the employee to weigh in on layoff selection, and a full, post-termination hearing before a neutral third-party? Probably not. The court specifically noted that “Levine was entitled to a full post-termination hearing because there was no way to give Levine the process that he had been due, which was an opportunity to respond before the termination occurred.” The court further explained that the requirement of a neutral third-party was a result of the contentious litigation in the Levine case.

The opinion gives less clear guidance on whether pre-termination notice and an opportunity to be heard are always required in a layoff situation. While it could be broadly read to support that requirement, where layoff selection is based on objective factors, such as the employee’s rank on a seniority list, an employer has a good argument that a pre-termination hearing should not be required because nothing the employee can offer would change application of such objective selection criteria. On the other hand, if selection is based on subjective factors, such as “most qualified” or employee performance, the safest course would be to provide employees selected for layoff with notice and an opportunity to be heard before making a final layoff decision.