Health Reform WK-EDGE ERISA shadows “big time fun” at Dave & Buster’s
Friday, March 4, 2016

ERISA shadows “big time fun” at Dave & Buster’s

By Glenn Sulzer, J.D.

Large employers looking to manage health care costs and avoid liability under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) by restricting formerly full-time employees to less than 30 hours per week should be cautioned by a recent court decision that suggests such “right sizing” strategies may violate ERISA. While employers have traditionally been allowed the freedom to make staffing and scheduling decisions in order to manage costs, the decision of a federal court in New York highlights an employer’s concomitant duty under ERISA not to take actions that interfere with an employee’s rights to health insurance and other benefits offered under an employer sponsored plan.

ACA mandates coverage of full-time employees

Under the shared responsibility provisions of the ACA, large employers are required to offer minimum essential coverage to full-time employees. Employers that do not offer such coverage, or do not provide affordable coverage that satisfies specified minimum value requirements, are subject to a significant penalty.

A “full-time employee,” for ACA purposes, is defined as an employee who is employed “on average at least 30 hours of service per week” (Code Sec. 4980H(c)(4)(A)). Significantly, ACA does not mandate coverage for part-time employees or those otherwise working under 30 hours per week, regardless of past employment status.

Final regulations set the accepted parameters for calculating hours of service and for determining full-time employee status (IRS Reg. 54.4980H-3). However, neither the ACA nor the regulations prevent an employer from restricting the hours of new employees or decreasing the hours of existing employees. Accordingly, in order the manage costs anticipated under the shared responsibility requirement and to avoid considerable liability for noncompliance, employers have attempted to manage the hours of their current workforce to reduce the number of full-time employees. As a consequence, former full-time employees who have been participants in ERISA governed employer sponsored health plans have been subject to the loss of current and future health benefits.

Marin v. Dave & Buster’s

Among the nation’s large employers subject to increased health care costs attendant the ACA’s shared responsibility requirements was Dave & Buster’s, a national restaurant and entertainment chain that claims to offer “big time fun.” Dave & Buster’s (D&B) maintained an ERISA governed plan that provided health coverage for its salaried and hourly employees. However, the company was concerned that it would incur substantial costs in providing for the enhanced coverage required under ACA. Accordingly, D&B initiated a nationwide program to reduce the hours of its existing employees.

The experience of an employee at a D&B location in New Your City was typical of the fallout from the new policy visited upon a class of nearly 10,000 employees. Maria De Lourdes Parra Marin worked full-time, 30-45 hours per week, at the D&B Times Square location from 2006-2013. As a full-time employee, Marin received health insurance benefits under the D&B plan. However, after apprising employees of potential increased liability of $2 million under ACA and of its intention to reduce the number of full-time employees to 40 to avoid that cost, D&B reduced Marin’s hours after June 1, 2013 to 10-25 hours per week, or an average of 17.43 per week. Marin subsequently received a letter on March 10, 2014 from D&B informing her that, because she was now a part-time employee, her health insurance would terminate on March 31, 2014. As a consequence, Marin not only saw her earnings drop from $450-$600 per week to $150-$375 per week, but lost medical and vision benefits to which she had been entitled under the plan.

Marin subsequently became the lead plaintiff in a federal class-action suit, alleging that D&B, by reducing the hours of selected full-time employees to avoid increased health care obligations under ACA, intentionally interfered with the employees’ ERISA protected right to health benefits. The compliant was based on ERISA Sec. 510 which states that: it shall be unlawful for any person to “discharge, fire, suspend, expel, discipline, or discriminate” against a participant or beneficiary for exercising any right to which he or she is entitled under the provisions of an employee benefit plan, or for the purpose of “interfering with the attainment of any right to which such participant may become entitled under the plan.” Essentially, the claim alleged that, by so severely curtailing the hours of the selected full-time employees, D&B discriminated against ERISA plan participants by interfering with their attainment of the health benefits to which they were or would become entitled.

D&B moved to dismiss the complaint, arguing that employees have no entitlement and no legally sufficient claim to benefits not yet accrued. Plaintiffs, D&B stressed, need to establish more than a lost opportunity to accrue additional benefits in order to state a claim under ERISA Sec. 510.

Note: D&B’s actions effectively deprived current employees of their existing right to health insurance, and not just the enhanced coverage D&B would need to offer in order to comply with the ACA requirements. Thus, D&B did not only deny the current employees an additional benefit, it denied them an existing benefit.

ERISA Sec. 510 protects welfare benefits to which participants may become entitled

ERISA Sec. 510 prohibits interference with the attainment of any right to which a participant may become entitled under an ERISA governed welfare or pension plan. A “participant” is defined as an employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan (ERISA Sec.3(7)). An employee “may become eligible” for an ERISA protected benefit by establishing a colorable claim that: (1) he or she will prevail in a suit for benefits , or (2) eligibility requirements will be fulfilled in the future (Firestone Tire & Rubber Co. v. Bruch, US Sup Ct (1989), 489 U.S. 101). Courts have further expanded the definition of a participant, for ERISA Sec. 510 purposes, to include part-time employees who have the reasonable expectation of becoming full-time employees (Fleming v. Ayers & Asscoc., CA-6 (1991), 948 F. 2d 993; Sanders v. Amerimed, Inc., DC OH (2014), 17 F. Supp. 3d 700).

Welfare rights protected. The United States Supreme Court has further explained that ERISA Sec. 510 does not distinguish between rights that vest under ERISA (e.g., pension benefits) and those that do not vest (e.g., welfare benefits) (Inter-Modal Rail Employees Association v. Atchison, Topeka, & Santa Fe Railway Co., US Sup Ct (1997), 520 U.S. 510). Tracking the language of ERISA Sec. 510, the Court noted that the power of an employer or plan sponsor to unilaterally amend or eliminate a welfare benefit plan (recognized by the Court in Curtiss-Wright Corp. v. Schooejongen, US Sup Ct (1995), 514 U.S.73) does not include to power to discharge, fire, suspend, expel, discipline, or discriminate against the plan’s participants and beneficiaries for the purpose of interfering with their rights under the plan.

Pursuant to Inter-Modal, employees who do not have a current right to benefits may further bring an ERISA Sec. 510 action to prevent interference with a nonvested right to future benefits (i.e., a future entitlement to benefits). Thus, contrary to D&B’s assertion, employees are not precluded from bringing suit under ERISA Sec. 510 for the lost opportunity to accrue additional benefits.

Inter-Modal, however, did not deny employers the right to make staffing and scheduling decisions necessary to the management of labor and other business costs. Nor have courts recognized the lost opportunity to accrue additional benefits, in itself, as stating an ERISA Sec. 510 claim. Employers are merely required to not act with the specific intent of interfering with the exercise or accrual of ERISA-protected rights to which employee may become entitled.

In alleging that D&B harbored the specific intent to interfere with its employees’ right to health insurance, the complaint noted that company representatives held numerous meetings throughout the country in which they specifically tied the reduction in the number of full-time employees to the anticipated costs of complying with the ACA requirements. Statements made by senior officers in public media further indicated that the work reductions were being made in direct response to the ACA conditions. Finally, D&B made an SEC filing (SEC Form S-1) in September 2014, in which it stated that: “Providing health insurance benefits to employees that are more extensive than the health insurance benefits we currently provide and to a potentially larger proportion of our employees, or the payment of penalties if the specified level of coverage is not provided at an affordable cost to our employees, will increase our expenses.”

The complaint concluded that D&B’s statements illustrated the company’s specific intent to interfere with ERISA protected benefit. Instead of challenging the plan participants’ legal entitlement to benefits that had not accrued (i.e., enhanced ACA compliant coverage), D&B could have plausibly maintained that its statements were merely a frank appraisal of the impact of ACA compliance on its labor costs and not an indication of a specific intent to interfere with benefits. D&B may have stressed that it was entitled to manage costs and make fundamental business decisions that have a collateral effect on protected benefits, as long as it did not specifically or solely target those benefits.

However, the court, at the motion to dismiss stage did not engage such arguments and was required to accept the plaintiffs’ factual allegations would be proved. Accordingly, the court determined that the complaint stated a plausible and legally sufficient claim for relief and denied the motion to dismiss (Marin, et al. v. Dave & Buster’s, Inc. et al., DC NY (2016), No. 15 Civ. 3608 (AKH)).

Surviving a motion to dismiss is significant, especially in a case of first impression. However, Judge Alvin K. Hellerstein, in volleying the case back into the court of the plaintiffs, has presented them with the more substantial challenge of proving that D&B actually harbored the specific intent to interfere with their right to health benefits. Such claims are among the most difficult ERISA allegations to establish.

Specific intent to interfere with benefits

The central element to a successful ERISA Sec. 510 claim is establishing that an employer was at least in part motivated by the specific intent to interfere with ERISA protected rights (Dister v. Continental Group, Inc., CA-2 (1988) 859 F. 2d 1108; Gavalik v. Continental Can Co., CA-3, 812 F.3d 834, cert. denied, 1108 SCt 495 (1987)). Employees are not required to prove that interference with ERISA rights was the “sole” reason for an employer’s action, but they must show more than an incidental loss of benefits (Seamen v. Arvida Realty Sales, CA-11, 985 F.2d 543, cert denied 510 U.S.916 (1993); Meredith v. Navistar Int’l Transp. Corp., CA-7 (1991), 935 F.2d 124; Titsch v. Reliance Group, CA-2 (1983), 742F.2d 1441; Conkwright v. Westinghouse Electric Corp., CA-4 (1991), 933 F.3d 231). Accordingly, an ERISA cause of action will not be stated where a loss of benefits was a mere consequence of, but not a motivating factor behind a termination of employment (DisterTitschBarbour v. Dynamics Research Corp., CA-1 (19995), 63 F.3d32, cert. denied 516 U.S.1113 (1996); Gioia v. Forbes Media, Inc., CA-2 (2012) 501 Fed. Appx. 52).

Burden of proof. Employees may meet the burden of establishing specific intent through direct evidence. Alternatively (and more typically), the burden may be met by circumstantial evidence, pursuant to procedures developed by the United States Supreme Court (McDonnell Douglass Corp. v. Green, 411 US 792 (1973); Texas Dept. of Community Affairs v. Burdine, 450 U.S. 248 (1981)).

Direct evidence of intention to interfere with benefits. Direct evidence of an employer’s specific intention to interfere with benefits is generally lacking. However, D&B’s numerous public statements (in addition to other evidence that may be uncovered on discovery), tying the reduction in the hours of its workforce to its anticipated costs under ACA, may constitute evidence sufficient to establish the prerequisite specific intent. A gradual increase in D&B’s health costs over time, separate from ACA-related costs, may also illustrate a motivation underlying a discriminatory action to target health benefits. For example, if the company was not otherwise planning a reduction in force or experiencing other financial pressures, but was concerned with existing health insurance costs, its statements on ACA could disguise an actual motive. It is perhaps relevant at this juncture to recall that employees relegated to part-time status by the reduction in hours lost all prior employer-provided health insurance. Discovery could produce documentation suggesting that the company’s general statements in opposition to ACA disguised the true motive of relieving itself of the existing health benefit costs for at least select hourly employees.

In order to counter such allegations, D&B could introduce evidence that it implemented the national reduction in hours for reasons other than health benefit costs. As noted, a collateral effect on ERISA protected benefits is permissible, as long as the sole intention of the employer’s actions was not to interfere with benefits. A nationwide reduction in hours, even if made in order to manage costs, can be upheld as a fundamental business decision.

Problematic for D&B, however, is that Marin’s attorneys, armed with the power of discovery, now have access to internal documents, which may include a “smoking gun” memo illustrating an intention to interfere with protected rights, and not just manage labor costs. However, it is also likely that such documentation will highlight considerations of the legitimate issue of costs. Cost, unlike other factors typically informing discrimination, are quantifiable and remain a legitimate basis for business decisions, even those adversely impacting employee benefits.

McDonnell Douglas circumstantial evidence procedures. Absent a direct proof of intent, employees under the McDonnell Douglas procedures must establish a prima facie case of discrimination, which creates a presumption of discrimination. The employer is then required to proffer a legitimate nondiscriminatory reason for its conduct. Under the burden shifting procedures, the employee must, in turn, demonstrate that the proffered reasons were mere pretext.

The McDonnell Douglas structure of proof is premised on the assumptions that: (1) employers generally make business decisions for a reason, not at random, and (2) where all valid, nondiscriminatory business reasons for a decision have been eliminated, common experience with employment discrimination suggests it is likely that the decision was based on unlawful considerations (Dister). At essence, the McDonnell Douglas methodology allows courts to resolve amorphous claims of discrimination while servicing the expansive remedial aims of ERISA Sec. 510.

Establishing prima facie case. In analogous ERISA Sec. 510 unlawful discharge cases, employees establish a prima facie case by showing that they: (1) were entitled to ERISA protection, (2) qualified for the position and, (3) discharged under circumstances that give rise to an inference of discrimination (Dister; Barbour) Plaintiffs, however, cannot establish a prima facie case merely by showing that , as a result of the termination they were deprived of the opportunity to accrue additional benefits (Clark v. Coats & Clark, CA-11 (1993) 990 F.2d 1217).

Marin and plaintiffs will need to establish that they were qualified for ERISA protection as plan participants, entitled to health benefits, and discriminated against under circumstances that give rise to an inference of discrimination. The Eleventh Circuit has explained that general measures designed to reduce costs that also result in an incidental reduction in benefit expenses do not suggest discriminatory intent (Clark). However, employees who were reclassified as independent contractors have been able to establish a prima facie case that the reclassification was specifically intended to interfere with their ERISA benefits where the employer could not consistently support the proffered rationale for the decision (Gitlitz v. Compagnie Nationale Air France, CA-11 (1997), 129 F.3d 554). Similarly, the fact that employees were discharged 4 months and 7 days before plan rights were to vest, resulting in substantial cost savings to the employer, was sufficient to give rise to an inference of discrimination (Dister).

The prima facie burden is not intended to be prohibitive. The direct statements of D&B suggesting a direct correlation between the reduction in hours and the pending ACA costs would seem to establish a prima facie case of interference with protected benefits, especially if evidence indicates that D&B was not experiencing other financial pressures (including from stockholders), was not implementing general cost saving measures beyond health care, and was not considering reducing its full-time workforce to manage health costs before enactment of the ACA.

Presumption of discrimination. Upon establishment of proof of a prima facie case, a presumption arises that an employer unlawfully discriminated against the employee (Burdine). The employer is then required to articulate, but not prove, a legitimate, clear, specific, and nondiscriminatory reason for its actions (Dister). Thus, going forward D&B will need to present legitimate business reasons for its actions. However, in order to dispel the presumption and shift the burden of proof, D&B will not need to persuade the court that it was actually motivated by the proffered reason (DisterBd of Trs. of Keene State Coll. v. Sweeney, US Sup Ct (1978) 439 U.S. 24). The company could plausibly argue that the substantial costs of complying with the ACA in an already challenging economic environment warranted its actions. The need to reduce costs can be among the most legitimate, clear, specific, and nondiscriminatory of reasons underlying business decisions. The necessity or reasonableness of implementing the specific measure under challenge in order to redress the cost issue, however, need not be proved in order to shift the burden and remove the presumption of discrimination.

Burden on employees to expose employer rationale as pretext. Once the employer has articulated a legitimate reason for its actions, the burden shifts to the employees to adduce sufficient evidence to create a genuine issue of fact as to whether the rationale was a pretextual disguise of a specific intent to interfere with ERISA protected rights. An employee satisfies the burden of proving pretext either directly by persuading the court that that a discriminatory reason more likely motivated the employer, or indirectly by showing that the employer’s proffered explanation was unworthy of credence (Dister, quoting Burdine).

Business decisions. In determining whether a proffered rationale is pretextual, a court is not authorized to second guess business decisions or to question a corporation’s means of achieving a legitimate goal (Burdine). The Second Circuit has explained that evidence that an employer made a poor business decision (in discharging an employee) generally is insufficient to establish a genuine issue of fact as to the credibility of the employer’s rationale (Dister). Similarly, the Seventh Circuit has explained that a business decision need not be good or even wise, but simply nondiscriminatory (Graefenhain v. Pabst Brewing Co., CA-7 (1987) 827 F. 2d 13).

An employer, however, may not disguise discriminatory motives behind a business decision. Material inconsistencies in an employer’s rationale or a less than uniform application of a policy may betray the pretext behind an otherwise valid business decision.

Cost savings. Evidence that an employer’s actions resulted in or would result in substantial cost saving has been offered to establish pretext. However, the cost savings resulting from an employer’s actions are not usually sufficient, absent other proof of discriminatory motive, to establish pretext.

In an instructive case from the Fourth Circuit involving pension benefits, the court held that an allegation that an employer saved money by terminating an employee was not sufficient to support a claim of pretext (Conkwright). Conclusory statements that an employer interfered with an employee’s attainment of ERISA rights in order to meet its financial need to save money are not sufficient to establish pretext, the court advised. Otherwise, “any action that results in savings would be suspect.” It is obvious, the court continued, that benefit costs make up a large amount of the costs of an employee to a company and that pension rights are a substantial component of benefit costs, but these undeniable propositions are not sufficient standing alone to prove the requisite intent by the path of pretext.” (Conkwright).

Relying on Conkwright, other courts have similarly ruled that a plaintiff must prove more than monetary savings in order to prevail on an ERISA Sec. 510 claim (Nixon v. Celotex Corp., DC Mich (1998), 693 F. Supp 547). The “something more” element that must be shown is a causal link between the ERISA protected benefit and the employer’s allegedly discriminatory actions. Thus, an employee must produce evidence sufficient to allow for the conclusion that an employer’s desire to avoid or reduce liability was a determinative factor in an employment decision. Similarly, the Second Circuit has advised “mere cost savings and proximity to benefits” are not sufficient to create a genuine issue of material fact (Dister; see in accord Humphrey v. Bellaire Corp., CA-6 (1992), 966 F. 2d 1037).

However, the Second Circuit has cautioned that an employer is not entitled to summary judgment in every case in which it relies on business judgment in making an employment decision (Dister). A business decision may be merely a “reason manufactured to avoid liability.” A proffered business rationale may also be so lacking in merit, implausible, riddled with material inconsistencies, or idiosyncratic as to indicate pretext.

Actions executed pursuant to a fundamental business decision may further indicate a discriminatory motive and a specific intention to violate ERISA rights. Thus, employers need to be alert to the caution of Supreme Court in Inter-Modal that ERISA does not authorize the attainment of a legitimate business goal (e.g., cost savings) through discriminatory actions that interfere with protected benefits.

Is D&B’s cost rationale pretextual?

Pretext is easier to prove when an employer’s action is undertaken on a small scale. For example, a full-time employee who has his hours reduced, effectively denying him health insurance, after incurring a terminal illness necessitating expensive treatment, may be able to establish that the employer’s targeted action was discriminatory. Citing costs would appear pretextual, especially if the employee’s condition was discussed by company officers beyond the HR department, no other employee sustained the same reduction in hours, and the employee’s performance had been documented as exemplary. However, a nationwide reduction in hours, uniformly and consistently imposed, and implemented in order to reduce quantifiable and measurable costs, offers less grounds for establishing pretext.

Pretext may also not even be at issue in the Marin litigation. The very public positon of D&B expressed to its employees and in regulatory filings indicated that the company was clearly, if not unapologetically, motivated by a desire to avoid incurring what it viewed as the onerous costs imposed by compliance with the ACA shared responsibility requirements. Whether those costs were sufficiently burdensome to warrant the drastic reduction in hours or whether alternative measures to offset those costs should have been entertained, may be suspicions at the heart of the employees’ complaint. However, a long history of deferential judicial precedent indicates that D&B was not obligated to engage those considerations, as long as its decision to reduce employee hours was reasonable, implemented on a nondiscriminatory basis, and did not constitute an illegitimate interference with protected rights.

Does ACA opposition indicate pretext? D&B’s public statements indicate stringent opposition to ACA. The fact that it has hosted events by Americans for Prosperity, an active and virulent opponent of ACA, further underscores its opposition to ACA. It is not implausible to suggest that D&B’s very public posturing compromised a presumption that its business decision was executed in good faith, and was not ideologically driven. However, optics aside, D&B’s opposition to ACA and the requirements thereunder, while aggressively impolitic, does not deprive it of the right to make fundamental business decisions that are uniformly imposed across its workforce.

Even ideological opposition to the idea of government dictated health care requirements does not negate the fact of the increased costs those requirements impose on employers. Nor would it be practical to suggest that a publicly traded company would fundamentally alter its workforce (thereby threatening its bottom line) in order to state a political point.

Concededly, employers may not operate with impunity in pursuing their business interests. However, D&B did not appear to target individual employees with high health care costs or use other impermissible criteria, such as sex, race, age, disability, sexual orientation, disability, or even support of President Obama and ACA, in implementing its policy. The fact that D&B prioritized reducing benefit costs, absent evidence of an illegitimate or discriminatory intent, may establish a prima facie case, but does not indicate pretext or delegitimize its action.

Finally, while employees have a protected right under ERISA 510 to health and welfare benefits, including those to which they may become entitled, this fact does not preclude an employer from making business decisions that have a negative impact on those rights. Therefore, if D&B can meet its burden of proving a cost justification for the workforce reduction and can illustrate the uniform, neutral, and nondiscriminatory application of its right sizing strategy, it opposition to ACA, no matter how publicly or stridently stated, may be of no legal consequence for ERISA 510 purposes.


D&B may ultimately regret alienating a stable full-time workforce and inviting the disruption that typically attends a primarily part-time staff. The company may eventually need to modify its position to bring on more full-time staff. However, that should be a decision coerced by the economy and the restaurant market and not by the government or the courts.

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