Pension & Benefits News Funds' business manager retaliated against employee who cooperated with DOL investigation
Thursday, February 14, 2019

Funds' business manager retaliated against employee who cooperated with DOL investigation

By Pension and Benefits Editorial Staff

The business manager and outside counsel for a group of ERISA trust funds violated ERISA Sec. 510's ban on retaliation for protected conduct when they first placed on leave, and then terminated, a department director who was cooperating with the Labor Department's criminal investigation of the business manager's conduct with respect to the funds, the U.S. Court of Appeals in San Francisco (CA-9) has ruled. However, the court also determined that the retaliatory conduct did not amount to a breach of fiduciary duty under ERISA Sec. 404.

Funds' audit department. A union's business manager also served as a trustee for the five employee benefit trust funds established by the union and other employer contractor associations. The trust funds had an internal Audit and Collections Department (A&C) that was responsible for auditing employers and collecting overdue or otherwise unpaid employer contributions.

As early as 2006, the A&C director had expressed to several fund trustees her concerns that the business manager interfered with her department's collection efforts in a way that benefited employers rather than the funds.

In October 2011, the A&C director received a call from the Labor Department informing her that the business manager was the target of a DOL criminal investigation. (The union vice-president had called the DOL earlier in 2011). The A&C director reported the call to a trustee who in turn informed the trust fund's attorney, who had her own law firm. The attorney was in a romantic relationship with the business manager.

In the following weeks the business manager and the attorney worked with other trustees to start an audit of the A&C Department and then to explore outsourcing that function to the funds' third-party administrator. The director was subsequently placed on leave and, when the TPA did take over the audit function, it hired every employee in the fund's audit department except for the director, effectively terminating her.

DOL investigation. The Labor Department filed suit against, among others, the trust funds, the business manager and the attorney. In 2015, the trust funds settled and agreed to pay the director $400,000 in lost wages.

After a bench trial, the district court then concluded that the business manager and the attorney had violated ERISA Sec. 510 when they first placed on leave, and then terminated, the director in retaliation for protected conduct. The court further held that the business manager violated his fiduciary duties under ERISA Sec. 404(a)(1)(A)-(B) when he caused the director to be placed on leave in retaliation for protected conduct. The court also concluded that the attorney violated ERISA Sec. 404 by knowingly participating in the business manager's breach of fiduciary duties. The court permanently enjoined the business manager and the attorney from working with the funds, and with respect to the business manager, from acting in a fiduciary capacity for any ERISA-covered plan.

Interference with rights. The Ninth Circuit upheld the lower court's conclusion that the business manager violated ERISA Sec. 510. The director, by cooperating with the DOL in connection with its investigation of the business manager, engaged in “prototypical” ERISA-protected activity. Further, the director's ERISA-protected activity was the “but for” cause of her being placed on leave. The court rejected the business manager's argument that it was the entire board of trustees that put the director on leave, not just the business manager. Under a cat's-paw theory of liability, the fact that the business manager was not the ultimate decisionmaker did not immunize him from liability. The Labor Department successfully demonstrated that the business manager had a retaliatory motive and then influenced the board to take the retaliatory action.

Fiduciary duty. The Ninth Circuit further held that the lower court erred in concluding that the business manager violated ERISA Sec. 404 when he retaliated against the director. The record is silent as to whether the business manager was a named or a functional fiduciary. Further, even if his status as a fiduciary was clear, there was no support for the contention that placing an employee on administrative leave was a fiduciary function under ERISA, rather than a corporate or business function. When analyzing a potential breach of fiduciary duty, courts must “examine the conduct at issue to determine whether it constitutes management or administration of the plan, giving rise to fiduciary concerns, or merely a business decision that has an effect on an ERISA plan not subject to fiduciary duties.”

Having determined that there was no liability for the business manager under ERISA Sec. 404, the court necessarily concluded there was no violation on the part of the attorney for knowingly helping him.

Injunction vacated. In addition, the court vacated the permanent injunction issued by the district court with respect to the business manager and the attorney. The injunction was issued pursuant to ERISA Sec. 409, which authorizes a court to provide equitable relief in the event of a fiduciary breach. However, the court explained, the Labor Department failed to prove there was a fiduciary breach. The court also rejected the Labor Department's contention that ERISA Sec. 502(a)(5) provided an alternative basis for the permanent injunction.

Dissent. The dissenting judge argued the business manager was “clearly acting as a fiduciary.” While acknowledging cases in which what were primarily business decisions were challenged unsuccessfully because of collateral effects on a fund, the dissent found “no law to support characterizing a fiduciary's efforts to cover up trust fund mismanagement as business, rather than fiduciary decisions.”

SOURCE: Acosta v. Brain (CA-9).

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