Guest Article

(From the May 11, 2009 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Plant Closings Can Raise Claims of ERISA "Interference"

The Sixth Circuit affirmed that employees who are fired or laid-off as a group -- such as in a plant closing -- are covered by ERISA § 510, and can bring suit if they believe the discharge was made for the purpose of interfering with their "attainment of rights" under an employee benefit plan.

Plant Closing and Allegations

In Crawford v. ___________, Nos. 08-1132/1777 (6th Cir. 3/1/2009), a class of former employees alleged that their employer violated ERISA by closing the plant where they worked for the purpose of interfering with the vesting of their retirement benefits. When the plant closed, three employees were within one year of reaching their full 30-year retirement benefit under the employer's collectivelybargained defined benefit pension plan, and four others were within two years of reaching that benefit.

The plant in issue was a 370,000 square foot facility that was used to manufacture front suspension components for various car makers. Faced with overcapacity problems that were hindering its productivity, the employer organized a group to research the costs of shutting down some of its North American plants. The group identified the large 370,000 square foot facility as a prime candidate -- but only after considering whether other, non-manufacturing assembly work could be moved to the facility to increase its utilization. The assembly work was eventually moved to a non-union facility, and the plant was closed. Before the plant shut-down, the employer and the union engaged in discussions to bridge the benefits of those employees who were close to vesting under the pension plan, but they failed to reach an agreement. In the course of closing the plant, management explained that pension costs -- colloquially known within the company as "legacy costs" -- were among the reasons for the decision. The manufacturing work previously done at the plant was transferred to a non-union facility.

A class of former plant employees sued, claiming the employer violated ERISA § 510 by improperly discharging them for the purpose of interfering with their attainment of retirement benefit eligibility. The employer moved for summary judgment, arguing that the facts alleged by the employees were insufficient to support their claim. The District Court agreed, and granted summary judgment in favor of the employer. The employees appealed. On appeal before the Sixth Circuit, the employer argued that plant closings are not actionable under ERISA § 510 because of the deference afforded to employer business decisions, and because of the fact that plant closings impact groups of employees -- not individuals, with whom ERISA § 510 is concerned.

Sixth Circuit Analysis

The Sixth Circuit flatly rejected the employer's contention that an ERISA § 510 action could not be brought in the context of a plant closing. ERISA § 510 states:

While acknowledging that the statutory language of ERISA § 510 speaks in the context of individually focused terms -- for example, to discharge, fine, suspend, or expel a participant -- the Court nonetheless concluded that:

By this holding, the Sixth Circuit aligned itself with similar decisions in the District of Columbia Circuit and the Third Circuit. In fact, the Sixth Circuit noted that the Third Circuit had explicitly recognized the possibility that an unscrupulous employer might sell or close a plant to shake off employees on the cusp of establishing benefit eligibility.

Although the Court rejected the employer's argument that an ERISA § 510 claim could never be brought in the context of a plant closing, it nonetheless agreed that the employees had failed to show that the employer discharged them with an improper motive (i.e., to interfere with their attainment of retirement benefits). The employer told the employees that it sought to reduce "legacy costs." The Court commented that such a goal was no surprise; that "labor costs are often among the largest costs for a plant, and such 'legacy' or retirement and benefits costs are often among the largest portion of labor costs." The fact that the manufacturing work previously done at the plant was transferred to a non-union facility helped to establish the presumption that the employer acted to interfere with the employees' attainment of pension rights. However, the employer was able to rebut that presumption with its business rationale for the closure: that only 30,000 square feet of the available 300,000 square feet in the facility was being used, so roughly 26% of every sales dollar went to fixed costs and overhead, etc.

The Court explained that the question boils down to "whether reducing pension benefits by shutting down a plant with employees close to vesting as a 'motivating factor' or was instead 'incidental' because there were other, neutral business reasons at play."

As it affirmed the summary judgment, the Court observed,

Observations

Legitimate business reasons for a plant closure may not be enough to keep an employer out of court where employees perceive the employer as motivated to interfere with their attainment of pension rights. While employees face some stiff evidentiary burdens in establishing a claim of interference under ERISA § 510 in the context of a plant closing or other class-based claim, the fact is that -- in at least three Federal circuits -- the ability to bring such a claim is recognized. In a successful suit, an employee may obtain equitable relief (e.g., reinstatement, attorneys' fees and costs). This case also illustrates the importance of careful employee communication and -- where a plant with employees who are close to vesting is being shut down -- for employers to make sure that the reduction of benefits costs is not a motivating factor, but rather incidental to other, neutral business decisions.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2009, Deloitte.