HR's Oral Representations Trump Summary Plan Description
(Published November 2, 2009)
Reprinted from PERSONNEL LEGAL ALERT, a widely read employment law newsletter that keeps HR executives up-to-date on the latest court cases, legal trends, government regulations, and federal legislation that affect the policies you write and procedures you administer.
HR talks to employees all the time. Beware of what you say regarding retiree health benefits, because such talk could be considered a fiduciary act. If HR is considered a fiduciary and materially misrepresents benefits, the company may be bound to a promise to pay it never intended to make, maybe for years to come. The summary plan description (SPD) doesn't necessarily trump those oral misrepresentations.
Case in point: In meetings hosted by HR, employees were informed that if they retired before a certain date, they would, essentially, receive affordable health benefits for life. Notwithstanding these statements, the company reserved the right to change its retiree health benefits plan. While HR knew about this reserve clause, it never came up in the meetings. The reserve clause was included in an SPD, which retirees customarily received when enrolled in the retiree health benefits plan. It was clear from the questions HR fielded that employees were confused about retiree health benefits.
The company eventually changed its retiree health benefits and retirees sued. Crux of their claim: The company breached its fiduciary duty by misrepresenting their health benefits as affordable lifetime benefits, by failing to adequately disclose the reserve clause, and by exploiting their confusion.
Company's defense: There was no misrepresentation or failure to disclose because the reserve clause was included in the SPD.
A federal trial court and an appeals court ruled in favor of 12 of the 14 retirees and required the company to reinstate the benefits those retirees had prior to the change. These factors contributed to HR's breach of fiduciary duty.
. The company delegated to HR the responsibility to discuss retiree health benefits. This was a fiduciary act under the Employee Retirement Income Security Act (ERISA). Appeals court: Fiduciary duty extends to particular people and to particular people performing particular functions.
0. HR's statements were misleading because it failed to inform potential retirees that the company could modify or terminate their benefits, even though no changes were contemplated at the time they retired. Further, the company knew employees were confused and that this confusion would benefit the company financially.
0. The misrepresentation or inadequate disclosure was material. A misleading statement or inadequate disclosure is material if there is a substantial likelihood that it would mislead a reasonable employee in making an adequately informed retirement decision. Appeals court: A reasonable fiduciary would have foreseen that employees would rely on HR's statements regarding affordable lifetime benefits in making their decision to retire.
0. Employees detrimentally relied on the misrepresentation or inadequate disclosure. Appeals court: This goes beyond just the decision to retire. Retirees, for example, may have turned down other jobs or failed to buy supplemental health insurance. (Adair v. Unisys Corp., 3rd Cir., Nos. 07-3369, 08-3025, and 08-3545, 2009)
Content and Context Count
Is every conversation you have with employees regarding benefits a fiduciary act? Probably not, but you're better off proceeding as if it was. Especially in stressful situations, such as corporate mergers or involuntary terminations, employees may not really hear what you're saying.
Do ensure that all HR staff members who are responsible for presenting benefits information are adequately trained.
Don't sugarcoat benefits. If the company has reserved the right to change or terminate benefits say so, and repeat yourself. Don't rely on the SPD to do your communicating for you.
Do keep records of who held meetings with whom, and when. After-action memos should summarize these meetings. Think about recording them, as well.
Don't hold meetings without the paperwork. Distribute SPDs and other documents to attendees. Also, highlight reserve clauses and other important information.
Do have attendees acknowledge that they received these documents.
Do encourage employees to seek outside retirement advice, and give them ample time to do so.