Employer Held Responsible for Inaccurate Descriptions of Employee Benefits by Low-level Employees
January 31, 2003
In difficult economic times, many employers are seeking to cut costs by changing their employee benefits programs. Two types of benefit plans that continue to receive attention are early retirement incentive programs and retiree medical care plans. Due to the difficult economy, many employers are seeking to reduce costs by encouraging older employees to retire under early retirement incentive programs or by changing or terminating existing retiree benefit programs to make them more cost effective.
When amending or terminating benefit plans, ERISA places the burden on employers and plan fiduciaries to provide employees and retirees with truthful and accurate information when employees ask about plan benefits and changes. Recently, in James v. Pirelli Armstrong Tire Corp., the U.S. Court of Appeals for the Sixth Circuit expanded these requirements for employers. It held that the inaccurate statements of low-level human relations representatives during meetings related to an early retirement incentive program bound an employer and plan fiduciary to a promise of lifetime retiree medical benefits.
ERISA Requirements and Varity Corp. v. Howe
ERISA requires that a fiduciary discharge duties with respect to a plan solely in the interests of the participants and beneficiaries. ERISA also imposes high fiduciary duty standards on plan administrators, including an unwavering duty to make decisions with single-minded devotion to a plan’s participants and beneficiaries.
In Varity Corp. v. Howe, the U.S. Supreme Court expounded on the scope of ERISA fiduciary duties, expressly stating that employers and fiduciaries have a duty to provide accurate information to employees about their benefits. Ultimately, the Supreme Court held that employees were entitled to have lost benefits restored under a breach of fiduciary theory because the employer’s high-level officers and fiduciaries had intentionally misled the employees regarding their benefits.
In James v. Pirelli Armstrong Tire Corp., the Sixth Circuit has now expanded the scope of liability under ERISA, finding that misstatements made even by low-level human relations representatives who are not fiduciaries are binding on an employer and fiduciary and actionable under ERISA.
James v. Pirelli Armstrong Tire Corp.
The facts in Pirelli Armstrong Tire Corp. are similar to many situations where an employer seeks to create an early retirement incentive program and, in explaining the program to employees, makes statements that affect future benefits changes. From 1986 through 1990, Pirelli offered its employees early retirement incentives as part of a downsizing effort. In connection with communicating the early retirement program, Pirelli held mandatory group meetings and exit interviews at its various facilities and distributed summary plan descriptions and other written materials, which included a description of retiree medical benefits. Corporate headquarters developed the strategy for implementation of the early retirement program and provided each facility with detailed information on the program, which included a written script for local representatives to follow in making the presentation at each facility and a letter from the president to be distributed to employees. Also, the corporate headquarters distributed the plan’s summary plan description, which included specific language reserving to the company the right to terminate or change retiree benefits at any time.
However, unbeknownst to the company’s officers, when the early retirement program was explained to employees at one branch facility, a low-level HR representative and the facility manager deviated from the company’s script and, during question periods and in exit interviews, contradicted Pirelli written plan. For example, the representative stated employees’ benefits under the early retirement plan "would not change" and were "for life" until they died. When specifically asked about the summary plan description language reserving the right to amend or terminate the plan, the representatives inaccurately stated the provision applied only to a change in insurance carriers and not to the level of benefits available.
Within a few years, Pirelli utilized its authority to make plan changes and implemented a series of cost-cutting measures affecting retirees’ premiums, deductibles and out-of-pocket maximums. When the changes were made, the corporate officers and plan fiduciary had no idea representatives at the branch facility had made contrary statements years earlier to employees. However, certain retirees of that facility remembered and filed an ERISA breach of fiduciary duty action, claiming that the company’s information and responses to questions related to the early retirement incentive program were misleading and not accurate.
After a trial, the district court concluded that, except as to two retirees who received the inaccurate information during personal meetings related to their retirement, there was no evidence that the representative deliberately or negligently misled the employees in answering their direct questions related to the early retirement plan. The district court also found that the employer did not deliberately mislead the employees to believe the company would not use its right to amend their retiree medical benefits years later.
The participants appealed, and the U.S. Court of Appeals for the Sixth Circuit reversed in the participants’ favor. The court deliberately reviewed the testimony of more than 20 trial witnesses and found that the employer, through the low-level representatives, provided inaccurate information to the potential retirees in the group and individual meetings that was materially misleading. The court concluded that representatives’ material misrepresentations during the group meetings were binding on the employer, constituting a breach of fiduciary duty for failing to convey truthful information because those employees who received the inaccurate information reasonably relied on the statements in making decisions whether to take early retirement. The court further found the representatives’ inaccurate responses to specific retirement questions from certain employees constituted an independent basis for a fiduciary breach. As a result, the court remanded the case to the district court to determine the appropriate remedy to be awarded to the class of retirees.
Impact on Institution of Benefit Plan Changes
The Pirelli Armstrong Tire Corp. decision is a instructive lesson about what can go wrong when early retirement incentive programs and retiree medical changes are developed at corporate headquarters and subsequently explained and implemented at the local facility. Historically, employers have been protected from situations such as that in Pirelli Armstrong Tire Corp. because the plan documents typically reserve to the employer the right to amend or terminate benefits at any time and for any reason, and courts uniformly have held that oral and written misrepresentations cannot override unambiguous plan terms. The Sixth Circuit has apparently abandoned this view in holding Pirelli liable for statements made contrary to plan documents by its low-level representatives.
This case should serve as a reminder to employers that a good reservation of rights clause in a benefit plan will not cure all problems that occur in the process of amending or terminating benefit plans. As the court in Pirelli Armstrong Tire Corp. warned: "When a plan administrator speaks, it must speak truthfully." Employers must always be cognizant of the high standards imposed by ERISA when communicating benefits information to employees generally. While no employer can ensure that all managers or other representatives accurately communicate benefits changes, where feasible, the employer should have all benefits communications go through a centralized office.
One way that employers may be able to control how benefits information is communicated is by videotaping benefits presentations at corporate headquarters and instructing local human relations managers that all questions regarding benefits should be referred to the corporation’s home office. Use of videoconferencing technology can help to ensure that all employees, wherever located, receive the same, accurate benefits information. The employer also should communicate clearly to employees which representatives or managers are authorized to provide benefits information. By limiting the group of people through which benefits information is disseminated, employers will be in a better position to control the content of the information provided and ensure all information is disseminated is accurate and consistent with the terms of their benefit plans.
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