The Covid-19 pandemic could spark a fresh wave of litigation over the health notices that companies are legally required to send employees they let go.
Big companies like Marriott International Inc., Lockheed Martin Corp., and Best Buy Co. Inc. have settled allegations prior to the pandemic that they sent deficient notices to former employees about their right to continued coverage under the companies’ group health plans. Walmart Inc. is in the midst of a legal fight now, and Nestlé Waters North America is the latest to be sued.
Now that Covid-19 has pushed millions of people into unemployment, defense attorneys say those types of lawsuits could be a burgeoning area of post-pandemic litigation—with big money at stake for corporations caught in the crosshairs. Companies could face steep penalties from both the Labor Department and the IRS for alleged violations of the Consolidated Omnibus Budget Reconciliation Act (COBRA).
“There are a lot more potential plaintiffs and potential defendants when so many companies are laying off large portions of their workforce as a result of downsizing, downturn in the economy, and downturn in business because of coronavirus,” said Emily Costin, a partner at Alston & Bird LLP in Washington, who represents employers, plan sponsors, insurers, and fiduciaries in employee benefit disputes.
“You just have a lot more people out there who are going to need to be sent a COBRA notice, and that’s just more potential plaintiffs and potential defendants,” she said.
COBRA requires employers with group health plans covering 20 or more employees to notify each plan participant and beneficiary of their right to choose continued health-care coverage for limited periods of time under certain circumstances, such as voluntary or involuntary job loss, reduction in hours, transition between jobs, death, divorce, or other life event.
Bracing for More
Cases brought under COBRA generally allege that an employer’s notice either caused someone to lose their health insurance or threatened to because it lacked required information or wasn’t written in an easy-to-understand way. At least eight lawsuits have been filed in federal court against companies over COBRA notices in the last year, according to an analysis of Bloomberg Law data.
Walmart is accused of sending notices that omitted critical parts of the Labor Department’s model notice. Nestlé, meanwhile, is accused of sending notices with ominous warnings about penalties that attempt to scare individuals away from electing COBRA.
Walmart didn’t respond to a request for comment. A Nestle spokesperson said the company typically doesn’t comment on pending litigation, but that it complies with all relevant and applicable federal and state employment laws.
“We are confident in our legal position and will defend ourselves vigorously,” the spokesperson said in an email.
Defense attorneys are now bracing for more litigation as the economic fallout from the pandemic continues.
With an influx of layoffs there will be more COBRA notices that need to be sent out, so it makes sense to expect more litigation over the forms to follow, said Nick Welle, senior counsel at Foley & Lardner LLP in Milwaukee, Wis.
“When there’s a recession typically there’s an increase in lawsuits,” he said.
But not everyone thinks more layoffs will translate into more inadequate notices, or more litigation.
“Not every COBRA form is deficient,” said Chad Justice, managing partner at Justice for Justice LLC in Tampa, Fla., who has represented employees in several COBRA cases, including the ongoing suit against Walmart. “I believe most companies do pretty well in drafting their notices.”
It’s when companies try to get too fancy with their language and how they administer the notices that they get into trouble, he said, adding that he’s vetted hundreds of COBRA notices.
Cases that have been brought allege a deficient notice either caused someone to lose their health insurance or threatened to, “so this can be very serious,” Justice said.
Consequences for employers who don’t get the COBRA notices right include civil penalties imposed by the Labor Department, which can be up to $110 per day per person. The IRS could also impose an excise tax of $100 a day per beneficiary and $200 a day per family until a compliant notice is sent.
“It’s big liability,” Welle said. “It’s excise tax liabilities, DOL statutory penalties and probably the biggest thing is a lawsuit with a demand for benefits as well as possible legal fees and costs.”
The Labor Department didn’t comment on its plans to relax enforcement of COBRA notices as a result of the coronavirus. In guidance filed April 30, however, the agency extended the deadline for employers to send COBRA notices.
Under the new guidance, employers that let employees go after March 1 don’t need to send COBRA election notices until the pandemic ends. Employees who were let go during the pandemic also now have more time under the guidance to elect COBRA coverage and more time to pay the premiums for that coverage if they do.
The new guidance doesn’t change what information has to be included in the notice.
At least two federal district courts have allowed cases to proceed on allegations that notices failed to follow the Labor Department’s model notice, weren’t provided in Spanish, didn’t adequately explain the procedures to elect health-care coverage, and failed to identify the plan administrator.
In February, the U.S. District Court for the Southern District of New York denied PepsiCo Inc.'s bid to dismiss a lawsuit alleging it sent notices that pushed beneficiaries and participants toward the federal marketplace and away from enrolling in COBRA continuation coverage to “presumably save Pepsi money.”
Former employees had alleged in their complaint that Pepsi failed to use the DOL’s model COBRA form, despite having knowledge and access to it.
Although employers aren’t required to use the Labor Department’s model notice, “the regulation also implies an employer’s decision to deviate from the model may constitute a violation if it is non-compliant,” the court said.
Attorneys for PepsiCo and the employees notified the court on April 30 that they had reached a settlement in the case.
To ward off litigation, benefits attorneys say employers should be checking their notices, even if they’ve hired a third party to administer them. The notice has to be customized to the employer and include the required information on how to elect coverage and where to send payments, Welle said.
The devil is in the details, he said.