Smoker Class Actions Put Pressure on Employer Wellness Programs

Employee benefits attorneys are monitoring a string of class actions over health insurance smoking surcharges with the potential to reshape how employers impose penalties in wellness programs.

At least half a dozen federal lawsuits are ongoing, with workers alleging employers are violating fiduciary duties and nondiscrimination provisions under the Affordable Care Act and Employee Retirement Income Security Act by penalizing smokers and pocketing the fines. Multiple corporations have settled cases with workers in recent months, with Performance Food Group Inc. most recently agreeing to pay $4.7 million to 18,500 employees.

Recent district court developments raise questions around how much time employers should give workers to complete cessation programs, and whether they’re entitled to retroactive refunds of penalties when they do so.

The ACA grants employers the ability to vary premiums and cost-sharing for certain workers if they’re implementing programs of “health promotion and disease prevention.” Employers can offer wellness programs with health-related contingencies—such as premium discounts for nonsmokers—so long as they meet certain requirements.

One requirement mandates that employers give workers with relevant medical conditions an opportunity to qualify for the “full reward” if they meet a “reasonable alternative.” For smokers with a nicotine addiction, that typically means completing a cessation program.

But the punitive nature of some wellness programs indicates that some employers aren’t asking the right questions to make their workers healthier, said Barbara Zabawa, founder of Wellness Law LLC.

“What kind of environment are we as the employer creating? What kind of environment does the employee live in?” she said. “And what can we do to help break down barriers so that they can make healthier choices?”

The cases allege employers are violating rules around wellness programs in various ways, including by not giving smokers enough time to comply with cessation programs and refusing to refund past premium surcharges after cessation programs are completed. The plaintiffs are seeking restitution of past penalties and injunctions against the employers.

Many programs are in violation of the current rules, argued Oren Faircloth, an attorney with Siri & Glimstad LLP, which represents a number of the plaintiffs in the smoker suits.

“As far as we can tell, there are hundreds—if not thousands—of companies that are imposing these surcharges on blue-collar workers, and the violations seem pretty widespread,” he said, adding that the penalties can reach $100 a month.

Retroactive Refunds

Employers notched a victory last month when Bally’s Management Group LLC beat a challenge from a worker seeking reimbursement of past penalties after completing a cessation program. Judge Mary S. McElroy of the US District Court for the District of Rhode Island dismissed the case, ruling that language directing employers to grant workers retroactive premium discounts in a 2013 rule from the Health and Human Services, Labor, and Treasury departments was unenforceable.

McElroy cited an “anti-parroting” doctrine that grants courts leeway in interpreting statutes when the implementing regulations do little more than restate the law. But the ruling—which is being appealed—runs counter to decisions from other courts allowing similar cases to proceed.

Whether that translates into a final win for the plaintiffs is far from guaranteed, Zabawa said.

Courts are shifting how much deference they give agencies following the US Supreme Court’s 2024 decision in Loper Bright Enters. v. Raimondo, which overturned the Chevron doctrine that gave judges greater leeway to decide whether agencies were properly interpreting statutes.

“If not, I think the statute is going to make it a lot harder for the plaintiffs to win,” she said.

‘Technical and Disclosure Compliance Is Critical’

Impacts from the appeal in Bally’s case before the US Court of Appeals for the First Circuit will be limited in the short-term, said Thompson Hine LLP counsel Michelle Webster. But employers need to pay close attention to plan documents explaining how workers can avoid the penalty and whether it applies retroactively.

“The lesson here is basically that technical and disclosure compliance is critical for these plans to avoid litigation,” she said.

A previous wave of litigation challenged wellness programs under the Americans With Disabilities Act, Zabawa said. Those cases prompted many employers to abandon biometric screenings and “health risk assessment” questionnaires, or reword them to avoid protected health information.

The new legal risk could deter some companies from offering wellness programs at all, she said, noting that data haven’t proven they even provide a return on investment.

“When you couple that with the potential compliance threat,” she said, “they start losing their luster.”

Compliance Time, Fiduciary Breach

Home health-care company LHC Group Inc. is also fighting an administrative judge’s recommendation that the US District Court for the Western District of Louisiana deny its motion to dismiss the case, in part because employees are only given four months to complete a cessation program requiring as many as eight counseling sessions.

Most wellness programs typically grant workers around a year to comply, Zabawa said, raising questions around whether employers with tighter timelines are considering the underlying mission of their wellness programs.

The plaintiffs also plausibly alleged that LHC is depositing the penalties into a general account in violation of ERISA’s “prohibited transaction” clause, the judge said.

Other cases against Sedgwick Claims Management Services Inc. and Carle Foundation have also advanced over fiduciary breach allegations, while similar claims have been dismissed in cases against GardaWorld Cash Service Inc. and Bally’s.

Employers have lost sight of the mission driving wellness programs, Faircloth argued. Consumers are getting hit with too many high costs to afford losing as much as $100 a month in tobacco penalties.

“Promotion of health should absolutely be the focus of all of these programs,” Faircloth said, “as opposed to setting up barriers and restrictions that make it significantly more difficult for blue-collar workers to get to the full reward.”