Employer Violated CBAs By Replacing Retirees' Health Plan Coverage with HRAs: Sixth Circuit | Practical Law

Employer Violated CBAs By Replacing Retirees' Health Plan Coverage with HRAs: Sixth Circuit | Practical Law

In United Steelworkers v. Kelsey-Hayes Co., the US Court of Appeals for the Sixth Circuit held that an employer that unilaterally discontinued group health insurance plans for retirees and replaced them with health reimbursement accounts (HRAs) breached the applicable collective bargaining agreements (CBAs).

Employer Violated CBAs By Replacing Retirees' Health Plan Coverage with HRAs: Sixth Circuit

by Practical Law Employee Benefits & Executive Compensation and Practical Law Labor & Employment
Published on 29 Apr 2014 • USA (National/Federal)
In United Steelworkers v. Kelsey-Hayes Co., the US Court of Appeals for the Sixth Circuit held that an employer that unilaterally discontinued group health insurance plans for retirees and replaced them with health reimbursement accounts (HRAs) breached the applicable collective bargaining agreements (CBAs).
On April 22, 2014, in United Steelworkers v. Kelsey-Hayes Co., the US Court of Appeals for the Sixth Circuit held that an employer that discontinued group health plan coverage for retirees and replaced it with health reimbursement accounts (HRAs) breached the controlling collective bargaining agreements (CBAs) (No. 13-1717, (6th Cir. Apr. 22, 2014)). The court rejected the employer's argument that it was permitted, under Sixth Circuit retiree benefit case law, to unilaterally change CBAs regardless of the CBAs' specific language.

Background

The plaintiffs, a class of 400 former union-represented employees, retired under collective bargaining agreements (CBAs) in which their employer agreed to establish health coverage for the retirees through self-insured or insured group health coverage. The CBAs included a "mutual agreement clause" stating that if providing benefits under the CBAs was not practicable, the employer would offer new benefits or coverage as "closely related as possible," and of equivalent value to, the benefits not provided.
Consistent with the CBAs, the employer provided the retirees and their dependents insured health coverage for several years (though the insurance carrier for the retirees' coverage changed on two occasions). In 2011, following the employer's purchase by a successor company, the retirees were informed that:
The successor employer did not commit to funding for the HRAs beyond 2013.
In a class action against the original and successor employers (collectively, the employers), the retirees argued that the change from health plan coverage to HRAs breached the CBAs in violation of the Employee Retirement Income Security Act (ERISA) and the Labor Management Relations Act (LMRA). A district court agreed with the retirees, ruling that:
  • The CBAs established a commitment to lifetime health care benefits for the retirees and their dependents.
  • The employers were not permitted to discontinue the vested health benefits.
  • The employers' unilateral decision to implement HRAs breached the CBAs.
  • The employers were required to reinstate the "status quo" (that is, the health coverage in effect through 2012).
The employers appealed to the Sixth Circuit.

Outcome

The Sixth Circuit affirmed the district court's judgment, and in doing so clarified its case law on evaluating the contractual vesting of health insurance benefits for retiree benefits provided under CBAs.

Effect of Post-Yard-Man Case Law

Before addressing the retirees' claims, the Sixth Circuit discussed what it viewed as the employers' "misapprehension" of the court's retiree benefits case law, including two cases that built upon the Sixth Circuit's leading retiree benefits case (UAW v. Yard-Man, Inc., 716 F.2d 1476 (6th Cir. 1983)). In Yard-Man, the Sixth Circuit concluded that when parties contract for benefits that accrue based on attaining retiree status, there is an inference that the parties likely intended those benefits to continue as long as the beneficiary remained a retiree. The court rejected the employers' reading of two post-Yard-Man cases in which the court concluded that disputed lifetime health benefits could be reasonably altered under a CBA that reset the rules for employees who retired after a certain date (see Reese v. CNH Am. LLC, 574 F.3d 315 (6th Cir. 2009) and Reese v. CNH Am. LLC, 694 F.3d 681 (6th Cir. 2012)). The Sixth Circuit disagreed with the employers that the Reese cases represented a "sea change" in its retiree benefits case law to mean that all CBAs in the Sixth Circuit are unilaterally alterable at any time, regardless of the governing CBA's specific language. Rather, the Reese cases permitted the scope of vested health benefits to be unilaterally changed because the parties' actions and the CBAs' language evidenced their intent to make these benefits alterable.

Implementation of HRAs Violated CBAs

On the merits of the retirees' claim, the Sixth Circuit held that the applicable CBAs (which promised the retirees continuation of the health care coverage they had upon retiring, with the employers paying the full premiums) were sufficient, under the Yard-Man inference, to create a vested lifetime right to health benefits. The Sixth Circuit also held that the employers' unilateral implementation of the HRAs breached the CBAs because HRAs were not what the parties agreed to in the CBAs. The court reasoned that HRAs are not company-provided health insurance, but are health care vouchers (similar to cash) that shifted significant health care risks from the employers to the retirees.
Additionally, the court reasoned that the CBAs' mutual agreement clause did not prevail over the general contractual principle that existing contracts cannot be unilaterally changed.
The Sixth Circuit viewed this case as factually distinguishable from the Reese cases in which it had concluded that an employer could reasonably change lifetime health benefits for retirees because:
  • Unlike in the Reese cases, the relevant CBA language in this case was unchanged from earlier CBAs (that is, there was no resetting of the rules).
  • The retirees in this case sued the employers as soon as they received notice of the HRA implementation, unlike in the Reese cases (in which the plaintiffs waited six years to sue).
  • The HRAs in this case were not bargained for, unlike the retirees in the Reese cases, in which the employer merely changed managed care providers.
The Sixth Circuit rejected several arguments raised by the employers, including that:
  • The HRAs provided the retirees better coverage than the initial group health coverage they replaced. Specifically, the employers argued that the HRAs allowed the retirees to choose from a variety of health plans to meet their individual needs, and that the retirees spent an average of $3,000 per year on health care costs (which was less than the HRAs' initial funding). The Sixth Circuit noted that:
    • the employers had refused to commit to continued HRA funding beyond the first two years; and
    • certain retirees could exceed the HRA funding amount in the future, due to increases in health care costs, which would force those retirees to incur costs in excess of the funded amount.
  • The retirees waived their right to challenge the HRAs by assenting to previous changes in group health care coverage (that is, the changes in insurance carriers). According to the court, those prior changes, unlike the switch to HRAs, did not violate the CBAs but merely replaced one group plan with another while the employers continued to pay the full premium.
  • The successor employer was not liable for promises under its predecessor's expired CBAs. The court affirmed that the plaintiffs introduced sufficient evidence for the successor to be liable under NLRB v. Burns Int'l Sec. Servs., Inc., 406 U.S. 272 (1972) for the predecessor's CBA obligations (see Practice Note, Collective Bargaining under the National Labor Relations Act: Bargaining Obligations from Business Acquisitions).

Practical Impact

From a benefits perspective, this case is instructive for employers with retiree benefits under a CBA that are considering adoption of a defined contribution health plan approach (or have already done so). The Sixth Circuit majority in this case goes to great lengths to clarify that the Reese cases on which the employers relied do not authorize an employer to unilaterally change its retirees' health benefits without regard to the governing CBA language.
From a labor and employment perspective, when negotiating a CBA, employers in the Sixth Circuit should be clear about the duration of their health insurance promises, the parties to whom they apply and whether they reserve the right to change or terminate those benefits. Employers should take steps, as in Reese, to cut off liability and take control of ambiguous promises of future, potentially life-long benefits.
Unions and employers are under no obligation to bargain about benefits for retirees, so an employer cannot insist that a union bargain to reduce benefits owed to retirees under past CBAs (Allied Chem. & Alkali Workers, Local Union No. 1 v. Pittsburgh Plate Glass Co., 404 U.S. 157 (1971)). Therefore, it may be very difficult to undo the contractual vesting of benefits to employees who already retired. Employers in the Sixth Circuit should be especially sensitive to the need for precise drafting (such as for reservations of rights to terminate retiree benefits) because the Yard-Man presumption remains intact after this case and the Reese cases.
This case serves as a reminder that purchasers should explore in due diligence expired CBAs of the companies they intend to purchase to assess whether there are latent vested retiree benefits. Purchasers should also evaluate whether the terms of their prospective deal and plans for operating the target may make them potential Burns successors for vested benefits.