Employers Should Protect Themselves Against Employee Benefit Lawsuits

Employment practices and employee benefit-related lawsuits are on the rise – and employers have to be eternally vigilant when it comes to meeting their compliance obligations as plan sponsors.

One recent case in point: Visteon, a global automotive industry supplier, outsourced their payroll and enrollment/disenrollment functions to outside plan administrators – a common practice in just about any industry other than payroll!

The Visteon Case

But because of internal mistakes at the firms that Visteon outsourced these noncore HR functions to, some former employees who should have received COBRA eligibility notices after leaving the firm reported that they never received them. At first it was just a handful. But ultimately 741 coworkers signed on to the class action lawsuit.

Visteon argued that it was not its own mistakes that caused the error. They made a good faith effort to hire outside experts to take over this function for them. Payroll and enrollment, after all, are not core competencies for an auto parts supplier. They were relying on the expertise of these other payroll companies to properly execute these functions and provide these notices.

The court didn’t buy their argument. Rather, they held Visteon responsible for poor internal tracking systems, negligence in overseeing their third party administrators, and failure to accept responsibility for their COBRA notification efforts. That exposed them to the statutory penalty of $110 per worker per day for failure to provide notification.

In the end, for doing what tens of thousands of employers are doing nationwide – relying on third-party administrators to handle payroll functions that are regulated under COBRA, they were slapped with $1.8 million in penalties.

Employers Are Frequent Lawsuit Targets

As much as companies rely on their employees to generate profits, simply having them around and administering their benefit plans potentially exposes employers to significant possible liability. According to a survey from CNA, employment-related disputes are the fastest-growing category of civil lawsuits in America.

Employers face tremendous risk from the potential of lawsuits employees may bring for alleged failure to fulfill their fiduciary duties as sponsors of retirement plans under ERISA, for example, or for accidental or unauthorized leaks of personally identifiable information (PII), which carries significant penalties under HIPAA. Sponsors of defined contribution pension plans, such as 401(k)s, are particularly frequent targets of lawsuits for various fiduciary failures, errors or omissions.

So short of going out of business, how can employers protect themselves against the potential costs of employee benefit-related litigation?

  • Carefully monitor your plan third-party administrators. Insist that they document their own compliance practices to you. Don’t take their word for it.
  • Reconcile your own lists of recently departed employees with your payroll company’s COBRA notifications
  • Understand your commercial general liability insurance policy usually will not cover you against liability arising from improper administration of employee benefit plans, ERISA, COBRA, USERRA, wage & hour laws, Title VII related lawsuits and the like.
  • Consider employment practices liability insurance. Statistically, employers are more likely to file an employment practices liability insurance claim than they are to have a claim against their general liability insurance.
  • Conduct regular reviews of investments and advisers in pension and 401(k) plans. Investments should be reviewed at least annually – and quarterly is not unusual.
  • Ensure that fees paid to 401(k) and other plan administrators are not excessive. You don’t have to go with the cheapest provider (that can be trouble, too!). But if you do choose a higher-fee vendor, document why you made that decision so that you can show your reasoning in court and defend your decision-making as sound and prudent.
  • Invest in data security and human resources compliance expertise.

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