EMPLOYEE BENEFITS MEMORANDUM
Date: May 16, 1997
Re: U.S. Supreme Court Case on Outsourcing --
Form Prevails Over Substance
You may have heard by now that on May 12 the U.S. Supreme Court decided the case of Inter-Modal Rail Employees Association v. Atchison, Topeka & Santa Fe Railway Co.
The case is alarming but -- in many circumstances that will arise in the future -- should have a relatively easy fix.
Here is what happened in the case.
A subsidiary of the Atchison, Topeka and Santa Fe Railway was responsible for transferring cargo between railcars and trucks. The railroad decided to put the transfer work out for bidding, and an outside vendor won the bid. Employees of the subsidiary were offered the opportunity to work for the outside vendor or terminate employment. Those who went to work for the outside vendor earned a lower level of health, disability, and retirement benefits than they had previously been earning.
The employees sued the railroad, alleging that it had "interfered" with their rights to obtain benefits under the railroad's ERISA plans. To oversimplify somewhat, the lower courts held that the employees did not have a legal basis to bring a claim. The Supreme Court reversed. It held that the railroad's actions may have violated Section 510 of ERISA, which makes it unlawful for employers to interfere with an employee's attainment of rights or benefits under an ERISA plan. In other words, the Supreme Court said that the employer's outsourcing may have been illegal if it was done to deprive employees of future benefits under the plans, which it more than likely was. That is one of the reasons companies outsource.
The Supreme Court appeared to acknowledge that the railroad could have amended the ERISA plans -- in advance of the outsourcing -- to exclude the terminated employees. The Court said -- again, oversimplifying somewhat -- that such action would have been within the railroad's power and would have been legal.
So what is the difference, you ask, between depriving employees of future benefits through an amendment and depriving them of future benefits through outsourcing? None of any significance. But it would appear that there is now a substantial difference between the legal consequences.
The moral of the story: if you are going to outsource work amend your ERISA plans to exclude the outsourced group before you remove the affected employees from your payroll. In most cases, this should defeat any legal challenge under Section 510 of ERISA. This is admittedly a silly result, and should not be the law. For the time being, though, it is something that you will have to live with.
