Limiting Employee Hours to Avoid ACA Could Violate ERISA, Court Rules

In a first-of-its-kind decision, a federal court recently upheld the right of employees to sure their employer for allegedly cutting employee hours to less than 30 hours per week to avoid offering health insurance under the Affordable Care Act (ACA). Specifically, the District Court for the Southern District of New York denied a defense Motion to Dismiss in a case where a group of workers allege that Dave & Buster’s (a national restaurant chain) “right sized” its workforce for the purpose of avoiding healthcare costs.

Reducing Workforce Hours in Response to ACA

As a background, the ACA requires employers who employ 50 or more “full-time equivalents” to offer affordable minimum-value coverage to full time employees and their dependents or pay a penalty if any of their full-time employees receive federal premium assistance to purchase individual coverage in the Health Care Marketplace ( also known as the “Employer Mandate”).
One of the initial concerns by ACA critics is that many employers would respond to the Employer Mandate by reducing full-time employee hours to avoid the coverage obligation and associated penalties, increasing the number of part-time workers in the national economy. This is because the ACA does not require an employer to offer affordable, minimum-value coverage to employees generally working less than 30 hours per week.

Does The Reduction Violate ERISA?

Although an employer who reduces employee hours would not violate any specific provisions of the ACA, there is an open question as to whether such an action would violate another federal law. As alleged by employees of Dave & Buster’s, such a reduction creates a cause of action under the Employee Retirement Income Security Act of 1974 (ERISA). A group of employees filed a class action lawsuit against the restaurant chain last year making such an argument.
Section 510 of ERISA prohibits discrimination and retaliation against plan participants and beneficiaries with respect to their rights and benefits. More specifically, ERISA Section 510 prohibits employers from interfering “with the attainment of any right to which such participant may become entitled under the plan”. Because many employment decisions affect the right to present or future benefits, courts generally require that plaintiffs show specific employer intent to interfere with benefits if they want to successfully assert a cause of action under ERISA Section 510.

Victory In Round One Goes To Employees

Dave & Buster’s moved to dismiss the class action lawsuit, arguing that the complaint failed to demonstrate that it reduced work hours with the specific intent to deny employees the right to group health insurance. However, the district court disagreed and recently denied the employer’s motion, clearing the case for further litigation. The court found that the class of plaintiffs set forth sufficient evidence in support of their claim that their participation in the health insurance plan was discontinued because the employer acted with “unlawful purpose” in realigning its workforce to avoid ACA-related costs.