Handbooks as Contracts: A Cautionary Tale

This recent 7th circuit opinion is a good reminder why employment lawyers should be involved in every step of a company’s HR program – this case involves FMLA rules, state breach-of-contract claims, employee notice and designation procedures, and more. And it’s all because of a handbook (are you listening, Sam Zell?):

In Peters v. Gilead Sciences, Inc. (July 14, 2008), an employee sued after the company denied him reinstatement after what he thought was FMLA leave.  This is from an Ogletree Deakins Client Update:

The day after beginning his leave, Peters received a letter from Gilead, stating the terms of his “FMLA” leave, and informing him of his right to reinstatement after leave.  The letter tracked language that was set forth in the company’s employee handbook regarding employees’ entitlement to family and medical leaves.  Although the letter and the handbook both included the 1250 hour/12 month language, neither included the 50-employees-within-a-75-mile-radius (“50/75”) language and, in fact, Gilead did not have 50 employees within a 75 mile radius. 

***

In April of 2003, Gilead decided to replace Peters with another employee.  On April 25, Gilead sent a letter to Peters, designating him as a “key” employee.  Under the FMLA, that designation – which includes the highest paid 10% of all salaried employees – allows a company to replace such a key employee rather than hold his position open.  The letter advised Peters that his position had been filled, but offered an alternative position to him, which he declined.

When the employee sued, the district court granted summary judgment because the company did not meet the 50/75 requirement.  But the 7th Circuit Court of Appeals remanded the case, because it thought Mr. Peters could have a state law contract claim, since the FMLA language was folded into the handbook.  The theory is this:  a handbook can be a contract under certain circumstances, and if that handbook is a contract, and it contains the same promises that are offered under the FMLA, it doesn’t matter whether you would be subject to the law or not, you’ve contractually obligated yourself to provide for leave the way the handbook says.  

The moral of the story, of course, is be careful with your handbooks.  Don’t just take a boilerplate policy set and hand it out.  What you think is just an explanation of a possibly-applicable law could become a binding contract and obligate you to all kinds of scary things like reinstatement and back pay.  

[ed. note: We normally don’t cite to firm publications, but I have to HT Ogletree Deakins for this one – we missed it here, and I haven’t seen it anywhere else, either.

39 Employees Canned For Smoking, Lying, Lying About Smoking

A Whirlpool plant in Indiana has suspended 39 employees who were apparently caught smoking after they claimed on their insurance forms that they were eligible for a $500 credit the company gives to nonsmokers.

My first question was: how in the hell did they get caught? I mean, if there is one group of people who has figured out how to expertly conceal their bad habits, it’s smokers. You don’t see nailbiters spraying themselves with acrylic in the car on the way home or blaming the nail shreds on the ground on their buddies who were over the night before. Smokers know how to hide it, right?

The workers were suspended after they continued to smoke in designated locations outside the Evansville plant despite enrolling for health insurance in October as non-smokers, avoiding the penalty.*

Okay. Well, I’ve got nothing to say to that. Consider the $500 a “moron tax” or something.

So now what? With the trend of offering credits for nonsmokers growing so fast, the termination creates a serious question about the plan’s future. According to the Tribune’s article, these benefits have always been based on the honor system. If Whirlpool found 39 workers, and is threatening more terminations in the future, how viable is the model for everyone else?

Honestly, if smokers have been hiding their habits from their parents and teachers and girlfriends and kids for years and years, what’s an employer? If you were offered $500 to say you didn’t smoke, and you’d been saying you didn’t smoke since you were 14 or something, why wouldn’t you sign the dang form?

Besides, you know, losing your job and all.

*[from the Chicago Tribune]

San Francisco “Pay or Play” DOA – ERISA Chews Up Another Pay or Play Law

Those of you who have been with us since the beginning (or have done some serious digging) know that one of our first posts at CE was on the unfortunate demise of the Suffolk County Fair Share Act, back in July. We said then that the Retail Industry Leaders of America was on a rampage trying to stop state “pay or play” healthcare laws by convincing federal judges they were per se preempted by ERISA – before Suffolk was a Maryland pay or play law that RILA put the brakes on.

How apropos, then, as we reflect on the year, that another business association has given us opportunity to revisit our earliest days. The Golden Gate Restaurant Association just got summary judgment in a lawsuit against the city of San Francisco in which it argued (what else) that the city’s pay or play law, which was to go into effect next week, was preempted by ERISA.

From the Sacramento Business Journal:

Under the San Francisco plan, employers with 20 to 99 employees would have to spend $1.17 an hour per employee on health benefits or pay that amount to the city. Businesses with 100 employees or more would have to spend $1.76 an hour for each employee.

Judge Wright ruled that the mandate interferes with ERISA provisions that specifies employer autonomy over whether and how to provide employee coverage. The decision stems from a lawsuit filed by the Golden State Restaurant Association, which argued the mandatory contributions place a costly burden on business owners.

Man, when ERISA makes the MSM, you know something’s going on. Though city attorney Michael Herrera is taking the appeal to the 9th Circuit, it’s clear that the state is fighting this battle, since the SF plan is pretty much a petri dish for the statewide plan sitting the Cali Legislature.

As far as Herrera’s chances go, his argument is not totally off base. From the city’s press release:

“Although state and local laws that dictate employer choices about ERISA plans are preempted, legal requirements that employers may readily satisfy without altering or adopting ERISA plans are not because they do not interfere with uniform benefit plan administration,” Herrera argued. “San Francisco’s Ordinance clearly falls in this latter category, because it allows employers to comply with the health care spending requirement without adopting an ERISA plan or altering an existing ERISA plan. If an employer wishes to avoid the burdens of setting up a plan, or wishes to maintain plan uniformity across jurisdictions, it can simply make payments to the City, and those payments will make their employees eligible for substantial health benefits—benefits that would cost a great deal more in the private market.”

Going against Herrera, of course, is the fact that this argument has completely failed twice before. In his favor is 1.) logic (to a certain extent) and 2.) the fact that the 9th Circuit is crazy, and they seem to like poking the Supreme Court in the face with cases like this.

In the meantime, though, that ERISA keeps getting fatter and fatter on preempted laws. At the risk of biased commentary, may I suggest she at least start chewing up and spitting out, rather than swallowing them whole?