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Ninth Circuit Expands Duty to Disclose Benefit Changes Prior to Final Approval

  • February 1, 2000

Planning changes to employee benefit programs covered by the Employee Retirement Income Security Act (ERISA), may trigger employers' fiduciary obligations requiring them to disclose the possibility of those changes to employees prior to final approval of the changes. Employers serving as fiduciaries of their ERISA covered benefit plans have a duty to respond accurately to participant inquiries concerning certain proposed changes to plan benefits once those changes are under "serious consideration." If the proposal (typically a benefit enhancement) would be material to an employee's decision to voluntarily terminate or retire, the duty to respond accurately applies.

In two recent decisions of the U.S. Court of Appeals for the Ninth Circuit, this fiduciary obligation was significantly expanded. Under these decisions, employers may be required to disclose pending benefit changes, even in the absence of a specific participant inquiry, to individuals the employer knows or has reason to know may be affected. Bins v. Exxon Co. U.S.A., 23 EBC 1617 (9th Cir. 1999) and Wayne v. Pacific Bell, 23 EBC 1629 (9th Cir. 1999). In the Bins case, the facts were typical. While planning for voluntary retirement scheduled for February 1996, the plaintiff heard rumors about a possible offer of enhanced severance benefits to retirement eligible employees. Wanting to participate in any enhanced benefits, he questioned his direct supervisors and others prior to retirement and was told there was no known offering.

During the same time period, senior management and human resources officials were considering plans to offer additional severance benefits as part of a reorganization and related workforce reduction. Human resources was instructed to keep the information "tightly held" and deny knowledge of any approved offering. Supervisors were told not to initiate discussions with inquiring employees on the subject. The plaintiff retired February 1, 1996, less than two weeks before the company publicly announced the reorganization and enhanced severance benefits. He was ineligible for the new program and sued when the company refused to pay him enhanced benefits.

The Ninth Circuit agreed with the generally accepted principle that once changes in an ERISA plan are under "serious consideration", the fiduciary duty to accurately communicate with employees about those changes is triggered. Serious consideration occurs when 1) a specific proposal 2) is being discussed for implementation 3) by senior management with the authority to implement the change (not just the board of directors). Identifying the point of serious consideration is a highly factual matter and requires a legal analysis of the organization's decision-making process in each case.

Departing from other circuits, however, the Ninth Circuit rulings go one step further. Once ERISA plan changes are under "serious consideration," the court held the duty to disclose proposed changes is absolute even in the absence of specific participant inquiry. Disclosure must be made at least to those the employer knows or has reason to know may be affected. Any economic interests the employer might seek to protect by deferring disclosure or responding only to those who inquire is completely supplanted by its ERISA duty of loyalty to its employees, the court concluded.

In the Wayne case, the same disclosure requirements were triggered at the time the company made an offer in collective bargaining negotiations to enhance ERISA plan benefits. The court ruled that "serious consideration" occurred when the offer, having been approved by senior management, was submitted as a written proposal to the union, regardless of whether it was ever accepted.

Editor's Note: The two Ninth Circuit rulings conflict with decisions in at least two other circuits that have held there is no duty to disclose proposed changes under the serious consideration in the absence of a specific participant inquiry. Employers will need to factor in the law of their jurisdictions making advance planning for changes in benefit programs more complicated. The choice for employers is to communicate proposed changes early, or defer disclosure until final approval at the cost of retroactively including all employees back to the serious consideration date. Regardless, management of employee communications will need to be included in the decision making process much earlier. We also have noted a recent judicial trend to find employers responsible for failing to volunteer material information about their ERISA benefit plans to inquiring employees even when the employee may not be clearly asking the appropriate question relevant to their circumstance. The Ninth Circuit rulings give significant support to this trend. Human resource personnel dealing with these types of inquiries on a daily basis should be aware of these and other disclosure obligations.

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