Business Law Chapter 21 Congress did occasionally become involved in the

Chapter 21

THE EMPLOYEE’S SAFETY NETS: UNEMPLOYMENT AND WORKERS’

COMPENSATION, SOCIAL SECURITY, AND RETIREMENT PLANS

INTRODUCTION

Chapter twenty-one focuses on government assistance for workers affected by unemployment, on-the-job

injury, work-related disability, or older age. These assistance programs are known as safety nets for when

CHAPTER OUTLINE

I. Historical Background

A. Workers affected by unemployment, on-the-job injury, work-related, and old age did

B. Congress did occasionally become involved in the welfare of employees in private

industry, even before the groundbreaking legislation of the 1930s.

1. The Railway Labor Act (governing labor relations), which was passed in

C. In the 1930s, under President Franklin D. Roosevelt’s New Deal program, social

welfare programs like the ones we have today emerged. All three social welfare

programs—social security pensions, workers’ compensation, and unemployment

compensation—descend from a common history and came into being about the same

time.

*Federal Employment Liability Act (FELA): A federal law designed to protect and compensate

railroad workers injured on the job.

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II. Unemployment Compensation

A. *Unemployment compensation: benefits paid to employees out of work through no

fault of their own and who are available for suitable work if and when it becomes

available

E. Incompetence is considered to be an unfortunate condition, not a basis for affixing

guilt, under this branch of employment law. So although an at-will employee, or even

one protected by a “good cause” provision in a labor contract, may properly be

dismissed for poor performance, that alone will not disqualify him or her from

receiving unemployment benefits.

F. Even if the conduct is clearly willful and wrong, it still may not be enough to

disqualify the applicant for unemployment benefits. If, for instance, the misconduct is

not readily discernible to the average worker and the employer failed to promulgate a

rule or give a warning for prior infractions, an unemployment referee may be

CASE 21.1 ARCHITECTURAL TESTING, INC., V. UNEMPLOYMENT COMPENSATION

BOARD OF REVIEW

940 A.2d 1277 (Pa. Commonwealth Ct. 2008.)

Facts: On May 30, 2006, the employer discharged Yohe for failing to submit to a drug test. He then

applied for unemployment compensation benefits, but his claim was denied based on Section 402(e)(1)

of the Unemployment Compensation Law (UCL), which relates to a claimant’s ineligibility for benefits

“due to failure to submit and/or pass a drug test conducted pursuant to an employer’s established

substance abuse policy.”

Issue: Must an employee’s refusal to take a drug test be in violation of a written drug testing policy that

specifically states that an employee can be discharged for refusing to take a drug test in order for the

employee to be disqualified from receiving unemployment benefits?

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G. Litigating Unemployment Claims

1. Unemployment benefits are paid for by a tax on the wages of the workers

CASE 21.2 LABEL SYSTEMS CORP. V. AGHAMOHAMMADI

270 Conn. 291, 852 A.2d 703 (Connecticut Supreme Court, 2004)

Background: This is an appeal case that arose out of a dispute between two former employees, the

defendants, Samad Aghamohammadi and Pamela Markham, and their former employer, the plaintiff,

Label Systems Corporation (Label Systems) and its president, Kenneth P. Felis. The defendants were a

married couple and both began their employment with Label Systems in the early 1980s. Both

defendants were regarded as valuable and trusted employees by Felis. During their employment, the

defendants were provided a company car. In November, 1992, while driving the company car, the

defendants were rear-ended by another car. The defendants received compensation from the insurance

company of the other driver and decided to delay the repair until after the birth of their baby, since the

car was their sole means of transportation. In early 1993, Label Systems, made provisions for

Markham’s pregnancy, in order to make it easier for her to continue work from home until she returned

to the office.

insurance.

After Markham gave birth to their child, Label Systems filed three complaints against the defendants

alleging conversion, breach of duties of loyalty and appropriation of trade secrets. The defendants had

requested unemployment benefits immediately following their termination, despite the objection of

Label Systems, separate awards of unemployment benefits were made to both defendants. But they were

not able to extend their health insurance.

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Issue: Whether Label Systems abused its leverage when it came to opposing defendants claim for

unemployment benefits?

Decision: From a review of the record, there was sufficient evidence from which the jury could

ANSWERS TO CASE QUESTIONS

1. It seems to be undisputed that the defendants wrongfully converted the insurance check while failing

to fix the company car. Beyond that, the jury found no wrongdoing with regard to the more serious

2. The court is somewhat unclear in its opinion. One reading is that the company relied on the allegations of

theft of trade secrets, breach of the duty of loyalty, and misuse of company property, rather than on

3. One might reasonably take the position that the company was not engaged in vexatious litigation, both

4. Certainly by the time this case came before the state Supreme Court there existed plenty of personal

animosity between the opposing parties. It’s harder to conclude that animosity motivated the employer

at the time of the defendants’ termination. Up until that time it appears that the defendants were well–

5. It would have been in the best interests of the company to settle early on, especially since the

evidence in their possession was so abstract.

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III. Workers’ Compensation*

*Workers’ compensation: Benefits awarded an employee when injuries are work related.

1. How should the Court handle an injury to a fetus, also known as in utero

injury?

ETHICAL DILEMMA

In Utero Workplace Injuries

In Meyer v. Burger King Corporation, Sonrise Management, inc. (Sonrise) was the management

company for a Burger King Corporation restaurant located in Lacey, Washington. Verona Meyer was

employed by Sonrise at this Burger King. On April 26, 1995, while working her shift, Verona, 35 weeks

The most analogous representative case is Cushing ex rel. Brewer v. Time Saver Stores, Inc., where the

Louisiana Court of Appeals held the exclusivity provision of Louisiana’s workers’ compensation statute

did not bar a child’s claim for damages for prenatal injuries suffered as a result of the mother’s fall at

work. The Cushing court found the child’s injuries in no way derived from the mother’s injuries because

whether mom is there to continue bringing home a pay check or to participate in the child’s life has no

relevance to this child’s alleged brain damage. The court held the workers’ compensation statute was not

intended to nor does it purport to affect the rights of an employee’s child who is injured on the

employer’s job site.

While upholding Patricia’s right to a remedy because she is a person exercising her retroactive right to

recover for prenatal injuries, we do not recognize a fetus as a ‘person in the whole sense’ and thus do not

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affect the jurisprudence established under Roe.”

More on in utero workplace injuries:

B. Federal Preemption of Workers’ Compensation Claims

1. Government acts (like FELA) typically supersede state workers’

compensation laws

2. ERISA specifically exempts state workers’ compensation laws from its

preemptive powers

IV. Social Security

A. Social Security is a federal program initiated during the New Deal of the 1930s,

B. There are three forms of Social Security

1. Retirement Insurance Benefits

a) The main purpose of social security is to provide partial replacement of

earnings when a worker decides it is time to retire. But for many, it is the

major source of income upon retirement.

b) This is true in part because the other major piece of federal legislation

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2. Medicare

a) Medicare is a form of health insurance retired Americans receive in

addition to basic benefits.

b) Medicare benefits cover a portion of the costs of hospitalization and the

medical expenses of insured workers and their spouses age sixty-five and

older, as well as younger disabled workers in some circumstances. This

insurance is divided into two parts, designated by the federal bureaucracy

as A and B.

a. Part A is hospital insurance for inpatient hospital care, inpatient

skilled nursing care, and hospice care. Part B is supplementary

3. Medicaid

a) The Supreme Court’s decision in National Federation of Independent

Businesses v. Sebelius also held that the ACA’s Hobbs’s Choice—

expand their Medicaid or face stiff federal penalties—could not stand.

4. Affordable Care Act

a) On June 28th by a vote of 5-4, the U.S. Supreme Court upheld the

Affordable Care Act (Obamacare) mandate, thus blessing the massive

5. Disability

a) Under the social security system, a worker is considered disabled when a

severe physical or mental impairment prevents that person from working

for a year or more or is expected to result in the victim’s death. The

disability does not have to be work related (as is the case for workers’

CASE 21.3 BAKER V. COMMISSIONER OF SOCIAL SEC.

384 Fed. Appx. 893 (11th Cir. 2010)

Facts: John L. Baker appeals the magistrate judge’s order affirming the Administrative Law Judge’s

(“ALJ”) denial of disability insurance and supplemental social security income benefits on behalf of the

Commissioner of Social Security. On appeal, Baker argues that his use of a cane renders him unable to

perform the full range of work at the “sedentary” exertional level. He also argues that the ALJ

inappropriately relied on the Medical Vocational Guidelines at 20 C.F.R. pt. 404, subpt. P, app.

2 (“Grids”), rather than a vocational expert’s testimony, to determine whether he was disabled.

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Issue: Did the ALJ commit a reversible error in deciding that Baker could perform the full range of work

at the “sedentary” exertional level?

V. Employee Retirement Income Security Act (ERISA)*

A. The act also requires that pension plan administrators disclose relevant financial

information to employees and the government. The act sets certain minimum

standards that pension plans must meet to qualify for preferential tax treatment, and it

provides legal remedies to employees and their beneficiaries in the event of

violations. (p. 14)

B. Applications of ERISA include:

1. Plans established by employers. The act recognizes two types of benefit

plans: welfare plans and pension plans.

a) Welfare plans usually provide participating employees and their

2. ERISA’s main focus is on pension plans. It seeks to ensure that all

employees covered by pension plans receive the benefits due them under

3. The provisions of ERISA do not apply to employee benefit plans that are

established by federal, state, or local government employers. Nor does the

act apply to plans covering employees of tax-exempt churches or to plans

*Employee Retirement Income Security Act: An act that sets standards for pension plans including

fiduciary conduct, information disclosure, plan taxation, and remedies for employees.

4. The two main features of ERISA—the imposition of standards for fiduciary

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5. The fiduciary duties and conduct standards apply to any employee benefit

7. The minimum standards for pension plans must be met for the employee

pension plans to qualify for preferential tax treatment. Because such tax

treatment enables an employer to deduct contributions to qualified benefit

C. Preemption

1. Despite the broad preemptive power that the federal courts have given to

ERISA, as originally recognized and explained by the U.S. Supreme Court

CASE 21.4 RUBY V. SANDIA CORP.

699 F. Supp. 2d 1247 D.N.M. (2010)

Background: The plaintiff in this case got two chances to measure up. Being deemed by his employer as

having fallen short both times, he was terminated. Among the consequences of his termination, he also

lost his pension, which was just shy of vesting. Ruby didn’t claim he was fired to prevent his pension

Issue: Among other bases for moving to dismiss Ruby’s suit, the defendant raised the specter of ERISA

preemption. Basically, Sandia said that the only compensation/benefits disparity that could possibly

support his allegation that he was fired to save money with a younger replacement was his pension rights.

ANSWER TO CASE QUESTIONS

1. ERISA preemption is extremely broad, allowing for few exceptions. Here the defendant successfully

argued, after removing Ruby’s case from state to federal court, that the only basis for Ruby’s allegation

of age discrimination was that his firing deprived him of his pension. The court did not totally buy this

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argument.

2. The court found that Ruby’s age discrimination and retaliation claims were not preempted. It also found

that his common law claims were preempted.

D. Fiduciary Responsibility

1. ERISA imposes standards of conduct and responsibility on fiduciaries of

benefit plans established or maintained by employers and unions engaged

in or affecting interstate commerce.

a) Requirements of ERISA:

a. All such plans must be in writing and must designate at least one

named fiduciary* who has the authority to manage and control

the plan’s operation and management.

d. The plan must establish a procedure for handling claims on the

fund by participants and their beneficiaries. Any individual with

a claim against the fund must exhaust these internal procedures

before seeking legal remedies from the courts.

*Fiduciary: Any person exercising discretionary authority or control respecting the management of the

benefit plan, or disposition of plan assets; or who renders, or has authority or responsibility to render,

THE WORKING LAW:

US Labor Department Seeks Public Comment on Proposal to Protect Consumers from Conflicts of

Interest in Retirement Advice

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The U.S. Department of Labor has released a proposed rule that will protect 401(k) and IRA investors by

mitigating the effect of conflicts of interest in the retirement investment marketplace. A White House

Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of

about 1 percentage point for affected investors—or about $17 billion per year in total.

The proposal also includes other new exemptions and updates some exemptions previously available for

investment advice to plan sponsors and participants.

ANSWERS TO END OF CHAPTER PROBLEMS

QUESTIONS

1. In November 2012, Barack Obama was reelected President of the United States. Additionally, the

Democratic Party retained control of the Senate. These two simple facts mean that Obamacare is here

to stay. However, for many reasons we can anticipate much negotiation — between Uncle Sam and

the states; between the Department of Health and Human Services and its diverse constituencies;

between the Republicans and Democrats in Congress. Litigation, too, will continue, despite the

Supreme Court’s June 2012 decision.

Second, there is the Medicaid elephant in the room. Chief Justice Roberts’s opinion for the

majority declared one piece of the massive statute unconstitutional… the part that would have

required states to participate in an expansion of Medicaid. Some states have opted out of the

expansion, now that they have a choice. Others are weighing their options. Meanwhile, noted

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2. The issue of who is a full– and who a part-time employee for purposes of Obamacare is one of the

toughest facing employers, as the PPACA’s provisions progressively kick in across the next few

3. While we tend to associate ERISA with pensions, the statute also covers other employee benefits.

A distinctive feature of ERISA, as contrasted to comparable legislation in other developed

nations, is that it does not mandate either pensions or other employee benefits, e.g., health

insurance. Obamacare by way of contrast mandates “pay or play.” Employers will be counting

4. The difficulty of defining willful misconduct results in loss of employment, sometimes through

the unintentional conduct of the employee. In addition, it is difficult to prove that an employee’s

5. First, even an employee who is guilty of willful misconduct has presumably contributed to the

state unemployment compensation fund through mandatory payroll taxes and, therefore, ought

not to be made ineligible for benefits. Furthermore, if such benefits are intended to bridge the

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6. This is clearly a matter of opinion, for which there isn’t a right or wrong answer. The answer

would depend on the student’s view of whether the system of Social Security is still as effective

CASE PROBLEMS

7. The court ruled that the victim-compensation law had to give way to the broader public policy

favoring employment at will, in the face of the facts of this case. Presenting employers with the

8. Florida is one of a number of states that have adopted the “impact” doctrine under which some

9. The court held that the negligent-hiring claim was barred by the exclusivity provision of the workers’

10. The federal law was deemed to preempt the Mississippi drug-testing statute. Therefore the employer

11. The court here held that collateral estoppel prevented the plaintiff from relitigating the reasons for his

discharge. Note that the American common law generally does not impose the same rule upon

12. The NLRB applied the rule that an employee terminated in violation of the NLRA is entitled to back

13. The court remanded the case to state court, reasoning that this was a contract dispute between the

14. The court concluded, on the facts, that the defendants (this being a declaratory judgment action) were

in fact independent contractors and not employees eligible for benefits under the plan.

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15. The majority held that the collective agreement and plan documents were ambiguous as to the issue

raised by the plaintiffs. Consequently the trial judge erred in dismissing the case, which was

16. The Supreme Court held that a reviewing court should consider the conflict of interest arising

from the dual role of an entity as an ERISA plan administrator and payer of plan benefits, as a

factor in determining whether the plan administrator has abused its discretion in denying benefits,

with the significance of the factor depending upon the circumstances of the particular case.

HYPOTHETICAL SCENARIOS

18. Reinstatement with back pay depends on whether the Navy officer was constructively discharged

or whether he was fired for willful misconduct. Based on the facts given, it does not sound like

19. The court should dismiss the suits against the employer unless the employer was informed of the

harassing behavior and had knowledge of it but failed to take proper protocol to stop it. If the

20. Recovering the funds from the AIG bailout will be difficult because according to AIG, payments

to executives in the form of performance and retention bonuses were due to contractual

obligations. Apparently, the government knew about these so-called contractual obligations

21. Through her receipt of disability she is considered to have a severe physical or mental impairment

that prevents her from working. Therefore her claim that her injury was non-job-related is

irrelevant. Whatever caused her disability renders her unable to work. If the injury is work–

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