Reduce Exposure to Retro-benefits Claims | DCR Workforce Blog

Reduce Exposure to Retro-benefits Claims

Rather than employ practices like term limits etc. to contain the risk of exposure to retro-benefits, staffing clients would be well advised to put in place the necessary protection to shield themselves from claims of benefits with retrospective effect…

Define with Clarity:

 Let us see if there are some ways and means through which an employer can ensure protection from claims of benefits from contingent workforces.

  1. Formulate policies and benefit plans with unambiguous distinction between employees and contingent workers and clearly demarcating the beneficiaries of the plans.
  2. Define who is to be covered with clear distinction like who issues their pay check, and those who are not covered – as per category, who the employers are and the payment system of their wages and other such differences.
  3. It helps to add that this exclusion from benefits stands good even if these contingent workers are deemed to be common law employees by any legal entity at a later date. (This is because all common law employees also do not automatically stand to benefit from all benefit plans)
  4. Quite a few companies are not aware that they can exclude certain categories of employees (like leased employees) from benefit plans.
  5. Retirement plans can be qualified by clauses which make it possible to exclude 30% of workforce – to keep out people who do not have very high compensation packages. Many companies design their retirement plans without excluding any direct employee and the 30% margin for exclusion usually goes unutilized. This margin can help to absorb long term, leased employees.

Such clear enunciation of policies usually leaves no weakness or loophole to be found by anyone interested in bringing a claim for compensation. Companies which have not earlier formulated such plans can also review them and bring in such definitions and clauses to ensure a water-tight distinction between the beneficiaries and non-beneficiaries.

The 1000-hour Rule:

Companies that have a vague knowledge and unclear understating of the ERISA’s (Employee Retirement Income Security Act) 1000-hour Rule also tend to get confused and try to end up safe with the imposition of a six month term rule. The rule is not meant to generally decide the eligibility of everyone who has put in 1000 hours of service. In fact, it only becomes applicable to all those who are considered eligible to receive the cover and does not endow anyone with the eligibility just because they had put in 1000 hours of service.

By strictly adhering to the various term limitation plans – companies may assure themselves of avoiding all exposure, but find it very counter-productive operationally to repeatedly lose trained hands and face flak from managers who would undoubtedly resist or try to circumvent such a move very strongly as it would impair their productivity. Some assume that a short 30 day break is sufficient to prevent exposure – but short breaks do not stand against the provisions of ERISA entitling one to benefits. Getting the worker to change the staffing agency and re-apply also does not reduce exposure in any way.

Coverage under many types of welfare and other benefit plans has no legal limits to exclusions, and allow for different types and levels of exclusion which could be easily extended to cover all of client’s leased employees. The plans also have varied participation waiting periods, with welfare benefit plans providing coverage on the first day of the flowing month (from date of joining), or have waiting periods of 30,60 or 90 days; while qualified pension and profit-sharing plans require one year of service for eligibility. It is necessary to review even the informal benefits and fringe benefits also to clearly establish their coverage with a clear distinction between direct employees and contingent workers. If, in spite of all such assessments, there is a real concern about possible exposure, a rotation policy could be considered as a means to mitigating the risk before adopting the term limit policy. It is necessary to maintain consistency of application if the policy were to be adopted or other risks could result.

It Pays to be Cautious

Some unwitting consequences of the term limit policy include a possible litigation for violation of EEOC norms for discrimination, inconsistency of application and exhibition of favouritism by managers (which invite the wrath of persons next in line to replace that particular employee right after the termination). So, it is for the management to decide if they want to fix the risk of exposure to retro-benefits or get into trouble with these other issues. Or regret in leisure about landing in the fire from the frying pan!

It may be a good idea to reiterate here that the real causes of exposure to co-employment claims lie in the way contingent workers are treated on par with the regular employees of the organization:

  • The relationship with the contingent worker where too much of control is wielded by the staffing client.
  • When contingent workers are treated on par with regular employees and invited to employee meetings, parties, picnics and other outings (without being asked to pay for it) along with them; when emails related to upcoming holidays and changes to company policies are sent to the contingent workforce also.
  • The real common law employer – based on the structuring of the relationship – must be clearly established to be the staffing firm.

Then the broad guidelines managing the company’s benefit plans of which life, disability and health could result in exposure to really heavy retro-benefits claims rather than the term of employment.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.