ARTICLES at Campbell & Associates PC

ERISA PROTECTS HUMAN RESOURCES DIRECTOR FIRED
 FOR COMPLAINING OF 401K PLAN UNDERFUNDING VIOLATIONS
     

        In Nicolaou v. Horizon Media, Inc., 402 F. 3d 325  (Docket No. 03-9186, decided 3/28/05), the Second Circuit, in a case of first impression, held that section 510 of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. §1140, protects a plan participant and fiduciary from unlawful termination who complains to management in an informal internal inquiry concerning possible ERISA violations relating to the defendant’s 401K plan.  The plaintiff, defendant’s Director of Human Resources, was terminated after she discovered certain payroll discrepancies involving the underpayment of overtime to employees which caused the Horizon 401(K) plan to be underfunded.

        Section 510 ERISA is a comprehensive federal benefit law which regulates pension, welfare, severance, life insurance and similar employee benefit plans.  Section 510 of ERISA contains an anti-discrimination and anti-retaliation provision similar to the anti-retaliation provisions of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §215, and Title VII of the Civil Rights Act, 42 U.S.C. §§2000e, et seq. 

        Section 510 prohibits employers from discharging in or in any other way discriminating against participants and beneficiaries in retaliation for exercising their rights under an employee benefit plan or ERISA or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan or ERISA.

        Section 510 also provides in relevant part that:
“It shall be unlawful for any person to discharge, fine, suspend, expel, or discriminate against any person because he has given information or has testified or is about to testify in any inquiry or proceeding relating to this chapter . . .”

       Section 510 applies to participants and beneficiaries who have a present or future entitlement to employee benefits or who may become entitled to benefits in the future.

Background

        In July, 1998, Horizon Media, Inc. (“Horizon”) hired Chrystina Nicolaou (“Nicolaou”) as Director of Human Resources.  As the Director of Human Resources Nicolau was a trustee of and participant in Horizon’s 401(K) plan.
 
        After she began working at Horizon, Nicolaou discovered a “serious” payroll discrepancy involving the under-payment of overtime which led to underfunding of the 401K plan.  Nicolaou told Horizon’s chief financial officer (“CFO”) of this problem, but he advised her to let it drop.  She then raised the issue with Horizon’s controller but he also declined to address the problem.

        In the Fall of 1999, Nicolaou contacted Horizon’s outside counsel, Mark Silverman, to conduct an investigation of the illegal payroll practice.  Nicolaou emphasized to Silverman, as she had to both the CFO and Controller, that the failure to pay overtime also resulted in underfunding of the 401(K) plan.
 
        Silverman confirmed Nicolaou’s findings regarding the payroll issue and in November, 1999 he and Nicolaou met with Horizon’s president William Koenigsberg to discuss this problem.  At the November meeting, Silverman described the payroll discrepancy and the underfunding of the 401(K) pension plan and he stressed the need to rectify the payroll problem, but Koenigsberg made no such commitment during the meeting and instead, “appeared disturbed.... and not pleased at all this issue was being brought to his attention.”

        Nicolaou’s amended complaint alleged that after the meeting her problems at Horizon began. Within days of the November meeting, Nicolaou was demoted to office manager and Horizon hired two individuals, who together assumed virtually all of her former responsibilities.  On November 7, 2000, Nicolaou was terminated.

Procedural Background

         Nicolaou filed a complaint alleging Horizon violated the anti-retaliation provisions in ERISA section 510 as well as the anti-retaliation provisions in the FLSA.  The district court granted Horizon’s Rule 12(b)(6) motion dismissing both the ERISA and FLSA claims.  The court dismissed Nicolaou’s ERISA claim solely because it construed the amended complaint as seeking only damages and not equitable relief as required by ERISA section 502(a)(3).

        Nicolaou moved for reconsideration of the district court’s dismissal of her ERISA claim and on reconsideration, the district court found that she was in fact seeking the equitable remedy of reinstatement.  Nevertheless, the court affirmed its dismissal of her ERISA claim on the basis that ERISA’s anti-retaliation provision only applies to formal, external investigations or proceedings relating to ERISA and not informal internal inquiries.  The district court reasoned that the anti-retaliation language in section 510 could not be distinguished from the anti-retaliation language in the FLSA, which the Second Circuit in Lambert v. Genesee, 10 F.3d 46 (2nd Cir. 1993) had construed not to apply to informal, internal complaints. The plaintiff’s appeal to the Second Circuit, limited solely to the ERISA issue, then followed.

Discussion

        Nicolaou argued on appeal that section 510's anti-retaliation provision was broadly worded and should be interpreted to protect participants who participate in informal internal inquiries relating to violations of ERISA.

        The Second Circuit compared the anti-retaliation language of ERISA section 510 with the anti-retaliation provisions of the FLSA and Title VII, and then discussed the district court’s reliance on the Lambert decision and pointed out that in Lambert, it (Second Circuit) held that the anti-retaliation provision of the FLSA does not apply to retaliation taken in response to internal complaints.  The Lambert panel had found that the plain language of the FLSA anti-retaliation provision limited the FLSA’s anti-retaliation protection to filing formal complaints, instituting a proceeding, or testifying but not to complaints made to a supervisor.

        While the district court in Nicolau could find no distinction between the FLSA’s anti-retaliation provision and section 510 of ERISA, the Second Circuit found otherwise and distinguished the anti-retaliation provision of the FLSA from the protection afforded by section 510 and concluded that “[w]hatever level of formality is implied by the term “proceeding” in the FLSA, the use of the somewhat less formal term “inquiry” in ERISA is indicative of an intent to “ensure protection for those involved in the informal gathering of information.”   Congress’ decision to add the term “inquiry” to the term “proceeding” when it drafted section 510  manifested an intent to protect those involved in the informal gathering of information.

        The Second Circuit reversed the district court’s dismissal and remanded the case and directed the district court to allow Nicolaou to file a revised amended complaint to eliminate ambiguities in the record including whether Nicolaou was contacted to meet with Koenigsberg in order to give information about the alleged underfunding of the 401(K) plan.
 
        In order to ultimately prevail in her section 510 claim, Nicolaou will have to demonstrate something more than the loss of benefits as a consequence of her loss of employment.  Once an employee establishes a prima facie case, the burden of production shifts to the defendant employer to show nondiscriminatory reasons for its conduct.  If and when the defendant articulates legitimate reasons for its conduct, the burden of production shifts back to the plaintiff to demonstrate by a preponderance of the evidence that defendant’s reasons are a pretext for discrimination.  The Second Circuit has adopted this shifting burden analysis,  developed under Title VII for employment discrimination cases in McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S. Ct.  1817 (1973), for section 510 claims under ERISA.  Dister v. Continental Group, 859 F.2d 1108 (2d Cir. 1988).

        A section 510 plaintiff establishes a prima facie case of unlawful termination by showing that she: (1) belongs to a protected group; (2) was qualified for the position, and (3) was discharged or denied employment under circumstances that give rise to an inference of discrimination.  Once an employer articulates a legitimate reason for an employee’s discharge, the plaintiff’s burden is to prove that the reason given was merely a pretext for discrimination.

         ERISA section 510 does not guarantee every employee a job until he or she has vested in a company’s benefit plan.  Dister, supra 859 F.2d at 1111.  An essential element of Nicolaou ’s case on remand  will be to prove that Horizon’s decision to terminate her was motivated by her engaging in activity protected by the statute.  As employment law practitioners know, the motivation for an employer’s conduct will only rarely be demonstrated by ‘smoking gun’ proof or by ‘eyewitness testimony as to the employer’s mental process.’  Dister, supra at 1112.  Most plaintiffs like Nicolaou without ‘smoking gun’ evidence prove motivation and intent by circumstantial evidence.

        Employers who conduct inquiries or investigations concerning ERISA matters should now treat such inquiries and investigations with heightened sensitivity and remember that they will have to demonstrate a legitimate reason for terminating employees who participate in such activities.