As demonstrated by the Sixth Circuit’s recent decision in Farhner v. United Transportation Union Discipline Income Protection Program, a well-drafted ERISA income protection or severance pay plan should enable the plan administrator to rely on the employer’s stated reason for termination of an employee, rather than conducting an independent review of the facts regarding the termination.
In May 2004, Mark Farhner, a trackman and conductor for the Kansas City Southern Railroad sought a three-month leave of absence for "medical reasons." KCSR’s human resources manager requested additional information from Farhner to justify his request. When Farhner’s vacation leave had been exhausted, his supervisor told him that he needed to provide the requested documentation or return to work within 48 hours. Rather than doing either, Farhner faxed a request for FMLA leave. After conducting an investigation (which included an actual hearing), KCSR terminated Farhner for insubordination.
Farhner then applied for "income-replacement benefits" from the United Transportation Union Discipline Income Protection Program ("DIPP"), an ERISA-based plan that permitted members to purchase coverage for any suspension or discharge, subject to certain restrictions. One of those restrictions was that the plan did not cover suspensions or discharges for insubordination. After reviewing the transcript of Farhner’s hearing, the plan administrator denied benefits because Farhner had been discharged for insubordination. The plan based its decision only on the evidence that was obtained during KCSR’s formal investigation. After exhausting his appeals under the plan procedures, Farhner filed suit with the federal district court challenging the denial of benefits on the ground that his discharge was really in retaliation for seeking FMLA leave.
The district court found that because the administrative record demonstrated that Farhner had been terminated for insubordination, which was a stated exclusion under the plan and therefore the plan’s denial of benefits was not arbitrary and capricious. On appeal to the Sixth Circuit, Farhner argued that KCSR improperly terminated his employment in violation of the FMLA, that the plan administrator should have looked beyond the plain meaning of the DIPP to determine whether his termination was proper, that it failed to do so, and that its determination was therefore arbitrary and capricious. But the court held that the plan had no obligation to make an accurate determination of whether KCSR complied with its FMLA obligations. In addition, the court found that the plan administrator was not required to look beyond the language of the plan where that language was unambiguous and the plan did not require any inquiry beyond the evidence that was already available to it. The court also stated that while the administrator actually went beyond the plan language to review facts, that did not modify the plan terms or change the requirement to adhere to plan terms. Because the evidence before the plan supported the conclusion that Farhner had been insubordinate, the Sixth Circuit upheld the denial of benefits.
The concurring opinion agreed that the administrator’s decision was not arbitrary and capricious, but argued that the administrator was not permitted to have "blindly relied on the employer’s stated reasons for its actions." We believe that "blind reliance" is exactly what should happen with a well-written plan. Farhner could have chosen to file an FMLA complaint against his employer in addition to or rather than a claim for benefits from the plan. If a court found that KCSR had violated the FMLA, then that fact could have been brought before the plan administrator for its consideration.
Though ERISA-based income protection plans are relatively rare, this case still is instructive to employers since these issues arise in the context of many other plans, such as severance pay plans, disability plans, and life insurance plans. These plans should include language providing the plan with discretion to determine eligibility for benefits and to construe the plan’s terms. This language in the DIPP was essential to ensuring that the court would only look to see whether the plan’s determination as to Farhner’s eligibility for benefits was "arbitrary and capricious." Without such language, the court will not give such a deferential standard of review. Second, this plan was designed to appropriately separate the employer’s role of hiring and firing employees from the plan administrator’s role of providing benefits. Redundant but even more helpful would have been a provision that stated the plan administrator was entitled to rely on the employer’s records (including stated reason for termination) and was not required to question those records.
As another example, in pension plans that provide service credit for periods of disability, the pension plan might provide that the administrator will rely on the long-term disability insurance carrier’s determination of the individual’s status. This separation of duties keeps the parties in their proper roles and helps prevents conflicts of interest.
It is interesting that there is no information to suggest whether Farhner ever filed an FMLA complaint against KCSR in addition to this claim for benefits under the DIPP. Query whether the availability of such benefits prompted Farhner to follow this relatively low cost option as opposed to an actual FMLA complaint. If so, the results of this case may prompt other employers to consider whether their ERISA plans are tailored to help avoid more costly litigation.