In Employee Classification Benefits Dispute, Tenth Circuit Holds That Plan Language Failed to Confer Discretion

Practical Law Legal Update w-019-8532 (Approx. 5 pages)

In Employee Classification Benefits Dispute, Tenth Circuit Holds That Plan Language Failed to Confer Discretion

by Practical Law Employee Benefits & Executive Compensation

Background

The LTD policy at issue in this case classified employees into two groups – one for sales personnel and another for non-sales employees. The claimant, who had worked for the employer as a cryotherapy technician until a degenerative eye condition forced him to retire, submitted a claim for LTD benefits under the employer's policy. Though the policy's insurer, in its role as claims administrator, approved the claimant's request for LTD benefits, it classified him as a non-sales employee rather than a salesperson. Under the non-sales classification, the claimant received significantly less in LTD benefits than if he had been classified as a salesperson.

Objecting to this classification, the claimant filed an administrative appeal asking the insurer to reconsider its decision. In support of the appeal, the claimant submitted his official job description, federal tax withholding statements, emails emphasizing the importance of marketing in his work, and other documents indicating that he had worked as a salesperson. Though acknowledging that the LTD policy did not define the term "sales personnel," the insurer affirmed its initial denial, citing a benefits consultant for the employer who stated that the claimant had performed a non-sales role. The insurer denied the claimant's request for a second appeal, after which the claimant sued the insurer in federal district court.

District Court Proceedings

The district court, having concluded that the policy did not grant the insurer discretion to decide employee classification questions, reviewed the insurer's decision under the less deferential, de novo standard of review (see Practice Note, ERISA Litigation: Standard of Review: De Novo Standard of Review). The court concluded that the insurer breached its fiduciary duties by accepting the employer's bare assertion that the claimant was not a salesperson without requiring documentation or justification for this claim (see Practice Note, ERISA Fiduciary Duties: Overview). The court remanded the case to the insurer to conduct further factfinding, but the insurer – this time relying on a statement by the employer's vice president/general counsel – again concluded that the claimant was a non-sales employee. Upon reopening the case, the district court ruled that the insurer had once again failed to sufficiently investigate the claimant's employment classification. The court concluded that the claimant was a salesperson, reversed the insurer's determination to the contrary, and awarded the claimant LTD benefits retroactively – calculated as a salesperson. The insurer appealed.

On Appeal, Tenth Circuit Examines Whether Insurer Is Entitled to Deference

On appeal, the Tenth Circuit addressed whether the LTD policy gave the insurer discretion to decide if the claimant was a salesperson. If so, the insurer's decision regarding the claimant's job classification was entitled to deferential (arbitrary and capricious) review. If not, the more searching, de novo standard of review applied. (See Practice Note, ERISA Litigation: Standard of Review: De Novo Standard of Review and Standard Clause, SPD Language, Firestone Plan Interpretation.)

Policy Language Regarding Standard of Review

The insurer argued that three provisions in the LTD policy granted it discretion to decide whether the claimant was a salesperson. First, the policy's claims procedures stated that the insurer was appointed the plan's named fiduciary "for deciding claims for benefits under the [p]lan" and gave the insurer 45 days after receiving a claim "to determine whether or not benefits are payable in accordance with the terms of the [p]olicy." In addition, another provision stated that benefits would end when the insurer determined that an individual was not disabled. A third provision required the employer to give the insurer "any information required to determine who is insured, the amount of insurance in force[,] and any other information needed to administer the plan of insurance."

The insurer argued that these provisions:

Allowed it to "determine" (a word present in each of the three provisions) whether employees were entitled to benefits under the policy.
Were similar to plan language that the Tenth Circuit had determined was sufficient to confer discretion in other cases.

Rejecting the insurer's argument, the Tenth Circuit observed that a plan may grant a plan decisionmaker discretion to make some decisions but not others – making it essential to focus the standard of review analysis on the particular decision at issue. The court noted that cases relied on by the insurer involved disputes over specific issues (for example, to decide whether care was medically necessary) for which the decisionmaker retained discretion to make determinations. In one case, for example, an administrator had discretion to find facts relating to disability because the plan required claimants to submit proof satisfactory to the administrator (see Practice Note, ERISA Litigation: Standard of Review: "Satisfactory to Us" Litigation).

In this case, however, the insurer failed to identify plan language granting it discretion over any specific determination. The Tenth Circuit reasoned that the broadly worded policy language cited by the insurer could not encompass all decisions involving the claims process. Moreover, the policy language cited by the insurer lacked the specificity that was present in other cases – for example, language granting a plan administrator complete authority to:

Determine eligibility for benefits.
Make factual findings.
Construe the plan terms.
Control and manage the plan's operation.

The court concluded that nothing in the policy granted the insurer discretion to determine who qualified as a salesperson. Rather, in the court's view:

The language quoted by the insurer determined who makes an initial benefits decision (here, the claims administrator rather than an employer).
If the insurer wanted to reserve discretion to decide other aspects of a claim (for example, whether an employee qualifies as a salesperson), then it should have done so explicitly.

As a result, the Tenth Circuit held that the insurer failed to demonstrate that it was entitled to deference in deciding who qualified as a salesperson under the policy.

Applying De Novo Review, Court Determines That Claimant Was a Salesperson

Applying de novo review, the court concluded that the claimant qualified as a salesperson. Affirming the district court, the Tenth Circuit concluded that a reasonable person in the claimant's position would have believed himself to be a salesperson because the position required the claimant to sell the employer's products.

Practical Impact

As the Tenth Circuit notes, it has been more than 30 years since the Supreme Court's Firestone decision required plan language granting discretionary authority to secure a deferential standard of review (see Significant Employee Benefits Developments Since ERISA's Enactment Timeline). Nonetheless, the Tenth Circuit's decision should cause plan administrators, insurers, and other plan decisionmakers to take a second look at their Firestone provisions to ensure that the language is sufficiently detailed to confer discretion for all the types of disputes that may arise in the benefits context. This includes complete authority to:

Interpret all plan terms (for example, as in this case, the definitions of different categories of employees and other plan participants).
Make factual findings.
Resolve any ambiguities.
Determine any questions relating to the plan's application or administration, including eligibility for benefits.
Control and manage the plan's operation.

As this case illustrates, the sufficiency of plan language conferring discretionary authority may make the difference between whether or not a challenged benefits decision is upheld on appeal in the litigation context.

In Employee Classification Benefits Dispute, Tenth Circuit Holds That Plan Language Failed to Confer Discretion | Practical Law