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COBRA Gross Misconduct Dispute Over Alleged Theft of Files Moves to Trial
Practical Law Legal Update w-040-5911 (Approx. 5 pages)
COBRA Gross Misconduct Dispute Over Alleged Theft of Files Moves to Trial
by Practical Law Employee Benefits & Executive Compensation
| Published on 28 Nov 2023 • USA (National/Federal) |
In litigation involving the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), a district court concluded that it could not resolve—at the summary judgment stage—a dispute over a local governmental employer's failure to provide COBRA election notices to employees it terminated for allegedly taking and deleting 55,000 files. The employer argued that it was excused from complying with COBRA's notice requirements because the employees had engaged in gross misconduct for COBRA purposes.
In litigation under COBRA, a district court concluded that it could not resolve—at the summary judgment stage—a dispute over a local governmental employer's failure to provide COBRA election notices to employees it terminated for allegedly taking and deleting roughly 55,000 files (Johnson v. City of Kewanee, (C.D. Ill. Nov. 21, 2023)). The employer asserted that it was excused from complying with COBRA's notice requirements because the employees had engaged in gross misconduct for COBRA purposes (see Practice Note, COBRA's Gross Misconduct Exception). The court concluded that the dispute must be resolved at trial.
City Employees Terminated for Alleged Theft
The plaintiffs in this case, a married couple, announced in September 2020 that they would retire from their positions with a city employer in early 2021. Before their last official days in the office, however, a coworker alleged that one of the spouses may have taken or copied information from a city computer. The couple was ordered by city representatives, including the mayor, to leave their offices at city hall early with their personal belongings. Although a city police officer oversaw the couple's departure, one of the spouses removed a flash drive from her computer and took it home. Upon reviewing the spouse's computers after she left, a city official could not find files on the computer that apparently should have been there.
In a visit to the couple's home, the city's police chief later asked the couple to return all city property. In response, the couple returned two flash drives, a ledger, and a digital camera to the police station. One of the flash drives held roughly 55,000 files containing personally identifiable information (including Social Security and bank account numbers) belonging to city residents and employees. The police officer later inspected the couple's personal electronic devices for additional city files and records.
In December 2020, the city terminated both spouses in a letter that cited their serious misconduct, which included removing city property and mishandling/stealing city data. The couple sued the city in early 2021 for failing to provide them COBRA election notices. However, the city responded that it had no COBRA obligations because the couple was terminated for gross misconduct (see Standard Document, COBRA Election Notice and COBRA Toolkit). The parties asked the court to rule on the matter without a trial (that is, by summary judgment).
Employer Asserts That Employees Were Terminated for Gross Misconduct
COBRA's requirements under the Public Health Service Act (PHSA) for group health plans sponsored by state and local government employers mirror those for private employers under the Employee Retirement Income Security Act (ERISA). Under these requirements, employers must offer certain individuals (known as qualified beneficiaries) the option to elect COBRA health plan continuation coverage following a termination that is not due to the individual's gross misconduct (see Practice Note, COBRA's Gross Misconduct Exception). The city employer in this case asserted that it was excused from furnishing COBRA election notices to the couple due to the alleged circumstances of their terminations. These circumstances included removing 55,000 city files and then deleting those files from the city's computer.
In reviewing the parties' claims, the court concluded that the central issue was whether one of the terminated spouses was authorized to access and use the disputed files in the manner alleged. However, because factual questions remained regarding these questions, the court concluded that the case could not be resolved at the summary judgment stage and a trial would therefore be required.
Standards in Evaluating COBRA Gross Misconduct Disputes
In reaching this conclusion, the court addressed standards under federal caselaw and state law that are typically applied in determining whether gross misconduct for COBRA purposes exists. Under these standards, the court observed, the term gross refers to "outrageous, extreme, or unconscionable" conduct, while the meaning of gross misconduct requires case-by-case consideration. Citing relevant cases, for example, the court noted that the courts have found gross misconduct where:
- An intoxicated employee crashed an employer-furnished vehicle.
- An employee threw an apple at a coworker and used a racial epithet.
- A manager beat a subordinate to the point that the subordinate required five days of hospitalization.
- An employee repeatedly and persistently refused to follow a manager's instructions.
- A professor engaged in student aid fraud and lied about having a bachelor's degree.
For more information, see Practice Note, COBRA's Gross Misconduct Exception: Behavior That May Constitute Gross Misconduct Under COBRA.
In other cases, courts concluded that the following conduct did not rise to the level of COBRA gross misconduct, for example:
- A forgetful employee who made sporadic mistakes or sometimes failed to follow a manager's directions.
- An employee terminated for lackluster sales.
Other courts, the court added, have looked to state unemployment law to determine whether COBRA gross misconduct has occurred. Under Illinois law, the court observed, an employee is ineligible for unemployment benefits if the employee is terminated for misconduct consisting of:
the deliberate and willful violation of a reasonable rule or policy of the employing unit, governing the individual's behavior in performance of [the individual's] work, provided such violation has harmed the employing unit or other employees or has been repeated by the individual despite a warning or other explicit instruction from the employing unit.
In support of its conclusion that the couple had engaged in gross misconduct, the city cited a case in which a participant allegedly stole "saver" stamps from an employer that could be used to redeem turkeys. The employee in that case also signed a statement admitting that she had violated the employer's policy by knowingly using the stolen stamps to obtain turkeys. The court in that case concluded that the termination was for COBRA gross misconduct, reasoning that the employee's behavior was essentially the theft of employer property.
Distinguishing the saver stamps litigation, the court in the instant case reasoned that although it agreed with the city that criminal theft is gross misconduct, the city employees had not admitted:
- To the alleged conduct at issue.
- That the alleged conduct was a violation of city policy.
Other aspects of the court's opinion addressed whether information used to support the city's claims against the couple was sufficient from an evidentiary perspective (for example, under the hearsay rule of federal civil procedure). The court also observed that the city tended to conflate the spouses' conduct (that is, treating the two individuals as a single entity rather than separate individuals). According to the court, the city lacked a legal basis or admissible evidence that permitted one of the spouse's actions to be fully imputed to the other spouse.
Reliance on Advice of Counsel
The city also asserted that it decided not to furnish the couple COBRA election notices based on advice from legal counsel and its human resources (HR) service provider. Both entities had advised the city that theft is gross misconduct for COBRA purposes. Citing COBRA's legislative history, the court agreed with the city that employers are supposed to operate in good faith compliance with a reasonable interpretation of COBRA's substantive requirements. However, the court noted that good faith efforts to provide COBRA notices generally are not the same as good faith efforts to determine whether particular behavior is gross misconduct. The court faulted the city for not offering caselaw authority for its assertion that an employer's conferral with counsel over whether to terminate an employee is good faith compliance with COBRA. As a result, the court did not consider the city's conferral with counsel as probative of the city's COBRA compliance efforts.
Practical Impact
Although this decision does not resolve the ultimate COBRA gross misconduct question, it offers a useful roadmap for how the courts evaluate whether particular employee behavior is gross misconduct for COBRA purposes. As is often the case, COBRA gross misconduct disputes are heavily fact-dependent—requiring the parties (and reviewing courts) to analogize and rely upon federal caselaw and state laws. Employers and their advisors should also note the court's rejection of the city's attempts to insulate its COBRA decisionmaking based on having consulted with counsel and an HR provider.