July 1996

Workplace Labor Update - Employer Liable for Not Disclosing Employment Terms – July 1996

3 min

The Employee Retirement Income Security Act (“ERISA”) is a federal law whichregulates pension and employee benefit plans. Among its many provisions, ERISA imposes upon plan administrators certain “fiduciary” obligations to protect the plan’s beneficiaries and its assets. The Supreme Court recently held that an employer violated its fiduciary duties under ERISA when it misled employees regarding the security of their employee benefits if they transferred to another entity controlled by the employer which subsequently went bankrupt. Varity Corp. v. Howe, 116 S. Ct. 1065 (1996).

Massey-Ferguson manufactures farming machinery and is a wholly owned subsidiary of Varity Corporation. In the mid 1980s, Varity implemented a LAN called “Project Sunshine” through which it created a new subsidiary called Massey Combines into which it transferred Massey-Ferguson’s money-losing divisions. Although Varity foresaw the possibility that Massey Combines would fail, it considered this to be a blessing in disguise because the result would be the elimination of several poorly performing divisions of Massey-Ferguson. Varity also envisioned that as a result of the reorganization, Massey-Ferguson’s obligations to pay medical benefits to employees of the money losing divisions would be eliminated because they would be assumed by Massey Combines.

To implement Project Sunshine, Varity held a meeting for employees of the failing divisions of Massey-Ferguson in order to persuade them to transfer to Massey Combines. Varity management told the employees that the business outlook of Massey Combines was sound and that their employee benefits would remain secure if they transferred to Massey Combines. In reality, however, the new company was insolvent from the day of its creation. After the meeting, approximately 1,500 Massey-Ferguson employees voluntarily transferred their employment to Massey Combines. In addition, Varity unilaterally assigned to Massey Combines the benefit obligations of approximately 4,000 workers who had retired from Massey-Ferguson prior to the reorganization.

After the first year of operation, Massey Combines incurred a $88,000,000 loss and soon went into receivership under which its employees lost their non-pension benefits. A class of employees filed a lawsuit under ERISA alleging that Varity, through its misrepresentations about the future of Massey Combines, violated its fiduciary duties by wrongfully inducing them to withdraw from the Massey-Ferguson benefit plan. They sought the benefits they would have been owed under the Massey-Ferguson plan had they not transferred to Massey Combines. After the trial court ruled for the employees and an appeals court affirmed, Varity appealed to the Supreme Court.

Varity argued that it was not acting as a fiduciary under ERISA when it told the Massey-Ferguson employees about Massey Combines. Varity specifically claimed it was not exercising authority regarding the benefit plan’s management or administration. The Court rejected this argument, reasoning that the meeting centered on employee benefits. According to the Court, management explained to employees the similarity between the benefit plans of Massey-Ferguson and Massey Combines and assured employees that they would continue to receive similar benefits if they transferred to Massey Combines.

The Court also found that by misleading the employees about the solvency of Massey Combines and the future security of its benefit plans, Varity violated the fiduciary obligations that ERISA imposes on plan administrators. The Court explained that to knowingly deceive beneficiaries in order to save the employer money at the beneficiaries’ expense is not to act solely in the interest of the beneficiaries.

As a result of the Varity decision, employers who administer ERISA-governed plans should review their plans and administrative procedures and specifically limit who is a fiduciary under the plan. Once these individuals are identified, they should be instructed not to make representations to employees or beneficiaries about future plan activities or projections. To the extent possible, administrators’ and fiduciaries’ communications to employees or beneficiaries should be limited to the plan as it exists – not the plan’s future.