Downsized Workers Get More Legal Firepower
CHICAGO — FOR 30 years, Ralph Thompson was proud to call himself "a Massey-Ferguson man" while selling company combines to farmers in Mississippi.
So it came as a shock when the company informed him soon after his retirement that the generous benefits his family depended on were no more.
"Massey-Ferguson came in and ZOOP, pulled the rug right out from underneath me and my family," Mr. Thompson says. To pay for some $100,000 in uncovered medical bills, the Cleveland, Miss., resident has had to take a minimum-wage job as a clerk for the county.
But when the United States Supreme Court ruled last month that Varity Corp., the parent of Massey-Ferguson, fraudulently denied benefits to Thompson and 92 of his retired colleagues, workers whose benefits have been wrongly eliminated in corporate downsizing suddenly got more leverage in court. And that, experts say, will probably mean more legal battles over changes in benefits.
For corporate America, however, the ruling will likely lead to higher litigation costs. And some legal experts say that will compel companies to curtail or withhold incentive programs for early retirement.
"You are going to see a lot of increasing legal expenses for companies," says Mark Ugoretz, president of the ERISA Industry Committee, a Washington-based organization representing business on issues related to benefits.
There are from 2,000 to 3,000 benefit disputes cases filed each year, according to attorneys and federal officials. Most cases in recent years have stemmed from corporate downsizing and restructuring, says Ronald Dean, an attorney in Pacific Palisades, Calif.
Many such disputes are covered under the Employee Retirement Income Security Act of 1974. Congress passed the measure to protect workers from loss of promised pension or health benefits, but the court has often interpreted the law to protect employers, not workers.
"There is no question there will be more cases once Varity sinks in," says Robert Eccles, a partner at O'Melveny & Myers in Washington.
Thompson and the other plaintiffs should receive a total of roughly $1.2 million for the cost of denied medical benefits, says H. Richard Smith, their attorney based in Des Moines, Iowa.
A suitable precedent?
The long-term impact of the Varity case on management and labor is unclear. The case is significant because it gives individuals the right to sue an employer who, when acting as a fiduciary, misleads employees. But Varity might not be a suitable precedent for cases in which corporate wrongdoing is less flagrant, say attorneys and federal officials.
Still, the March 19 ruling warns management of the risks from deceptive efforts to aggressively cut costs at workers' expenses, say defenders of employee rights.
"What many downsizing companies don't remember is that with many benefit plans they act as a fiduciary so they have to put the interests of employees over those of the company," says Thomas Moukawsher, a lawyer in Groton, Conn.
Varity, which is based in Buffalo, N.Y., dumped the weakest branches of Massey-Ferguson into a new corporate entity called Massey Combines in 1986. Under a scheme it called "Project Sunshine," Varity assured its employees that Massey Combines would flourish. It persuaded Thompson and some 1,500 other workers to transfer to the new division. Varity also shifted 4,000 retirees to Massey Combines without their knowledge.
Insolvent from its creation, Massey Combines lost $88 million its first year and filed for bankruptcy after 22 months. Its employees and retirees completely lost their medical benefits.
"To downsize and do it the way Varity did it to us is kind of heartbreaking," says Thompson, retired manager of a closed Massey-Ferguson outlet in Cleveland, Miss.
Varity and verity
The Varity case affirms that companies "can't lie or mislead or withhold vital information" over benefits, says Mr. Moukawsher, who successfully represented a worker last year in a Connecticut suit similar to Varity.
The high court and Connecticut rulings have thrown managers on the defensive. The decisions will compel companies to curtail their flexibility, openness, and generosity in deliberations over retirement and severance benefits, say corporate attorneys.
The rulings "put a terrible chilling effect on employer's ability to provide enhanced benefits," says William Scogland, an attorney at Jenner & Block in Chicago. They will compel companies to curtail or withhold incentive programs for early retirement, which are comparatively benign ways to cut payroll costs, says Mr. Scogland. He represents employers in benefit dispute cases.
The Varity case might indirectly vex both managers and employees at trustworthy companies. It "is very troublesome because it creates a tension between the employer's desire to be helpful and explanatory and the fact that any statement now has the potential for being a fiduciary duty," says Dave Gordon, an attorney at O'Melveny & Myers in Los Angeles.
"If the decision had gone the other way, we would have been left with a situation where large numbers of people would have potentially had no avenue of redress at all for restitution of damages that they suffered," says Alan Lebowitz at the US Labor Department's pension and welfare benefits administration.
"This at least gives them an opportunity to make a claim," he says.