The Dave & Buster’s restaurant chain recently settled a class action lawsuit claiming it violated ERISA’s “discrimination” rules by reducing hours of various employees to cause them to lose eligibility for the company’s group health plan. After over three years of litigation in the Southern District of New York and suffering some procedural losses along the way, Dave & Buster’s agreed to settle the matter for $7.425 million.  After attorneys’ fees and costs, we estimate the employees will receive about $2,100 each.

Dave & Buster’s took the action in response to the “employer mandate” provisions of the Affordable Care Act, which require large employers to offer compliant and affordable group health coverage to full-time employees, generally defined as those working an average of at least 30 hours each week, in order to avoid potentially substantial tax penalties. The saga took a long time to play out.  The law passed in March 2010.  Dave & Buster’s started reducing employees’ hours in mid-2013. The lead plaintiff worked a reduced shift and lost eligibility for group health insurance in March 2014.  She filed suit in May 2015.  The court approved the settlement in December 2018.  The class members have to be notified, the plaintiffs’ attorneys will seek their fees and the court is expected to approve everything once and for all in mid-May 2019.  After that, class members will be paid, likely well into late-2019.

For Dave & Buster’s the settlement agreement prevents the company from the flexibility in business management that other employers should enjoy (more on that below) because it agreed “to prohibit management . . . .from . . ..denying an employee increased hours, for the purpose of denying that employee coverage, or eligibility for coverage” under its group health plan.  The settlement agreement does not contain an “end date” on these restrictions.

We think it was critical that employees already were covered under Dave & Buster’s group health plan when their hours were reduced in order to cause them to lose eligibility for coverage. This is compared with the employer taking action to ensure that employees’ hours are managed and monitored in order to prevent the employee from becoming eligible for coverage under the plan in the first place.  ERISA’s nondiscrimination provisions prohibit an employer from taking action to fire, suspend or take other adverse action against a plan participant for “exercising any right to which he is entitled under” the plan or for “interfering with the attainment of any right to which” the participant may become entitled under the plan.”

The scenarios in which discrimination is fairly evident is where an employer says “Employee Susy’s big health claims are costing our plan a bundle. We have to get rid of her before we have to pay out another dime!”  Or in a pension plan:  “John soon will be vested in his benefit under the plan.  We’ll have to pay big bucks if he gets that benefit – terminate him before we have to do that!”

If an employee is not covered under an employee health or pension plan, he or she also is not a “participant” and ERISA’s nondiscrimination rules should not apply. Employers should be free to manage their businesses, taking into account total compensation costs, including all benefit plans, in determining employees’ work schedules.  There may be other factors at issue in restricting employees’ work hours, e.g., employee morale, turnover, etc., but those are not legal issues.

We also have to keep in mind that the Dave & Buster’s case was settled, not decided by a court.  How the case turned out doesn’t mean an employer cannot plan around health costs and still comply with the law, in terms of managing its full-time and part-time populations.  But employers should tread carefully here.  The facts of each situation are very important and we recommend that employers take steps to reduce or eliminate benefit coverage for any group of employees only after seeking advice from competent counsel.