Opinion ID: 3009695
Heading Depth: 2
Heading Rank: 1

Heading: Elimination of Haberern's Gross Receipts

Text: Percentage and the Funding of the Defined Benefit Plan The appellants first challenge the district court's finding that Lehigh Valley breached its fiduciary duty under ERISA when it eliminated the gross receipts percentage component of Haberern's compensation. This alleged breach focused on the appellants' establishment in 1979 of the defined benefit plan which provided benefits calculated on certain factors such as age, compensation, and years of employment. Prior to the creation of the defined benefit plan, Lehigh Valley paid Haberern her salary bi-weekly and her percentage of its gross receipts annually. Haberern claims that ERISA compelled the appellants to include her in the plan, and asserts that to include her, but to keep down its contributions to the plan, the appellants eliminated Haberern's percentage of gross receipts. The district court concluded: In 1980 Lehigh Valley eliminated the portion of [Haberern's] compensation that was calculated on the basis of Lehigh Valley's gross receipts thus reducing [Haberern's] compensation from $18,358 for the fiscal year ending June 30, 1979 to $14,429 for the fiscal year ending August 31, 1980. (Lehigh Valley had changed its fiscal year from July to June to September to August.) Based upon a salary of $19,000, Lehigh Valley would have to contribute approximately $10,000 on behalf of [Haberern] into the newly formed Defined Benefit Plan. The doctors felt this was too much. Therefore, they reduced her salary to $14,400, thus requiring Lehigh Valley to contribute only $5,500 to the Defined Benefit Plan. By virtue of the elimination of her receivables percentage, [Haberern] was taking her salary and funding her Defined Benefit Plan. 10 Haberern, 822 F. Supp. at 254 (citations omitted) (emphasis added). The district court also found that the appellants did not inform Haberern that Lehigh Valley was required to make the contributions to the plan. Id. In fact, the district court found that in 1980 the appellants provided Haberern with a summary plan description but omitted the pages stating Lehigh Valley was required to make the full contribution required to fund the plan on her behalf. Based on these facts, the district court held that the appellants breached their fiduciary duty. In computing damages, the court concluded that the appellants were liable not only for the lost compensation predicated on the 1980 salary reduction, but also for the reduction of benefits under the defined benefit plan, which, but for the wrongdoing, would have been calculated on a higher salary, and the reduction of benefits under the defined contribution plan, which, but for the wrongdoing, would have reflected contributions based on a higher salary. Id. at 257. However, the court also concluded that the reduction in salary did not violate ERISA's anti-discrimination provisions. 29 U.S.C. § 1140. In this regard, in a pretrial opinion granting the appellants summary judgment on Haberern's discrimination claim relating to the reduction in salary, the court noted: In this case, the reduction in [Haberern's] salary . . . [was] consistent with the treatment of all other plan participants, including the physician plan participants. The payroll records furnished by defendants 11 established that the salaries of all plan participants were substantially reduced in 1980. App. at 136 (citations omitted). The appellants raise two challenges to the district court's conclusion that in eliminating Haberern's percentage of gross receipts and creating the defined benefit plan they violated their fiduciary duties under ERISA. First, they argue that they took these steps as employers, and not as fiduciaries, and thus they did not owe a fiduciary duty to Haberern. Second, they argue that Haberern's status as an at will employee allowed them to change her compensation at any time.0 Accordingly, they contend that by continuing to work after 1980 she accepted the modified terms of her employment. The district court responded to these points by indicating that simply because [Haberern's] employment was at will does not entitle Lehigh Valley to violate ERISA. 822 F. Supp. at 260. The appellants rely on section 404(a)(1)(D) of ERISA, 29 U.S.C. § 1104(a)(1)(D), and on several of our opinions for the proposition that when an employer acts in a management capacity, its business decisions are not regulated by ERISA. See Nazay v. 0 In our discussion of appellants' division of Haberern's compensation into salary and bonus, we consider whether a plan beneficiary may bring an action under section 501(a)(1)(B) of ERISA for breach of fiduciary duty. We do not address that point in this section of our opinion, as the appellants do not contend that Haberern could not bring an action for breach of fiduciary duty predicated on the appellants' elimination of Haberern's compensation based on gross receipts, if the elimination was wrongful. Of course, we are holding that the elimination of the compensation based on gross receipts does not implicate any fiduciary obligation under ERISA which the appellants might have owed Haberern. 12 Miller, 949 F.2d 1323, 1329 (3d Cir. 1991); Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1158 (3d Cir. 1990). See also, e.g., Malia v. General Elec. Co., No. 92-7487, slip op. at 9-10 (3d Cir. May 13, 1994). Section 404(a)(1)(D) imposes a fiduciary duty on a trustee when administering an ERISA plan to act in accordance with the documents and interests governing the plan, but it does not impose fiduciary duties on an employer making a management decision. The appellants contend that because of Haberern's at will status, their business decision affecting her compensation and establishing the defined benefit plan was not subject to ERISA's fiduciary provisions, notwithstanding [its] collateral effect on prospective, contingent employee benefits. Brief at 15 (quoting Bell v. Allstate Ins. Co., 822 F. Supp. 1222, 1224 (D.S.C. 1992)). Haberern responds that the appellants' contentions are without merit because ERISA preempts state laws relating to the protection of employee pension benefits and, accordingly, regardless of the appellants' rights under state law, their conduct violated their ERISA fiduciary duties. Haberern's reliance on ERISA preemption is misguided. She cites Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478 (1990), in support of her position. In Ingersoll-Rand, the plaintiff brought a state common law claim for unlawful discharge in a Texas state court. Id. at 136, 111 S.Ct. at 481. He claimed that his employer discharged him to avoid making contributions on his behalf to a pension plan. The trial court granted the employer summary judgment, and the state court of 13 appeals affirmed, holding that the plaintiff's employment was terminable at will. The Texas Supreme Court reversed and remanded for trial. That court held that under Texas law, an at will employee could sue for wrongful discharge if he could establish that the employer's principal reason for the discharge was to avoid paying pension benefits or to avoid contributing to a plan. The United States Supreme Court granted certiorari and reversed. The Court noted that Congress expressly included a broad preemption provision in ERISA, section 514(a), 29 U.S.C. §1144(a), which provides: Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title. The Court noted '[a] law relates to an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan.' Ingersoll-Rand, 498 U.S. at 139, 111 S.Ct. at 483 (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 103 S.Ct. 2890, 2900 (1983)). In the Texas case, the plaintiff was required to prove that the principal reason for his termination was to interfere with a plan. This required him to plead, and the court to find, that there was an ERISA plan and that the employer had a pensiondefeating motive in discharging him. Because this inquiry was directed to the existence of a plan, the judicially created 14 cause of action 'relate[s] to' an ERISA plan. Ingersoll-Rand, 498 U.S. at 140, 111 S.Ct. at 483. Thus, it was preempted. The Court noted, however, that ERISA's preemptive force has limits. Thus, in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 107 S.Ct. 2211 (1987), the Court had held that ERISA did not preempt a Maine law which required the payment of severance benefits because the state law did not require the establishment or maintenance of an ongoing plan. Ingersoll-Rand, 498 U.S. at 139, 111 S.Ct. at 483. In the Texas case, this limitation did not apply because the case did not involve a generally applicable statute that makes no reference to, or indeed functions irrespective of, the existence of an ERISA plan. Id. The limitation on the preemptive force of ERISA recognized in Fort Halifax and Ingersoll-Rand is applicable in this case. In Pennsylvania, absent a statutory or contractual provision to the contrary, employment relationships presumptively are at will. Schoch v. First Fidelity Bancorporation, 912 F.2d 654, 658 (3d Cir. 1990). This presumption is unrelated to the existence vel non of any pension plan. Of course, it follows that if an employer may terminate an employee without cause, it has the right to decrease her compensation, as this constitutes a more modest change in the employment relationship. Clearly, this right to decrease compensation functions irrespective of . . . the existence of ERISA, and therefore is beyond the scope of ERISA preemption. Ingersoll-Rand, 498 U.S. at 139, 111 S.Ct. at 483. 15 Accordingly, inasmuch as ERISA does not preempt the appellants' state law management rights to determine Haberern's salary, the critical question is whether they were acting in their management capacity when they reduced Haberern's salary by eliminating the portion of her compensation based on gross receipts and contemporaneously created the defined benefit plan. If they were, then they breached no duty under ERISA for, as they contend, ERISA does not impose fiduciary duties on employers acting in their management capacity. 29 U.S.C. § 1104(a)(1). Nazay v. Miller, 949 F.2d 1323, is instructive. In Nazay, a retired employee brought suit against his former employer under ERISA to recover the balance due for his hospitalization after the employer's health plan only partially paid a hospital bill he had incurred. Id. at 1325-27. The employee had admitted himself to a hospital after his physicians agreed that it was imperative that he be treated for a heart condition. Though the employee was aware that the plan required certification by the plan administrator prior to a hospital admission, he nonetheless did not notify the administrator before he entered the hospital. Furthermore, neither his doctors nor anyone else notified the administrator of the admission during his stay. The certification process enabled the administrator to consider whether hospitalization was necessary and to consider alternatives to hospitalization. Additionally, it allowed the patient and hospital to ascertain how much of the proposed hospitalization would be reimbursed. The plan included a penalty 16 amounting to 30% of the otherwise covered expenses if the employee failed to obtain preadmission certification. Id. at 1326. The district court held that the penalty provision was arbitrary and capricious. Id. at 1325. Further, the court held it would not enforce any provision in a benefit plan that denied benefits, unless the employer could establish that the participant's failure to comply with the provision prejudiced the plan. Id. We reversed, concluding an employer is free to develop an employee benefit plan as it wishes because when it does so it makes a corporate management decision, unrestricted by ERISA's fiduciary duties. Id. at 1328-31. In discussing the nature of an employer's fiduciary duties under ERISA, we noted [i]n the words of the Supreme Court, ERISA was 'designed to promote the interests of employees and their beneficiaries in employee benefit plans.' However, as we have observed on several occasions, ERISA's concern is with the administration of benefit plans and not with the precise design of the plan. Id. at 1329 (emphasis in original) (citations omitted). Therefore, if an employer also acts as a plan administrator, ERISA permits [it] to wear two hats, and . . . [it] assume[s] fiduciary status only when and to the extent that [it] function[s] in [its] capacity as plan administrator[], not when [it] conduct[s] business that is not regulated by ERISA. Id. (citations and internal quotation marks omitted). Although we recognized that the determination of whether an employer acts as a business manager or plan 17 administrator involves a sensitive analysis, we concluded that an employer's inclusion of a penalty provision in a benefits plan is a management decision. Id. Earlier, in Trenton v. Scott Paper Co., 832 F.2d. 806 (3d Cir. 1987), cert. denied, 485 U.S. 1022, 108 S.Ct. 1576 (1988), we endorsed the design/administration distinction. In that case, Scott Paper Company had created a Salaried Employee Retirement Plan (SERP) as well as a Scott Highly Accelerated Retirement Program (SHARP). Id. Scott created SHARP to provide an incentive to salaried employees at certain of its overstaffed facilities to retire early. Id. But some of the salaried employees eligible for retirement under SERP were not eligible for the more favorable treatment under SHARP. The plaintiffs, a class of employees covered by SERP but not by SHARP, brought suit alleging that their exclusion violated ERISA. The district court granted the defendants' motion for summary judgment and we affirmed. The plaintiffs argued that the amending of SERP to include SHARP was an ERISA administration decision. After considering who had the authority to design and implement SHARP, we disagreed. In reaching our conclusion, we indicated that [i]f SHARP had been a part of SERP when SERP was implemented, SHARP would clearly be part of the design of the plan. Id. at 809 (emphasis in original). We then stated that, [w]e think it clear in this action that Scott, not the Retirement Board, had the sole authority to determine who would be eligible for SHARP. The design of the SHARP plan was purely a corporate management 18 decision. Id. Accord Bell v. Allstate Ins. Co., 822 F. Supp. 1222 (D.S.C. 1992) (Allstate's decision not to include commissions from state auto reinsurance mechanism was design decision outside the scope of ERISA). It is quite plain from our opinions that the appellants' decision to reduce Haberern's compensation by eliminating her percentage of gross receipts and to establish the defined benefit plan was managerial in character. The fact that this decision may not have been in Haberern's interest makes no difference. Furthermore, the district court's statement that, contrary to the terms of the defined benefit plan, the appellants required Haberern to fund her own benefits is nothing more than the court's pejorative characterization of the undisputed facts. Accordingly, we cannot sustain the court's determination by treating it as a factual finding subject to deferential review.0 Thus, the appellants are not liable for their decision to reduce 0 The fallacy in the argument that Haberern funded the defined benefit plan may be demonstrated by considering the collective bargaining process. In contract negotiations, the employees' representative might obtain a pension plan fully funded by the employer and in return might agree to accept a less favorable wage structure than it could have obtained if the employer had not created a pension plan. In that situation, it hardly could be argued fairly that by paying the negotiated wage scale the employer has required the employees to fund the pension plan. In principle, the situation here is no different because the appellants' decision to set Haberern's compensation in light of their expenses for a pension plan is identical to an employer's decision to accept a collective bargaining agreement that adds to its pension costs but moderates wages. On the other hand, this case would have been different if the appellants had withheld money from Haberern's established salary for payment into the defined benefit plan. 19 Haberern's compensation and contemporaneously to establish the defined benefits plan. Haberern also argues that the appellants did not inform her that her participation in the plan was voluntary. But this point is immaterial. While we will assume without deciding that Haberern could have refused to participate in the defined benefits plan, and we further will assume without deciding, as she contends, that the plan could not have become effective without her participation, it does not follow that the appellants could not have reduced her salary without regard for whether she participated in the defined benefit plan. Quite to the contrary, under Pennsylvania law they had the right to decrease her compensation whether or not they had established a benefits plan. Therefore, Haberern's only remedy if she had been unwilling to continue her employment for the compensation offered was to resign. Of course, she did not do so. Thus, it is clear that Haberern should not have recovered a judgment against the appellants by reason of their elimination of her gross receipts percentage and their method of the funding of the defined benefit plan.