May Companies Reduce Employee Hours to Avoid ACA Requirements?

The Affordable Care Act (the “ACA”) generally requires that large employers offer health coverage that meets certain requirements to their full-time employees (i.e., employees working 30 hours or more per week) and their children to avoid paying potential tax penalties.  Some employers have decided to reduce certain employees’ hours to less than 30 hours per week, rendering these employees ineligible for health coverage under the terms of an applicable group health plan while insulating the employer from any ACA tax liability with respect to these employees.

A class action suit filed in May against Dave & Buster’s Inc. (“D&B”) contends that this conduct violates ERISA Section 510 and requires D&B to reinstate coverage for those employees who were reduced to part-time status.  ERISA Section 510 generally prohibits employers from intentionally interfering with the attainment of any benefits that an employee is entitled to, or may become entitled to, under an employer-sponsored group plan.  The employees suing D&B assert that D&B violated ERISA Section 510 by involuntarily reducing their hours so that they were no longer eligible for coverage under the terms of D&B’s group health plan and were no longer considered full-time under the ACA, allegedly resulting in D&B’s intentional interference with the employees’ right to future coverage.

While federal appellate courts have not always been consistent in their application of ERISA Section 510, an employer is generally shielded from Section 510 liability by showing that it acted in furtherance of a legitimate business interest.  For example, an employer’s desire to control costs might insulate an employer from liability.  Employers reducing employees from full-time to part-time status to avoid providing health coverage and paying ACA tax penalties may want to consider the legal ramifications before doing so.  These employers may also want to consider documenting their legitimate business reasons for such reductions.

This suit appears to be the first of its kind.  The court’s rulings in this case may have a significant impact on employers who have made reductions in employee hours.

For more information regarding large employers’ responsibilities under the ACA, please see Nancy Campbell’s “Health Care Reform’s Employer Shared Responsibility Penalties: A Checklist for Employers.”