Employment, Benefits, Executive Compensation, and Immigration Law is a constantly changing landscape affected by, not only case law and statutes, but also administrative regulations, agency interpretations and decisions, and public policy. This Law Update is designed to give you up-to-date information, as well as keep you abreast of common legal issues, affecting your business. We navigate the legal landscape so you can concentrate on conducting your business. Click here to download a PDF of this newsletter.

In this month’s issue, we cover:

The 401(k) Plan Fiduciary’s Dilemma – Complying with ERISA Duties
Refresh Your Knowledge: The Fair Credit Reporting Act (FCRA): Do You Know Your Obligations When Conducting Employee Background Checks?
What are an Employer’s Obligations Under the FCRA?
GUARDING AGAINST EMPLOYMENT CLAIMS

The 401(k) Plan Fiduciary’s Dilemma – Complying with ERISA Duties

Sponsors of qualified retirement plans, including 401(k) plans, appoint fiduciaries to manage and control the plan’s operations in order to insure that the plan is comprehensively operated for the exclusive benefit of plan participants. Importantly, plans need to be continually monitored to insure that they offer appropriately diversified investment options, provide adequacy of investment returns relative to an appropriate benchmark and ensure a reasonable fee structure.

The Employee Retirement Income Security Act of 1974 (ERISA) generally defines a fiduciary as anyone who exercises discretionary authority or control over a plan’s management, administration (including control over plan investments). A person may be a named fiduciary or be a functional fiduciary by virtue of his or her exercise of discretion or control. A fiduciary’s duty to conduct a thorough, independent and unbiased investigation and evaluation of a plan’s investment options and the costs associated with them is one of ERISA’s fundamental requirements. Plan fiduciaries need to continually exercise a very high level of care and prudence in the conduct of these responsibilities. In that regard, fiduciaries are well served to institute a process to continually engage in a prudent, continuous and comprehensive review and assessment of plan operations, investments and fees. This review should include identifying and evaluating relevant information and alternative courses of action in order to make informed decisions consistent with this information; comprehensively documenting the process used and the decisions taken, and using qualified and competent experts to support such efforts. Most importantly, plan fiduciaries can be held personally liable for breaches of fiduciary duty and the unintended consequences of these breaches. Therefore, whether or not a person is a fiduciary under the law, and whether or not this fiduciary adequately meets his/her duties and responsibilities become critically important.

In the 2014 case of Tussey v. ABB, Inc., the US Court of Appeals for the Eighth Circuit considered a 2012 District Court decision awarding $36.9 million against ABB Inc. (“ABB”) and Fidelity Management and Research, Inc. (“Fidelity”). The award related to claims of excessive recordkeeping fees paid to Fidelity and failure to monitor and control these fees by Plan fiduciaries, improper selection and mapping of investment options in the Plan by the fiduciaries and improper use of float income by Fidelity. ABB sponsored two 401(k) plans (“Plans”) for its employees and ABB’s fiduciary committees administered the Plans. ABB had retained Fidelity to provide record-keeping services to the Plans. Fidelity was paid via revenue sharing, a practice whereby mutual funds pay a portion of their fees to the record-keeper. Plaintiffs were employees and participants in the Plans and sued ABB and Fidelity on behalf of a class, claiming that the revenue sharing payments and other aspects of plan administration amounted to breaches of fiduciary duties the District Court awarded a total of $36.9 million – $35.2 million against ABB, which included $13.4 million for the recordkeeping claim, $21.8 million for losses related to the selection and mapping of investments claim, and $1.7 million against Fidelity related to the float claim, plus $13.4 million in attorneys’ fees and costs, which were jointly and severally assessed against all defendants.

In its decision, the Appellate Court clarified that where a plan document gives a plan administrator the discretion to interpret the plan, as the ABB plans did, the administrator’s exercise of that discretion is entitled to deference so long as it is reasonable and not an abuse of discretion. Nevertheless and notwithstanding such deferential standard of review, the Court upheld the recordkeeping judgment against ABB because the Court found “ample support in the record” that ABB had failed to calculate recordkeeping fees paid to Fidelity, assess whether the fees were reasonable, negotiate lower fees, or prevent the use of fees to subsidize administrative costs unrelated to the plans.

The case is important because it highlights key fiduciary duties and standards of responsibility that prudent fiduciaries must meet in order to comply with ERISA’s fiduciary rules:

Fiduciaries must always remember that they act solely for the exclusive benefit of plan participants;
Fiduciaries must establish and implement a process to continually evaluate and assess plan functions and investments, and document these deliberations and decisions;
Fiduciaries must remember to always act in accordance with plan terms;
Plan fees and revenue-sharing arrangements must be carefully and continuously scrutinized and benchmark to insure value to the plan;
Fiduciaries must carefully consider the issue of float income;
Fiduciaries could be held personally liable for breaches of fiduciary duty:
Fiduciaries must ensure that plan documents contain proper language to provide fiduciaries with very broad discretion to interpret plan language.

Finally, Corporate senior managers and Boards of Directors must also be cognizant of these considerations. ERISA liability applies to the organization as well as individual fiduciaries and can be financially material. Oversight of 401k and other benefits plans must be an ongoing topic of Board deliberations.

Refresh Your Knowledge: The Fair Credit Reporting Act (FCRA): Do You Know Your Obligations When Conducting Employee Background Checks?

The Fair Credit Reporting Act (“FCRA”) details the procedures employers must follow when using consumer reports to make employment decisions – typically when deciding whether to hire or promote applicants or current employees (i.e., “consumers”). Under the Act, a “consumer report” can include criminal background checks, credit reports, driving records, civil lawsuits, reference checks and other information obtained by a consumer reporting agency and provided to an employer. The purpose of the FCRA is to insure that information regarding consumers is gathered, disclosed, and used in a confidential, accurate, and relevant manner.

What are an Employer’s Obligations Under the FCRA?

An employer has specific duties it must perform at each stage of the hiring and/or promotion process when relying, even in part, on a background check or other consumer report to make an employment decision.

Prior to Obtaining a Consumer Report: Before an employer can obtain any type of consumer report as part of a background check, the employer must:

Disclose to the consumer in writing that a consumer report may be obtained for employment purposes. This notice must be contained in a document that consists solely of the disclosure.
Obtain written authorization from the consumer permitting the employer to obtain the report.
Provide certification to the consumer reporting agency that (1) the employer will not use information from the report in violation of any equal employment opportunity laws; (2) the employer has disclosed its intention of obtaining the report and has obtained the proper authorization from the consumer; and (3) the employer will comply with the requirements of the FCRA regarding any potential adverse actions based on information contained in the consumer report.

Prior to Taking Adverse Action Based on the Report: Suppose the consumer report contains information that renders the consumer unsuitable for hire or promotion. Before an employer can take any adverse action, based in whole or in part on information contained in the consumer report, the employer must give to the consumer (1) a copy of the report and (2) a description of the consumer’s rights in the form required by the Federal Trade Commission. The purpose of providing the consumer with this information prior to taking adverse action is to provide the consumer with an opportunity to dispute and correct any inaccurate information contained in the consumer report.

Taking Adverse Action: Once an employer has provided the consumer with the pre-adverse information, it must give the consumer a reasonable amount of time to correct or explain the information in the report prior to taking the adverse action. Assuming the consumer in not able to identify inaccuracies or otherwise explain negative information contained in the report, the employer must provide notice to the consumer of the adverse action. This notice must be separate and distinct from the pre-adverse notice and must contain the following information:

The name, address, and telephone number (including a toll-free number if available) of the consumer reporting agency that furnished the report;
A statement that the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer with specific reasons why the adverse action was taken;
A notice of the consumer’s right to request a free copy of the consumer report on which the adverse employment action was based. This notification should specify that the individual has a 60-day period in which to obtain this free report; and,
The consumer’s right to dispute with the consumer reporting agency the accuracy or sufficiency of the information in the report.

Advice To Employers: Although employer obligations under the FCRA appear straightforward, recent years have seen an increase in FCRA lawsuits – particularly class actions. Employers should note that the penalties for noncompliance could be hefty and include statutory damages of $100 to $1000 per violation, punitive damages, and attorneys’ fees. If you or your Company have questions regarding the FCRA, or would like confirmation that your background check procedures are compliant, you should contact legal counsel.

GUARDING AGAINST EMPLOYMENT CLAIMS
Internal Investigations – Make Them Count

Employers have a basic duty to investigate employee complaints of employment related misconduct. However, oftentimes, it is prudent for an employer to conduct an internal investigation regardless of whether a formal complaint has been made or whether a duty to investigate exists. A properly conducted investigation can mean the difference between resolving a minor complaint internally and a public, lengthy, and expensive litigation. The purpose of any such investigation should be to document and arrive at a proper business decision regarding the alleged misconduct so that the employer can defend its actions. The following are important issues to keep in mind when the need for an internal investigation arises:

Take the Complaint Seriously. The success of any investigation depends on appropriate preparation and planning before beginning the investigation. The first step is to take the allegations of misconduct seriously and not brush them off. What may seem like minor complaints, once reported, put the employer on notice of the claims. If left unchecked, and found to be meritorious, the employer can be found to have condoned the prohibited behavior and allowed it to continue. Thus, as soon as the employer becomes aware of any allegations of misconduct, the employer is wise not to ignore them.

Choose the Right Investigator. One of the most important decisions to make in initiating any investigation is to determine who will conduct it. Depending on the experience of the employer in conducting internal investigations and/or the complexity of the issues, it may be beneficial to involve outside counsel and an independent investigator. The employee witnesses who may be uncomfortable being candid with an internal investigator may perceive an independent investigator as being neutral. Internal investigators can also be seen as only being concerned with protecting the company, further hampering their ability to elicit accurate information from employee witnesses. Other important factors to consider are the relative positions of the complainant and accused, potential impact on business operations, and any particular qualifications needed for the type of issues involved.

Availability of Witnesses. It is important to identify all potential witnesses and interview them regarding their knowledge as quickly as possible. Equally important is to ensure that these witnesses, especially the helpful ones, will be available in the future should the complaint evolve into litigation. Determine whether the employment of any potential witness is scheduled to be terminated, voluntarily or involuntarily, and take appropriate steps to ensure that they will be available and cooperative when needed. For example, make sure that the severance agreements that are typically used have a provision requiring continued cooperation in any investigation or litigation as a condition of payment.

Be Mindful of Privilege Issues. Be aware that the investigator can potentially be a witness if the complaint evolves into litigation. In addition, any report issued by the investigator is subject to discovery. Thus, the investigator should be careful not to give any legal advice on what steps the employer should take as a result of the investigation. The report should only delineate the facts uncovered during the investigation and provide a factual conclusion as to what occurred. This omission of legal advice is particularly important because, should the employer decide not to follow the legal advice contained in the report, its failure to do so may create additional issues down the road. Also, the investigation report should be given to in-house or outside counsel, not to Human Resources at the employer, so that it can reasonably be argued that the report as a whole is subject to privilege, such as the “in anticipation of litigation” privilege.

Any investigation should be conducted so that it is fair, impartial, respectful, and conducted with integrity. If you believe that an internal investigation may be necessary but are unsure how to begin, contact one of our many Employment Law attorneys and we can assist you in getting started.

Contributors:

Joseph Saburn
Sara Bass
Mukti N. Patel

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