Posted on Mar 13, 2017

A U.S. Appeals Court recently ruled that the outsourced employees of a staffing company did count for purposes of determining whether the company met the small employer exception of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Therefore, the court found the company was subject to the law, and imposed penalties due to the company’s failure to provide a COBRA notice to a terminated employee.

Facts of the Case

A sales manager was employed by a staffing company and was covered by its group health plan.

The employer terminated the sales manager’s employment on January 6, 2012, and cancelled his medical coverage retroactively for the month of January even though his final paycheck had a deduction of $467 for “health.”

The company didn’t provide the employee with a COBRA notice about his right to continuation of coverage. It relied on the small employer exception, which exempts employers with fewer than 20 employees from COBRA requirements.

In response, the employee filed a lawsuit, alleging that the small employer exception didn’t apply to the company, and it had violated the law by failing to provide him a COBRA notice.

The company argued that it employed fewer than 20 employees, and the 396 employees they outsourced to clients didn’t count. It claimed that there was no evidence that Congress intended COBRA to apply to staffing companies that have only a few full-time employees in the company office (such as the sales manager), but also have other outsourced workers with no insurance benefits whose work is directed by the company’s client employers.

The problem: The outsourced employees in this case remained on the staffing company’s payroll and were recruited, screened, hired, trained and supervised by the company even though they performed services for its clients.

The U.S. District Court held that the company’s outsourced employees were its common-law employees, and as a consequence, COBRA’s small employer exception didn’t apply to the company. Thus, the court imposed COBRA penalties of $110 a day on the company and its owner due to its failure to provide a COBRA notice to the terminated employee.

Outsourced Employees

On appeal, the Eleventh Circuit agreed with the district court decision and held that COBRA’s small employer exception didn’t apply to the staffing company. The appellate court reasoned that if the outsourced workers were counted along with the company’s full-time employees, they indisputably employed significantly more than the requisite 20 employees to be subject to COBRA.

The court also noted the company “held itself out as the employer of the staffing workers by claiming federal tax credits for them.”

Although the outsourced workers were at other job sites, the evidence indicated that they remained the staffing company’s employees for purposes of COBRA. Thus, the court affirmed the district court’s imposition of penalties for failing to provide the employee a COBRA notice.

Was it a Qualifying Event?

For COBRA purposes, a “qualifying event” includes termination of an employee “other than by reason of such employee’s gross misconduct.” In this case, the employer argued that the sales manager’s termination wasn’t a qualifying event under COBRA because he was terminated for “gross misconduct.”However, the court also rejected this argument. It stated that the evidence suggested the sales manager was fired because he missed his sales quota (in other words, he was fired for unsatisfactory job performance rather than misconduct). (Virciglio v. Work Train Staffing LLC, 2016, WL 7487725)

Basics about COBRA

COBRA requires group health plans to offer continuation coverage to covered employees, former employees, spouses, former spouses and dependent children when group health coverage is lost due to certain specific events.

Those qualifying events include:

Death of a covered employee,
Termination or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct,
A covered employee becoming entitled to Medicare, divorce or legal separation of a covered employee and spouse, and
A child’s loss of dependent status (and coverage) under the plan.
COBRA sets rules for how and when continuation coverage must be offered and provided, how employees and their families may elect continuation coverage, and what circumstances justify terminating continuation coverage.

Employers can require individuals to pay for COBRA continuation coverage. The premium the employer charges can’t exceed the full cost of the coverage, plus a 2% administration charge.

COBRA generally applies to private-sector group health plans maintained by employers with at least 20 employees on more than 50% of its business days in the previous calendar year. Both full and part-time employees are counted. Each part-timer counts as a fraction of a full-timer, with the fraction equal to the number of hours that the part-timer worked divided by the hours an employee must work to be considered full time.

Notice Responsibilities

Group health plan administrators must give each employee and each spouse of an employee who becomes covered under the plan a general notice describing COBRA rights. The general notice must be provided within the first 90 days of coverage.

After receiving a notice of a qualifying event, the plan must provide the qualified beneficiaries with an election notice, which describes their rights to continuation coverage and how to make an election. The election notice must be provided to the qualified beneficiaries within 14 days after the plan administrator receives the notice of a qualifying event.

— Source: U.S. Dept. of Labor,
“Employer’s Guide to Group Health Continuation Coverage under COBRA”

Issues to Keep in Mind

COBRA’s small employer exception focuses on the total number of employees — not just on the number covered by the health plan. This court case illustrates that employee status isn’t determined on the basis of a worker’s title or job location, but on factors enumerated by IRS and the courts.

Although the court didn’t address the issue, it would appear that the outsourced employees wouldn’t only be counted for purposes of the small employer exception, but they also would be entitled to COBRA rights to the extent they participated in the company’s group health plan and experienced a qualifying event under COBRA.

If you have questions about your company’s responsibilities under COBRA, consult with your HR or employee benefits advisor or your employment attorney.