Monthly Archives: May 2015

May 18, 2015

Plan Fiduciaries Beware: Your Ongoing Duty to Monitor Investments Allows Beneficiaries To Claim Breach Within Six-Year Statute of Limitations

In a ruling that will likely raise the anxiety level of plan fiduciaries, the U.S. Supreme Court unanimously ruled today that beneficiaries of a 401(k) plan could pursue their claim against the plan’s fiduciaries related to mutual funds that were added to the plan eight years before the complaint was filed, despite the six-year statute of limitations normally applying to ERISA breach of fiduciary duty claims. The Court concluded that because fiduciaries have a continuing duty to monitor investments and remove those that are imprudent, a claim for breach of that duty is timely so long as the alleged failure to monitor occurred within six years of the filing of the complaint. Tibble v. Edison Int’l, 575 U.S. ___ (2015).

Higher Administrative Fees Prompted Lawsuit

In 2007, several beneficiaries of the Edison International 401(k) Savings Plan (Plan) filed a class action lawsuit against the Plan fiduciaries to recover alleged losses incurred as a result of excessive mutual fund fees. According to the beneficiaries, in selecting the investment choices available to Plan participants, the Plan fiduciaries had chosen six “retail-class” mutual funds, instead of identical “institutional class” funds. The retail-class funds carried higher administrative and management fees than the institutional-class offerings. Three of the funds were chosen in 1999, and the others in 2002.

As to the funds selected in 2002, the lower courts found that the Plan fiduciaries offered “no credible explanation” for selecting the higher-cost retail funds. However, as to the 1999 funds, the Plan fiduciaries argued that the ERISA statute of limitations applicable to fiduciary breaches would bar the beneficiaries’ claims involving the 1999 funds, because they were selected more than six years before the lawsuit was commenced. The statute, 29 U.S.C. § 1113, bars a fiduciary breach claim brought more than six years “after the date of the last action which constituted part of the breach or violation,” or “in the case of an omission the latest date on which the fiduciary could have cured the breach or violation” (emphasis added). The Ninth Circuit Court of Appeals agreed with the fiduciaries, and dismissed all claims relating to the 1999 funds.

A unanimous Supreme Court, however, reinstated the beneficiaries’ claims pertaining to the 1999 funds. The Court found that, although the funds may have been chosen previous to the fiduciaries’ action in selecting the 1999 funds, the statute did not bar claims relating to the fiduciaries’ alleged omissions since that time. Specifically, the Court held that ERISA fiduciaries have a “continuing duty to monitor trust investments and remove imprudent ones.” This duty imposes a “continuing responsibility for oversight of the suitability of the investments already made.” Since such continuing reviews by the Plan fiduciaries might have been required within the six-year limitation period, a claim that the fiduciaries breached their oversight and review responsibilities could not be summarily dismissed.

No Guidance on Oversight Duty

Having held that Plan fiduciaries have a duty to oversee and monitor investment decisions previously made, the Court provided little guidance as to what that duty entails. The Court articulated the fiduciaries’ oversight and monitoring responsibilities only in a broad, theoretical way, holding that “a fiduciary normally has a continuing duty of some kind to monitor investments, and that “the nature and timing of the review [are] contingent on the circumstances.” Because these circumstances had not been fully developed by the lower courts, the Supreme Court remanded the case for further consideration, noting that it did not necessarily find that the Plan fiduciaries had violated any of their duties.

Lesson for Fiduciaries

The Supreme Court has made clear that benefit plan fiduciaries have a continuing responsibility to monitor the suitability and prudence of a plan’s investment choices, and that the six-year statute of limitations runs from the alleged breach of this ongoing responsibility, not from the date a particular investment was initially selected. However, the Court provided essentially no guidance concerning how fiduciaries can fulfill this ongoing responsibility. The parameters of a fiduciaries’ ongoing responsibility to monitor and evaluate investment choices will, in all likelihood, be developed only by extensive future litigation.

Because the Court provided little specific guidance concerning the ongoing duty to monitor investment choices, plan fiduciaries will need to increase their focus on what little regulatory guidance is provided by the U.S. Department of Labor, and many fiduciaries will likely increase their reliance on objective, professional investment advisors. Of course, the choice of an investment advisor is, itself, a fiduciary act, and under the guidance of the Tibble decision, it is likely the fiduciaries’ ongoing responsibility to monitor the suitability and performance of advisors as well. In short, the Tibble decision expands the potential for fiduciary liability without providing much guidance on how that liability might be minimized.

May 11, 2015

Recruiting Employees By Making False Promises Can Cost You

By Mark Wiletsky

You desperately want to hire a competitor’s top sales person, so to lure her away, you promise that she can expand the scope of her sales while continuing to serve her existing customers nationwide. What’s the harm if after she joins your team, you limit her territory and the type of products she can sell? For one computer company, it cost over $370,000 in damages and interest to the disgruntled, former employee. Add in the time and expense of defending the lawsuit and those seemingly innocuous recruiting statements can really come back to bite you.

Misleading Statements Meant to Entice

Hiring experienced executives, managers and sales persons can be tricky because the best performers are in high demand. In order to entice a quality person away from his or her existing company, you likely have to sweeten the compensation package, offer a promotion or growth potential, provide a better cultural fit, or some combination of these conditions of employment. You wine and dine your candidate and make assurances that things will be better if they leave their current, lucrative job and join your company.

But what if your promises don’t come to pass? What if your regional sales structure does not allow the sales executive to continue to service their national clients? What if the growth you promised isn’t in the cards? You could face a lawsuit alleging negligent misrepresentation, fraudulent inducement, promissory estoppel or other claims.

The federal court in Colorado recently handled such a case in which a successful computer sales person with national accounts left her lucrative position to join another computer company who had promised that she could keep her current accounts and expand the scope of her sales beyond mainframe computer systems. After her new employer assigned many of her lucrative accounts to other sales representatives and told her that she would not be able to sell outside of the mainframe area, she sued. Although her new employer claimed that its recruiting statements were nothing more than predictions or statements of future intent, a jury found in favor of the sales person on her claim of negligent misrepresentation. The jury awarded her damages in the amount of $231,665 and, after an appeal, an additional $139,625 in prejudgment interest. David v. Sirius Computer Solutions, Inc., 779 F.3d 1209 (10th Cir. 2015).

Don’t Make Promises You Can’t Keep

Tempting as it may be, refrain from making guarantees or promises to job candidates that you can’t fulfill. Executives and high-level sales persons typically have a lot at stake when switching companies, which consequently leads to significant damages should they sue.

In addition, be careful when putting any terms, such as pay, bonuses, commissions and benefits, in writing. If the terms can be changed or will be reviewed periodically, be sure to include that in the written document. If the employment relationship is “at-will,” be sure to specify that so there is no misrepresentation about a guaranteed period of employment. In short, when seeking to induce high performers to leave their current positions, talk up the attributes of your organization but be careful about making promises that you may not be able to keep.

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May 6, 2015

Colorado Legislators Fail to Pass New Employment Laws in 2015

By Emily Hobbs-Wright

The 2015 Colorado legislative session is ready to adjourn and few substantive bills related to labor and employment were passed by both chambers this session. Numerous bills on topics such as minimum wage, overtime and discrimination were introduced but with Republicans controlling the Colorado Senate and Democrats controlling the House of Representatives, it’s no surprise that little was enacted. Here's a look at employment-related bills that were considered this session.

Raise Colorado’s Minimum Wage – Concurrent resolutions in both the House and Senate sought to put Colorado’s minimum wage on the November 2016 ballot to allow voters to decide whether to amend the Colorado Constitution to increase the minimum wage to $9.50 an hour on January 1, 2017 with annual increases of $1.00 per hour until 2020, which would see a $12.50 minimum wage. In years thereafter, the minimum wage would be increased annually for inflation (which is the current adjustment provided in Colorado’s Constitution). Both bills failed. (HCR15-1001 and SCR15-003)

Overtime Fairness Act – This bill would have set a minimum salary requirement for administrative, executive, supervisor and professional exemptions at 120 times the state minimum hourly wage rate. At the current $8.23 minimum wage, the salary threshold would be $987.60 per week. This bill failed to pass. (HB15-1331)

Repeal of the Job Protection and Civil Rights Enforcement Act of 2013 – The 2013 law that established compensatory and punitive damage remedies for unfair employment practices under Colorado law was under attack in two bills. The Senate passed a bill that would have repealed all components of the 2013 law except for the expansion of age-based discrimination to individuals age 70 or older. (SB15-069) The House killed that bill. A separate bill introduced in the House sought to eliminate the punitive damage provision of the 2013 law. (HB15-1172) That bill never got out of the House.

Expand and Extend Parental Involvement in K-12 Education Act – The current Colorado law that entitles parents to take time off of work to attend their child’s academic activities is set to expire on September 1, 2015. This bill sought to extend the law indefinitely and to expand the types of academic activities for which parents could take this leave. The bill passed in the House but never got out of the Senate committee to which it was assigned. (HB15-1221)

Limit on Audits Performed by the Department of Labor and Employment – This bill sought to amend Colorado’s employment verification law by limiting audits by the Department of Labor and Employment (CDLE). Under this provision, the CDLE would be permitted to investigate only an employer’s compliance with the employment verification and examination requirements. This bill never got out of the House committee to which it was assigned. (HB15-1176)

Right of Private-Sector Employees to Inspect Their Personnel Files – This proposal would have created a right for employees and former employees to inspect or request copies of their personnel file within 30 days of a written request. This bill failed to pass the House. (HB15-1342)

Independent Contractor Determinations – Two bills sought to change the determination of independent contractor status under Colorado’s unemployment insurance law. The first sought to eliminate the requirement that the individual’s freedom from control and direction of the company must be shown “to the satisfaction of the division.” (SB15-107) This bill never got out of committee. The second bill before the Senate sought to create a bright-line test for whether an individual is an employee or an independent contractor. That bill proposed to establish a numerical standard so that an independent contractor relationship would be recognized if at least six of eleven factors listed in the proposed provision were found to exist. This bill, SB15-269, was introduced rather late in the session and at the time of writing (and with just one week before the session adjourns), was still in committee.

Additional bills were introduced that would have affected some Colorado employers, including a bill to require that youth sports organizations conduct criminal history checks on persons who work with children and a bill that would create an income tax credit for employers who assist employees in repaying their student loans for degrees in certain fields, such as science, technology and math. These bill also failed to make it to the Governor’s desk.

Wrap-Up: A Quiet Session for Colorado Employers

Colorado's legislative session adjourns for the year today, May 6th, and it concludes without Colorado employers having to learn new employment-related laws. Accordingly, on the state level, most of our labor laws are remaining status quo for another year. However, with so many recent changes related to federal employment laws, most Colorado employers will consider the lack of any new state employee protections good news.

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