Be Careful Before Denying COBRA to Employee Terminated for Gross Misconduct

The Ninth Circuit Court of Appeals has rendered a decision in Mayes v. WinCo Holdings that reminds employers to be very cautious about denying COBRA coverage based on the gross misconduct exception.

Facts
Defendant grocery store fired the plaintiff, who supervised employees on the night-shift freight crew, for taking a stale cake from the store bakery to share with fellow employees and telling a loss prevention investigator that management had given her permission to do so. The employer deemed these actions theft and dishonesty, and determined that the plaintiff’s behavior rose to the level of gross misconduct under the store’s personnel policies. Therefore, the employer fired the employee and did not offer COBRA coverage to her or her dependents. Plaintiff sued asserting gender discrimination claims under Title VII, a claim under COBRA, and wage claims.

The Law
Under COBRA, an employer does not have to offer COBRA coverage to an employee and their covered dependents if the employee is terminated for “gross misconduct.” Unfortunately, the COBRA statute does not define “gross misconduct,” and court decisions do not provide clear guidance on what that term means.

The Case
The trial court in this case initially ruled in favor of the employer, finding that theft and dishonesty can constitute gross misconduct under COBRA, regardless of the amount involved. The Ninth Circuit reversed, finding that there was sufficient evidence of the employer’s discrimination to allow the discrimination case to go to trial, and reasoning that if the employer fired the plaintiff for discriminatory reasons then that could not constitute termination for gross misconduct. Therefore, if the termination was discriminatory the employee and her dependents would be entitled to COBRA benefits and the employee could prevail on her COBRA claims.

Lessons for Employers
An employer terminating someone for violating company policy (such as theft), may be reluctant to offer them COBRA coverage, particularly where the employer’s plan is self-insured and, therefore, the employer sees the potential for large medical claims. However, denying COBRA coverage based on the gross misconduct exception is risky for a number of reasons.

First, if the employer is ultimately found to have denied COBRA incorrectly it is exposed to penalties for failing to offer coverage, and the employee and their dependents can get COBRA coverage retroactive all the way back to the initial termination of coverage. That scenario could happen in the Mayes case.

Second, if a terminated employee foresees having large medical claims, they will have a bigger incentive to sue to secure coverage. If they do file suit for COBRA coverage, they will invariably include other claims attacking the termination decision. Therefore, denying COBRA coverage increases the likelihood of a costly lawsuit challenging the termination decision.

Third, defending a case that includes a COBRA claim is also more difficult than a straight wrongful termination claim. It is easier for a judge to grant an employer summary judgment on a wrongful termination claim, which only affects the employee plaintiff, than it is to uphold a denial of COBRA, which directly affects the employee and her children, who are innocent bystanders. In most cases, therefore, an employer is better off defending a wrongful termination suit alone, and not also defending a claim that the employer failed to offer COBRA coverage.

For these reasons, in most cases discretion is the better part of valor and employers should not invoke the gross misconduct exception.

Some employers may be concerned that offering COBRA coverage after terminating someone for gross misconduct may undermine their defense of the termination decision (on the theory that offering COBRA means the termination must not have been for gross misconduct). This can be mitigated by including a self-serving cover letter on the COBRA offer indicating that while the reasons for termination most likely amount to gross misconduct, the employer is voluntarily choosing to offer the employee and their dependents COBRA coverage.

Author: Erwin

Erwin Kratz practices exclusively in the areas of ERISA and employee benefits law, focusing on tax and regulatory matters relating to qualified and nonqualified deferred compensation and welfare benefits.