A U.S. Appeals Court ruled that outsourced employees of a staffing company 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)

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.



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