Avoid the Litigation Headache

Outsourcing decisions cannot be motivated by a desire to reduce pension costs.

by Thomas C. Greble

A recent federal court of appeals decision highlights an important issue that must be taken into account when contemplating an outsourcing transactionRegister et al. v. Honeywell Federal Manfacturing & Technologies, 2005 U.S. App. Lexis 2734 (8th Cir. Feb. 17, 2005). In Register, the court analyzed a claim by former employees of Honeywell who had accepted employment by an engineering company to which Honeywell had outsourced engineering departments. The employees argued that this transaction violated their rights under ERISA, the federal statute that governs pension and retirement plans. More specifically, several former Honeywell employees who had been participants in Honeywells defined benefit plan claimed that Honeywell had outsourced their departments in order to reduce Honeywells pension costs. They relied upon Section 510 of ERISA, 29 U.S.C. 1140, which makes it unlawful for an employer to discharge a participant in an employee benefit plan for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.

Following the Supreme Courts decision in Intermodal Rail Employees Assn v. Atchison, Topeka and Sante Fe Ry, 520 U.S. 510 (1997), the court in Register explained that for the claimants to prevail under 510 [they] must show that Honeywell had a specific intent to interfere with their pension benefits, [and that such intent] may be shown by circumstantial evidence.

Honeywell argued that its outsourcing decision was never intended to interfere with the employees pension rights. Honeywell proffered two legitimate reasons for outsourcing the affected departments: 1) It was dissatisfied with the departments performance and management and had been unable to retain a qualified executive team; 2) The work of the departments was not within Honeywells core competence, and performance and management of these departments needed to be upgraded in order to more effectively compete for a contract with Department of Energy.

The district court rejected Honeywells first argument as a mere pretext to conceal an improper intent, but accepted the second reason as legitimate. The Court of Appeals carefully reviewed the business factors that led to Honeywells outsourcing decision and concluded that the plaintiffs had not succeeded in undermining Honeywells evidence of its legitimate business reasons for the outsourcing or demonstrate that these were not its real concerns.

Like other Section 510 cases, the court in Register relied heavily on Honeywells own materials as evidence of the rationale for its outsourcing decision. Honeywell had good documentation from both an outside consultant and the provider themselvesoften the outsourcers own records (especially e-mails!) provide the best evidence of its reason for outsourcing.

Moreover, Honeywell showed that the benefits package offered by the outsourcing company was comparable in value to the overall value of the benefits package the plaintiffs had received from Honeywell prior to the outsourcing (even though the new pension plan was a defined contribution plan rather than a defined benefits plan they had with Honeywell). The court did not view this comparability of benefits as dispositive of Honeywells intent, but judged this to be one factor that tended to show how Honeywells proffered legitimate business reasons for outsourcing were credible.

To maximize your chances of avoiding Section 510 claims and to minimize your prospect of losing such cases that cannot be forestalled, it is vital that the legitimate business purposes of the outsourcing transaction be carefully and consistently documented. An exchange of documents between the client company and the vendor is usually helpful as are other external communications (e.g., to lenders, insurance carriers, etc.) Communications to employees must be carefully vetted to ensure that the employees do not infer erroneously that the company is outsourcing in order to save pension costs.

Employee complaints or assertions that the company is outsourcing to avoid pension or retirement plan costs should be immediately rebutted, preferably in writing. As Register illustrates, prevailing in Section 510 cases requires a thorough and documented record confirming the legitimate business reasons for the transaction. The evidence of the intent behind the outsourcing decision must be sufficient to overcome the predictable employee allegation that the companys motive was to save money by interfering with the attainment of any right to which such participant may become entitled under the [pension or retirement] plan. Since development of the written rationale for the outsourcing is within the parties control, there is no justification for failure to document.

Mr. Greble gratefully acknowledges the assistance of John Gliedman of Brown Raysman in the preparation of this article.