An employer could not qualify for COBRA´s small employer exception, a federal district court in Puerto Rico ruled, based on arguments that relatives who worked for the employer were not employees. Also unavailing were arguments that part-time employees should not be counted in determining the number of employees employed by the employer and the only employees counted are those covered by the group health plan. The case is Cruz-Jiminez v. MueblerÂas Delgado, Inc., 2002 WL 638530 (D. Puerto Rico, March 23, 2002).
Facts of the Case
Teofilo Cruz-Jiminez, an employee of MueblerÂas Delgado, Inc., had family coverage under the company´s group health plan. After he was terminated from employment March 29, 1999, Cruz-Jiminez allegedly did not receive a COBRA election notice. (Under COBRA, an employer has 30 days to notify the plan administrator of a qualifying event. The administrator then has up to 14 days to provide the qualified beneficiary with a COBRA election notice. See 1311 and 1313 of the Guide.)
He and his family then sued MueblerÂas Delgado, noting that, as an employer that employed 20 or more employees on a typical day during the preceding calendar year, the company was obligated to provide COBRA coverage.
In a formal response to his allegation, MueblerÂas Delgado agreed that it employed 20 or more employees during the calendar year preceding Cruz-Jiminez´s termination. (COBRA provides that employers are only exempt from COBRA´s requirements if they "normally employed fewer than 20 employers on a typical business day during the preceding calendar year." See 1021.) However, the company still argued that the claim should be dismissed because it was not a covered employer under COBRA. Furthermore, MueblerÂas Delgado contended that Cruz-Jiminez was terminated due to gross misconduct; therefore, he was not entitled to COBRA coverage. (COBRA provides that a termination of employment for gross misconduct is not a qualifying event. Therefore, an employer does not have to offer COBRA coverage to the ex-employee. See 1122.)
Small Employer Exception
MueblerÂas Delgado had conceded that it employed more than 20 employees in its formal answer to Cruz-Jiminez´s claim. Nevertheless, in this proceeding, MueblerÂas Delgado argued that, although it employed 27 full-time employees and one part-time employee in its two furniture stores, it still was eligible for COBRA´s small employer exception. In the company´s view, nine persons - seven relatives (five children and two nephews) and two owners - should not have been counted for purposes of the exemption. Those individuals should have been treated as owners having special access to the decision-makers (that is, the two principal owners), according to the company.
In addition, MueblerÂas Delgado contended that its part-time employee, who only worked two hours a day, could not be considered an employee under COBRA. MueblerÂas Delgado also argued that it also met the exception because fewer than 20 employees were covered under its health plan.
Cruz-Jiminez countered that:
(1) Just because some MueblerÂas Delgado employees were the owners´ sons, daughters or nephews does not mean that they should not have been considered employees;
(2) The company provided no evidence to support its position;
(3) COBRA does not require that at least 20 employees be covered under the group health plan, rather, the mandate is that the employer employs at least 20 persons; and
(4) MueblerÂas Delgado admitted earlier that it employed 20 or more employees.
In analyzing case law, the court looked to MartÂnez v. Dodge Printing Centers, Inc., (see 1900) which noted that "little guidance" existed from Congress, the administrative agencies or the courts on precisely how employers qualify for the small employer exception." Accordingly, the MartÂnez court looked to the IRS proposed regulations of June 1987, which provided that:
- [a]n employer is considered as having normally employed fewer than 20 employees during a particular calendar year if, and only if, it had fewer than 20 employees on at least 50 percent of its working days that year.
The Cruz-Jiminez court noted that the IRS did issue final regulations in February 1999 that apply to qualifying events occurring in plan years beginning on or after Jan. 1, 2000. However, because Cruz-Jiminez was terminated on March 29, 1999, the court determined that those final rules did not apply to his case. Accordingly, it also looked to the 1987 proposed rules, as well as other case law.
First, the court rejected MueblerÂas Delgado´s argument regarding its part-time employee, nothing that it conflicted with case law in the district of Puerto Rico. In Morales-Cotte v. Cooperativa de Ahorro y Crédito Yabucoeña, the court relied upon the 1987 proposed regulations in holding that part-time employees are treated as full-time employees for the purposes of determining eligibility for the small employer exemption. The Cruz-Jiminez court found it "noteworthy" that the Morales-Cotte court found that part-time employees who just worked eight hours per week were employees under COBRA. (Note that under the IRS´s final regulations, each part-time employee is counted as a fraction of an employee.)
Relatives Are Counted as Employees
Next, the court analyzed the status of the relatives at the company. The court noted that MueblerÂas Delgado´s did not contend that the relatives were owners. Instead, it argued that they be "treated" as owners. Apparently, the company´s position was based on Puerto Rico law, which defines an employee as:
- any individual whose work has ceased as a consequence of or in connection with any labor dispute, or because of any unfair labor practice, but shall not include any person ... employed by his parents or spouse . . . [and] any person at the service of any individual, partnership or corporation employing one or more persons under any contract for services, whether express or implied or verbal or written, and whether such person is man, woman or child. [Emphasis added]
However, the court indicated that the legal action was not based on Puerto Rico law, but ERISA, which defines an employee as "any individual employed by an employer." Furthermore, the U.S. Supreme Court has adopted the common-law agency test for determining whether an individual is an employee for ERISA purposes. (See Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318, 323 (1992).) That test considers the hiring party´s right to control the manner and means by which the product is accomplished, as well as other factors, including, the duration of the relationship between the parties; whether the hiring party is in business and the provision of employee benefits.
The Darden factors do not indicate that a parental or familial relationship is considered in determining whether an individual is an employee under ERISA, according to the Cruz-Jiminez court. Accordingly, the court rejected the company´s argument. It also pointed out that MueblerÂas Delgado admitted that it has employed 20 or more employees on a typical day during the preceding calendar year of Cruz-Jiminez´ termination.
Number of Employers in Plan
Finally, the court analyzed MueblerÂas Delgado´s contention that it was exempt from COBRA because fewer than 20 employees were covered under its group health plan. The court first reiterated the small-employer exception for group health plans maintained by employers that employ fewer than 20 employees on a typical business day in the prior calendar year. It then noted that COBRA defines a group health plan as:
An employee welfare benefit plan providing medical care (as defined in section 213(d) of Title 26) to participants or beneficiaries directly or through insurance, reimbursement, or otherwise. In turn, ERISA defines an "employee welfare benefit plan" as: Any plan, fund, or program ... established or maintained by an employer ... to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment.
This language does not address any requirements regarding the number of employees covered under a group health plan, according to the court. Although the court found MueblerÂas Delgado´s theory "quite interesting" and conducted an "exhaustive" case law search, it found nothing to support the company´s position and therefore rejected it. Accordingly, the court held that MueblerÂas Delgado was not eligible for the small employer exception.
Finally, the court noted that other questions existing regarding whether or not Cruz-Jiminez was eligible for COBRA coverage. Presumably, these questions relate to applying the gross misconduct exception to the case facts. Therefore, it declined to dismiss his COBRA claims.
Implications
Although the Cruz-Jiminez case is fairly straightforward, it serves as a reminder that COBRA´s small-employer exception only looks at the number of persons employed by the employer. Whether these employees are covered by the group health plan is irrelevant. Therefore, if an employer employs 20 or more employees on a typical business day in the prior calendar year, its group health plan is subject to COBRA even if fewer than 20 employees are covered by the group health plan.