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June 2016


Gross Misconduct Can Void COBRA Rights

In a recent court case, Gilson v. Pennsylvania State Police, 2016 WL 1237351 (W.D. Pa., March 30, 2016), a federal district court in Pennsylvania ruled that the plaintiff, William Gilson, was appropriately denied the option of COBRA coverage due to his termination of employment for “gross misconduct.” Although the term “gross misconduct” is not clearly defined in COBRA statute, therefore being rather ambiguous to affirm, courts generally look to state unemployment law in making their determination of whether a termination occurred by actions that escalated to the level of “willful misconduct.” In this case, state trooper Gilson’s actions of sexual misconduct and deception were found to be just cause for the negation of his COBRA rights.

The facts of the case are as follows: As an employee of the Pennsylvania State Police (PSP) Gilson, along with several other officers, were called to an incident in August of 2009 where a female crisis service worker was also present. She alleged that Gilson touched her inappropriately, claiming he placed his arm around her waist and pulled her toward him. There was at least one other officer that corroborated this violation. Disciplinary and arbitration proceedings ensued which found that Gilson lied several times about the facts of his actions. Consequently, it was determined that Gilson had indeed violated the PSP’s regulations prohibiting police officers from engaging in sexual misconduct/harassment and was thereby given a notice of termination in November of 2010. After an arbitrator upheld PSP’s decision, Gilson was terminated on May, 2, 2011 and given no option of COBRA coverage by PSP because of his gross misconduct.

Gilson decided to sue PSP as well as several individuals, claiming his COBRA rights under the Public Health Service were violated. Because the COBRA statute does not contain an actual definition of what “gross misconduct” means, the court chose to take the lead from the standards set by the state in terms of unemployment compensation. So in this case, the court noted that under Pennsylvania law discharges resulting in willful misconduct connected with work disqualifies an individual from receiving unemployment benefits. It was therefore determined that for COBRA purposes, Gilson’s actions would also constitute “willful misconduct” thereby taking away his COBRA rights.
Gilson fought back. Ironically, in this case, he was actually awarded state unemployment compensation, therefore bringing into question whether his actions did comprise the willful misconduct standards. Gilson argued that the unemployment office determined that the August 2009 incident “was not sufficiently related in time” to the notice of termination in November 2010. Because of that, the unemployment office could not say for certain that his termination was caused by the PSP rule violation. However, the court noted that just because the unemployment office may have had a hard time with the timing issue, it did not rule out the fact that Gilson’s inappropriate physical contact and “serious act of deception” was deemed “gross misconduct.” Subsequently, the court ruled in favor of the defendants.

In this author’s opinion, employers should be very cautious when considering a gross misconduct decision. Because of the lack of a clear-cut definition in COBRA statute this a judgment call that should be well thought out and documented to avoid costly litigation. Remember laws vary from state to state. Not all legal verbiage in one jurisdiction can be applied across the board. Taking a good look at relevant cases in your locality may offer helpful guidelines.

Small Employer Part of a Controlled Group

Business owners or plan administrators need to both understand their obligations and abide by them in complying with COBRA regulations. Courts frown upon employers offering erroneous advice and then blaming their qualified beneficiaries for following that same misinformation.

For example, a small business employer may think they are exempt from COBRA; however, if they are part of a controlled group of businesses, they may not be considered a small business by COBRA regulations and therefore must comply with COBRA mandates.

In a recent case an employer was sued for only providing three months, instead of 18 months of COBRA coverage. Since the employer had less than 20 employees, the employer tried to dismiss the claims by arguing that it met COBRA’s small business employer exception. In this case however, the employer was part of a controlled group of businesses with a combined employee count that exceeded the COBRA exception cut-off, so the exception did not apply. The case is Warnecke v. Nitrocision LLC, 2012 WL 5987429 (D. Idaho, Nov. 29, 2012).

Ronald Warnecke was the CEO/founder of Nitrocision LLC, a small company with less than 20 employees. Warnecke also founded two other companies - Trutech, LLC and Nitrocision Hanford LLC. Warnecke and his family were covered under a group health plan jointly sponsored by Nitocision, Trutech and another company, Channel Blend. All three companies were under common control.

In March 2009, Warnecke resigned from his position. After his termination, Nitrocision provided the Warneckes with COBRA coverage for three months and then terminated the coverage. Warnecke and his wife sued Nitrocision, Trutech, and Nitrocision Hanford for various claims including an ERISA Section 503 claim to recover benefits. They sued Nitrocision for violating COBRA law by terminating their COBRA coverage after only three months. They asked for $6,850.80 which accounted for the difference between their costs of comparable coverage (at $738.75 per month) for the rest of the 18 month period of coverage they felt they should have received.

Nitrocision stated that due to COBRA’s small employer exception, the Warneckes’ claim should be dismissed. Although Nitrocision employed fewer than 20 employees, the Warneckes countered that Nitrocision was under common control with both Trutech and Channel Blend which exceeded the 20-employee threshold. The attorney for Nitrocision conceded that Nitrocision, Trutech, and Channel Blend were under common control and the court held that the small employee exception did not apply to Nitrocision.

Based upon the election form that the Warneckes signed, Nitrocision stated that the Warneckes agreed to the three months of coverage. The form stated that coverage would begin on May 1, 2009 and could last until July 31, 2009. A human resources employee testified that Nitrocision’s management believed the company was required to provide only three months of coverage, and at the end of that period, a letter was sent to Warnecke indicating “that the COBRA benefit period was over.”

The complication in the Warneckes’ summary judgment motion was the issue of their premium payments. The court noted that an employer has the right to terminate COBRA coverage when a qualified beneficiary fails to pay a premium payment in a timely manner. It is true - the Warneckes paid for only three months - not 18 months. However, the court noted that they only stopped the premium payments because Nitrocision stated on the election form that they were only obliged to provide three months of coverage to the Warneckes.

The court noted, “Nitrocision may be barred by estoppels from claiming that coverage was properly terminated because the Warneckes failed to make payments after three months.” However, because the Warneckes’ legal claim did not sufficiently mete out this point, the court denied their summary judgment motion.

In this author’s opinion: The employer in this case was fortunate. The fact that they were not required to pay COBRA penalties is remarkable. Usually a court will not side with an employer or plan administrator who claims ignorance. Just because the employer did not understand that they were not exempt from the small business exception and they did not seem to understand COBRA timeframes, is no excuse. Also, the qualified beneficiary was suing for the amount of medical coverage not received and did not state any medical claim hardship which could have been a factor in the court’s decision to deny summary judgment. If the Warneckes had indeed incurred medical costs during this timeframe, the court may have been more likely to apply COBRA penalties.


In this Issue:

Gross Misconduct Can Void COBRA Rights

Small Employer Part of a Controlled Group

See Also:

COBRA Solutions
Cafeteria Plan Manager
Employee Database Manager
COBRA Administration Manager
U.S. Department of Labor
COBRA and the Trade Act of 2002
COBRA and Medicare Entitlement

Technical Information
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