Employer Claims of ‘Small Business Exception’
& ‘Gross Misconduct’ Denied by Court
In a recent COBRA case, the 11th U.S. Circuit Court of Appeals affirmed a
lower court ruling that assessed a $3,300 penalty against a company that tried
to use both the gross misconduct and small employer exception to no avail. In
this unpublished opinion of Virciglio v. Work Train Staffing LLC, 2016 WL
7487725 (11th Cir. December 30, 2016) the employer, Work Train USA and Work
Train Staffing (Work Train), offered employee staffing services that were
outsourced for its clients. Work Train’s revenue came from hiring the personnel
that provide the services and as such were claiming federal tax credits for
hiring those staffing employees.
The facts of the case are as follows: Sam VIrciglio, an employee of Work
Train, was terminated on January 6, 2012 after returning from a leave of
absence. The reason given for the termination was failure to meet a monthly
sales quota. The company owner, Frank Petrusnek, told Virciglio that his health
insurance coverage would remain in effect through the end of January 2012;
therefore, Virciglio obtained alternate coverage that began February 1, 2012.
However, Work Train, decided to cancel his coverage retroactive to the 1st of
January, and failed to reimburse him for the premium that was taken out of his
In the month of January Virciglio’s wife had cancer treatments that cost more
than $50,000. At first, these expenses were paid through his employer-based
policy, however, once the retroactive cancellation came through, Virciglio was
billed for those expenses without ever being notified of his COBRA rights. At
that point, VIrciglio decided to sue his former employer for COBRA notice
violations. In response, Work Train was able to reinstate Virciglio’s full
January coverage and his medical expenses were then covered.
During the ensuing litigation, Work Place first attempted to claim they were
exempt under the small employer exemption. They tried to say that their “full
time” employers numbered less than 20 and that the staffing workers did not
count. However, the court determined that even though the staffing workers were
outsourced at other jobsites, they were still considered to be Work Train
employees. After examining the evidence, the court found that Work Train was
referred to as the “sole employer” of the staffing workers in its client
contracts as well as the fact that the contracts confirmed Work Train was
responsible for all hiring and management of those workers. But most compelling
was the fact that Work Train had claimed federal tax credits for the staffing
workers therefore that excuse not pan out.
Next, they tried the “gross misconduct” exemption, which would negate the
termination as a trigger for a “qualifying event” however, it was clear that
Virciglio was fired for poor sales performance – not a misconduct issue. So in
the end, the court ruled in Virclgio’s favor confirming the $3,300 penalty
against Work Train for the COBRA notice violation.
In this author’s opinion, this case serves to remind employers of two
important standards that have relevance in similar court cases. First, “gross
misconduct” can be a very difficult and risky claim to prove. Performance issues
or incompetence does not qualify. And secondly, to determine if an employer does
not have to extend COBRA coverage, in general, if the employer normally employed
less than 20 employees on a typical business day during the proceeding calendar
year, the exemption may qualify. But keep in mind both full and part-time
employees are counted tin order to determine whether a plan is subject to COBRA
mandates. Furthermore, each part-time employee counts as a fraction on an
employee, with the fraction equal to the number of hours that the part-time
employee worked divided by the hours an employee must work to be considered
COBRA Notice Part of USERRA Case
Military personnel are protected by federal law for continuation coverage
when called up for military duty under the Uniformed Services Employment and
Reemployment Rights Act of 1994. In a recent case the 8th U.S. Circuit Court of
Appeal’s reversed the ruling of a lower court which ruled that sending a COBRA
notice election notice shortly after an employee began military duty was not
evidence that the employee was fired due to his military status in violation of
USERRA. The case is Dorris v. TXD Services, LP, 2014 WL 747476 (8th Cir., Feb
As an employee for TXD Services, Jonathan Dorris received orders in April
2007 that informed him that in six months he would have to report for active
military service. He notified both his supervisor and human resource department.
Dorris continued working until Sept. 11, 2007 and reported for military training
on Oct. 1 where he served on active duty for 12 months beginning January 2008.
Dorris received a COBRA qualifying event notice from TXD in October 2007 that
stated the reason for his qualifying event was ‘Termination of Employment’.
After receiving this notice Dorris called the human resource department and they
told him his was terminated for not showing up to work.
While Dorris was away on active duty TXD sold its assets to Foxxe Energy
Holdings in February 2007. The sale included a list provided to Foxxe of all
current TXD employees. Foxxe stated that they would use reasonable efforts to
retain employment for all the individuals on that list, however Dorris’ name was
When Dorris returned from military service in August 2008, he found out
through friends that all of TXD’s employees had been hired by Foxxe Energy. In
December 2008 Dorris decided to contact both TXD and Foxxe looking to be
rehired. Foxxe hired Dorris in April 2009 to the same position he held at TXD.
Dorris then decided to sue TXD for USERRA reemployment and discrimination
A federal district court ruled in TXD’s favor on the claims, both of which
were based on the COBRA notice and termination reason provided by TXD. The court
stated that although Dorris had sued TXD, it was no longer operating as a
business. The court did not think that the COBRA notice constituted
discrimination under USERRA even though the notice stated ‘Termination of
Employment’ because that reference was derived from the COBRA statue, not from
TXD or USERRA.
Dorris decided to appeal just the discrimination ruling and the COBRA notice
was not addressed again at this level. Dorris stated that TXD violated its
USERRA obligations by not including him on the list of TXD employees provided to
Foxxe. USERRA states that an employee on military leave in entitled to the same
rights as similarly situated employees on furlough or leave of absence.
The court stated that two issues were in contention. The first being whether
the TXD list to Foxxe was a benefit of employment protected by USERRA, and the
second issue was that if being on that list was a benefit of employment and
Dorris’s military service was a ‘motivating factor’ in his not being on that
list, then the burden shifts to TXD to show that the same action would be taken
in the absence of military service, i.e., that anyone similarly on furlough or
leave of absence would have been left off the list. The court reversed the
ruling on the USERA discrimination claim and set the case for further
In this author’s opinion: Ultimately this case did not did not really involve
COBRA but it does show how two laws can interplay. USERRA provides continued
employer-sponsored group health plan coverage to employees who are called to
active military duty. It is possible for employees to have continuation coverage
rights under both USERRA and COBRA.
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