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HR and Tax Newsletter-December 2003

A New Hampshire federal court has refused to dismiss invasion-of-privacy and other claims brought by the widows of rank-and-file Wal-Mart employees who discovered the company used confidential medical information to get life insurance for their spouses. The deceased employees did not consent to the use of the information. Besides an invasion of privacy claim the widows also stated a claim for breach-of-fiduciary duty. The court concluded that Wal-Mart was required to respect the trust the employees had placed in the company when they provided confidential medical information and that Wal-Mart abused its fiduciary relationship with the employees by using that personal information to obtain life insurance.

Heightened Scrutiny Given to Both Fact Determinations and Plan Interpretations.

A heightened arbitrary and capricious standard of review applies both to determinations of fact and to plan interpretations by a fiduciary of a plan covered by ERISA. In the case in issue it was clear that heightened arbitrary and capricious review applies because the employer had a conflict of interest (the employer made decisions and paid claims). The court reached its decision on the basis of earlier decisions and because the court believed that the need to protect against self-interest was as important for determinations of fact as plan interpretations.

HR Practice Pointers:

The definition of employee under the Fair Labor Standards Act is broader than under the common law; an individual may be an employee under the Fair Labor Standards Act even if they are not an employee under the common law. Focusing on the amount of control and supervision exercised by a company over an individual the courts have often classfied workers as subject to the Fair Labor Standards Act despite agreements designating the employees as independent contractors.

A misclassification of an individual as an independent contractor may have broader implications than a violation of the Fair Labor Standards Act. For example, a failure to treat an individual as an employee for Fair Labor Standards Act purposes may be accompanied by a failure to include that individual in a company's employee benefit plan, which creates liability under ERISA.

The Fair Labor Standards Act applies not only to certain size enterprises (generally those with sales of at least $500,000) but also to individual employees who are engaged in interstate commerce, produce goods for commerce, or work in activities closely related and directly essential to the production of goods for commerce. This includes employees who work in communications or transportation, regularly use the mail or telephones for interstate communications, handle, ship or receive goods moving in interstate commerce, or regularly cross state lines in the course of their employment; an individual employee may be covered based on his/her job duties even though the employer is not covered as an entity.