Q3 2024 FINPRO Management Liability: Need to Know

Every quarter, our management liability team shares noteworthy trends and emerging issues to help US-based companies make decisions to manage their risks. We will cover topics related to employment practices/wage & hour liability and fiduciary liability risks and share insights on building an effective, customized insurance program that is fit for an evolving risk landscape.

Our Q3 2024 issue focuses on:

• A recent Supreme Court decision that could reshape labor and employment law by limiting judicial deference to federal agency interpretations.
• The legal challenges to the proposed non-compete ban can create uncertainty for employers, underscoring the importance to carefully monitor evolving state regulations.
• Recent changes to California’s Private Attorney General Act, which introduces amendments aimed at streamlining dispute resolution and potentially reducing litigation costs for employers.
• The need for employers to navigate the complexities of HIPAA’s non-discrimination requirements in view of a number of class action lawsuits challenging health plan surcharges for tobacco and vaccination use.
• The importance for employers to enhance their employee benefits plans’ cybersecurity measures and employ increased diligence in their vendor selection process.
• Recent legal challenges that are prompting companies to reassess their health plan structures and financial implications.

Employment practices liability

Potential implications for labor and employment law after the Supreme Court overturned the Chevron doctrine

On June 28, 2024, the Supreme Court of the United States delivered a landmark decision in Loper Bright Enterprises v. Raimondo, overturning the longstanding Chevron doctrine. The 6-3 ruling alters the deference given to administrative agencies' interpretations of ambiguous statutes, which can have significant implications for labor and employment law.

The Chevron doctrine, established in 1984, required courts to defer to an administrative agency's reasonable interpretation of an ambiguous statute. However, the Loper Bright decision held that courts must exercise independent judgment in determining the meaning of statutory provisions, rather than automatically deferring to agency interpretations. While an agency's interpretation may still carry weight, especially if it aligns with the statute and remains consistent over time, courts now have more discretion to accept or reject agency interpretations.

Potential implications for labor- and employment-related federal agencies

The ruling could have far-reaching implications for federal agencies responsible for interpreting and regulating labor and employment laws, including the Department of Labor (DOL). In general, these agencies will no longer enjoy the same level of deference from the courts, potentially limiting their ability to shape labor and employment law through regulations and interpretations. 

Legal commentators have noted that the end of Chevron deference is unlikely to significantly affect the way federal courts view the regulatory guidance issued by agencies like the Equal Employment Opportunity Commission and the National Labor Relations Board because courts have rarely granted Chevron deference to these agencies in the past.

Challenges to regulations and compliance

Legal experts have observed that the Loper Bright decision makes it easier for employers and other stakeholders to challenge agency regulations. This may lead to increased litigation and a potential patchwork of inconsistent rulings across jurisdictions.

This may be exacerbated since the Loper Bright decision does not affect the rule-making authority of state and local agencies, with only federal agencies being impacted. Employers should be aware that state laws may diverge from federal interpretations, and compliance obligations may vary across jurisdictions. State and local agencies may seize the opportunity to fill the regulatory gap left by the curtailed deference to federal agencies.

Considerations for employers

In light of the Loper Bright decision, employers should closely monitor developments in administrative interpretations of workplace laws. It is essential to review existing practices and policies that rely on agency rules or guidance and consult with legal counsel to assess the need for any adjustments. Employers must stay informed, adapt their practices, and navigate the evolving labor and employment law landscape.

Legal challenges and varied rulings following the FTC’s non-compete ban

Recent developments surrounding the Federal Trade Commission's (FTC) ban on non-compete agreements have created uncertainty for employers. While a federal ban will no longer take effect, the issue of non-compete agreements remains a hot topic.

On April 23, 2024, the FTC approved a final rule that would have essentially banned all non-compete agreements for workers. While existing agreements with senior executives would be excluded, the ban would apply to all non-compete agreements with workers, including senior executives, after the rule’s effective date. The rule was set to go into effect on September 4, 2024.

Rule halted by district court

In Texas, two federal actions were filed challenging the ban on non-compete agreements. One was filed by a tax preparation service, while the other was filed by the Chamber of Commerce and related business associations. Both obtained an initial preliminary injunction and stay of the non-compete rule; the injunctions only applied within the state of Texas. 

A separate challenge was filed in the Middle District of Florida. The judge in this case issued a limited, plaintiff-specific injunction, concluding that while the FTC generally has regulatory power over unfair methods of competition, the specific ban on non-compete agreements went too far.

A third judge in the Eastern District of Pennsylvania denied a similar request for an injunction, creating a split in the district court rulings from different states. This denial suggests a different interpretation of the ban and underscores the complexity of the legal landscape surrounding non-compete agreements.

On August 10, 2024, however, the District Court for the Northern District of Texas granted summary judgment, setting aside the rule, with nationwide effect, ordering that “the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”

The three cases, in three different circuits, heighten the likelihood that the issue is ultimately bound for the Supreme Court. The FTC has not yet indicated whether or when it may appeal. 

Implications for employers

Considering the current uncertainty brought about by differing rulings, employers should focus on a number of issues, including:

• State law: With the federal ban no longer taking effect, the validity and enforceability of non-compete agreements are primarily governed by state law. Employers must familiarize themselves with the specific regulations and requirements in the states where they operate to ensure compliance.
• FTC authority: Although the ban was set aside, the FTC retains the power to investigate and take action against companies using non-compete agreements that it deems constitute unfair competition. Employers should be mindful of the FTC's continued oversight and ensure their non-compete agreements align with antitrust regulations.
• Nationwide movement: Despite the federal ban's setback, the movement to restrict or ban non-compete agreements remains strong across the country. Employers should stay informed about legislative developments in their respective states and be prepared for potential changes in non-compete regulations.

Finally, employers should remain up to date with evolving regulations and discuss them with their legal counsel and broker to determine how they could be impacted by changes and how their existing policies may respond.

California legislature overhauls Private Attorney General Act

In recent years, claims under California’s Private Attorney General Act (PAGA) have become an increasingly significant concern to some employers. PAGA allows employees to pursue civil penalties against employers for violations to the Labor Code that would otherwise be recoverable only by the California Labor and Workforce Development Agency (LWDA).

Over the past two decades, PAGA lawsuits have increased litigation costs for employers, bypassed federal court removal, and circumvented class certification requirements. Recent employee-friendly court decisions further exacerbated the challenges faced by employers. Additionally, PAGA claims cannot be waived in arbitration agreements, ensuring that employees have the right to pursue their claims in court.

Amendments to dispute resolution process

To avert a potential repeal of PAGA on the November 2024 ballot, California Governor Gavin Newsom collaborated with labor and business groups and signed into law Assembly Bill 2288 and Senate Bill 92. These bills aim to address controversial and unpopular features of PAGA and provide a framework for resolving disputes more efficiently, with amendments including:

• Changes to who has standing to sue under PAGA and under what claims
• Caps on employer penalties
• Empowerment to courts to better address manageability concerns when trying a PAGA case
• Penalty reductions for certain violations
• Prohibition of "stacking" penalties
• Expanded cure rights
• New options for early resolution
• Relief for employees paid weekly
• The introduction of injunctive relief
• Increased distribution of penalties to employees

These changes to PAGA will only affect actions where the LWDA Notice and the civil complaint were filed on or after June 19, 2024; other actions are bound by the pre-reform PAGA provisions.

Insurance implications

It is important to note that insurance coverage for PAGA claims may be limited. Most employment practices liability insurance policies exclude or significantly sublimit coverage for wage and hour claims, which are the most common basis for PAGA claims.

Additionally, many EPL policies exclude coverage for penalties, which are the primary form of relief in PAGA claims. It is therefore important for employers to consider standalone wage and hour coverage.

The amendments provide some relief for employers, but their effectiveness will depend on how they are implemented and interpreted by the courts. Compliant policies, training programs, and proactive measures to address violations are crucial to mitigate penalties. While the amendments may make PAGA litigation less lucrative for plaintiffs' lawyers, their impact will only become clearer over time.

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Fiduciary liability

Health plan tobacco and vaccination surcharges face scrutiny

A series of class action lawsuits have been filed against organizations that sponsor self-funded health plans with premium surcharges related to an employee’s tobacco use or vaccination status. The plaintiffs argue that these surcharges violate the non-discrimination requirement of the Health Insurance Portability and Accountability Act, even though HIPAA includes an exception for outcome-based wellness programs.

HIPAA’s non-discrimination requirement prohibits group health plans from charging higher premiums based on factors related to an employee’s health status. However, employers can offer incentives through wellness programs. The Department of Labor has brought cases related to health plan premium surcharges and is currently litigating a case regarding a tobacco surcharge.

The plaintiffs in the class action lawsuits — current and former employees who paid the surcharges — are arguing that the plans do not offer reasonable alternative standards and the existence of alternatives was not communicated in all plan materials. The lawsuits also claim that the collection of surcharges is a breach of fiduciary duty. The plaintiffs are requesting declaratory and injunctive relief, reimbursement of surcharges, disgorgement of profits, and payment of a portion of attorneys’ fees. While no court has ruled on the allegations yet, some cases have already settled.

It is good to note that we continue to see fiduciary policies respond to claims unrelated to retirement plans. These types of novel lawsuits may lead to hesitancy from insurance carriers to lower premium rates. Plan sponsors should be aware of the risk of litigation for wellness plans and be prepared to answer questions from fiduciary insurance underwriters related to decisions regarding these plans.

Enhanced focus on employee benefits plans’ cybersecurity measures

As cyberattacks grow more sophisticated, there is increased scrutiny of actions employers take to protect information of employees and other participants in company offered plans.

Recent cases have shown that breaches can lead to significant legal repercussions under the Employee Retirement Income Security Act (ERISA), particularly regarding fiduciary duties to safeguard personal and financial data. Plaintiffs have argued that having inadequate cybersecurity measures in place constitutes a breach of fiduciary responsibilities under ERISA. This has led to a reassessment of what qualifies as reasonable security practices.

Two cyber-related considerations recently emerged. The US Department of Labor (DOL) has clarified that its 2021 cybersecurity guidance applies to all employee benefit plans, including health and welfare plans. The DOL’s guidance emphasizes the importance of selecting and monitoring service providers with strong cybersecurity practices, conducting periodic reviews of cybersecurity programs, reviewing agreements with service providers, and educating participants and beneficiaries about online security. The updated guidance includes additional recommendations on insurance coverage for cybersecurity breaches, multifactor authentication, and password security.

Secondly, in a recently settled lawsuit against a large consumer products company, an employee claimed that the plan sponsor and plan recordkeeper breached their fiduciary duties when a significant amount of money was stolen from a former employee’s account. The plaintiff claimed that a fraudster changed her contact and bank account information and requested a cash distribution; she accused the defendants of ignoring red flags, failing to follow procedures, and lacking reasonable fraud prevention measures.

Since the funds were not stolen by the sponsor, crime insurance is unlikely to respond. However, the plan sponsor’s vendor selection process is under scrutiny, leading to a potential fiduciary insurance claim.

The lack of a court judgment in the case means there is still no precedent for how similar cases could play out. Plan sponsors will need to continue to assess the interplay of their crime, cyber, and fiduciary policies.

We expect fiduciary insurance underwriters to ask more questions about cyber controls. While they may not be as interested in the sponsor’s own security measures, they will likely want more information about the process sponsors use to vet the security of vendors that are entrusted with participant data and funds.

Health plan costs and fees being carefully examined

Employees are increasingly scrutinizing their employers’ health plans, demanding clarity on how costs are determined and whether they are fair and reasonable. And recent legal developments regarding health plan costs have led to lawsuits challenging the way companies manage their health plans, with special focus on transparency in costs and the fees associated with health services.

In one significant ERISA case, the US Court of Appeals for the Third Circuit recently upheld the dismissal of claims against a large insurer. The plaintiffs had accused their former employer of breaching its fiduciary duty and engaging in prohibited transactions by redirecting drug rebates for its own benefit instead of using them to lower participant contributions or provide direct benefits. The court ruled that the plaintiffs lacked standing because they did not demonstrate actual harm. However, the court rejected the sponsor’s argument that beneficiaries of ERISA-regulated defined-benefit plans only suffer injury if they do not receive promised benefits. The court left the possibility for the plaintiffs to amend their claims. 

As these legal challenges gain traction, companies are being pushed to reevaluate their health plan structures and the associated financial implications for employees. While the case in question could be considered a favorable outcome for the defendants, fiduciary insurers continue to express significant concerns about the potential defense costs of similar cases.

Insurers have not yet developed a specific set of underwriting questions to help them assess insureds’ evaluation processes since it remains uncertain where individual courts will focus. In the meantime, insureds should be prepared to discuss their evaluation process for healthcare vendors and costs. They should also demonstrate that a committee meets regularly to evaluate health and welfare plans in the same manner it evaluates retirement plans.


Marsh is not licensed to engage in the practice of law or provide legal advice to its clients. Information in our newsletter should not be considered or relied upon as legal advice.

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