Claiming 'Gross Misconduct' May Not Protect Employers from COBRA Litigation

Ferne Emery, Vice President Health & Benefits Compliance Officer, Pinnacle Financial Partners

If you are an employer with at least 20 employees and offer health benefits, there is a good chance you know about COBRA continuation and how important it is to handle with care. COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985) requires certain employers sponsoring certain benefit plans to provide individuals with the right to temporarily continue their coverage upon losing coverage. Sounds simple on the surface, but it’s actually very complex and sometimes ambiguous which could lead to costly litigation for employees.

When an employee experiences a loss of coverage due to a qualifying event, for example termination of employment, the former employee and any qualified beneficiaries must receive a COBRA Election Notice. This notice offers an opportunity to continue their benefit plan coverage(s). Employers must send notices timely and be able to prove the notice was sent. Following these steps provides employers with a “COBRA insurance policy” in the event a former employee claims they never received a notice and threatens a lawsuit.

While termination of employment is the most common COBRA qualifying event, an employer does not have to provide an offer of COBRA if the termination was a result of “gross misconduct.” Keep in mind though that just because a former employee’s terminable actions may be considered both “gross” and “misconduct,” claiming “gross misconduct” to avoid offering COBRA may not help you avoid a COBRA lawsuit.

“The cost of litigation is alarming on its own. Add to that a potential for retroactive penalties and excise taxes that are assessed per day plus a requirement to provide COBRA coverage retroactively.”

“Gross Misconduct” exceptions are not defined under COBRA law. They are decided on a case-by-case basis and require a review of facts and circumstances. Oftentimes a trial is needed to decide the applicability of the exception. This is not necessarily what any employer wants to hear.

The judge in the case of McKnight v. School District of Philadelphia, 171 F.Supp.2d 446 (U.S. Dist. Ct., E.D. PA) defined “gross misconduct” as "action that may be intentional, wanton, willful, reckless, or in deliberate indifference to an employer's interest. It is misconduct beyond mere minor breaches of employee standards but conduct that would be considered gross in nature." In this particular case, the employer correctly applied the exception, and an offer of COBRA was not required.

On the contrary, in the case of Johnson v. City of Kewanee, 2023 WL 8091963 (C.D. Ill. 2023), two city employees allegedly stole data and deleted over 55,000 files from the city’s computer system. The former employees sued the city for not offering COBRA after their termination. The ruling found that there was no evidence to dismiss the plaintiff’s claim against the city, requiring further proceedings. There simply was not enough evidence for the city to assert a gross misconduct exception.

The cost of litigation is alarming on its own. Add to that a potential for retroactive penalties and excise taxes that are assessed per day plus a requirement to provide COBRA coverage retroactively. Suddenly, employers may be wishing they had offered COBRA after all.

Murky areas of COBRA law can cause concern and worry for employers, especially when getting it wrong comes with a hefty cost. When an employer is unsure whether an employee’s termination meets the definition in the McKnight case, they should seek legal counsel before claiming an exception for gross misconduct.