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What were the practices that appeared improper if not unlawful? To the employee, it appeared that there were overcharges and duplicative billing and that an effort had been made by the State Office to code the billings in a way that would mask the improprieties. For example, there appeared to be three voucher payments for the placement of one individual; the amount of the voucher payments were higher that what the State Office would usually pay; and the voucher payments were coded as requests for reimbursement for training when the recipient organization was not a training facility but rather an employment agency. The employee reported the findings to their supervisor but corrective action was taken.

Oh no, what did I discover? The Hornets’ Nest. The employee was fearful of being personally implicated in a cover-up of the apparent improprieties due the conviction of past employees in kick-back type schemes and was concerned that their supervisor might be involved in the wrongdoing because of the supervisor’s relationship with the private facilities involved. In fact, the employee commented to us that they knew they had “walked into a hornets’ nest and that [they] were going to get stung.”

Doing the right thing. After weighing the advice of employment counsel on various available options, and despite the employee’s fear of being in trouble for reporting a problem of monies that involved the bosses’ friends within a politically powerful rehabilitation facility, the employee decided that they “wanted to do the right thing” and take action by reporting the wrongdoing to the Federal Bureau of Investigation (FBI). The FBI, in connection with the U.S. Attorney’s office, opened an investigation and advised the employee to inform their supervisor of the disclosure made to the FBI.

Wrongful retaliation against an employee that exercised integrity. Within six months of the employee informing their supervisor of the reporting to the FBI, the employee was stripped of their duties and the State Office extended the probationary period of the position that the employee had recently been promoted to. In addition, the employee was issued a probationary evaluation report that the characterized the employee’s performance as “average” or “satisfactory” despite many prior years of performance reports that characterized the employee as “exception,” “consistently exceed[ing] the requirements for all…tasks,” and making “exceptional contributions.”

The FBI and the U.S. Attorney’s office ultimately concluded their investigation and issued a written letter determining that there was no prosecutable case. Nine days following this determination, and after the employee devoted their entire professional career of 20-odd years to improving employment opportunities for handicapped persons, the State Office terminated the employee from their current position and demoted them. The termination notice stated that the employee did not satisfactorily complete the probationary period (which was not scheduled to end for several months) and the employee would be returned to their prior position with a decreased salary.

As a result, the employee suffered trauma caused by the events leading to the demotion and after the demotion the employee suffered years of pain and sleepless nights. The employee was essentially ostracized by former colleagues and the employee felt that their reputation had been destroyed.

We took action on behalf of this employee. We sued the State Office on behalf of the employee alleging that a violation of civil right for retaliation against the employee for exercising First Amendment rights in reporting suspicious of unlawful activity practices to the FBI. The complaint alleged the retaliation took the form of giving the employee a false and damaging performance review, systematically stripping the employee of their responsibilities, and finally demoting the employee from their employment position.

At trial, we were able to establish these allegations through evidence and pierce through the general principal that state officials cannot be sued on the exception that the actions of the State Office violate clearly established statutory or constitutional rights. Part of our evidence included the FBI agent’s testimony that the FBI’s determination did not mean that no wrongdoing occurred just that the prosecutor’s assessment was that they did not believe a successful prosecution could be obtained.

The jury found in our favor on all measures and awarded the employee with a substantial amount of damages including back pay, emotional distress, punitive damages and attorneys’ fees.

For more information on whistleblower laws or to contact an employment attorney, you may visit the Employee’s Briefcase.

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In Precious Plate, Inc. v. Russell, the court ordered a Vice President of Human Resources to execute the necessary documents to transfer a life insurance policy to the executive’s former employer based on the failure of the executive to make a timely election upon retirement. This deprived the executive of the opportunity to pay the employer an amount equal to the employer’s interest in the life insurance policy and thereby secure future payment of the death benefit due under the policy. The lesson of this case is that credit union executives need to understand the legal implications of technical timing requirements contained in deferred compensation plans including, but not limited to, split-dollar life insurance arrangements.

A hypothetical credit union example based on the facts of Precious Plate, Inc: depending on the cause of death, it may be less painful. Let’s say a credit union executive—named John Russell (“Russell”)—enters into a deferred compensation plan with Precious Plate Credit Union (“Precious”) in 1985. This plan is not offered to any other of Precious’s employees. Russell is issued a life insurance policy and, at the same time, executes an “Assignment of Life Insurance Policy as Collateral” and a split-dollar agreement, by which Russell assigns the policy to Precious as collateral for amounts advanced by Precious under the agreement. Upon Russell’s death, Precious agrees to take whatever action is necessary and required to collect the proceeds of the policy and to pay $150,000 to the designated beneficiary.

In 1989, the parties enter into a second, identical deferred compensation plan consisting of whole life insurance and an assignment of the policy as collateral for an advancement under a second split-dollar agreement. Russell reserves the right to designate and change the beneficiary under both agreements.

Did the parties anticipate what happens when their employment relationship ends? Both the 1985 and 1989 split-dollar agreements contained identical provisions specifying the parties’ rights upon termination of Russell’s employment with Precious. Each provided that Russell would have, for the 30 days immediately following the date of termination, the right to obtain a release of the assignment of the policy by paying Precious an amount equal to Precious’s interest in the policy. Upon such payment, Precious would release its interest in the policy to Russell.

In addition, the agreements provided that, if Russell failed to make the required payment within 30 days of termination of his employment, Russell agreed to transfer all of his rights, title and interest in the policy to Precious, which could thereafter deal with the policy in any way it may see fit.

Russell retires and fails to take any action. Russell retires, with his employment ending on December 31, 2005. Russell does not make the required payment to Precious within 30 days but nonetheless refuses to execute the necessary documents to transfer his rights and interest in the policies to Precious. Precious never explained the 30-day provision to Russell and never advised him that it would rely on the provision despite Russell’s repeated inquiries regarding his rights and obligations under the agreements. Further, Russell maintains that he had, at all times, been willing and able to make the required election under the agreement and fully reimburse Precious for premiums paid.

Precious sues Russell in court. Precious brings suit against Russell in New York State Supreme Court, which was later removed to the U.S. District Court for the Western District of New York. Precious set forth five causes of action in its amended complaint, whereby it seeks declaratory relief and specific performance pursuant to both ERISA and state law, and damages for breach of contract. Russell files a counterclaim for breach of contract and ERISA violations, including breach of fiduciary duty and failure to distribute a summary plan description (“SPD”) and other required plan documents.

Is this split-dollar life insurance arrangement subject to ERISA? The court first held that the plans were unfunded “top-hat” plans, and thus were not subject to ERISA’s fiduciary requirements. The court noted that ERISA § 201(2) defines a “top-hat” plan as “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.”

First, Russell conceded that the plan was maintained exclusively for him, a highly compensated management employee. Next, the court was able to conclude that the plan was unfunded pursuant to New York court cases, which provide that a plan is unfunded when benefits thereunder are paid solely from the general assets of the employer. The court noted that Precious had the sole right to collect the policy proceeds at death or maturity or to surrender the policy for its cash value and, once Precious collected the policy proceeds, those funds would become part of the general assets of the corporation. As a result, Russell’s beneficiary’s claim to Russell’s share of the policies was a claim against the corporation, not the insurance company, leaving Russell with rights no greater than any unsecured creditor of Precious. Therefore, because the plans were top-hat plans under ERISA, ERISA’s fiduciary provisions did not apply, and Russell’s breach of fiduciary duty claims were consequently dismissed.

Even still, I should have still gotten an SPD, no? Next, the court denied Russell’s motion for summary judgment on the claims brought under ERISA for Precious’s failure to provide an SPD and other plan documents. The court noted that, even though the plan was a top-hat plan, it nonetheless remained subject to ERISA’s disclosure requirements, which includes a mandate that the plan administrator furnish an SPD to plan participants and beneficiaries. Although Precious conceded that it had not prepared an SPD or provided one to Russell, the court cited to New York court cases finding that an ERISA claim premised on the complete absence of an SPD also requires a showing of likely prejudice. The court determined that Russell did not show the requisite prejudice because he was in possession of the relevant documents, he was Precious’s corporate officer responsible for labor matters and employee benefits, and he did not show that he requested documents that were not provided. As a result, Russell’s remaining ERISA counterclaims were dismissed.

Sorry Russell, you’re out of luck. Finally, the court granted Precious’s motion for summary judgment on its ERISA causes of action. The court stated that ERISA plans are construed according to federal law, and are therefore interpreted as a whole, giving terms their plain meanings. Considering that Russell was required under the plain language of the agreements to make an election within 30 days of termination of his employment and he failed to do so, he was therefore obligated to transfer all of his rights, title and interest in the policies to Precious. Correspondingly, the court ordered that Russell execute the necessary documents to facilitate the transfer as per the agreement.

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