This article is Part I1 of a two-part series providing an overview of recent United States Supreme Court decisions in employment law. Part I of this article was featured on July 25, 2014.

The following opinions round out the Court’s labor and employment law opinions issued during the October 2013 Term. Although Supreme Court decisions typically affect broad groups of employers, the reach of these cases is relatively narrow. In each case, the Court addressed issues that are peculiar only to specific employers.

Burwell v. Hobby Lobby (June 30, 2014)

Contrary to suggestions in the media, the Hobby Lobby decision does not address constitutional rights. The case was decided pursuant to the federal Religious Freedom Restoration Act (RFRA). RFRA increases scrutiny of federal laws of general applicability that substantially burden the free exercise of religion. Congress enacted RFRA to overturn a Supreme Court case in which two Native Americans were discharged and denied unemployment benefits for using peyote in religious ceremonies.

Hobby Lobby invoked the RFRA in response to an Affordable Care Act (ACA) regulation. The regulation, called the “contraceptive mandate,” requires medical insurance to cover contraceptives. The family who owns Hobby Lobby objected to the contraceptive mandate on the ground that paying insurance premiums towards coverage of certain contraceptives would violate their religious beliefs.

The first issue for the Court was whether Hobby Lobby was entitled to seek relief under RFRA. The Act applies to “person[s],” and Hobby Lobby is a for-profit corporation. However, Hobby Lobby is a “close corporation,” meaning it has a small number of shareholders and is not publicly traded. The Court held that close corporations can operate subject to shareholders’ religious beliefs, and therefore can be a “person” with religious beliefs under RFRA. The Court distinguished publicly traded corporations on the ground that their shareholders are heterogeneous and cannot be limited by religious beliefs.

The Court then determined that the contraceptive mandate substantially burdened Hobby Lobby’s free exercise of religion. Although the ACA gives two options for avoiding covering contraceptives, they involve either paying a daily fine per employee, or dropping healthcare altogether and paying a tax of $2,000 per employee per year.

Finally, RFRA’s framework required the Court to consider whether a less restrictive alternative to the contraceptive mandate might exist that could still achieve the government’s interest in providing contraceptive coverage. The Court concluded that the ACA already contained an alternative applicable to religious non-profits. Therefore, there was a less restrictive alternative. The Court also noted the government itself could provide the contraceptives at issue. Because at least one option less burdensome on Hobby Lobby’s religious beliefs was available, the Court found the contraceptive mandate to be a violation of RFRA.

The dissent expressed concern that the decision would unfairly burden third-party employees who may not share their employer’s religious beliefs. They also argued that the Court’s decision was too broad and would lead to numerous exemption requests that could affect millions of employees. The majority countered that the decision was very narrow: it only addresses closely held corporations that operate under united religious beliefs. It is also limited by the “less restrictive means” analysis — meaning that there still must be a showing that an alternative option exists.

The Hobby Lobby decision likely will not affect most employers’ obligations under the ACA. It is speculative to predict the extent of the case’s reach. Congress may address the decision through new legislation or revise the regulation. More litigants are certain to test the boundaries of the decision, and we will have to wait and see how other courts interpret its scope.

Fifth Third Bancorp v. Dudenhoeffer (June 25, 2014)

Fifth Third, a bank, offered a retirement package that included an option to invest in the company’s Employee Stock Ownership Plan (ESOP). ESOPs are ERISA-covered defined contribution plans that provide employees with shares of the employer-company. The shares are held in trust by the company until retirement or the employee leaves the company.

Employees sued Fifth Third and some of its officers after its stock declined 74% in the 2007 recession. The employees alleged that the company’s ESOP administrators breached their duty of prudence under ERISA by holding stock as normal and failing to mitigate losses.

As fiduciaries, the plan administrators owed the participants a duty to be prudent in making investments. Fifth Third argued that ESOP administrators should be entitled to a “presumption” of prudence given their limited role in managing investments; that is, ESOP administrators are not required to diversify holdings as is the case with traditional retirement plans. Their only role is to buy and hold company stock.

But, contrary to the lower court, the Supreme Court held that ESOP administrators are held to the same duty of prudence any other plan administrator, and are not entitled to any presumption in their favor. This decision could expose more plan administrators of ESOP plans to litigation if the company’s stock price decreases significantly.

Harris v. Quinn (June 30, 2014)

In-home caregivers who are paid pursuant to Medicare are a peculiar hybrid of public and private sector employee. The laws creating these positions provide that the Medicare client is the “employer,” yet the caregiver’s compensation is federally funded and paid through the state.

In Illinois, unions are authorized to collectively bargain on behalf of such caregivers. Those employees who do not wish to join the union are still required to pay a reduced fee to support collective bargaining efforts, called the “fair share.” Those employees who opt out do not have to pay the union the full amount of union dues, which support activities such as lobbying and other activities unrelated to bargaining.

Several Illinois caregivers sued the state, claiming that the fair share requirement violated their First Amendment rights to free speech. Although fair share payments have been upheld for public employees, the Court found that the caregivers were not “full fledged” public employees. The Court therefore held that the First Amendment prohibited compulsory fair share payments, stating that “no person in this country may be compelled to subsidize speech by a third party that he or she does not wish to support.”

This decision does not modify fair share rules for unambiguously public employees. It’s also not clear yet whether states will modify the laws that created these hybrid employees to address the Supreme Court’s concerns.

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