City That Cancelled Health Insurance After Firefighter Exhausted FMLA Did Not Violate COBRA

Very few cases have focused on the relationship between COBRA and FMLA.  The case of Neal v. City of Danville, Virginia, 2014 U.S. Dist LEXIS 17126, W. D. Va. (December 11, 2014) provides employers with important insight on this issue.

Barry Neal, a firefighter, was severely injured in a non-work accident on February 1, 2013.  He began using his sick time for the first two weeks.  The City then placed him on FMLA.   Neal did not want to utilize FMLA time but the City so designated the leave.  Neal then continued to draw on sick leave resulting in continuous pay throughout the 12 weeks of FMLA leave.

After the 14 weeks of leave, (two weeks of sick leave and 12 weeks of FMLA), the City advised Neal that his health insurance benefits would be cancelled on May 14, 2013 due to the exhaustion of his FMLA leave.  The City policy specifically stated:  “in all cases, at the point of FMLA leave exhaustion, the employee’s benefits will be subject to COBRA and/or direct billing, as applicable, based upon the benefit.”

Neal was not able to return to work after the expiration of his FMLA leave, but the City did not terminate his employment.  On May 15, 2013, the City cancelled his health insurance under its policy that it “will not pay health insurance benefit coverage for employees that are unable to return to work upon the exhaustion of [the FMLA] benefit period.  The City of Danville does not provide coverage in excess of the requirements of the FMLA.”

Neal was given the opportunity to continue his health insurance benefits through COBRA, which meant that he had to pay all the premiums. He paid about $1,871 in premiums after his FMLA leave was exhausted. On July 17, 2013, he was cleared to return to work and all benefits were restored.

Neal sued in federal court and argued that the City violated COBRA when it cancelled his insurance benefits.  The court first noted that COBRA allows an employee the opportunity to continue health insurance coverage under the same terms of the employer’s health plan after a “qualifying event” that would otherwise end the employee’s health insurance coverage.  Among the qualifying events as defined in 29 U.S.C. 1161 (2014) is termination or reduction of hours.

The City argued that when Neal did not return to work following exhaustion of his FMLA leave, his hours reduced to zero, constituting a reduction in hours.  The court observed that the regulations say a reduction of hours occurs when there is a decrease in the hours that a covered employee is required to work or actually works.  26 C.F.R. 54.4980B-4(A-1)(e).

The court also said that it was crucial in this case that the City had a policy which made clear that if any employee does not return from FMLA leave, “the employee’s benefits will be subject to COBRA and/or direct billing, as applicable, based upon the benefit.”

Neal argued that sick leave is no different than FMLA leave and that if FMLA leave is excluded from constituting a “reduction in hours,” then the same should be true for sick leave.  The court disagreed with this because only FMLA leave is specifically excluded from the COBRA definition of a reduction in hours.  The court said, “Moreover, the FMLA regulations make clear that an employee has no obligation to continue providing health benefits if any employee continues on leave following the exhaustion of FMLA leave.”

This case is extremely important to employers as they try to determine what a reduction of hours means in relation to someone who has a large bank of sick leave that carries well beyond the FMLA leave period.  This employee was never fired and he had a very large bank of accrued sick leave but nonetheless, he had to pay his health insurance premiums after FMLA leave expired.

It should be emphasized that in this case the City had a specific policy stating that once FMLA leave is exhausted, the employee’s benefits will be subject to COBRA.  The City won this case both because it was right about the definition of reduction of hours and because it had instituted a clear policy in regard to COBRA after exhaustion of FMLA leave.