By Emily Brill

Law360 (May 8, 2020, 8:33 PM EDT) -- When the coronavirus pandemic subsides, employers can expect a spike in litigation over employee retirement plan investments, notices to laid-off workers about benefit rights, and companies' handling of retirement and health plans after furloughs or layoffs.

Lawsuits over employee stock ownership plan transactions and benefit claim denials are also expected to tick up as the U.S. makes its way back from record-high unemployment numbers and a pandemic that put much of the nation on lockdown.

Here, Law360 breaks down the types of litigation employers can expect to see more of as a result of the COVID-19 pandemic.

Lawsuits by Laid-Off Workers

About 20.5 million American workers lost their jobs in April, contributing to a national unemployment rate of 14.7% — the highest since the Great Depression. The retail and hospitality industries have been particularly hard hit, according to U.S. Department of Labor data.

When companies put workers out of a job, special benefit considerations come into play, particularly in the event of mass layoffs.

The IRS requires companies that let go of more than 20% of their staff ensure each departing employee is fully vested in the retirement plan, even if the employee hasn't worked there long enough to vest.

And the Employee Retirement Income Security Act requires companies to notify all laid-off workers of their benefit rights. This includes the right to stay on the employer's health insurance plan — guaranteed by the Consolidated Omnibus Budget Reconciliation Act, or COBRA — and the right to continue other types of coverage, like life insurance, which isn't required by law but is often part of benefit contracts.

Employers must ensure they're notifying workers of their benefit continuation rights and handling their retirement plans' vesting procedures properly after layoffs, or else they could find themselves facing litigation and penalties.

"These are fertile grounds for litigation," said Mark Grushkin, co-chair of Littler Mendelson PC's benefits practice.

Lawsuits by Furloughed Workers

Layoffs aren't the only employment status change that can trigger employers' benefit responsibilities. Companies must keep their fiduciary duties in mind during furloughs.

Employers that want to maintain their nonworking employees' health insurance coverage must ensure their insurer knows there's been a furlough. If not, the workers' coverage could lapse.

"Policies often have very particular eligibility rules. An employee must be scheduled to work or else the benefits will lapse," Faegre Drinker Biddle & Reath LLP partner Philip J. Gutwein II said. "Things like that will be an issue for employees who are furloughed."

A lapsed policy could become an issue for the employer, too, if a furloughed worker seeks medical treatment and can't count on their employer-provided health care plan to pay the bill. Employers could end up facing lawsuits by either the worker or the provider, Grushkin said.

To prevent this, employers must do their due diligence after furloughing workers, Grushkin said.

"If you're insured, you'll want to tell the carrier to make sure the furloughed employees are still being covered by the health plan. When you have a self-insured medical plan, it's important that you amend the plan document to extend coverage for the folks who are furloughed, and it's also essential to notify your stop-loss carrier," he said.

Workers also must be told of any part they must play to keep the coverage going, such as paying a portion of the monthly premium, said Todd Wozniak, head of Holland & Knight LLP's ERISA litigation group.

Lawsuits Over Retirement Investments

Benefits attorneys predict that the economic slump caused by the coronavirus shutdown will lead to more lawsuits over retirement plan investments, which typically crop up more often in a downturn. Grushkin said he heard more stories of clients receiving threats of litigation over poor investment performance in 2008 and 2009 than in other years.

"People are looking for someone to blame in the event they've lost money," Grushkin said. "They may be more responsive to plaintiffs' bar's reach-outs about some of these issues."

The investment lawsuits will likely target low-performing funds in 401(k) plan lineups and companies' decisions to include their own stock in their employees' retirement plans, attorneys said.

"For companies that have publicly traded stock in their plans, there are some that are being really impacted by [the pandemic], and I can see that leading to a precipitous drop in price, and some challenges about whether the company stock should have been an investment option in the retirement plan," Wozniak said.

The massive health and medicine corporation Johnson & Johnson and the tech giant IBM's retirement committees are currently facing lawsuits over proprietary stock in retirement plans, while colleges such as Columbia University and the University of Miami are facing lawsuits over allegedly underperforming retirement plan investments.

Lawsuits Over ESOPs

An unstable economy leads to other benefit complications as well. When private companies want to transfer to an employee-owned format by creating an employee stock ownership plan, the initial transaction can become risky in an unsteady economy.

That's because the initial transaction requires company executives to commission a valuation of the business, and valuing a company is tough when market conditions are fluctuating.

"When markets are uncertain and they're bouncing around a lot, you can have valuation issues for these types of plans, so there may be some increased ESOP litigation because the valuations can be a little unpredictable," Wozniak said.

Casino Queen, an Illinois casino, and ISCO Industries Inc., a Kentucky piping company, are currently facing lawsuits over their initial ESOP transactions.

Lawsuits Over Claim Denials

Finally, companies should expect to see more lawsuits over denied claims for benefits as workers fight to get the care they need during a pandemic.

"I see more litigation over health care coverage decisions — either insurers or third-party administrators denying claims for certain kinds of treatment, or mishandling treatment related to the COVID-19 virus," Wozniak said.

These lawsuits are "probably already in play," just like lawsuits over severance benefits are already in play, Faegre Drinker associate Stephanie L. Gutwein said.

The spike in litigation over denied insurance claims may extend beyond medical claims and into disability claims, Wozniak said, because people may need the money more after the pandemic.

--Editing by Breda Lund and Emily Kokoll.

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