The Sixth Circuit recently held that, even though eliminating labor costs (and by implication, costs of retirement benefits) was an incidental factor in a plant-closure decision, the decision did not violate the Employee Retirement Income Security Act (ERISA) because the motivating factor in the employer’s decision was production overcapacity. In doing so, the Court declined to fashion a bright-line rule that plant closures are never actionable under ERISA. Instead, the Court held that, where affected employees can show that interference with attainment of ERISA-covered benefits is the motivating factor behind the closure, the decision violates ERISA.

Automotive supplier TRW Automotive decided to close its Van Dyke manufacturing plant in 2005. Before making the decision, TRW considered using the facility for a new project. Ultimately, TRW determined that the work should be done at a subsidiary’s Mancini plant. The Mancini plant employees were not represented by a union and were not participating in a pension plan. The employees at the Van Dyke facility, however, were covered by a collective bargaining agreement and a defined pension plan. Under this pension plan, an employee needed to be credited with 30 years of service to maximize benefits. After the Van Dyke facility was closed, a certified class of former Van Dyke employees sued TRW under Section 510 of ERISA arguing that TRW’s closing of the Van Dyke facility, failure to recall the employees from layoff, and failure to transfer the employees to the Mancini facility unlawfully interfered with their retirement eligibility. The district court granted summary judgment for TRW, dismissing the employees’ claims.

The U.S. Court of Appeals for the Sixth Circuit affirmed. The Sixth Circuit held that a plant closure is actionable under Section 510 only when interfering with employees’ attainment of ERISA benefits is a “motivating factor” in the decision, as opposed to a mere “incidental” factor. Further, it held that there is no requirement under ERISA to transfer or recall employees near their vesting date for ERISA benefits. The Court declined, however, to create a rule that ERISA claims can never arise from plant closure decisions. In contrast, the Court explained that employees asserting such claims must show that the proffered business justification underlying the decision was “incredible or phony,” a difficult showing to make.

In its analysis, the Sixth Circuit found that the employees made a threshold showing that the employer was, at least in part, motivated in its plant closure decision by a desire to reduce labor costs, which necessarily included the cost of retirement benefits. The Court also found that the employer articulated a legitimate, non-discriminatory reason for the plant closure by asserting that the Van Dyke facility was only 10 percent utilized. As a counter to TRW’s evidence, the employees introduced evidence that the Van Dyke facility was poorly run and that cost cuts could have saved the facility from closure. The Court, however, found that this evidence was insufficient as a matter of law to show that the overcapacity justification was a pretext to prevent pension vesting. In so holding, the Court found it critical that although the employees argued that the employer shut down the Van Dyke facility with employees close to obtaining the 30-year service mark, most of the employees needed more than five additional years of service to reach that mark. Only seven were within two years of attaining the mark, and two of the seven later reached the 30-year mark after being recalled on the basis of seniority under the collective bargaining agreement. The Sixth Circuit then suggested that employees must show that the employer “targeted” certain benefits or rights for interference to avoid dismissal.

Further, the Court found nothing in ERISA Section 510, the collective bargaining agreement, or the pension plan terms that would support the employees’ contention that the employer was required to recall many of them back or transfer them to the Mancini facility. Rather, the ultimate inquiry hinged on whether the plant closure and resulting discharges were lawful, which the Court determined they were.

This Sixth Circuit decision provides employers with a timely reminder during difficult economic times. TRW reminds employers considering plant closings or other discharges that where pension costs are involved that it may be fairly easy for discharged employees to establish a presumption of ERISA discrimination. Hence, during the planning stages, it is essential that an employer consider whether it will be able to produce evidence supporting a legitimate, non-discriminatory reason for the discharges.