A Non-ERISA Short-Term Disability Plan Gives Employer Reasonable Discretion to Determine Benefits Eligibility

Leone v. Tyco Electronics Corp., No. 5:08-CV-290-F (E.D.N.C. June 26, 2009) – A federal court in North Carolina recently held that an employer that provided non-ERISA short-term disability (STD) benefits for employees under a written policy had the discretion to determine whether an employee met the definition of “disabled” so long as it exercised the discretion in a reasonable manner and in good faith.

The employer had a written policy that provided benefits to employees in the event of a non-work related disability. The STD benefits were funded out of general company assets and were not covered by the Employee Retirement Income Security Act (ERISA). The policy provided that benefits could be “approved” or “denied,” contained an appeal process, and gave the company the final authority to make final decisions to interpret the policy. The policy provided for a maximum of six months of STD benefits and required the employee to return to work for at least 30 days in order to be approved for a new period of disability.

Joseph Leone applied for and was granted STD benefits in November 2006. Leone’s disability was caused by an unusual sleep disorder which made it very difficult for him to stay awake during the day. Leone remained out of work for just under six months, returned to work for 31 days, and went back out of work. He then made an application for another period of STD benefits based on the same sleep disorder which had been the cause of his first period of disability. Leone submitted medical information, which was extensively reviewed by the company’s designated physician. The company’s physician also took the unusual step of having multiple discussions with Leone’s physician in an attempt to determine the nature of the alleged disability. Finally, the company, based on its physician’s review, denied the second claim for STD benefits. The company provided Leone with two separate opportunities to appeal the denial of benefits. After conducting a further review, the company affirmed the denial of the second claim. Leone sued, claiming the company breached a contract and violated the North Carolina Wage and Hour Act by failing to grant his second request for STD benefits.

The district court granted the company’s motion for summary judgment, holding that the STD policy gave the company discretion to determine an employee’s eligibility for benefits, which the company was only required to exercise in good faith, fairly and reasonably. The court held that the undisputed facts showed that the company had thoroughly and diligently reviewed Leone’s claim for benefits and had afforded him all of the processes required under the written STD policy. Leone failed to produce any evidence that the company acted in bad faith or unreasonably in denying the claim. In addition, the court agreed with the company’s position that the denial of the STD benefits was not a violation of the North Carolina Wage and Hour Act.

Ogletree Deakins attorney Greg McGuire represented the company in this case. The matter is currently on appeal to the Fourth Circuit Court of Appeals.

Note: This article was published in the October 2009 issue of the North Carolina eAuthority.