Are employers allowed to offer different benefits to different employees and to charge more for the same benefit, or is this a discriminatory practice?

There are no federal laws requiring plans to provide the same benefit coverage to all employees. However, some states have laws on certain benefits, such as paid sick leave, that apply to all of an employer’s employees. The Patient Protection and Affordable Care Act (PPACA) requires employers with 50 or more employees to either offer employees health care coverage or pay a fee, but the law does not apply to part-time workers. In addition, under the PPACA, fully insured plans providing more generous premium subsidy levels to highly compensated employees will be in violation of PPACA nondiscrimination rules once final regulations are issued and enforced on this provision. Until such time, employers are advised to consult with legal counsel and/or their health insurance carrier for clarification regarding the practice of providing different premium subsidies for different groups of employees.

Thus, generally employers have discretion when structuring their benefits plans and are able to make distinctions among employee populations regarding access to and the level of benefits offered. Plans may differ among employees only on “bona fide employment-based classifications” consistent with the employer’s usual business practice. For example, part-time and full-time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service can be treated as different groups of similarly situated individuals. It is perfectly permissible to offer three weeks of vacation to exempt employees and two weeks to nonexempt employees because the basis of the vacation benefit is their FLSA category and not any protected category or other applicable law.

A plan may draw a distinction between employees and their dependents. A plan also can make distinctions between beneficiaries themselves if the distinction is not based on a health factor. A plan can distinguish between spouses and dependent children, or between dependent children based on their age. However, under the PPACA, adult dependents must be covered to age 26, and employers must offer them the same level of coverage at the same price as currently offered to other similarly situated dependents in order to avoid fees.

The key is to make sure that benefits plan decisions are nondiscriminatory, keeping in mind the adverse impact on protected groups and any unintentional discrimination that may result from those decisions. The EEOC Compliance Manual of Employee Benefits, Section 3 provides this helpful guidance:

This Section addresses discrimination in life and health insurance benefits; long-term and short-term disability benefits; severance benefits; pension or other retirement benefits; and early retirement incentives. Under the ADEA, the ADA, and Title VII, charges involving these types of benefits may raise unique issues that require special analysis. This Section discusses that analysis in detail. At bottom, however, the fundamental principle of the anti-discrimination laws applies in this context as in all others: if an employer provides a lower level of benefits to an individual based on a prohibited factor, it must make out a defense. If it cannot do so, its conduct will be unlawful, and cause should be found.

In addition, the Health Insurance Portability and Accountability Act (HIPAA) makes it illegal to assess health insurance premiums based on health factors. It is not permissible to charge some employees more than any other similarly situated individuals based on medical conditions, claims experience, receipt of health care services, genetic information or disability. HIPAA does allow an employer to make distinctions in benefits that are offered and in the cost of benefits when those distinctions are not discriminatory.

Human resource professionals engaged in benefit design decisions would be wise to take a high-level overview of their employee population to ensure that design decisions do not have unintended discriminatory consequences. Consider if any employees protected by Title VII of the Civil Rights Act, Americans with Disabilities Act, Age Discrimination in Employment Act or pregnancy discrimination laws may be disproportionately affected. Parental leave benefits that do not relate to a pregnancy-related disability must be applied equally to men and women under Title VII and the FMLA. If an employer does not limit the availability of maternity leave to the period of disability, male employees must be granted paternity leave under the same terms and conditions as females.

Human resource professionals should also be concerned with giving highly compensated employees special perks. Certain welfare plans (including self-insured medical and group term life insurance plans) will create taxable income for those employees if they receive a disproportionate amount of tax-advantaged benefits and could cause a company plan to fail its nondiscrimination testing.

In summary, it is not necessary under federal laws to give equal benefits to all employees, but an employer should base benefit eligibility on tenure, full- or part-time status, exempt/nonexempt status, job group or even department. An employer must exercise due diligence to ensure its benefits are not discriminatory.