On Problems in the Sponsor/Third Party Administrator Relationship

Ouch. Here’s the story of a payroll company that overpaid salary for years to an employee of its client company, because that employee was authorized to provide the payroll company with payroll information and direct it to issue payments; according to the case, she requested additional payments to herself and the payroll company made those payments. Who bears the loss here, the client company or the payroll company it hired? The former, not the latter, because the contract between the client and the payroll company could most fairly be interpreted as assigning the risk in that manner. Here is the opinion, and blogger Stanley Baum down in New York has a detailed review of the case here.

Anyone, like me, who has represented third party administrators hired by plan sponsors has seen the outline of this problem before, although often under less sinister circumstances; disputes in this relationship usually arise out of performance issues by the third party administrator relating to its operation of a benefit plan, followed by litigation over who is responsible and to what degree for those problems. Inevitably, as in the case of this payroll administrator, the linchpin of the dispute becomes the terms of the contract between the parties, and often those contracts are written in ways that protect the third party administrator from, or strongly limit its liability for, losses from its operation of the plan. As I have argued in court in the past when speaking on behalf of a third party administrator in that relationship, if the sponsor wanted different performance obligations or stronger remedies for performance failings, it should have written them into the contract in the first place. That is the story here, as well: any third party administrator contract requires looking a little bit into the future and guessing at the potential problems that may occur down the road, and allocating responsibility for them in the contract before they occur. Sure, its easier said than done, but that should be part of what a plan sponsor is paying for when it hires an attorney to deal with these types of contracts.