Time Warner: The Ongoing “Temporary Employee” Saga (December 1999)

Article
December 1999

Time Warner: The Ongoing “Temporary Employee” Saga

The Pension and Welfare Benefit Administration (PWBA) of the United States Department of Labor is suing Time Warner, Inc. and three of its subsidiaries ("Time Warner") as well as the individual members of the Administrative Committee of its benefit plans. In the lawsuit, the PWBA claims that Time Warner and the committee members improperly failed to include certain employees (namely, workers classified as "temporary employees" or “independent contractors") in their benefit plans.

"Contingent workforce" issues have been the source of other high profile cases of late; software giant Microsoft has been involved in litigation on claims that it improperly excluded "freelance" workers (that is, workers who were classified by Microsoft as independent contractors, but who were found by the IRS to be common law employees) from participation in its plans. In the case of large employers like Time Warner and Microsoft, coverage decisions are typically made by their in-house legal and benefits staff. But in the case of most smaller employers, who rely significantly on outside advisors for benefits advice, there is a risk that the employers' internal classification of workers may not be appropriate for benefits purposes (thus potentially subjecting the qualified plans to disqualification due to a failure to administer the plan according to its terms and also due to the failure to satisfy the IRC §410(b) coverage rules). In our experience, small and mid-sized employers often classify workers as independent contractors, provisional employees, temporary employees, conditional employees, seasonal employees, and so on, without consulting with their benefits advisors. To compound the problem, those employers ordinarily do not include those contingent workers in their census materials given to the third party administrators for plan administration—since the employers believe that the workers are not eligible to be in their plans.

In the first ruling in the Time Warner litigation, the court held that the PWBA's breach of fiduciary duty claims could go forward against both Time Warner and the members of the plan committee as individuals.

In response to a motion by Time Warner to dismiss the case, the PWBA argued that Time Warner and the plan committee members had a fiduciary duty under ERISA to administer the benefit plans according to their terms and that the fiduciary duty extended to the plans' eligibility provisions. Further, under the facts alleged in the complaint, that duty required Time Warner and the committee members to look beyond the company's classification of workers as temporary employees and independent contractors who were excluded by the terms of the plans and to determine if they were in fact properly classified. The PWBA's complaint alleges that, if a prudent investigation had been made, Time Warner and the committee members would have determined that the workers were employees entitled to participate in the plans and that Time Warner owed additional contributions to the plans to fund the benefits for those employees.

The court agreed that those allegations supported a fiduciary breach claim. Therefore, Time Warner and the individual committee members are potentially liable for the failure to include those classes of employees as plan participants and the necessary contributions to the plan. (Note that, in breach of fiduciary duty cases, members of plan committees, as well as other plan fiduciaries, can be personally liable and the liability is joint and several, that is, each member can be liable for the full amount of the damages.)

The Court's holding is not a final determination that Time Warner and the other defendants did, in fact, breach their fiduciary duties. However, the ruling paves the way for more extensive litigation in this and other cases.

Third party administrators and other consultants need to be aware of the evolving law in this area and to govern their practices accordingly. While an analysis of a third party administrator's duties in this area is beyond the scope of an ASPS ASAP, we can give you several tips to protect your clients and yourselves:

Educate your clients on the contingent workforce issues. That education should include both the tax qualification concerns and the fiduciary duties. The education can be done, for example, through newsletter articles, letters or memos, or an insert in the annual package sent to your clients. But, on a cautionary note, it should be in writing so that you can prove that it was done.
Review your standard communications with clients, including promotional brochures, newsletters, data gathering materials, engagement letters, to insure that you are not making any representations about determining eligibility which could possibly be interpreted to include advice in this area. In other words, have you said anything that could create a duty on your part to affirmatively go out and advise your clients in this area?
Review and, if need be, revise your engagement letter to specifically state that any determinations that you make about which employees are included in the plan is to assist the plan fiduciaries in their responsibility to decide who participates in the plan and is based on the information that the employer supplies to you. In other words, you cannot assume the responsibility of the integrity of the information that your clients supply to you.

Learn more about R&R related practice areas:
Employee Benefits
ERISA Litigation