Classification of Workers
We continue to see litigation concerning the classification of workers that excludes them from coverage in the employer's tax qualified retirement plan. For example, employers frequently exclude temporary employees, agency employees, independent contractors, and other workers from participating in their retirement plans. The exclusion may be done under specific plan provisions to that effect or it may be done administratively because plan coverage is limited to common law employees.
The basis for the lawsuits is that the group of workers who are excluded from the plan assert that they are, in fact, common law employees and that they were misclassified by the employer. Their claim is that the employer and the plan's administrative committee breached their fiduciary duties by not insuring that the plan covered all of the employees who were entitled to participate.
In some of those cases, the workers are prevailing and in others the employers are winning. What's the difference? While each case turns on its own facts, there is a common thread. The thread is that the plan language and the summary plan description help one side and hurt the other.
Where the plan is silent, other than a general statement about covering common law employees, the workers have a better chance of winning. Where the plan language specifically deals with the issue, the employer is better positioned.
Since, in our experience, many employers exclude various classes of workers from participation, we recommend the following:
- The plan document should be amended to specifically exclude those groups of workers who are not intended to be included in a plan.
- The summary plan description should be amended in the same way.
- The plan document should also be amended to include a provision that, if workers are re-classified as employees (for example, if an IRS audit re-classifies the workers as common law employees), the workers will nonetheless be excluded from the plan. The IRS has issued favorable guidance on this issue.
This is a case where the problem is difficult, but the solution is not. The solution is to anticipate the possible challenge and draft the documents properly.
© 2004
Reish Luftman Reicher & Cohen. All rights reserved. The ERISA Report for Plan Sponsors is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.
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