ERISA Requirements for Employee Retirement Investment Plans

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ERISA is a federal law that regulates employee benefit plans. For an employer to receive favorable tax treatment for benefit plans, it must comply with ERISA.

The most interesting employment law claims arising under ERISA ask which employees qualify for employer benefits. A central tenet of ERISA is that plans must carefully define who receives qualified benefits and who does not. Thorny issues surround workers placed with an employer through payroll services, which many employers misclassify as 'independent contractors.'

The most interesting (and often misunderstood case) on this subject is Microsoft v. Vizcaino, 97 F.3d 1187 (9th Cir. 1996), Microsoft v. Vizcaino, 120 F.3d 1006 (9th Cir. 1997) (en banc), cert denied sub nom. Vizcaino v. Microsoft, 118 Sup. Ct. 899 (1998), on remand 98-1 U.S. Tax Cas. ¶ 50,240 (W.D. Wash. 1998).  Microsoft settled the case for $97 million with about 10,000 workers who sued because the company excluded them from its employee stock purchase plan (ESPP).  The press at the time referred to the workers as "permatemps."

The Microsoft case raised primarily ERISA questions and not questions about overtime, payroll taxes and other important issues that arise when an employer classifies a worker as an independent contractor.  Almost all questions other than ERISA turn on whether the employee is a "common law employee."  (See our Contractor v. W-2 page for more information about classification errors).

Microsoft v. Vizcaino does not stand for the proposition that ESPPs and other ERISA-covered employee benefits automatically apply to common law employees misclassified as independent contractors.  Rather the decision looks to the language of the ERISA plan documents.  If the plan documents refer to employees, then the employer's failure to properly classify a worker as an employee will likely result in that employee having a claim to the plan's benefits.  But ERISA plans can be more carefully tailored

ITAA President Harris Miller said at the time before the US Supreme Court affirmed the Ninth Circuit's decision:

There are significant problems with this decision and we fully believe it will be overturned. Were this ruling to become the law of the land, not just Microsoft but virtually every firm, inside and outside the IT industry, using independent contractors and outsourcing firms would be adversely impacted. It is totally outrageous to think that this court, with its history of anti-business, anti-growth decisions, would conclude that workers who sign on with companies on a project basis are incapable of sound judgement on employment decisions.

But affirmed it was.  The Supreme Court's decision denying certiorari leaves Microsoft v. Vizcaino as good law, albeit law that many companies appear not to follow.

The IRS also becomes annoyed with companies that have long term 'permatemps' and during the Microsoft v. Vizcaino case, the IRS determined that Microsoft's permatemps were common law employees of Microsoft and the company owed millions in back payroll taxes.  The IRS found that the staffing firm's role was simply that of payroll processor.

After the Microsoft v. Vizcaino case, Microsoft instituted a policy that no temoprary employee could be employed at Microsoft for more than 364 days and that a worker must be separated from Microsoft for more than 100 days between temporary assignments.  Many companies, however, have not changed their policies and employ 'permatemps' for years without interruption.

In Nahoun v. Employees' Pension Plan of Credit Suisee First Boston, No. 04-CV-9221 (SDNY June 22, 2005), the employee pension plan defined the term "employee" as "any person employed by the corporation and treated as such on the books and records of the corporation" and "shall not include any person treated by the corporation... as an independent contractor."  But the court found that the plan failed to define "books and records" and determined that the plan's language "treated as an independent contractor" was insufficient to support a motion to dismiss because the employe offered evidence that although he was designated an independent contractor, he was in many ways treated as an employee.  Nahoun also suggests that ambiguities in plan documents and inconsistent definitions and language across plan documents from one benefit to another creates ambiguities sufficient to create a triable issue of fact.

One of the first questions an employer should ask is "What does my ERISA plan document say about this issue?"  An employee misclassified as an independent contractor should ask exactly the same question.

The Employee Benefits Security Administration (EBSA) makes available through its Public Disclosure Room certain employee benefit plan documents and other materials required by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a Federal law that is designed to protect the rights of millions of American workers and beneficiaries in private-sector pension plans, group health plans, and certain other employee benefit plans.

To order a copy of a company's ERISA plan documents, an interested party can visit, fill in a form M-1 and allow approximately one week for a response.  Or you can call the Employee Benefits Security Administration's Public Disclosure Room at (202) 693-8673.  Department of Labor may charge $0.15 per page for reproducing plan documents.

Tension remains between IRS rules regarding classification, complex ERISA regulations and the common law definition of employee.  The Microsoft case may have changed Microsoft's practices, but more than ten years later, few companies have taken notice.

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