By Sheldon M. Geller, Esq., Geller & Wind, Ltd.

The Employee Retirement Income Security Act (ERISA) requires an employer to include every common-law employee, unless otherwise excluded, in its benefit plans. (The IRS has reclassified independent contractors as common-law employees).

Although an employer may exclude temporary and leased workers as well as other classes of employees from participation in its benefit plans, some plans fail to clearly exclude individuals that are otherwise reclassified as employees. Every benefit plan must exclude leased and reclassified individuals from plan participation to the extent legally possible. Although many employers draft their plans to exclude “leased employees” from participation, most plans do not exclude “reclassified” employees.

Employers must include their long-term leased employees in determining coverage, even if these employees are on a staffing organization’s payroll. A qualified plan must satisfy its eligibility requirements after taking into account the total number of “statutory” employees, including leased employees and reclassified employees.

Nevertheless, the IRC permits employers to exclude from their benefit plans union employees, nonresident aliens with no U.S.-source income, and employees with less than one year of service. Additional exclusions must meet the IRC’s general coverage requirements. The employer’s ERISA counsel and benefits consultant must monitor the number and type of exclusions to make certain that the plan passes the general coverage requirements. If a sufficient number of individuals are excluded from coverage, the plan may fail the qualification requirements and jeopardize its tax exemption.

ERISA does not prohibit an employer from distinguishing between groups or categories of employees, providing benefits for some groups but not for others; nor does ERISA mandate that employers provide any particular benefits. ERISA does provide that exclusions may not be based upon age or length of service. Accordingly, an employer need not include all employees that meet the common-law employee test in its pension and 401(k) plans.

Because ERISA plans are generally drafted specifically for an employer, ERISA counsel should consider recent legislative changes to minimize the effects of the unintended results of a reclassification of employees. Furthermore, employers should require temporary or leased employees, at the inception of their engagement, to execute agreements providing that they will not be eligible to participate in the employer’s benefit programs, regardless of whether they are reclassified as common-law employees.

Employers that amend their plans properly are unlikely to be required to include staffing company employees in their benefit programs. Employers should review their independent contractor and leasing arrangements taking into account the traditional IRS list of factors in order to determine common-law employee status. An employer may take certain steps to limit its right to control the terms and conditions under which a worker performs his or her functions, particularly when the services are supplied by a staffing organization. The employer should not have the right to hire, fire, or discipline an employee, but only to provide information to the staffing company.

Although recent case law does not effectively prohibit the use of staffing company employees, employers need to review their engagement of nontraditional workers and their potential entitlement to benefits otherwise reserved for the employer’s full-time common-law employees. Small and mid-sized employers should review decisions to classify workers as independent contractors, provisional employees, temporary employees, conditional employees, seasonal employees, and part-time employees with their outside benefits advisors.

The Department of Labor (DOL) has argued that employers and plan committee members have a fiduciary duty under ERISA to administer benefit plans in accordance with their terms and that this fiduciary duty extends to the plans’ eligibility provisions. The DOL has alleged that, if a prudent investigation had been made, the employer and committee members would have determined that certain workers were employees entitled to participate in benefit plans and that the employer owed additional contributions to these plans to fund the benefits for those employees.

Courts have agreed that allegations to cover contingent workers support a fiduciary breach claim. Therefore, the employer and the individual committee members are potentially liable for the failure to include certain classes of employees as plan participants and the necessary contributions to the plan. In breach of fiduciary duty cases, the courts have held that committee members as well as other ERISA fiduciaries may be personally liable and that the liability is joint and several, meaning that each member may be liable for the full amount of the damages.

In general, employers need to be educated about contingent workforce issues relating to tax qualification and fiduciary duties. Employers and their committee members have the sole responsibility for determining eligibility, unless they properly delegate that responsibility to an outside benefit advisor.

Third-party plan administrators should bear in mind that employers ordinarily do not include contingent workers in census materials that they give to third-party administrators, in the mistaken belief that these workers are not eligible for their plans. Third-party plan administrators do not generally make their own determinations about eligibility and rely on the employee census materials given to them for plan administration purposes by employers.

Prudent Selection of 401(k) Investment Options

Several lawsuits have been filed recently against employers for allegedly violating ERISA. The lawsuits claim that the employers failed to prudently select 401(k) investment options, monitor the performance of those options, and remove or replace specific funds where appropriate. These lawsuits also name officers of the employer that selected the investment options for failing to adequately investigate competing mutual funds in the marketplace. These lawsuits further allege that had these officers made proper investigations, they would have determined that better investment options were available than the alleged mediocre performing funds.

Court cases have concluded that ERISA fiduciaries (including members of the retirement plan committee, responsible officers, and trustees) have a duty to prudently investigate potential investments and to regularly monitor investments for suitability. Furthermore, courts have held that members of the board of directors of the employer sponsoring the 401(k) plan have a duty to monitor the ERISA fiduciaries’ performance in selecting, monitoring, and replacing investment options.

From information in recently released publications, it appears that DOL investigations will include inquiries into the diligence of a plan’s sponsor in selecting 401(k) investment options and in regularly monitoring its performance and costs. Further, representatives of the DOL’s Pension and Welfare Benefits Administration have pointed out that ERISA requires that fiduciaries of participant-directed 401(k) plans have a fiduciary duty to remove investment options that are no longer appropriate for participant direction (e.g., funds that have consistently underperformed their peer group).

Editors:
Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Mitchell J. Smilowitz
GBS Retirement Services Inc.