Pension & Benefits News Terms of 401(k) plan expressly prohibited allegedly misclassified distributors from participating in plan as common law employees
News
Thursday, November 15, 2018

Terms of 401(k) plan expressly prohibited allegedly misclassified distributors from participating in plan as common law employees

By Pension and Benefits Editorial Staff

Distributors who may have been misclassified as independent contractors were not eligible for benefits under a company’s 401(k) plan as common law employees, according to a federal trial court in Georgia, because plan terms expressly denied eligibility to distributors. The plan’s extension of eligibility to some self-employed individuals did not negate the express exclusion of distributors.

401(k) plan excluded distributors from eligibility. A baking company entered into distribution agreements with individual parties for the distribution of its products. The distribution agreements labelled the distributors as independent contractors, a designation to which the distributors objected.

The parent company of the bakery sponsored a 401(k) plan that was expressly limited to eligible employees of the company or a controlled group member. Distributors who were prohibited from participating in the plan filed suit under ERISA, seeking benefits they were allegedly due under the plan as common law employees. The bakers moved for summary judgment, arguing that the distributors were expressly ineligible for benefits under the terms of the plan and would remain so even if they were ultimately deemed to be common law employees. The court agreed that the distributors were not eligible for benefits under the plan and granted summary judgment to the bakers.

Distributors not eligible for benefits under the plan. Initially, the court explained that, in order to state a claim under ERISA, a party must be a plan participant or beneficiary. A participant is defined by ERISA as an employee or former employee of an employer who is or who may become eligible to receive a benefit of any type from the ERISA plan.

The distributors argued that they were common law employees who had been misclassified as independent contractors to enable the bakers to avoid overtime obligations under the Fair Labor Standards Act. The court, however, did not resolve the issue of whether the distributors were misclassified as independent contractors, but focused on whether they would have been eligible for benefits under the terms of the plan even as common law employees.

An employer may condition participation in an ERISA plan on any variable, other than age or length of service. The plan did not condition benefits on age or service. Moreover, the plan did extend coverage to common law employees and leased employees of controlled group members. However, the plan also contained independent terms that, notwithstanding other plan provisions, expressly excluded distributors who have executed a written agreement with a member of the controlled group for the distribution or sale of goods or products (and any employees, agents, or independent contractors of such distributors) from being eligible to participate in the plan. The applicable summary plan description further informed individuals that they were not eligible employees and could not participate in the plan if they were a distributor who had an agreement for the distribution or sale of goods or products.

Given the express nature of the plan’s terms, the court concluded that the distributors could not maintain a plausible claim for benefits. Even if the distributors could ultimately prove that they were common law employees, the court stressed, they would remain ineligible for benefits.

Self-employed subject to exclusion of distributors. The distributors alternatively argued that they were eligible for benefits under the terms of the plan that defined an employee as including any self-employed individual who is treated as a member of the controlled group pursuant to Code Sec. 401(c)(1). However, the court noted that even assuming the distributors qualified as self-employed individuals, the plan’s independent exclusion of distributors continued to apply.

SOURCE: Ryan v. Flowers Foods, Inc. (DC GA).

Back to Top

Interested in submitting an article?

Submit your information to us today!

Learn More