Excluding workers from benefit plans - conflicting guidance from the courts.

• Author: Day, Althea R.

Employers maintaining benefit plans intended to exclude a specific category of workers should be reviewing plan documents and administrative procedures in light of recent judicial guidance. The Ninth Circuit's initial decision in Vizcaino v. Microsoft Corp., 97 F3d 1187 (9th Cir. 1996), and other recent cases have raised concerns that some independent contractors, leased employees or freelance workers might be held entitled to employee plan benefits. The Ninth Circuit granted a rare re-hearing in Microsoft, which was argued Mar. 27, 1997. The decision on re-hearing will provide further guidance on this important issue.

In Microsoft, the affected individuals were "freelancers" who had been hired as independent contractors. After these freelancers were reclassified by the IRS for employment tax purposes as employees, they sued for benefits under Microsoft's Sec. 423 employee stock purchase plan and its Sec. 401 (k) plan. Focusing on the plan language defining persons eligible to participate, the Ninth Circuit's decision concluded that, since the reclassified individuals were "employees," they were eligible to participate in the Sec. 423 plan, which by law requires participation by virtually all employees. The court also determined that since the individuals were "employees" within the definition of that term under the Sec. 401 (k) plan, they were eligible for benefits under said plan. With respect to the latter plan, the court did not defer to the plan administrator's interpretation of the definition of "employee," but rather, held Microsoft to a strict interpretation of the plan language.

In Bronk v. Mountain States Telephone & Telegraph, 495 F Supp 1317 (DC Colo. 1996), a district court found that employers were required to include leased employees as covered employees in a retirement plan. In reaching this conclusion, the Bronk court applied the analysis used in a 1992 New York district court decision, Renda v. Adam Meldrum & Andersen Co., 806 F Supp 1071 (DC N.Y 1992). The court in Renda found that Section 1052(a)(1)(a) of the Employee Retirement Income Security Act of 1974 (ERISA) and Sec. 410 require a business to cover leased employees in its tax-qualified retirement plans if the individuals are common-law employees; the court supported its conclusion by citing various requirements for plans set forth in Sec. 410 and the related regulations. In Bronk, the Tenth Circuit has accepted Mountain States Telephone's appeal as to whether the...