Nationwide v. Darden: restoring to the term "employee" its common-law meaning.

• Author: Hollrah, Russell A.
• Position: Nationwide Mutual Insurance Co.

In Nationwide Mutual Insurance Co. v. Darden,(1*) the Supreme Court of the United States restored to the term "employee," at least for purposes of the Employee Retirement Income Security Act of 1974 (ERISA),(2) its historically recognized meaning. At the same time, the Court provided guidance for interpreting such term within the context of many other federal statutes. This article reviews the Darden decision and discusses its implications.

BACKGROUND

The Court's unanimous decision in Darden held that for purposes of ERISA the term "employee" means the master-servant relationship as defined under the common-law agency doctrine.(3) In addition, the Court explicitly adopted as a general rule of construction the following analysis set forth in its 1989 copyright decision in Community for Creative Non-Violence v. Reid:(4)

Where Congress uses terms that have accumulated

settled meaning under ... the common law, a court

must infer, unless the statute otherwise dictates, that

Congress means to incorporate the established meaning

of these terms .... In the past, when Congress

has used the term "employee" without defining it, we

have concluded that Congress intended to describe

the conventional master-servant relationship as understood

by common-law agency doctrine.(5)

While the Darden decision has implications for a number of other federal statutes, it has unique implications for purposes of ERISA, which among other things vests in an employee certain rights with respect to any covered employee benefit plan in which such employee participates.(6) The term "employee" defines the universe of individuals who are entitled to the protections afforded by ERISA.(7) ERISA defines an employee as "an individual employed by an employer."(8) Such a circular definition invites divergent interpretations - as is evident by the Darden case itself.

FACTS OF THE

DARDEN CASE

The Darden case involved an effort by Robert Darden, a former insurance agent who represented Nationwide Mutual Insurance Co. to nullify the effect of a noncompetition clause in his agent's agreement with the insurance company. Under the noncompete clause, Nationwide was free under certain circumstances to terminate certain payments to Darden that otherwise were owing under the Agent's Security Compensation Plan (the Plan) to which Darden was a party. The Plan was maintained by Nationwide to provide its former agents "post-termination" income.

The Plan consisted of two programs - the Deferred Compensation Incentive Plan and the Extended Earnings Plan. Darden's contract with Nationwide provided that he would forfeit all benefits under the Plan if he violated, among other things, a specific noncompetition provision in his agent's contract.

Notwithstanding the noncompete clause, Darden engaged in conduct that violated his agent agreement's noncompete provision almost immediately after his agency agreement with Nationwide was terminated. Upon learning of Darden's conduct, Nationwide stopped making payments under the Plan to Darden. Darden then brought suit against Nationwide claiming that the noncompete clause contained in his agent's agreement was unenforceable on account of ERISA's nonforfeiture provisions.

WILL ERISA VITIATE THE

NONCOMPETE CLAUSE?

According to section 203 of ERISA, if plan benefits become "vested," they generally cannot be forfeited.(9) ERISA's nonforfeiture provisions, however, apply only to plans that are covered by ERISA.[10] What is more, an individual must be an "employee" to be eligible for ERISA's protections.

For purposes of determining whether the Plan in Darden was covered by ERISA, each of the Plan's two programs was examined separately. The U.S. Court of Appeals for the Fourth Circuit held that the Extended Earnings Plan was not covered by ERISA,[11] primarily on the basis of the court's 1986 decision in Fraver v. North Carolina Farm Bureau Mutual...