Off Payroll Employees Ineligible for Benefits

What is the benefit status of off-payroll workers? That was the question in Edes v. Verizon Communications, Inc., a recent decision from the First Circuit. The short answer is that the worker's benefit status depends on the language of the benefit plans at issue. The Edes plaintiffs were hired directly by GTE but received their paychecks from one of two payroll agencies. In all other respects the plaintiffs were indistinguishable from employees who received paychecks from GTE. Nevertheless, because the plan excluded workers who were not "paid directly" by the employer, the plaintiffs lost their claims under Section 502(a)(1)(B).

Given the plan language as described in the decision, the result was not surprising in light of similar decisions from other courts. But the plaintiffs also had a claim under Section 510, which prohibits employers from discriminating against "participants" for the purpose of interfering with their right to attain benefits. The plaintiffs argued that GTE should have moved them to the GTE payroll after they were hired but instead, deliberately kept them off payroll for the purpose of excluding them from GTE's benefit plans.

The court avoided a decision on the merits because it found that the Section 510 claim was time-barred. But if the claim was timely what might be the outcome? Plaintiffs argument is intriguing, but, in my view, not a winner.

Under ERISA, a "participant" is any "employee" of the employer who becomes eligible for benefits. The Supreme Court previously ruled that the term "employee" as used in ERISA means any common-law employee of the employer. The Edes plaintiffs likely were GTE's common-law employees if the facts as alleged in the complaint were true and, therefore, may have become benefit eligible if they were on the GTE payroll. So, the argument goes, GTE's failure to move them to the payroll discriminated against the plaintiff class.

If that's the argument, how does it square with the general principle that an employer's plan design decisions are not subject to ERISA? For example, employers are permitted to create separate plans for salaried and union personnel, with different benefits, so why not two (or more) classes of worker, common-law or otherwise. Moreover, the Third Circuit has held that Section 510 does not apply to hiring decisions. So, if GTE could hire the Edes plaintiffs into non-benefit positions, why would GTE later have an obligation to move them to the payroll so that they could become benefit eligible?

Recall that in the Supreme Court's Inter Modal decision, the Court stated:

But in the case where an employer acts with a purpose that triggers the protection of §510, any tension that might exist between an employer's power to amend the plan and a participant's rights under §510 is the product of a careful balance of competing interests, and is most surely not the type of "absurd or glaringly unjust" result . . . that would warrant departure from the plain language of §510.

The Supreme Court was acknowledging the tension between Section 510 and the employer's right to amend benefit plans -- in certain instances, an employer's decision-making may be subject to Section 510 constraints. The Edes plaintiffs, however, go farther. In Inter Modal, the issue was whether Section 510 applied to discharged employees who had not vested in certain "welfare" (e.g. non-pension) benefits. But in Inter Modal, there was no question that the plaintiffs were employees of the defendant employer, at least until they were fired.

In other words, before the Inter Modal plaintiffs were fired, they were eligible to receive, or would become eligible to receive, certain benefits. The employer had promised to provide the benefits to its existing employees (who were recognized as such) and Section 510 "helps make such promises credible." By contrast, in Edes, GTE never promised the plaintiffs any benefits because, from day one, they were off-payroll.

There are other theories that could support the claims of off-payroll employees, but Section 510 does not appear to help those individuals who never were on the employer's payroll.

Overtime Pay for Stockbrokers

As reported in the New York Times today, Merrill Lynch agreed to pay $37 million to settle an overtime pay case involving up to 3000 California stockbrokers. Financial industry employees are perceived generally to be exempt from overtime rules, but that is not necessarily true. The FLSA overtime exemptions are based on a two part duties and salary test. If both tests are satisfied, the employee is exempt from overtime. If only one test is met, the employee must be paid overtime.

The new "Fair Pay" regulations provide:

Employees in the financial services industry generally meet the duties requirements of the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer's income, assets, investments or debts; determining which financial products best meet the customer's needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer's financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

So one area of uncertainty is whether the broker's "primary duty" is selling financial products.

The salary basis test requires that employees receive a minimum salary of $455 per week. While the salary can be paid on a bi-weekly or monthly basis, a pure commission arrangement does not qualify. Apparently, the Merrill Lynch brokers may not have received this guaranteed salary.

Merrill Lynch also contended that the brokers were exempt from overtime rules because they were employed in a retail business (e.g. selling stock to individual customers). However, the regulations specifically exclude "stock or commodity" brokers from the exemption for retail businesses. In other words, stockbrokers must be paid overtime pay unless they meet the duties and salary test.

Comment: The new "Fair Pay" regulations went into effect in August of 2004. The old rules, however, were similar enough to the new "Fair Pay" rules that brokers who were improperly classified as exempt before August 2004 likely remain entitled to overtime pay under the new rules.

Some Contract Issues Facing Professional Sports Players

The Sports Law Blog has two interesting posts on professional sports player contracts. In one post, the author raises the question of whether certain players for the Washington Nationals have a misrepresentation claim against the team because the dimensions of the RFK field turned out to be larger than represented. As pointed out, the key issue is whether the ballpark dimensions are "material" to the player's decision to sign with the team. The article concludes that the players probably have only a small chance of succeeding.

The other post discusses the longing of NFL players for guaranteed contracts. The players union continues to believe that the current system of up-front bonuses in lieu of guaranteed contracts best protects the players, but the players see it differently.

Is 4 Greater than 9?

The AARP, the EEOC and interested retirees are waiting to hear from the U.S. District Court for the Eastern District of Pennsylvania whether four is greater than nine or whether nine is greater than four. The district court previously enjoined the EEOC from publishing regulations that would explicitly permit employers to coordinate retiree health care benefits with Medicare eligibility. Those regulations were designed to overturn the Third Circuit's ruling in the Erie County case in 2000 that it was a violation of the ADEA age discrimination rules for benefit plans to reduce coverage when retirees became eligible for Medicare. The district court ruled that in the wake of the Third Circuit's ruling, the ADEA was not ambiguous and, therefore, the EEOC had no authority to issue contrary regulations.

The Supreme Court's Brand X decision however, opened the door for the district court to take a second look at the issue. In Brand X, the Supreme Court held that "[o]nly a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction." According to the EEOC, Brand X requires the district court to ignore Erie County in determining whether the EEOC has the authority to issue the challenged regulations.

While the EEOC concedes that Section 4 of the ADEA prohibits the practice of coordinating retiree health benefits with Medicare, Section 9 specifically authorizes the EEOC to issue regulatory exemptions as necessary and proper. Because Erie County analyzed Section 4 only, the EEOC believes that Erie County simply doesn't apply to the EEOC's regulatory activity under Section 9. In short, 9 is greater than 4.

The AARP, by contrast, argues that after Erie County, the ADEA is clear on its face that health benefits cannot be reduced when retirees become Medicare eligible. As such, there is no ambiguity and no gap for the EEOC to fill with a new regulation. In essence, the AARP is arguing that there is no need to analyze the ADEA beyond Section 4. In short, 4 is greater than 9.

Calling Judge Roberts?

The AARP and EEOC briefs can be found at the ERISA Industry Committe website here.