:: Of The Many Troubles That Attend Worker Misclassification – Another Item For The List

Janell Grenier recently noted the employee benefit troubles that can result from misclassification of workers. The occasion of the comment was a recent article in the L.A. Times, “Independent Contractor Status Scrutinized.”

In addition to the problems of having insurance coverage defeated based upon “employee” definitions, inadvertently promising benefits to those you did not intend, and jeopardizing the qualified status of your retirement plans, there is a another significant issue – ERISA preemption may not be available as a defense to claims brought by independent contractors.

Consider the analysis offered in this opinion:

Neither the United States Supreme Court nor the Oklahoma Supreme Court has addressed the scope of ERISA preemption under the precise situation presented here. Federal appellate case law, however, supports the view that a state-law claim by a non-participant who has no remedy under ERISA is not preempted. In Weaver v. Employers Underwriters, Inc., 13 F.3d 172 (5th Cir.1994), the Fifth Circuit Court of Appeals faced a closely analogous situation. An independent contractor who believed he was covered under an employer’s group policy was injured while working. The insurer, initially believing that the contractor was an employee covered by the policy, began paying benefits but discontinued payment when it discovered the contractor’s true status. It then negotiated a settlement with the contractor on terms extremely favorable to the insurer. The contractor sued the insurer, alleging claims based on deceptive practices, constructive fraud, duress, and bad faith. The district court dismissed based on ERISA preemption. The Fifth Circuit reversed, holding that, because the contractor was not a plan participant, his claims were not preempted as they did not “implicate the relationship” of the “traditional ERISA entities”-the employer, the plan, the plan fiduciaries, the plan participants, or the plan beneficiaries. The court stated:

We do not agree that the claims of an independent contractor “directly affect the relationship between the traditional ERISA entities-the employer, the plan and its fiduciaries, and the participants and beneficiaries.” [Plaintiff] is not a participant in the [employer’s] plan …. If [Plaintiff] is not an employee, then he is not an ERISA “participant.” … The claims by a nonparticipant and nonbeneficiary to a plan do not affect the relationship between the traditional ERISA entities. Therefore, such claims are not preempted.

McDermott v. Sentry Life Ins. Co., Inc., 15 P.3d 508 (Okla.Civ.App. Div. 2000)

Classification of workers has become more complex than ever in this age of multiple employer welfare plans and professional “employer” organizations. Of the many things to worry about, plan sponsors should add state law causes of action to the list.

Note: McDermmot was distinguished by Hollaway v. UNUM Life Ins. Co. of America, 89 P.3d 1022 (Okla. 2003).

The McDerrmmot court cites in support of its view the following:

Other federal circuit courts of appeal, including the Tenth Circuit, have reached the same conclusion under analogous circumstances. In Fugarino v. Hartford Life and Accident Insurance Co., 969 F.2d 178 (6th Cir.1992), cert. denied, 507 U.S. 966, 113 S.Ct. 1401, 122 L.Ed.2d 774 (1993), a sole proprietor, his spouse, and his son were not participants in the proprietor’s ERISA plan. Therefore, the court reasoned the group health insurance policy covering the proprietor’s employees constituted an insurance contract governed by state law as to those three plaintiffs, and they were entitled to “sue under and seek the broader relief provided by state tort law.” Id. at 186.

The Ninth Circuit, in Harris v. Provident Life and Accident Insurance Co., 26 F.3d 930 (9th Cir.1994), dealt with a former employee’s claims for breach of contract and misrepresentation. Because the plaintiff had not been shown to be a participant in employer’s health care plan, the court stated his claims were not preempted, as “it would be contradictory to rule that state law claims are preempted where the court has already held that the same plaintiffs … are ‘not participants’ in the ERISA plan.” Id. at 934 (quoting Deller v. Portland Gen. Elec. Co., 734 F.Supp. 916, 918 (D.Or.1990).

If this premise is true, however, then why did the Third Circuit apply an ERISA statute of limitations in Martin v. Public Service Elec. & Gas Co., Inc. Slip Copy, 2008 WL 857934 C.A.3 (N.J.) (March 31, 2008) where the plaintiffs were independent contractors?

The heart of appellants’ breach of fiduciary duty claim is the purported intentional and wrongful misclassification of them at the outset of, and throughout, their employment as independent contractors, a misclassification that denied them participation in plans in which they were otherwise entitled to participate. . . .

We are certain, however, that at least as early as January 1, 1998 (and likely as early as October 17, 1994), the amendments to that definition carved out independent contractors, and that that date was the “date of the last action.” Indeed, appellants have not even alleged any part of a breach of fiduciary duty within the six-year statute of limitations that is independent of or other than a mere continuation of what occurred in 1998-or 1994. See Ranke, 436 F.3d at 203. The complaint, therefore, is time-barred.

In this case, the plaintiffs were initially employees and ostensibly plan participants. The change in their classification formed the basis for their claims. (Compare on this point Hollaway v. UNUM Life Ins. Co. of America cited above.) Thus, if the plaintiffs were initially plan participants, ERISA preemption should still be available as a defense.