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The Stacks – 3rd Quarter 2021

Are Your ICs Really EEs? A Look at Who’s Who on an Employee Benefit Plan … The Saga Continues
By: Kelly Dempsey, Esq. & Philip Qualo, J.D.

Last time we addressed the issue of classifying workers in March of 2020, the world was a totally different place. Face masks were only worn by doctors during surgery, quarantine was a term almost exclusively used in sci-fi and horror movies, and the blurry rules applicable to classifying workers had remained relatively unchanged for decades. What a difference a year can make! Facemasks have become the hottest new accessory, “Zoom fatigue” is a real thing, a new administration, and an entirely new framework for classifying employees and independent contractors is on the horizon.

For most laymen, the question of whether a worker is an employee or an independent contractor is simple…an independent contractor is compensated by Form-1099, and an employee is compensated by Form W-2 as well as subject to federal and state tax withholding. Many are surprised to find out that the analysis is far more complicated than which tax form is provided annually. For employers, this is a far more complex undertaking (whether they realize it or not). Employee status triggers employer obligations under various federal and state laws that do not apply to independent contractors, and the responsibility for classifying a worker correctly falls squarely on the employer. The implications are even larger for employers that sponsor self-insured health plans - correctly classifying workers is an extremely important undertaking as offering coverage to independent contractors can create significant compliance issues for their health plans as well as issues with stop-loss reimbursement.

No bright-line test exists to determine when a worker should be classified as an employee rather than as an independent contractor. In September 2020, the U.S. Department of Labor (DOL) issued proposed rules aimed at simplifying classification of workers. Final rules were published on January 7, 2021 with a March 8, 2021 effective date; however, actions taken by the Biden administration delayed the effective date of the final rule to May 7, 2021. To further complicate matters, on March 11, 2021, proposed rules to withdraw the final rules published on January 7 were issued. While it is likely these rules will be withdrawn without much objection, it is important to understand what was being proposed as it is possible future rules may arise as the concept of employee vs. independent contractor is a very hot topic, especially in California. Prior to the DOL issuing final rules, California had previously placed California Proposition 22 on the November 2020 ballot. California Proposition 22 established more stringent classification standards for certain workers and it is likely the lobbying entities will seek similar legislation in other states. Changes to state law and the impending federal rules make this a good time for employers to start reviewing their own internal processes for classifying workers (that is if employers did not heed Kelly’s prior article - see The Self-Insurer March 2020 edition).

Before we dive into the final rules that are now pending withdrawal, it is important to emphasize why this classification matters. Employers are required to withhold income taxes based on information employees provide on IRS Form W-4. If an employer fails to withhold income taxes on behalf of a worker improperly classified as an independent contractor, and the individual has failed to pay the taxes, the employer may be liable for federal or state taxes that were required to be withheld but were not. Furthermore, independent contractors are not eligible to receive tax-free benefits from an employer - such as an offer of coverage to participate in a self-insured health plan. If an employer chooses to offer health care benefits to an independent contractor, the contractor must pay income taxes on the value of the benefit. Additionally, if the company includes an independent contractor in its defined benefit pension plan, it risks losing the tax-exempt status of the plan. Employers offering self-insured health coverage to independent contractors are especially vulnerable to compliance risks for the plan, including inadvertently creating a Multiple Employer Welfare Arrangement (MEWA) plan subject to state law and no longer protected by ERISA preemption mandates.

Historically, the DOL, Internal Revenue Services (IRS), and federal courts have interpreted the Fair Labor Standards Act (FLSA) to consist of a broad general rule that a worker was an independent contractor, and not a bona fide employee, if the employer had the right to control or direct only the result of the work of an individual, as opposed to what will be done and how it will be done. To determine how to properly classify workers and assess the degree of control and independence in the employer/worker relationship, the agencies and the courts have focused on three broad categories, which consist of a total of 20 factors for employers to consider when determining whether a worker was a bona fide employee of the employer, or an independent contractor. The 20 factor list is fairly exhaustive and can be overwhelming, however, the categories are seemingly straightforward. The first category is behavioral control - a worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. The second category focuses on financial control - whether the business has a right to direct or control the financial and business aspects of the worker's job. The third category focuses on the relationship between the parties. Essentially, an expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship. Ultimately, whether a worker was an independent contractor or employee depended on the facts in each situation.

Towards the end of 2020, however, the DOL published a proposed rule revising its interpretation of the FLSA's classification provisions to determine whether a worker is an employee or independent contractor. Subsequently the rules were finalized very early in 2021, but are now subject to withdrawal. With that said, it is important to understand what these rules would have changed. Under the “economic reality test”, the DOL would consider whether a worker is in business for themselves and thus is an independent contractor, or if the worker is economically dependent on an entity for work and is an employee.

In making this determination, the DOL would identify two core factors: (1) the nature and degree of the worker's control over the work (2) the worker's opportunity for profit or loss based on initiative or investment. It also will identify three other factors that may serve as additional guides in the analysis. These factors include the amount of skill required for the work, the degree of permanence of the working relationship between the worker and the potential employer, and whether the work is part of an integrated unit of production.

The DOL noted that the first two core factors are entitled to greater weight than the other factors. The first factor would suggest that an individual is an independent contractor to the extent that he or she exercises substantial control over key aspects of the performance of the work. Examples of an individual's substantial control include setting his or her own work schedule, choosing assignments, working with little or no supervision, and being able to work for others, including a potential employer's competitors.

In contrast, the control factor would weigh in favor of classification as an employee to the extent that a potential employer, rather than the worker, exercises substantial control over key aspects of the work, such as imposing requirements that the individual work for the employer exclusively during the working relationship. The second factor would suggest that an individual is an independent contractor if he or she has an opportunity for profit or loss on either the exercise of personal initiative, including managerial skill or business acumen or the management of investments in or capital expenditure on (for example, helpers, equipment, or materials).

As for the skill factor, the DOL proposed focusing on the amount of skill required. Because the worker's ability to work for others is already analyzed as part of the control factor, the final rule articulates the permanence factor without reference to the exclusivity of the relationship between the worker and potential employer. The permanence factor would weigh in favor of an individual's being classified as an independent contractor when the working relationship is definite in duration or sporadic. By contrast, the factor would suggest someone is an employee if the working relationship is indefinite in duration or continuous.

The "integrated unit" factor would focus on whether an individual works in circumstances similar to a production line. This factor weighs in favor of employee status where a worker is a component of a potential employer's integrated production process, whether for goods or services. The overall production process must be an integrated process that requires the coordinated function of interdependent subparts working toward a specific unified purpose. This may happen when the worker depends on the overall process to perform work duties.

According to the DOL, if the first two core factors—control and opportunity for profit or loss—point toward the same classification, their combined weight is substantially likely to outweigh the other factors. This differs from the original test supported by the agencies as the actual practice of the parties involved will be considered more relevant than what may be contractually or theoretically possible.

The proposed withdrawal of the final rules outlines various reasons the rule should not become effective. In short, based on over 1,500 comments received, the DOL now believes the final rules create more confusion and potential inconsistency in application as opposed to providing clarity and certainty as intended. While these rules now face even greater uncertainty than just delayed application, one state has already implemented their own set of stringent rules for worker classifications that have been making headlines since the November elections.

California’s Proposition 22

As mentioned above, California’s Proposition 22 was on the ballot in November 2020 and passed with a relatively narrow majority at 58%. Several key requirements now apply to “gig companies” – sometimes referred to as “on-demand companies” and better known by their names including Uber, Lyft, DoorDash, and Instacart. These on-demand companies must provide (1) an hourly wage equal to 120% of local or state minimum wage requirements for time spend on rides; (2) a stipend for health insurance for individuals working 15 hours or more per week; and (3) access to accident insurance. The catch-22 (pun intended) is that Proposition 22 also solidifies an exemption under state law for these same on-demand ride-hail and delivery companies to treat workers as independent contractors. This means these workers are not protected by California’s generous employee protections, including paid sick leave laws. Many following these developments in California have observed that California has essentially created a third category of workers. Aside from the general controversy surrounding the new requirements and permanent independent contractor status, the success in California means the door to additional states having similar laws has been kicked open.

New Jersey Classification Penalties

Faithful readers may recall the March 2020 discussion of New Jersey’s modifications to worker classification laws. Some rules took effect in late 2019 and additional requirements began in April 2020. As a quick refresher, one very notable change was the addition of monetary penalties for misclassification of employees and independent contractor. Penalties include an administrative penalty for misclassifying an employee beginning at $250 per misclassified employee and increasing for subsequent violations to a maximum of $1,000 per misclassified employee. The second penalty is a monetary amount that is to be no more than 5% of the worker’s gross earnings over the past 12 months. The limitation applies to the earnings from the employer that actually misclassified the individual – meaning a new employer that has contracted to work with the independent contractor cannot be held accountable for the prior employer’s mistake. Given the radical turn 2020 took with the pandemic, it is likely to be some time before information on violations make their way to the surface.

Final Considerations for Self-Insured Plans

Those familiar with self-funding will know that private self-insured employers are generally used to enjoying ERISA preemption of state law; however, as classification of workers is a rule directed to employers, the lines begin to blur and as discussed, these rules can have an impact on how an employer is offering a self-insured benefit plan. Classification of workers is certainly an area of regulation that will continue to develop at a state and federal level. In addition to the various federal laws that include testing requirements (such as the Mental Health Parity Addiction Equity Act, Code Section 125, and Code Section 105(h)), employers will need to remain acutely aware of how they are classifying workers regardless of whether or not the final rules take effect. While the future always carries a fair amount of uncertainty, being proactive and assessing the status of their current workforce is something that employers should not ignore.

The Pandemic May be On the Back Nine; but What About Its Impact?
By: Christopher M. Aguiar, Esq.

What a year; 2020 was one for the history books - the year almost everything changed (except aggressive, polarizing, political rhetoric)!  Presidential Administrations changed as we witnessed an historic election, the results of which were not determined for over a week and disputed for several more. Live shows became live streams and drive ins. Movie theatres turned into ghost towns. Remote working became the norm. City dwellers fled in droves in search of more space and cheaper housing costs. Iconic/historic hotspots became relics of the past. Supply in the housing market, nationally, reached never-before seen lows while the future of the commercial real estate market spiraled into question. Parents doubled as financial providers and teachers. Finally, and perhaps most upsetting of all, remote learning became a norm that virtually all school systems were forced to learn to implement, cementing that future generations of children may never again experience the magic of a snow day!

As vaccinations ramp and millions of Americans march towards “herd immunity”, many are starting to feel that we are reaching the home stretch. What exactly, though, does life after COVID, the so-called “new norm”, look like? Even after the pandemic is behind us, we will be experiencing its effects, and perhaps some newly established behaviors, well into the future. Whether it be an increase in virtual meetings and remote work, a change in the way we greet each other upon meeting, an increase in mask usage during peak viral seasons, or as society deals with some of the financial consequences of a year of lock downs and fear, people and organizations will need to find ways to address some of the financial concerns that came with this pandemic.

Benefit plans, for example, may need to find new innovative ways to cut costs as they deal with what some are projecting to be a greater than normal increase in medical spend. Some projections, like those made by the American Institute of Certified Public Accountants, indicate that national health spending projections are showing a per year increase over the next decade at 450% of the inflation rate seen between 2014 – 2018 (from 1.2% to 5.4%). This COVID surcharge is no doubt intended to make up some of the losses suffered by hospitals who, according to, saw a 35.8% decrease in hospital spending in March and April of 2020 alone – thanks in large part to a decrease in non-critical services, those among the most profitable delivered by hospitals.

Luckily, regulators across the country are seeking ways to make cost containment for benefit plans a bit more possible. A perfect example of this is with potential changes in worker’s compensation coverage – an area of insurance traditionally heavily regulated by state government. Why are changes necessary in the worker’s compensation arena? Proving someone contracted the virus at work can be very difficult, even in situations where the person has a high-risk job. For example, a nurse assigned to a COVID unit is much more likely to contract the virus than, say, a grocery store cashier. Yet, both may be considered essential employees and, by the very nature of their employment, contract the virus while working. Both could also easily contract the virus at the grocery store on the way home from their shift while running errands after work. How, then, do you prove causation - the most important element of an injury claim?  Causation is the element that ultimately establishes an employee contracted the virus while dealing with an infected person rather than getting too close during a walk and breathing in that person’s droplets.

Every state treats the key legal concept differently, that of ‘Presumptive Illness’. This presumption, often used for firefighters who contract certain diseases such as lung disease or cancer that were likely caused by their time on the job, requires the insurance company to presume causation while allowing them to prove otherwise. So, the nurse assigned to a COVID unit would be presumed to have contracted the virus there; the insurance carrier then has the burden to prove otherwise. Causation, then, becomes a significantly lesser barrier to benefits.

As of March 22, 2021 - 16 states have some type of presumption that would cover COVID-19 already on the books; the remaining 34, however, do not. 20 of those states either have no activity considering a change to their presumptive illness practices as it relates to worker’s compensations benefits, or bills have been introduced but not passed.

All entities providing or administering health benefit plans in America should be evaluating all their cost containment options in a post COVID world and preparing for what could be a significant increase of medical bills both, directly and indirectly related to this pandemic. The potential cost to health benefit plans as a result of this virus will no doubt be significant. We have all heard the stories, COVID treatment itself is very expensive; the other charges, however, are also likely primed to see increases as hospitals review their charge masters and attempt to remedy a black hole of non-emergent care caused by lock downs and folks unwilling to trek to the hospital. After months of record losses, it is only natural that they will find ways to recoup them. If benefit plans, too, are going to stem the tide, they must seek options to account, budget, and wherever possible, mitigate this surge of inevitable costs.

Pension Ruling Limits Health Plan Mismanagement Cases
By: Brady Bizarro, Esq.

In the complex world of ERISA litigation, court rulings can often impact both retirement and health and welfare benefit plans. When a crossover occurs in a case primarily involving retirement plans, the impact on health and welfare plans is typically limited. Every so often, though, a case centers around a threshold question which impacts every federal case, and as such, the ruling has significant consequences for all employee benefits cases. Last summer, the Supreme Court of the United States decided Thole v. U.S. Bank N.A., a case principally about pension plans.[1] The 5-4 ruling was considered extremely consequential in this area because it limited beneficiaries’ right to sue plan fiduciaries. Now, attorneys representing health plan fiduciaries are finding success in utilizing the Court’s ruling in Thole to dismiss cases brought against them.

The Thole case involved one of the most fundamental legal doctrines in America law: the standing requirement. Standing is the determination of whether a specific person is the proper party to bring a matter to a court for adjudication. To establish constitutional standing, a plaintiff must prove (1) that she suffered an injury in fact that is concrete, particularized, and actual or imminent, (2) that the injury was caused by the defendant, and (3) that the injury would likely be redressed by the requested judicial relief.[2] Here, the plaintiffs, Thole and Smith, were two retired employees who participated in U.S. Bank’s retirement plan. They filed a class-action suit against the plan fiduciaries, alleging that they mismanaged more than $748 million, causing them harm. The Court ruled that because the plan participants had suffered no monetary injury, they lacked standing to sue the plan fiduciaries.

To understand why this case is having a major effect on health plan litigation, it is essential to dig into the facts, the Court’s majority opinion, and its lengthy dissent authored by Justice Sonia Sotomayor. The plaintiffs in this case were part of a defined-benefit plan, not a defined-contribution plan. In defined-benefit plans, retirees receive a fixed payment each month, and those payments do not change with the value of the plan or because of plan fiduciaries’ good or bad investment decisions. Compare that to a defined-contribution plan, most commonly a 401(k) plan, in which benefits are usually tied to the value of their accounts, and those benefits can fluctuate depending on plan fiduciaries’ investment decisions. Thole and Smith, as pensioners, receive $2,198.38 and $42.26 per month, respectively, despite the plan’s value at any given moment or any of the investment decisions made by the plan fiduciaries. They have received all of the money due to them and are legally and contractually entitled to receive those amounts for the rest of their lives.

While the plaintiffs did not sustain a monetary injury, they brought suit against the plan fiduciaries under ERISA, claiming that the defendants violated ERISA’s duties of loyalty and prudence by poorly investing plan assets some ten years ago, to the tune of a $748 million loss. They asked the Court to force the fiduciaries to repay the losses to the plan, to replace the plan fiduciaries, and to award them $31 million in attorney’s fees. The district court in Minnesota found that the plaintiffs had sufficient standing to proceed with the case, and after that determination, U.S. Bank made a substantial contribution to the pension plan, bringing it above the statutory minimum. The district court ultimately dismissed the case, and on appeal, the U.S. Court of Appeals for the Eighth Circuit found that the plaintiffs lacked statutory standing.

Justice Brett Kavanaugh authored the Supreme Court’s majority opinion, joined by the Court’s other conservative justices. He noted that the pensioners had thus far received all of the money due to them and that the outcome of this suit would have no impact on the plaintiffs’ future monthly benefit benefits. If they lost the case, they would still receive the exact same monthly payment. If they won the case, they would not receive any additional benefit payments. The majority went on to dismiss four alternative arguments advanced by the plaintiffs, concluding that they lacked a sufficient stake in the case to have standing to sue.

First, the plaintiffs argued that a plan fiduciary’s breach of a trust-law duty of prudence or duty of loyalty itself causes harm, even if the plan participants have not and will not suffer any monetary losses. The Court disagreed, noting that this argument would be proper if the plan at issue were a defined-contribution plan or a trust. In a defined-benefit plan, the Court does not recognize a plan participant’s equitable or property interest in the plan. Then, the Court determined that the plaintiffs did not have standing as representatives of the plan itself because they did not suffer an injury in fact.

Third, the plaintiffs argued that language in ERISA itself grants plan participants a statutory right to sue for breach of fiduciary duty and other equitable relief. In response, the majority noted that a statutory right to sue does not itself satisfy the constitutional standing requirement. Finally, the plaintiffs asserted that if beneficiaries are unable to bring fiduciary breach claims against plan fiduciaries, no one will meaningfully regulate plan fiduciaries. Here, the Court noted that employers have strong incentives to avoid fiduciary misconduct because they are on the hook for plan shortfalls. ERISA authorizes the Department of Labor (“DOL”) to enforce fiduciary obligations, and the Court explained that since the federal government is required by law to pay vested pension benefits of retirees, the DOL has a strong incentive to police plan fiduciaries. Further, certain claims of fiduciary misconduct can be bought directly against individual plan fiduciaries (for example, if using plan assets for personal gain). Justice Kavanaugh sums up oversight of ERISA plan fiduciaries as a “regulatory phalanx.”[3]

Justice Sotomayor wrote a lengthy dissent, joined by Justices Ginsburg, Breyer, and Kagan. For the dissent, there is no meaningful difference in the rights afforded to participants of defined-benefit plans from those of defined-contribution plans or trusts. Without affording plan participants in these cases an equitable interest in the plan, no one would hold that title, leaving about 35 million people with defined-benefit plans vulnerable to fiduciary misconduct in the eyes of the dissent. Justice Sotomayor also found the majority’s argument that a financial injury is necessary to establish standing exceedingly unpersuasive. For example, the Supreme Court has long recognized that a breach of fiduciary duty claim exists regardless of the beneficiary’s personal gain or loss. It is for this reason, the dissent observes, that the majority declares that this case has no bearing on those alleging failure to provide plan information (which would support standing). The majority did not persuade the dissenting justices that a beneficiary’s noneconomic right to loyalty and prudence from fiduciaries is meaningfully different.

The dissent also presents two arguments for standing based in contract law. First, they observe that the Plan Document itself confers upon the beneficiaries an equitable stake in the financial integrity of the plan. Second, they cite to the majority’s claim that the plaintiffs have a contractual right to receive monthly payments for life and note that a breach of contract always creates a right of action, even when no financial harm was caused. Essentially, the dissent recognizes an equitable interest based in trust law for defined-benefit plans while the majority views beneficiaries’ rights under these arrangements as largely contractual.

Since the Thole decision, over one hundred cases have cited to its holding. Out of those, at least three cases involved health and welfare benefit plans and claims of health plan mismanagement. They were all dismissed by courts for lack of standing. At first glance, this should seem unusual because unlike pension plans, self-funded health plans are not defined-benefit plans. The Court’s ruling in Thole did not contemplate health and welfare benefit plans. If anything, self-funded health plans are most like defined-contribution plans since the “benefit” received is not defined and the contribution, the amount contributed by a plan participant to the plan, is typically defined.

Nevertheless, the strategy being utilized by attorneys representing self-funded plans is to analogize the facts of their cases with Thole. In particular, they assert that the alleged fiduciary misconduct never had or will have a material impact on the benefits due to plan participants. In De Fuente v. Preferred Home Care of N.Y. LLC, the plaintiffs were home health aides enrolled in a self-funded health plan.[4] The plan was part of a captive arrangement in which the employer paid premiums to the captive insurer, which then used the premium to establish a reserve to pay covered medical claims. The plaintiffs alleged the employer breached its fiduciary duties and engaged in prohibited transactions under ERISA by receiving profits and excess premiums from the captive insurer. The district court found that the plaintiffs, like those in Thole, had received all of the benefits to which they were entitled and winning or losing would not increase their health benefits. As such, the district court found that the plaintiffs lacked standing to sue.

In Crosby v. Cal. Physicians’ Serv., the plaintiffs alleged that their health plan improperly considered age and therapy history in medical necessity determinations for children with autism. The district court cited Thole, noting that the plaintiffs had received all of the benefits due to them, and that the plaintiffs must show they have been injured beyond their need to pursue administrative appeals. In the district court’s view, they did not, and the case was dismissed for lack of standing.[5] Finally, in Bryant v. Wal-Mart Stores, Inc., the plaintiff brought suit against Wal-Mart’s health plan for alleged failure to provide timely COBRA notices. The district court, however, found that the plaintiff was not injured by a lapse in coverage, and cited to Thole when it dismissed for lack of standing.[6]

Taken together, these cases, with their reliance on the holding in Thole, reveal that the Supreme Court has paved the way to limit suits against health plan fiduciaries alleging mismanagement of plan assets. It will now be much more difficult for plan participants to satisfy the constitutional standing requirement in ERISA cases where they are alleging breach of ERISA’s duties of loyalty and prudence by poorly investing or utilizing plan assets. The Court made clear that in such cases, the plaintiff would have to show that they received fewer benefits due to them, or will receive fewer benefits due to them, as a result of the alleged fiduciary breach.

One unanswered question in the Thole case involves extreme situations. The majority left open the question of whether a plaintiff would have standing to sue when “the mismanagement of the plan was so egregious that it substantially increased the risk that the plan and the employer would fail and be unable to pay the participants’ future pension benefits.”[7] In today’s economy, given the volatility of the post-pandemic market and risky investment opportunities such as cryptocurrency, I would caution plan fiduciaries to continue to handle plan assets with the skill and prudence which is typical in our industry.


[1] Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020).

[2] Lujan v. Defenders of Wildlife, 504 U. S. 555, 560-561 (1992).

[3] Thole, at 1621.

[4] De Fuente v. Preferred Home Care of N.Y. LLC, 2020 U.S. Dist. LEXIS 187681, at *1 (E.D.N.Y. Oct. 9, 2020).

[5] Crosby v. Cal. Physicians’ Serv., 2020 U.S. Dist. LEXIS 210654, at *1 (C.D. Cal. Nov. 2, 2020)

[6] Bryant v. Wal-Mart Stores, Inc., 2020 U.S. Dist. LEXIS 125266, at *10 (S.D. Fla. July 15, 2020)

[7] Thole, at 1621-1622.