EBIA Weekly Newsletter

Court Defers to Plan Language in Denying 401(k) Eligibility to Distributors

   September 6, 2018

Ryan v. Flowers Foods, Inc., 2018 WL 3427878 (N.D. Ga. 2018)

Distributors for a large baking company filed a class action suit alleging that the company improperly classified them as independent contractors for purposes of avoiding overtime obligations. In addition, the distributors claimed that the company violated ERISA by refusing to allow them to participate in the company’s 401(k) plan. The court dismissed the overtime claim (pending the outcome of a related lawsuit), but agreed to hear the ERISA dispute. The distributors argued that they should not have been classified as independent contractors, but as common-law employees who were eligible to participate in the 401(k) plan. The company argued that the distributors were expressly ineligible for benefits under the terms of the plan, regardless of whether they were classified as independent contractors or common-law employees.

The court ruled in favor of the company, finding that the plan language explicitly excluded the distributors from coverage. The plan document provided that individuals not treated as common-law employees for purposes of the company’s payroll records were excluded from plan participation —even if a court determined they were common-law employees and not independent contractors—and further specified that individuals who were distributors under an agreement with the company for the distribution or sale of goods or products were not eligible to participate in the plan. The ineligibility of distributors was also clearly stated in the summary plan description. The court noted that because the exclusion was not based on age or length of service, it was permissible under ERISA.

EBIA Comment: Qualified plans such as 401(k) plans are not required to cover all employees, and a company can make choices (within certain limits) about which categories of employees should receive plan benefits. (Even more leeway is allowed when designing employer-sponsored group health plans and other ERISA benefits.) The company’s success in this case was the direct result of its precisely drafted plan document and SPD. The plan language made it clear that the company did not intend for this category of workers to be eligible for plan participation, no matter what their classification. Plan sponsors should take heed and ensure that plan eligibility provisions are written to clearly reflect their intent. For more information, see EBIA’s 401(k) Plans manual at Sections VII.B.2 (“Independent Contractors: the Problem of Misclassification”) and VII.C (“Eligibility Condition #2: Participation Limited to Class of Eligible Employees Defined in Plan”). See also EBIA’s Self-Insured Health Plans manual at Section XIV.C (“Which Employees and Other Workers Will Be Allowed to Participate?”) and EBIA’s ERISA Compliance manual at Section IX.C (“Eligibility Provisions Should Appear in the Plan Document”).

Contributing Editors: EBIA Staff.