The Issue: Companies often divide their workers into a variety of categories . . . agency employees, temporary employees, provisional employees, independent contractors, and so on. Unfortunately, many companies believe that those classifications are significant from a retirement plan perspective. They are not . . . and that belief can lead to trouble.
The Solution: Plan sponsors need to properly place all of their workers into one of three categories: employees, leased employees, and independent contractors. If any worker doesn’t fit into one of those categories, legal advice should be sought. The provisions of the retirement plan should be reviewed to see how each category (and particularly leased employees) are treated.
Analysis: For ERISA plans, there are the three primary categories listed earlier: employees; leased employees; and independent contractors. The label used by an employer is not determinative. The test for determining the appropriate classification is a functional one . . . i.e., does the employer control how the work is done, determine the hours worked, and so on?
For example, an agency employee, temporary employee or provisional employee is . . . an employee.
Viewed through those lenses, the first “ERISA” step is for employers to divide the people who work for them and/or at their facilities into those three categories. The second step is to determine whether the workers have been properly classified. The third step is to see what the plan document says about each of the categories. For example, the plan should say whether the leased employees are covered by the plan or not. Be careful, though . . . employers may call leased employees by other names, such as agency employees or temporary employees. Regardless of the label, they are either leased employees or common law employees and need to be categorized properly.
The final group for our purposes is independent contractors. If a worker satisfies the legal definition of an independent contractor, the worker can be excluded from a plan without adverse consequences.
Since this is a short article, we cannot discuss all of the categories of workers. There are other categories that can be treated differently, for example, union employees.
However, our goal is to give you a good starting point for analyzing the coverage issues for your retirement plans. If you can’t properly place a worker into one of the three main categories -- employee, leased employee, or independent contractor -- then you should talk to your employment law or ERISA attorney. This is a significant issue and is audited by the IRS and investigated by the DOL. In addition, it has been the source of noteworthy litigation.