ERISA is the law that governs benefit plans for employees. These usually mean retirement plans like 401(k)s and related plans that offer monetary rewards to employees other than wages.
ERISA is a huge, complicated law with almost fifty years of caselaw under its belt, and yet for reasons totally beyond me, many business owners just take it for granted that nothing under ERISA can bother them as long as they don’t have (or at least, think they don’t have) any retirement plans, or run it all through an outside company. Not so. Read on, and be chilled by just how easy it is to become subject to ERISA’s onerous disclosure requirements and other expensive compliance rules:
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1. Brown v. Ampco-Pittsburgh Corp., 876 F.2d 546 (confidential memorandum to management created severance pay plan)
In this landmark case on ERISA’s requirements that plans come with full, informative disclosure to employees about their crucial terms, the Sixth Circuit Court of Appeals found that a single memorandum circulated among managers inadvertently created an ERISA-governed retirement plan - even though the memorandum was marked as “confidential.” The executives of the Pittsburgh Forging Company circulated an internal document describing severance pay calculations for certain workers, and even though this document was never deliberately released to any workers not covered by the severance policy, the court nevertheless found that an ERISA-governed benefit plan had been created by that memorandum.
Merely creating a reliable perception among your employees that there are certain regular, predictable payments owed to them in the future by the company can be all it takes to wind up in possession of an ERISA-governed plan. This means that you will be subject to costly, time-intensive compliance requirements even if you only intended to create benefits for a certain class of employees.
2. Henglein v. Informal Plan for Plant Shutdown Benefits For Salaried Employees 974 F.2d 391 (“a plan was held to exist where the employer was aware that salaried employees believed there was an ongoing discretionary severance program but made no effort to dispel that impression.”)
So maybe after reading Brown v. Ampco, you’ve decided that the new safe way to create a benefits plan for some of your employees is to do it informally, with a wink and a nod. Right? Can’t be a retirement plan subject to ERISA if I just don’t commit it to paper?
Unfortunately, the Henglein case tells us that this probably is not enough to squeak out from underneath ERISA’s broad reach. Even the wrong oral representations - just stuff you say - can entitle your workers to the protections ERISA provides.
In Henglein, the Third Circuit Court of Appeals was asked whether or not employees were entitled to benefits of a retirement plan based on essentially oral representations from upper management. Even though the Court remanded the case to a lower court to the dirty work, it did give us the general rule that even though an existing plan cannot be modified orally, allowing employees to believe that there is a plan, that it is (or will be) funded, and that there are consistent, non-discretionary procedures for enrolling in the plan, that’s enough for the plan to be governed by ERISA. That’s right, even saying the wrong things can put you at risk of incurring penalties for not complying with the requirements of ERISA for a plan that you didn’t even know existed and that you never intended to create.
3. Cvelbar v CBI Ill., Inc. 106 F.3d 1369 (“a single-employee arrangement can be a plan subject to ERISA.”)
OK, C-Squared. You’ve scared me to death. We’re going to do everything in our power to make sure everybody knows that there’s no retirement plan here, compliant to a T with the provisions of ERISA.
Except, I have this one employee - one, solitary, single employee - who I just can’t lose. Surely, by definition, a retirement plan is something that needs a plural number of employees. I’ll just offer her a funded, non-discretionary retirement benefit and everything will be fine, right?
Nope. When faced with this very question in Cvelbar v. CBI Illinois, the Seventh Circuit Court of Appeals took the opportunity to clearly announce the rule that, so long as the offered benefit meets ERISA’s definition of a covered plan, ERISA’s compliance obligations can still apply to retirement plans that are designed for only a single employee. While in this case it was the employee, instead of the management, trying to escape the long reach of ERISA, the Court sided with an extremely broad reading of ERISA’s coverage and declared that what seemed like an individual employment contract did, in fact, create an ERISA-governed plan.
So when you’re deciding how to strengthen your relationships with your most important employees, you might find yourself accidentally stepping into the expensive, complex world of ERISA compliance. Are you sure your attorney has the expertise to handle that?
4. Vizcaino v. Microsoft Corp. 120 F.3d 1006 (9th Cir. 1997)(en banc) (If you misclassified your independent contractors, they ALSO get to seek damages for what they would have gotten for participating in your plans)
All this compliance talk is interesting, yes, but what about my bottom line? Well here’s a scary thought - if you’ve discovered that you’ve been accidentally operating an ERISA-governed plan for years but didn’t know it, what’s the damage going to look like?
Bad - especially if your employment practices have weaknesses in other areas, too. In the landmark case of Vizcaino v. Microsoft, which is part of the vast tapestry of legal nightmares Microsoft underwent a few years ago as a result of its widespread misclassification of software development employees as independent contractors, found that not only were those misclassified employees entitled to the various other benefits of proper classification, they were also entitled to ERISA’s disclosure requirements regarding Microsft’s various ERISA-governed plans.
If you aren’t sure that your employment practices are up to date and in compliance with the best practices recommended by an employment attorney, don’t wait for the audit. Don’t wait for the lawsuit. Don’t want for your penalties and legal expenses to shoot through the roof. Just call us - we’ll help you get compliant and stay that way.
5. Musmeci v. Schwegmann Giant Super Mkts. 332 F.3d 339 5th Cir. 2003 (vouchers for groceries provided to retired supermarket employees)
Maybe this has scared you so badly that you’re no longer doing interested in anything to help your retiring employees get benefits. Bummer. But surely there must be something you can do for them - some benefit other than cash.
Muscemi v. Schwegmann Giant Super Markets is the case you’ll want to read first. Here, an ERISA-governed plan was found to exist where the defendant grocery chain didn’t even offer cash to its employees as a benefit - instead, they used a set of vouchers for groceries at other Schwemann stores. That’s right - you might have an ERISA-governed benefit plan without even offering cash to any of your employees, ever.
Feeling non-compliant yet? If so, just give us a call using the Contact Us form on our page. We’ll make sure your business is protecting its most valuable asset - its people - without getting the company on the losing end of an expensive, morale-obliterating ERISA lawsuit.
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