Independent Contractors’ ERISA Lawsuit Fails to State Actionable Claim

The United States District Court for the Northern District of Georgia has ruled in favor of defendants’ motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit filed against Flowers Foods, Inc., and Flowers Baking Co. of Villa Rica (FBC).

The plaintiffs are or were distributors for FBC, which utilizes distributors to sell and distribute its fresh baked goods. According to the text of the decision, FBC enters into a Distributor Agreement with each of its distributors, which outlines the terms of their relationship. In this Distributor Agreement, FBC’s distributors are labeled as independent contractors, which the plaintiffs contend is an “intentional misclassification for the purpose of avoiding overtime compensation obligations under the FLSA [Fair Labor Standards Act].”

The text of the decision shows Flowers Foods sponsors various benefits plans for eligible employees. One such benefits plan is its 401(k) Retirement Savings Plan, which is administered and maintained as an employee welfare benefit plan subject to ERISA. Important to the course of this litigation, Flowers Foods is the plan sponsor of the 401(k) plan, while FBC does not offer any 401(k) plans. The plan contains various requirements to be eligible for participation. For example, to be able to participate, an individual must be considered an “Eligible Employee,” as defined by the terms of the plan. The plaintiffs have not been permitted to participate in the plan.

On March 6, 2017, the plaintiffs filed a proposed class and collective action complaint, asserting the following claims: (1) violation of the FLSA due to the defendants’ failure to provide proper overtime compensation; and (2) violation of ERISA based upon the defendants’ failure to provide the plaintiffs benefits that they are entitled to under the terms of the plan. On July 19, 2017, the parties stipulated to the dismissal without prejudice of the plaintiffs’ FLSA claim due to the pendency of a similar, earlier-filed FLSA action in the U.S. District Court for the Middle District of Florida.

Leading to this decision, the defendants successfully moved for summary judgment as to the sole remaining claim for violation of ERISA—arguing their case on two grounds. First, they argued that the plaintiffs are expressly ineligible for benefits under the terms of the plan, even if they are ultimately deemed to be common law employees. Second, the defendants argued that even if the plaintiffs are eligible for benefits under the plan, they nonetheless failed to exhaust administrative remedies under the plan.

Weighing these arguments, the court concludes that the plaintiffs’ ERISA claim in fact fails because they have not shown that they are eligible for benefits under the plan.

“Therefore, it is unnecessary to address whether the plaintiffs were required to exhaust their administrative remedies,” the decision explains.

The text of the decision points out that, to assert a claim under ERISA, a plaintiff must be either a “participant” or a “beneficiary” of an ERISA plan. A participant is defined as “any employee or former employee of an employer who is or may become eligible to receive a benefit of any type from the ERISA plan.” Thus, ERISA requires a plaintiff to satisfy two requirements to establish participant status, the decision explains. First, the plaintiff must be a common law employee. Second, the plaintiff must be, according to the language of the plan itself, eligible to receive a benefit under the plan.

“An individual who fails on either prong lacks standing to bring a claim for benefits under a plan established pursuant to ERISA,” the court concludes.

The first requirement, whether the plaintiff is a common law employee, requires an independent review by the court of the employment relationship. Relevant here, the Supreme Court has instructed “that the term ‘employee’ as used in the ERISA statute refers to the common law analysis, which distinguishes between employees and independent contractors by examining at least 14 factors.”

“With this analysis, the parties’ description of their employment relationship is one consideration in determining whether a plaintiff is an employee, but it is not dispositive,” the decision states. “However, even assuming that the plaintiffs prove that they are common law employees, their ERISA claim nonetheless still fails because they cannot meet the second requirement that they are eligible for benefits under the terms of the plan. The second prong—whether the plaintiff is eligible for benefits—is an examination of the terms of the company’s ERISA plan. This requirement is necessary because companies are not required by ERISA to make their ERISA plans available to all common law employees.”

As highlighted in the decision, in fact, nothing in ERISA requires employers to establish employee benefits plans. Instead, the plaintiff in this situation must show that he or she is eligible for benefits under the terms of the plan.

“ERISA’s limitations on who employers can exclude from ERISA plans are very narrow,” the decision states. “The law prohibits an employer from denying participation in an ERISA plan on the basis of age or length of service. Other than that, any bases for exclusion from a plan are permissible. Here, even if the plaintiffs have a plausible argument that they are common law employees of the defendants, their ERISA claim nonetheless fails because they have not shown that they are eligible for benefits under the terms of the plan. The dispositive question is not whether the claimants were employees but whether, considering them as employees, they were eligible to participate in an ERISA plan according to the specific terms of the plan under consideration. There is no dispute of fact that the plan language explicitly excludes the plaintiffs from coverage.”

The full text of the lawsuit, which includes substantially detailed argumentation on the conclusions drawn above, as well as an informative discussion by the court of the different classifications of employment that plaintiffs have brought to bear, is available here.