Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

Landmark Bill Passes: California Codifies “ABC” Test for Worker Classification

On Thursday, September 12th, the California State Assembly passed Assembly Bill 5 (“AB 5”), the controversial new law that codifies the three-factor “ABC” test introduced by the California Supreme Court in its 2018 Dynamex decision. The passage of AB 5 marks a sea change in the way that companies doing business in California will be required to classify their workers.  AB 5 now goes to Governor Gavin Newsom’s desk for his signature, and Governor Newsom has previously committed to sign the bill into effect.

Effective January 1, 2020, AB 5 adopts Dynamex’s rigorous three-factor test for determining how a company may classify its workers. Under the so-called “ABC” test, which will be codified in Section 2750.3 of the California Labor Code, a worker will be considered an employee unless the company hiring the worker establishes all of the following three prongs:

(A) the worker is free from the control and direction of the company in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) the worker performs work that is outside of the “usual course” of the company’s business; and

(C) the worker is customarily engaged in an independently established trade, occupation, or business that is of the same nature as the type of work performed for the company.

Unlike Dynamex, which applied only to California Wage Orders (i.e., generally, minimum wage, overtime and meal and rest break liability), AB 5 is far more sweeping, and applies to California’s Wage Orders as well as the Labor Code and Unemployment Insurance Code. This means that, in the wake of AB 5, companies that are found to misclassify workers could face broader liability than they would have under Dynamex (including for unemployment insurance, various benefits, paid sick days, and state family leave).

Notably, while AB 5 specifically exempts certain industries, in its current form AB 5 does not include an specific exemption for “gig” economy companies.

To learn more about the California Supreme Court’s decision in Dynamex, listen to our podcast on The Proskauer Benefits Brief:  Legal Insight on Employee Benefits & Executive Compensation.

Please contact any member of the Proskauer Employee Benefits & Executive Compensation Group or the Proskauer Labor & Employment Group with any questions about this post.

Ninth Circuit Overturns Precedent and Sends ERISA Claims to Individual Arbitration

In a case of first impression, the Ninth Circuit overturned 35 years of precedent and ruled that ERISA class action claims brought on behalf of an ERISA plan are subject to individual arbitration. The Court also enforced the arbitration agreement’s class action waiver and sent plaintiff’s putative ERISA class action to individual arbitration with relief limited to plaintiff’s individual plan losses. Plaintiff—a former Charles Schwab employee and participant in the Charles Schwab 401(k) sponsored plan—brought a putative ERISA class action lawsuit against the fiduciaries of the Charles Schwab 401(k) plan. Despite the plan’s arbitration provision and class action waiver and several other similar employment-related arbitration agreements, plaintiff brought his lawsuit on behalf of the entire 401(k) plan and a putative class of more than 25,000 participants. Plaintiff alleged that the company included proprietary Charles Schwab investment funds in the plan for self-gain in violation of ERISA’s prohibited transaction rules and breached its fiduciary duties of prudence and loyalty by allowing participants to invest in proprietary investment options that were more expensive and underperformed comparable non-proprietary options available in the market.

Proskauer moved to compel individual arbitration of plaintiff’s claims arguing that claims under ERISA, like any other federal statute, are subject to individual arbitration (class action waiver) under the Federal Arbitration Act. The district court denied Charles Schwab’s motion to compel arbitration for multiple reasons, including that the arbitration provision was inserted into the plan document after plaintiff ceased being a plan participant and because plaintiff’s claims were brought on behalf of the plan and the plan had not consented to arbitration. The district court also stated that even if the plan did consent to arbitration, the consent would not be valid under ERISA because it would inappropriately limit the plan fiduciaries’ liability. Arguing for Charles Schwab before the Ninth Circuit, Howard Shapiro contended that the district court’s order was incorrect both factually and legally on each point.

The Ninth Circuit reversed, adopting all of Defendants’ arguments and becoming the first federal court of appeal to hold that class action ERISA claims brought on behalf of an entire ERISA plan are subject to individual arbitration with relief limited to the individual plaintiff’s claims. First, in light of intervening Supreme Court case law, the Court overruled its longstanding precedent set forth in Amaro v. Continental Can Co., 724 F.2d 747 (9th Cir. 1984), which held that ERISA claims were not arbitrable. Second, the Court ruled that the district court incorrectly found that plaintiff was not bound by the plan’s arbitration provision as he was a participant in the plan for nearly a year after the provision was inserted. The Court noted that by participating in the plan plaintiff “agree[d] to be bound by” the arbitration provision. Third, the Court found that the plan had consented to individual arbitration by including the arbitration provision in the plan document. Fourth, the Court rejected the district court’s conclusion that the arbitration provision/class action waiver limited the fiduciaries’ liability as the arbitration provision merely provided for a different forum that “offered quicker, more informal, and [] cheaper resolutions for everyone involved.” Lastly, the Court held that nothing in ERISA precludes limiting plaintiff’s relief to his individual losses as the Supreme Court has recognized that claims brought on behalf of a plan “are inherently individualized when brought in the context of a defined contribution plan like that at issue.” Therefore, the Court reversed and remanded with instructions for the district court to order arbitration of individual claims limited to seeking relief for the impaired value of the plan assets in the individual’s own account.

The decision resulted in two separate opinions: Dorman v. Charles Schwab Corp., No. 18-15281, 2019 WL 3926990, __F.3d__ (9th Cir. Aug. 20, 2019); Dorman v. Charles Schwab Corp., No. 18-15281, 2019 WL 3939644, __F. App’x__ (9th Cir. Aug. 20, 2019). The Proskauer team representing Charles Schwab includes partners Howard Shapiro, Myron Rumeld, and Stacey Cerrone, senior counsel John Roberts , associates Tulio D. Chirinos and Lindsey Chopin, and senior paralegal Blair Jones.

Seventh Circuit Holds Withdrawal Liability Cannot Be “Decelerated”

The Seventh Circuit held that a multiemployer pension fund’s withdrawal liability claim was barred by the six-year statute of limitations applicable to claims under the Multiemployer Pension Plan Amendments Act (MPPAA).  After the employer failed to make several quarterly withdrawal liability payments, the fund declared the employer to be in default, accelerated its withdrawal liability, and filed suit in 2008 to collect the accelerated amount.  Shortly thereafter, the parties entered into a settlement pursuant to which the employer cured the default and agreed to resume making quarterly payments.  The employer defaulted on its obligation multiple times over the course of several years and in each case entered into a settlement to resume making quarterly payments.  The last time the employer defaulted, the fund sued seeking the withdrawal liability owed based on the most recent settlement agreement.  The employer argued that the claim was time-barred because it began to accrue in 2008 when the fund first accelerated the employer’s withdrawal liability, and not when the employer breached the subsequent settlement agreements.  The district court agreed and the Seventh Circuit affirmed.  In so holding, the Seventh Circuit rejected the fund’s argument that it could “decelerate” an employer’s withdrawal liability as there was no basis under the MPPAA for doing so.  The Court also commented that its ruling did not affect the fund’s right to file a state law claim for breach of the settlement agreements.  The case is Bauwens v. Revcon Technology Group, Inc., No. 18-3306, 2019 WL 3797983 (7th Cir. 2019).

Prominently Displayed, Fundamental Discrepancy In Benefits Triggered Contractual Limitations Period

The Fifth Circuit concluded that a plan’s three-year contractual limitations period began to accrue when a beneficiary received a letter in 2008 that prominently displayed on the first page the monthly earnings used to calculate his long term disability benefits.  The Court held that the claim was time-barred because the beneficiary failed to bring his miscalculation claim until 2017.  In so holding, the Court explained that the alleged discrepancy in monthly earnings of almost $3,000 was so large and fundamental that its effect on the beneficiary’s plan benefits was apparent, and the discrepancy was not of a type that required him “to decipher complex formulae or piece together inferences from incomplete information.”  The case is Faciane v. Sun Life Assurance Co. of Canada, No. 18-30918, 2019 WL 3334654 (5th Cir. July 25, 2019).

Back to Basics: IRS Issues Ruling About Failure to Cash a Distribution Check from a Qualified Retirement Plan

In Revenue Ruling 2019-19, the IRS answered three basic questions about the consequences of an individual’s failure to cash a distribution check from a qualified retirement plan. Uncashed checks arise in a number of contexts and questions on the taxation of uncashed checks should be carefully considered.

In the hypothetical posed by the IRS, Individual A received a fully taxable distribution check from a qualified retirement plan in 2019. Individual A took no action with respect to the distribution check (and did not make a rollover contribution with respect to any portion of the distribution check). The IRS confirmed the following consequences:

  • Gross income inclusion: As expected, the IRS confirmed that the amount of the distribution is includible in Individual A’s gross income in 2019, explaining that Individual A’s failure to cash the distribution check does not permit her to exclude the amount from gross income. The IRS noted that, for purposes of the revenue ruling, it is irrelevant what actually happens to the check (e.g., whether Individual A keeps the check, sends it back, destroys it, or cashes it in a subsequent year).   This conclusion makes it clear that recipients are not allowed to manipulate the year of income inclusion by simply holding distribution checks until a later tax year.
  • Withholding and reporting obligations: The IRS confirmed that the plan administrator’s obligation to withhold tax under IRC § 3405(d)(2) from Individual A’s distribution is not altered by Individual A’s failure to cash the distribution check. Likewise, the plan administrator is required to report the distribution to Individual A on a Form 1099-R for 2019. Because the plan administrator is usually unaware of precisely when a distribution check is cashed, altering the plan administrator’s withholding and reporting obligations to align with the time the check is cashed, rather than when the check is issued, would prove very burdensome for plan administrators.

Perhaps the most interesting part of this ruling is the final sentence, in which the IRS alludes to continuing to analyze issues arising in other situations involving uncashed checks – “including situations involving missing individuals with benefits under those plans.” So stay tuned for (potential) further guidance from the IRS regarding missing participants.

District Court Denies Motion to Dismiss Mental Health Parity Act Putative Class Action

In the latest volley between participants and group health plans over mental health services coverage, a federal district court in California denied United Healthcare’s motion to dismiss a putative class action challenging the reimbursement rates for out-of-network mental health services.  In this case, the plaintiffs alleged that UHC reduced reimbursement rates for out-of-network services by 25% for services provided by a psychologist and by 35% for services provided by a masters level counselor in violation of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (the “Parity Act”).

The Parity Act, which we have blogged about previously, requires that, if a group health plan or health insurance issuer provides medical/surgical benefits and mental health and substance use disorder (MH/SUD) benefits, the financial requirements and treatment limitations applicable to MH/SUD benefits cannot be more restrictive than those that apply to medical/surgical benefits.

The court ruled that plaintiffs stated a plausible claim under the Parity Act.  In so ruling, the court first concluded, over UHC’s objections, that plaintiffs could pursue multiple theories as to how the reimbursement adjustment violated the Parity Act—including alleging that the restriction was an impermissible financial requirement, quantitative treatment limitation and nonquantitative treatment limitation.  Next, the court rejected UHC’s argument that plaintiffs failed to state a claim because the complaint did not identify a medical/surgical benefit comparable to the MH/SUD benefits at issue and did not allege that the reimbursement policy was applied more stringently to the MH/SUD benefits than the comparable medical/surgical benefit.  The court explained that it was sufficient for the complaint to allege that the defendant had singled out MH/SUD services for disparate treatment by applying the reimbursement adjustment to MH/SUD services only.  According to the court, plaintiffs did not need to identify a medical/surgical analogue that was not subject to a comparable reimbursement adjustment.

The case is Smith v. United Healthcare Insurance Co., No. 18-cv-06336-HSG (N.D. Cal. July 18, 2019).

[Podcast]: Worker Classification after Dynamex, Not as Simple as ABC

proskauer benefits brief podcast

In its 2018 decision in Dynamex Operations West v. Superior Court of Los Angeles County, the California Supreme Court upended decades of precedent by setting out a new, stringent, three-factor test to determine proper worker classification for purposes of California’s wage order rules. Then, this year, the Ninth Circuit first applied Dynamex retroactively and then wiped out that ruling and returned the question to the California Supreme Court. In the meantime, Assembly Bill No. 5, which seeks to codify the Dynamex test, is before the California Senate. In light of these developments, employers with workers in California are increasingly faced with conflicting information about the practical impact of Dynamex.

In this episode of The Proskauer Benefits Brief, Kate Napalkova and Pietro Deserio discuss Dynamex and its broader meaning for employers and other stakeholders in the compliance and transaction arenas.


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Life Insurer Compelled to Produce Attorney-Client Communications

A federal district court in Ohio concluded that internal communications between a plan administrator and in-house counsel about a beneficiary’s first-level benefit claim remained protected by the attorney-client privilege, and that ERISA’s fiduciary exception to the attorney client privilege did not apply. In so ruling, the court explained that once the beneficiary’s counsel submitted a “strongly worded, evidence-based letter along with [a doctor’s] opinion letter, [defendant] faced more than a mere possibility of future litigation if it continued to deny benefits,” and thus the relationship was clearly adversarial and litigation was a near-certainty. The court did, however, compel the production of communications between the plan administrator and in-house counsel before and after the initial claim denial, but only up to the point when the beneficiary’s counsel submitted the “strongly worded, evidence-based letter.” The case is Charlie Duncan, Ex’r of the Estate Of Paul W. McVay, et al. v. Minnesota Life Ins. Co., No. 17-cv-25, 2019 WL 3000692 (S.D. Ohio July 10, 2019).

SDNY Rejects Class Standing and Fiduciary Breach Claims In Connection With Alleged Double-Charging Scheme

A New York federal district court concluded that a defined benefit plan participant lacked standing to seek relief on behalf of plans other than the one in which he was a participant. In this case, plaintiff claimed that defendants breached ERISA fiduciary duties and engaged in prohibited transactions by charging undisclosed markups for securities trades. The court concluded that plaintiff could pursue his claim only with respect to the plan in which he participated because the defendants’ alleged improper charges for that plan would not resolve whether, when, and in what amount defendants charged undisclosed markups to other plans.

The court also dismissed the plaintiff’s fiduciary breach claims, finding that he failed to plausibly allege that the defendants had discretion over the disposition of plan assets such that they could be deemed functional fiduciaries. In so ruling, the court rejected plaintiff’s argument that the defendants became fiduciaries with respect to the markups by virtue of the discretion they exercised over their own compensation. The court concluded that the markups depended on a number of factors outside the defendants’ control, such as the type of customer, time of day, the time and amount of securities being traded, and the market price. The case is Fletcher v. Convergex Group LLC, No. 13-cv-9150, 2019 WL 3242586 (S.D.N.Y. July 2, 2019).

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