So the 1st Circuit says that if an employer's plan document excludes (from plan participation) the employer's common law employees , who are paid and issued W-2s not by their common law employer... but by an outside payroll service entity ..... then those common law employees cannot be participants in their common law employer's retirement plan? How rude!

I'm surprised, but I'll get over it.

Would those excluded employees have to be considered in the employer's 410(b) discrimination test ?

Is this a screw ball way to describe leased employees?

I think it is not a "screwball way" but an effective way to exclude a group of employees that the parties all expect to be ineligible for the service recipient's plan. The IRS has basically indicated that virtually no individuals can meet the leased employee definition without being the common law employees of the service recipient (gutting the leased employee rules in my opinion).

However, if they are the common law employees of the service recipient, they must be included in the non-discrimination and coverage tests as eligible but not benefiting.

JDuns, are you sure that is the IRS position? I've never heard that leased employee definition is met only if leased worker is common law employee of lessee employer. (When you say "service recipient" ... you do mean lessee employer, right?)

I thought that if a leased worker is deemed a common law employee of lessee employer, then the fact that the plan document excludes leased employees will not exclude him (even if he meets the defintion of a leased employee) because his status as a common law employee supersedes the fact that he is also a leased employee.

A worker can meet the leased employee definition and not be a common law employee. Thus, if the plan document allows leased employees ...then he will participate, even though he is not a common law employee.

After the IRS issued its PEO guidance, it was my understanding that virtually all individuals who had previously been classified as leased employees were now classified as common law employees of the recipient. Given the leased employee definition requiring the individual to work for the employer on a substantially full time basis for at least one year under the primary direction and control by the recipient.

You are right that, if the plan just excluded leased employees (and not the "screwball definition"), these common law employees paid by a PEO would not be excluded.

I would be interested in hearing an example of a leased employee that was not a common law employee but met the rest of the test.

JDuns, an example in which a leased worker is the common law employee of leasing organization and is the leased employee of recipient organization:

Leasing organization (LO) hires X, for the purpose of leasing X to reciepent organization (RO). LO trains X , sets X's salary amount and allows X to participate in LO's retirement plan. LO pays X each pay day, withholds taxes, issues X a W-2 and can fire X. LO signs a leasing agreement with RO, that X will perform services for RO. RO can tell X what to do (X will be under the primary direction and control of RO), but RO cannot fire X from the employment of LO. RO can can only call LO and say "I don't want X to provide servies for me anymore, send me someone else".

Therefore, X is a common law employee of LO (not RO).

If X performs services for RO on a full time basis for at least one year, then X is a leased employee of RO (but not a common law employee of RO).

Keep in mind that "primary direction and control" of X by RO, does not cause in and of itself .... X not to be the common law employee of LO.

I thought that ERISA 202(a)(4) permits a plan to limit participation to members of an eligible group as defined by the plan. The employer can define participation as any classification of employees not based on age or service.

I haven't read the decision, so I don't know if the specific situation and decision changes the "normal" interpretation of current law or not. But based on my current understanding, I agree with Mbozek that you can exclude any class you want to (subject to a few restrictions) and I also agree with Moe that these excluded classes, if considered "employees" would have to be counted in the testing. So if you want to exclude your leased employees, no problem as long as you pass testing.

Whether this decision says something different, I don't know until I read it. Moe, do you know the name of the case, or have a link to it? Thanks.

Belgarath, perhaps the case is: Edes v. Verizon Communications (1st Cir 08/02/05) (as stated in Moe's title).

I just noticed that - didn't have time to edit my post. Oh well, I'm used to looking foolish anyway!

It's .... Edes vs. Verizon Communication

I'm one of the plaintiffs in Edes v. Verizon Communications. Supposedly, there was "case law" on the books for suits such as ours, i.e., Microsoft and ARCO. I'm not a lawyer, but in those two cases, contract employees, like us, sued and won their cases against Microsoft and ARCO.

We were all hired by GTE (now Verizon) for a 6-month assignment that eventually stretched into nearly 5 years. We were not hired by the outside agencies that paid us and provided W-2's. Other contractors hired 6 months earlier were made full-time employees with all benefits and retroactive service credit. We were told we would be made full-time employees, too, if we stayed with the project for its duration.

All contractors on the project knew that GTE was taking advantage of our status, but had we spoken out or made any attempts to seek legal guidance on the matter, we would have been fired. Besides, we wouldn't have been "vested" in GTE's retirement plan or been eligible for some other benefits until we had met certain service requirements. Our service dates from 04-12-94 thru 12-31-98 would have given us "vested status." GTE's pension system was used to calculate our pension benefits, had full-time employment been granted.

There's lots more I could say about this ruling, and if anybody has any specific questions, feel free to email me. I don't know what happened to the old adage that begins with the words......"If it looks like a duck," etc., etc., but I do know this.....we we treated like employees, told to act like full-time GTE employees, signed legal documents like full-time employees, evaluated the performance of full-time employees, were listed in GTE's corporate phonebook just like GTE employees, attended seminars, lectures, and training sessions along with full-time employees, had online access to GTE's research library in Stamford, CT like full-time employees, headed up and served on in-house committees to increase operating efficiency, our performance was "rated" by GTE management annually and raises recommended, we chose our own agencies for payroll purposes but GTE controlled our assignments, handled disciplinary matters in-house, fired contractors without agency involvement, and essentially told our two agencies that they had no control over us whatsoever, except for payroll. Not to mention that contractors had keys to the office and its secured rooms and opened and closed the office daily. I could go on, but I won't.

"If it looks like an employee, acts like an employee, is treated like an employee, employees past and present believe it's an employee, it's told to sign documents and tell callers it's an employee, it does everything a full-time employee does and more.......it's an EMPLOYEE!

Are you going to appeal?

This month's decision was in reference to our "appeal." There are no further legal avenues available, so I've been told.

It seems to me you could appeal to the US Supreme Court. This case is interesting in several ways. Do you know if the IRS is going to examine the plan for qualification problems?

What is interesting about a case where the plan defined the eligible group to exclude persons who were not paid by the employer as permitted under ERISA?
There is also a recent case in Fed Ct in Mass., Walsh v. Gillette, 9/13/05 where eligibility for the retirement plan required that the employee report wages on a W-2 form which excluded independent contractors.