Amicus Curiae Brief — Nationwide Mut. Ins. Co. v. Darden

; | fapreme Court, U.S.

Y FILED

No. 90-1802 [ NOV 29 1987

a DFHCE OF THE CLERK

Iu the Supreme Court of the at. co ’

OCTOBER TERM, 1991

NATIONWIDE MUTUAL INSURANCE COMPANY, ET AL,,

PETITIONERS

v.

ROBERT T. DARDEN

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

KENNETH W. STARR

Solicitor General

MAUREEN E, MAHONEY

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

Department of Justice

MARSHALL J. BREGER Washington, D.C. 20530

Solicitor of Labor (202) 514-2217

ALLEN H. FELDMAN

Associate Solicitor

ELIZABETH HOPKINS

Attorne y

Department of Labor

Washington, D.C. 20210

QUESTION PRESENTED

Whether a person who operates his own insurance

business under an agreement to represent one insurance

company on an exclusive basis is an “employee” of that

insurance company under Section 3(6) of the Employee

Retirement Income Security Act of 1974 (ERISA), 29

U.S.C. 100216).

ee

TABLE OF CONTENTS

Interest of the United States .... CR

Statutory provisions involved 2.000.000.0000... ooo

Ne cesses ccsusevuuoseneeuccecsucees

Summary of argument ................................... ok 5, Ee

Argument:

A person who operates his own insurance business

pursuant to an agreement to represent one insurance

company on an exclusive basis is an “independent

contractor,” not an “employee” of that insurance

company under Section 3(6) of ERISA

A.

This Court has made clear that the term ‘‘em-

ployee,” as used in remedial social legislation, is

defined with reference to the common law fac-

tors construed as a whole and in light of the

purposes of the statute at issue 000.

The term “employee” in Section 3(6) of ERISA

should be defined primarily with reference to

the factors of the common law test, which should

be applied in light of the remedial purposes of

a emsscutecetuecsenenees

The court of appeals erred by abandoning the

common law test and concluding that Darden

was an employee of Nationwide —.......0000000000000.....

a Tne SAS

Cases:

TABLE OF AUTHORITIES

Albernaz v. United States, 450 U.S. 333(1981)..

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

EE ST tiditntsdeenenarvenst<ssnnnervvensverenees

Avis Rent A Car Sys., Inc. v. United States, 503

P.20 428 (20 Cir. 1974) ........................ alnisiediiniees

Bartels v. Birmingham, 332 U.S. 126 (1947).

Brennan Vv. Gilles & Cotting, Inc., 504 F.2d 1255

(4mm Cir. 1974)............. Gicasees ieee soe

11

11

15

22

26

14

16

14

13

14

IV

Cases—Continued : Page

Burnetta Vv. Commissioner, 68 T.C. 387 (1977)... 19

Clarkson Constr. Co. Vv. OSHRC, 531 F.2d 451

AU TR ace 14

Cobb v. Sun Papers, Inc., 673 F.2d 337 (11th

Cir.), cert. denied, 459 U.S. 874 (1982) 000000. 14

Community for Creative Non-Violence v. Reid,

490 U.S. 730 (1989) ...... RU ecm eae Be, 12, 14, 18, 22

Donovan V. DialAmerica Marketing, Inc., 757 F.2d

1376 (3d Cir.), cert. denied, 474 U.S. 919

(1985) ....... Se 14

EEOC vy. Zippo Mfg. Co., 13 F.2d 32 (3d Cir.

NE CREM ee BOT TIN marry Ss cn 14

Eaves v. Penn, 587 F.2d 453 (10th Cir. 1978) ana 16

Firestone Tire & Rubber Co. v. Bruch, 489 U.S.

101 (1989) ......... seicpueiselpadasdiaves taaatiaian nes tan ne 12

Holt v. Winpisinger, 811 F.2d 1532 (D.C. Cir.

UIE os cae ee era ae SU

Hummell v. S.E. Rycoff & Co.., 634 F.2d 446 (9th

EA CIID -cocsceanucecunsenasecenntnnacetecmdsadeemetiebiaitetie mica 25

Korea Shipping Corp. Vv. New York Shipping

Ass’n, 880 F.2d 1531 (2d Cir. 1989) . | 14

Kross Vv. Western Elec. Co., 701 F.2d 1238 (7th

3 ee ESE It one oan 16

Mayeske Vv. International Ass’n of Fire Fighters,

905 F.2d 1548 (D.C. Cir.), cert. denied, 111

S. Ct. 347 (1990) _... siccouenannuiiapienasiedanaamnctimeiie 10, 12, 20-21

NLRB vy. Hearst Publications, Ine., 309 U. S. 111

SINT <schislsisieoniindadesbonspadieedapbacbuaecuasiadenseiaamiomaimmadaaltineh 7,15

NLRB vy. United Insurance Co., 390 ‘US. 254

(1968) . y na

Nachman Corp. ' V. PBGC, 446 US. 859 (1980) 16

PBGC v. R.A. Gray & Co., 467 U.S. 717 (1984) . 16

Pilot Life Ins. Co. Vv. Dedeaux, 481 U.S. 41

III ecsiicccctec acct tae ocaecien ancengaamenéndeaaacasbacen dedi eda tami reek 12

Penn V. Howe-Baker Eng’rs, Inc., 898 F.2d 1096

(5th Cir. 1990) ............. 10, 20, 21

Plazzo Vv. Nationwide Mut. Ins. Co., -g92 F.2d 79

(6th Cir. 1989), cert. denied, 111 S. Ct. 370

RE eee ee IS Bel ae. 20

Professional & Executive Leasing, Ine. Vv. Com-

missioner, 89 T.C. 225 (1987), aff'd, 862 F.2d

anne = RRR n Ener 10, 18, 19

Cases—Continued : Page

Rettig v. PBGC, 744 F.2d 133 (D.C. Cir. 1984)... 16

Richardson Vv. Central States, S.B. & S.W. Areas

Pension Fund, 645 F.2d 660 (8th Cir. 1981)... 20

Rutherford Food Corp. Vv. McComb, 331 U.S. 722

(1947) . aa at Uae

Short v. Central States, ‘S.E. & S. Ww. Areas Pen-

sion Fund, 729 F.2d 567 (8th Cir. 1984) 0... 20

Singer V. Star, 510 So. 2d 637 (Fla. Dist. Ct. App.

1987) . DADS P SID eo LAME SY ORS EINE URPPET SCPE OOD 21

Smith v. C MTA- IAM Pen nsion 2 Trust, 746 F.2d 587

SI RO es ge Se 16

United States Vv. Silk, 331 U.S. 704 (1947) —.... 5,9, 14, 15

Wardle v. Central States, S.E. & S.W. Areas Pen-

sion Fund, 627 F.2d 820 (7th Cir. 1980), cert.

denied, 449 U.S. 1112 (1981). ae 20

Wolcott v. Nationwide Mutual Ins. Co. ™ 884 F.2d

245 (6th Cir. 1989) .......... pee SER TC ARES: 10, 19, 24

Wright v. United States, 537 F. Supp. 568 (N. D.

Si Sa 20 a a el ee 21

Statutes and regulations:

Employee Retirement Income Security Act of

1974, 29 U.S.C. 1001 et seq.:

I i culsnseiivabiicteies ey —

§ 2(a), 29 U.S.C. 1001 (a) 11

§ 3(1),29 U.S.C. 1002(1) .. EAs ee 11

8 3(2), 3 USC. 1668(s) .........................-......... 11

§ 3(2) (A), 29 U.S.C. 1002 (2) (A) 2, 4, 8, 11, 23

§ 3(6), 29 U.S.C. 1002(6).....................1, 2, 4, 9, 11, 12,

13, 18, 19, 20

Ee i i Ae ETD ve essinseccentcescasncesessernces . 4,11

§ 3(40), 29 U.S.C. 1002 (40) 2

§ 203(a), 29 U.S.C. 1053 (a) ° — =

Bo SPS RR Ses): CO) 4

§$ 514(b) (6) (A), 29 U.S.C. 1144(b) (6) (A) | 17

Fair Labor Standards Act of 1938, ch. 676, § 3(e),

52 Stat. 1060 . 13

Fair Labor Standards Act, 29 U. S.C. 201 et seq. 13

Federal Insurance Contributions Act, 26 U.S.C.

3101 et seq.:

Be Peeeaas MI TOURED oc ctssicccctssepuneradudcsnctecensandengs 25

VI

Statutes and regulations—Continued : Page

a scensecindammaneniioniall 25

es ND CU ID ic sceccciccncesecsecencnenseee 25

ES EE ee ee eNO eae 18

I 2 i deeisieeeeaieenin 2

a epsennnunieen re es 18

26 U.S.C. 410(b) (1) (A) 0... SRNL P PREMIO Poe 18

a eosaeeinnaiaenananneaah 21

ne ceiepnaennsemientalid 19

OD. cn cencnsccenonateonensensesoesn 19

Reorg. Plan No. 4 of 1978, § 101, 5 U.S.C. App. at

oo i daaeienian sessssnesessensenees 1,18

Miscellaneous:

BT CED vassiceiisiceccssccceenesserscnseccene 25

Dep’t of Labor, Op. Ltr. No. 77-75A (Sept. 21,

ce od oo aa nasmeigemmnensenaian 18

Dep’t of Labor, Op. Ltr. No. 81-88A (July 9,

NN coe ee hit is ee eS ee 17

Dep’t of Labor, Op. Ltr. 91-17A (Apr. 5, 1991) ..2, 9, 16, 17

H.R. Conf. Rep. No. 1280, 93d Cong., 2d Sess.

RE RIESESIIS SP Ze ae es ane nna olsen Nomen enc 25

H.R. Rep. No. 807, 93d Cong., 2d Sess. (1974) ......... 25

J. Langbein & B. Wolk, Pension and Employee

Rg one re 22

Restatement (Second) of Agency (1958) ........ 5, 12, 20, 22

Rev. Rul. 75-85, 1975-1 C.B. 181 ................................. 19

Rev. Rul. 85-31, 1985-1 C.B. 153 _.............. la eee aa 25

Rov. Rul. 67-41, 1967-1 C.BB. BOG .......--cccsecsscocssrcensesesse: 19

Iu the Supreme Court of the United States

OCTOBER TERM, 1991

No. 90-1802

NATIONWIDE MUTUAL INSURANCE COMPANY, ET AL.,

PETITIONERS

Vv.

ROBERT T. DARDEN

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

INTEREST OF THE UNITED STATES

The issue in this case is whether respondent Robert T.

Darden, an insurance agent, was an “employee” of peti-

tioners, the Nationwide insurance companies, within the

meaning of Section 3(6) of the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. 1002(6).

The Department of Labor and the Internal Revenue

Service have substantial administrative responsibilities

under the Act. See Reorg. Plan No. 4 of 1978, § 101, 5

U.S.C. App. at 1374. Performance of those responsi-

bilities often depends upon the definition of “employee,”

because that term is used in a variety of provisions

throughout the Act. These agencies have accordingly

issued opinions and adopted positions concerning the

proper definition of the term “employee” under ERISA.

(1)

2

For example, the Department of Labor recently issued

an opinion letter on the issue of whether a health plan

was a “multiple employer welfare arrangement” within

the meaning of Section 3(40) of ERISA, 29 U.S.C.

1002140), which turned on whether the participants in

the plan were employees of the company marketing the

plan. Dep’t of Labor, Op. Ltr. 91-17A (Apr. 5, 1991).

The IRS is also required to determine who are “em-

ployees” of a company, because the minimum participa-

tion rules of Title I] of ERISA, 26 U.S.C. 401-410, only

provide favorable tax treatment of pension plans if ben-

efits are extended to a broad group of “employees.” Be-

cause this case involves the meaning of one of ERISA’s

basic definitional terms, the United States has a strong

interest in the resolution of the question presented.

STATUTORY PROVISIONS INVOLVED

1. Section 3(2) (A) of ERISA, 29 U.S.C, 1002(2) (A),

provides in pertinent part:

Except as provided in subparagraph (B), the terms

“employee pension benefit plan” and “pension plan”

mean any plan, fund, or program which was hereto-

fore or is hereafter established or maintained by an

employer or by an employee organization, or by

both, to the extent that by its express terms or as a

result of surrounding circumstances such plan, fund,

or program—

(i) provides retirement income to employees,

or

(ii) results in a deferral of income by em-

ployees for periods extending to the termination

of covered employment or beyond |.|

2. Section 3/6) of ERISA, 29 U.S.C, 100216), pro-

vides:

The term “employee” means any individual employed

hy an employer.

3

STATEMENT

1. a. From 1962 through 1980, respondent Robert T.

Darden sold Nationwide insurance in Spring Lake, North

Carolina, pursuant to the terms of a series of agency

agreements. The pertinent terms of the agreement are

not in dispute. Darden was required to represent Na-

tionwide on an exclusive basis, and Nationwide com-

penvated Darden by payment of commissions based on his

sales performance. Darden controlled the manner in

which he performed his sales responsibilities: he rented

and jater purchased an office at his own expense; he

determined his own hours; he was free to solicit: sales

“wherever, whenever, and from whomever he wished”;

and he hired and fired his office help. Pet. App. 4%a-49a;

jr. in Opp. App. 20a. Neither party characterized the

avency relationship as one of employment in their formal

records. Nationwide’s business records listed Darden as

an “independent contractor and not an employee.” Pet.

App. 49a. Similarly, Darden’s tax returns reported his

commission income and business expenses as income de-

rived from a sole proprietorship—not as income derived

from employment. [hid,

Although Darden was not eligible to participate in

the pension plan Nationwide maintained for those in-

dividuals it considered to be its employees, the agency

avreements did establish a “Deferred Compensa‘ion In-

centive Plan” and an “Extended Earnings Plan” for

insurance agents such as Darden. Under the terms of

the deferred compensation incentive plan, “Nationwide

maintained a retirement account for Darden and annually

credited to ‘hat account a sum based on Darden’s earn-

ings from original and renewal fees for insurance poli-

cies.” Pet. App. 33a. Under the extended earnings plan,

“Nationwide agreed to pay Darden, upon his retirement,

termination, death or disability, a sum equal to his earn-

invs from renewal fees over the prior twelve months.”

/d. at Sta. The agency agreements also provided that

4

Nationwide’s obligation to pay such benefits would cease

if Darden competed with Nationwide within a twenty-

five-mile radius of Darden’s former business location

within one year after the cancellation of the agency

agreement, or induced a Nationwide policyholder to cancel

an insurance contract with Nationwide at any time after

the termination of the agency relationship. [bid.

b. In 1980, shortly after Nationwide terminated Dar-

den’s agency contract because the company determined

that Darden was a “marginal agent,” Darden began

competing with Nationwide at the same business loca-

tion he had used while representing Nationwide. Pet.

App. 48a. Consequently, Nationwide informed Darden

that it would not pay him his deferred compensation

benefits, which amounted to $28,664 at the time of his

termination, or his extended earnings benefits, which

amounted to $65,706. Id. at 34a.

Darden then brought this action against Nationwide

under Section 502(a) of the Employee Retirement In-

come Security Act of 1974 (ERISA), 29 U.S.C. 1132(a).

Darden claimed that he was a “participant” entitled to

bring suit under Section 502(a); the plans were “pen-

sion plans” within the meaning of Section 3/2) (Ai, 29

U.S.C. 1092(2) (A); and his benefits under the plans had

become nonforfeitable pursuant to Section 203(a), 29

U.S.C. 1053(a). Darden’s claims depended in part on

whether he was an “employee” under Section 3(6), 29

U.S.C. 1002/6): first, he could only qualify as a “partici-

pant” entitled to bring suit under Section 502(a) if he

was an “employee or former employee” of Nationwide,

Pet. App. 36a-37a; § 3(7), 29 U.S.C. 1002(7), and second,

Section 3/2)(A) defines a “pension plan” as a plan that

“provides retirement income to employees” or “results in

a deferral of income by employces for periods extending

to the termination of covered employment or beyond,”

29 U.S.C. 1002/2)(A) (emphasis added). If Darden

was an “employee” he would be entitled to the benefits

withheld by Nationwide, as long as the benefits were in

the nature of “pension” benefits, because (1) the bene-

5

fits he claimed would have been vested under the terms

of ERISA, and (2) Section 203(a) of ERISA would

have precluded forfeiture of those benefits under the

noncompetition clauses of the agency agreement.

2. The district court initially concluded that Darden

was not an employee of Nationwide based upon decisions

of this Court interpreting Congress’s use of the term

“employee” in other remedial social legislation. The dis-

trict court relied upon the common law agency factors

this Court used in United States v. Silk, 331 U.S. 704

(1947), to determine whether truck drivers were em-

ployees for purposes of the Social Security Act. The

court considered “(1) [the] degree of control over the

workers; (2) the opportunity for the worker for profit or

loss from his own efforts; (3) the investment by the

workers in equipment; (4) the permanency of the rela-

tionship: and (5) the skill required of the workers to

carry out their duties.” Pet. App. 49a-50a.' The district

'Those factors were borrowed from the common law test set

forth in the Restatement (Second) of Agency § 220 (1958). The

Restatement defines a “servant” as “a person employed to perform

services in the affairs of another and who with respect to the

physical conduct in the performance of the services is subject to

the other’s control or right to control.” Jd. § 220(1). The Restate-

ment sets out ten factors for consideration “[ijn determining

whether one acting for another is a servant or an independent con-

tractor,” id. § 220(2):

(a) the extent of control which, by the agreement, the

master may exercise over the details of the work:

(b) whether or not the one employed is engaged in a dis-

tinct occupation or business;

(ec) the kind of occupation, with reference to whether, in

the locality, the work is usually done under the direction of

the employer or by a specialist without supervision;

(d) the skill required in the particular occupation:

(e) whether the employer or the workman supplies the

instrumentalities, tools, and the place of work for the person

doing the work;

(f) the length of time fer which the person is employed:

6

court also relied on this Court’s conclusion in NLRB

v. United Insurance Co., 390 U.S. 254, 258 (1968). In

defining the term “employee” under the National Labor

Relations Act, the Court observed that “[w]hat is im-

portant is that the total factual context is assessed in

the light of the pertinent common-law agency principles.”

Pet. App. 50a.

Based upon these principles, the district court con-

cluded that “ ‘[t]he total factual context’ of Mr. Darden’s

relationship with Nationwide shows that he was an inde-

pendent contractor and not an employee.” Pet. App. 50a.

The district court emphasized that “it was primarily

through [Darden’s] own efforts, ingenuity, and good busi-

ness sense that he made money.” Id. at 49a.

3. The court of appeals reversed. Pet. App. 32a-46a.

The court recognized that under “traditional common law

principles, Darden most probably would not qualify as an

employee.” Jd. at 39a.* But the court held that “the

(g) the method of payment, whether by the time or by the

job;

(h) whether or not the work is a part of the regular business

of the employer;

(i) whether or not the parties believe they are creating the

relation of master and servant; and

(j) whether the principal is or is not in business.

This test was developed to determine when a third party can re-

cover against a principal for the tortious conduct of an agent, but

it has been used by state courts in a variety of contexts.

*In reaching that conclusion, the court noted that “Darden was

relatively free to run his business as he chose’; he “was compen-

sated through commissions, rather than through a salary,” and

“received his commissions from Nationwide without deduction for

income taxes or other charges”; “[hle paid his business expenses

cut of his commissions, including office maintenance and utilities

and the salaries of his clerical staff’; he “owned the building houws-

ing his agency’s offices and the furniture used there, as well as an

automobile maintained for business purposes”; and “Darden and

Nationwide referred to their relationship as one between inde-

pendent contractors,” so that he “was not entitled to receive certain

benefits reserved for Nationwide ‘employees.’” Pet. App. 39a-40a.

7

common-law test for the relationship of master and serv-

ant is not the appropriate standard for application here.”

Id. at 40a. In reaching that conclusion, the court of

appeals relied on this Court’s decisions in Silk and NLRB

V. Hearst Publications, Inc., 322 U.S. 111, 120-129

(1944), which indicate “that the definition of ‘employee’

should be tailored to the purposes of the statute being

construed.” Pet. App. 40a. Thus rejecting “the common-

law test of master and servant,” the court fashioned a

test “focusing on the objectives and purposes of ERISA,”

id. at 43a, from the congressional statement of purpose

set out in Section 2 of ERISA, 29 U.S.C. 1001.* The court

of appeals described its test as follows, Pet. App. 41a-42a:

The protected class described in the statement of

purpose encompasses, first of all, persons whose re-

tirement benefits were ‘anticipated.’ * * * Second,

persons within the protec‘ed class must have relied

on that expectation by remaining for ‘long years,’

or a substantial period of time, in the ‘employer’s’

service, and by foregoing other significant means of

providing for their retirement. * * * Finally, im-

plicit in the congressional statement of purpose is

the recognition that the persons to be aided by the

statute lacked sufficient economic bargaining power

to obtain contractual rights to nonforfeitable benefits.

Applying its test, the court determined that “Nation-

wide created a reasonable expectation on Darden’s part

that benefits would ultimately be paid to him.” Pet. App.

41a. The court also indicated that “|{t]here is also evi-

dence in the record indicating Darden’s reliance on that

expectation.” Jd. at 42a. The court nevertheless remanded

the case for further factual development on the issues of

Darden’s reliance and “the respective bargaining strength

of the parties.” Jd. at 43a.

3In Section 2, Congress said that because “many employees with

long years of employment are losing anticipated retirement bene-

fits,” it was taking steps to assure “the equitable character of such

plans and their financial soundness.” See Pet. App. 4la.

8

4. On remand, the district court determined that

Darden had relied on the availability of Nationwide’s

deferred compensation benefits. This finding rested pri-

marily on evidence that Darden had not otherwise made

adequate financial arrangements for his retirement. With

respect to the issue of bargaining power, the court found

that Nationwide “received input from its agents” regard-

ing the terms of the agency agreements, but that Nation-

wide nevertheless “felt free to disregard any advice it

received” from them. Pet. App. 2la. Accordingly, the

court found “that Darden, and Nationwide agents as a

group, lacked sufficient bargaining power to obtain the

contractual right to nonforfeitable retirement benefits

from Nationwide.” /d. at 23a.

The district court next determined that the deferred

compensation plan—pursuant to which “Nationwide main-

tained a retirement account for Darden and annually

credited to that account a sum based on Darden’s earn-

ings from original and renewal fees for insurance poli-

cies,” Pet. App. 383a—was a “pension plan” under Section

3(2)(A) of ERISA and that his benefits had vested

pursuant to Section 203(a). Pet. App. 24a, 3la. How-

ever, the district court determined that the extended

earnings plan—pursuant to which “Nationwide agreed to

pay Darden, upon his retirement, termination, death or

disability, a sum equal to his earnings from renewal fees

over the prior twelve months,” id. at 34a, was not a pen-

sion plan. 7d. at 5a. Since ERISA’s nonforfeiture rule

applies only to pension plans, and not to other sorts of

employee benefit plans, the court held that the clause in

Nationwide’s plan providing for the forfeiture of benefits

if the agent competes with Nationwide was not invalid

with respect to the extended earnings plan.

5. The court of appeals affirmed. Pet. App. la-12a. It

“agree|d| with the district court’s conclusion that Darden

was an employee under ERISA,” id. at 8a; the finding

“that the Deferred Compensation Plan represented an

ERISA ‘pension plan,’” id. at 9a; and the finding “that

9

the Extended Earnings Plan did not constitute a pension

plan under ERISA,” id. at lla. Accordingly, under the

court of appeals’ judgment, Darden is entitled to the

money in his deferred compensation account, but is not

entitled to benefits under the extended earnings plan.

In its petition for a writ of certiorari, Nationwide con-

tended that the court of appeals erred by holding that

Darden is an employee within the meaning of Section

3(6) of ERISA.

SUMMARY OF ARGUMENT

1. Congress did not regulate all arrangements that

provide for retirement or medical benefits. Instead, Con-

gress expressly restricted ERISA’s reach to employee

benefit plans. This Court has made clear that congres-

sional use of the term “employee” in remedial social leg-

islation, like ERISA, must be defined through reference

to the common law of agency, applied in light of the

remedial purposes of the legislation. Rutherford Food

Corp. V. McComb, 331 U.S. 722, 729-730 (1947) (Fair

Labor Standards Act); United States v. Silk, 331 U.S.

704, 712 (1947) (Social Security Act).

2. Consistent with these precedents, the Department

of Labor and the Internal Revenue Service have both

interpreted “employee” in Section 3(6) primarily with

reference to the common law test, but have applied those

factors in light of the purposes of the Act. For example,

the Department recently determined that the participants

in a health care plan were employees of the clients of the

company that marketed the health care plan. Even though

the agreement between the clients and the company stated

that the participants were employees of the company

marketing the plan, the participants were employees of

the clients because they were subject to the control of the

clients. Dep’t of Labor, Op. Ltr. No. 91-17A (Apr. 5,

1991). Similarly, the IRS successfully argued that pro-

fessionals could not evade ERISA’s minimum participa-

tion requirements by “leasing” themselves to their prac-

10

tices, since under common law principles they were not

employees of the leasing company, which did not control

the manner in which services were provided. Profes-

sional & Executive Leasing, Inc. Vv. Commissioner, 89

T.C. 225, 231-235 (1987), aff’d, 862 F.2d 751 (9th Cir.

1988).

The courts of appeals have followed a similar approach

tied to common law factors. The Fourth Circuit is in fact

alone in its decision to disregard the common law ap-

proach in favor of its own novel definition of an “em-

ployee.” Mayeske v. International Ass’n of Fire Fighters,

905 F.2d 1548, 1553-1555 (D.C. Cir.), cert. denied, 111

S. Ct. 347 (1990); Penn v. Howe-Baker Eng’rs, Inc., 898

F.2d 1096, 1102 n.6 (5th Cir. 1990); Wolcott v. Nation-

wide Mutual Ins. Co., 884 F.2d 245, 250 (6th Cir. 1989) ;

Holt v. Winpisinger, 811 F.2d 1532, 1538 (D.C. Cir.

1987).

3. The test devised by the court of appeals in this case

does not conform to congressional intent. It has no basis

in the text of the statute and departs from the common

law test altogether. It is also unworkable on a practical

level. By focusing on factors such as anticipation of

benefits, reliance, and relative bargaining power, the test

makes “employee” status inherently unclear and subject

to change. That, in turn, renders the legal status of pen-

sion plans uncertain, since such plans are subject to

ERISA’s requirements and qualify for its advantages only

if they provide retirement income to employees.

The flawed nature of the Fourth Circuit’s test is also

illustrated by the fact that it led the court to conclude

that Darden—the sole proprietor of his own business—is

an employee. In contrast, the district court’s initial deci-

sion applied the proper test and reached the correct resu!t.

As the district court found, an individual, such as Darden,

who makes money “primarily through [his] own efforts,

ingenuity, and good business sense,” is an independent

contractor, and is therefore excluded from ERISA’s cov-

erage. Pet. App. 49a.

11

ARGUMENT

A PERSON WHO OPERATES HIS OWN INSURANCE

BUSINESS PURSUANT TO AN AGREEMENT TO

REPRESENT ONE INSURANCE COMPANY ON AN

EXCLUSIVE BASIS IS AN “INDEPENDENT CON-

TRACTOR,” NOT AN “EMPLOYEE” OF THAT INSUR-

ANCE COMPANY UNDER SECTION 3(6) OF ERISA

ERISA does not cover all plans providing benefits of

the sort listed in Section 3(1) and (2) of the Act, 29

U.S.C. 1002(1) and (2). That is, Congress did not say,

for example, that any plan providing retirement income

or medical benefits is subject to the Act. Instead, Con-

gress limited the coverage of ERISA to employee benefit

plans: to pension plans to the extent that they provide

retirement income to “employees,” 29 U.S.C. 1002

(2)(A), and to welfare plans to the extent that they

provide benefits to “participant|s],” 29 U.S.C. 1002/1),

which the Act in turn defines to mean certain “employ-

ee(s]” or “former employee[s],” 29 U.S.C. 1002(7).* In-

deed, Congress provided that, as used in the Act, “pension

plan” is a shorthand for “employee pension benefit plan”

and “welfare plan” is a shorthand for “employee welfare

benefit plan.” 29 U.S.C. 1002(2) (A), 1002(1).

A. This Court Has Made Clear That The Term “Em-

ployee,” As Used In Remedial Social Legislation, Is

Defined With Reference To The Common Law Factors

Construed As A Whole And In Light Of The Purposes

Of The Statute At Issue

Although the term “employee” is a basic component of

ERISA, the statutory definition set forth in Section 3/6)

of the Act—‘any individual employed by an employer’’—

4 The restriction to employees is in line with the purposes of the

Act, which is called the Employee Retirement Income Security Act

and was enacted in part because “employee benefit plans * * * have

become an important factor affecting the stability of employment

and the successful development of industrial relations.” 29 U.S.C.

1001 (a).

12

provides essentially no guidance on its face. However, this

“circular” definition, Mayeske v. International Ass'n of

Fire Fighters, 905 F.2d 1548, 1552 (D.C. Cir.), cert.

denied, 111 S. Ct. 347 (1990), derives meaning from

prior judicial construction of the term “employee” in

various statutes and this Court’s repeated decisions hold-

ing that the term should be construed with reference to

the factors considered under the common law of agency.®

In a recent decision involving the question of employee

status under the 1976 Copyright Act, the Court stated

that “when Congress has used the term ‘employee’ with-

out defining it, we have concluded that Congress intended

to describe the conventional master-servant relationship

as understood by common-law agency doctrine.”” Commu-

nity for Creative Non-Violence (CCNV) v. Reid, 490

U.S. 730, 739-740 (1989) (citing Federal Employer Li-

ability Act cases).° The ultimate question under the com-

mon law test is whether “with respect to his physical con-

duct in the performance of the service,” the person “is

subject to the other’s control or right to control.” Re-

statement (Second) of Agency § 220(1) (1958). This

focus on the right to control flows naturally from the

original purpose of the common law test, which was to

determine whether a party should be held vicariously li-

able for another person’s tortious acts.

In cases involving remedial! social legislation, the Court

has relied primarily on the factors used to determine

whether an individual would be considered a “servant”

5 The meaning of “employee” in Section 3(6) is necessarily a

matter of federal law. See Firestone Tire & Rubber Co. v. Bruch,

489 U.S. 101, 110 (1989), quoting Pilot Life Ins. Co. Vv. Dedeaur,

481 U.S. 41, 56 (1987) (“we have held that courts are to develop

a ‘federal common law’ of rights and obligations under ERISA-

regulated plans”).

6 The Court found further support for its conclusion that refer

ence to the common law test was warranted because the term “scope

of employment” in the Copyright Act provision at issue was ‘

widely used term of art in awency law.” 490 U.S. at 740.

13

for purposes of the common law test, see n.1, supra, but

has emphasized the need to tailor the application of such

factors to further the particular congressional scheme.

The Court has concluded that Congress did not intend to

confine the definition of “employee” in such statutes to the

strict application of common law principles governing

vicarious liability. For example, under the Fair Labor

Standards Act of 1938 (FLSA), 29 U.S.C. 201 et seq.,

the Court suggested that “many persons” who might not

be employees under the common law standard might

nevertheless be employees under the FLSA. Rutherford

Food Corp. v. McComb, 331 U.S. 722, 729 (1947).7 The

Court nevertheless considered factors similar to those

analyzed under the common law of agency, and the

Court’s conclusion would in fact appear to be consistent

with the common law test. See also NLRB v. United In-

surance Co., 390 U.S. 254, 258 (1968) (National Labor

Relations Act); Bartels v. Birmingham, 332 U.S. 126,

130 (1947) (Social Security Act).

In Rutherford Food, the issue was whether persons

working as butchers in a slaughterhouse were employees

entitled to overtime pay, and the Court relied on the fact

that “[t]he premises and equipment of [the slaughter-

house] were used for the work”; “|t]he group had no

business organization that could or did shift as a unit

from one slaughterhouse to another’; and “|[t]he manag-

ing official of the plant kept close touch on the operation.”

331 U.S. at 730. The Court concluded that while “profits

to the |butchers] depended upon the efficiency of their

work, it was more like piecework than an enterprise that

actually depended for success upon the initiative, judg-

ment or foresight of the typical independent contractor.”

*The FLSA is particularly relevant here since the definition of

“employee” under that Act—‘any individual employed by an em-

ployer,” see 331 U.S. at 728 n.6 (quoting ch. 676, §$3(e), 52 Stat.

1060 )-—is identical to the definition of “employee” in Section 3(6)

of ERISA.

14

Ibid.” Viewing “the circumstances of the whole activity,”

the Court held that the butchers were employees rather

than independent contractors. /bid.°

Thus, while “reject|ing] the test of the ‘technical con-

cepts pertinent to an employer’s legal responsibility to

third persons for acts of his servants,’” United States v.

Silk, 331 U.S. 704, 713 (1947), the Court has also re-

peatedly borrowed factors developed under the common

law of agency.'’ Those factors have been applied in a

SIn this case, in contrast, the district court found that “it was

primarily through | Darden’s}| own efforts, ingenuity, and good busi-

ness sense that he made money.” Pet. App. 49a. The court of

uppeals did not disagree—-it stated that under “traditional common

law principles, Darden most probably would not qualify as an em-

ployee,” id. at 39a—but instead departed completely from the fac-

tors considered under. the common law test.

% As illustrated by the cases from the 1940s involving remedial

social legislation and the cases cited in CCNV v. Reid, 490 U.S. at

740, this Court has long construed “employee” in light of the

common law of agency and the purposes of the statute at issue.

Congress was presumably aware of that practice when it enacted

ERISA in 1974. See Albernaz v. United States, 450 U.S. 333, 341-

342 (1981) (“Congress is ‘predominantly a lawyers body’ * * * and

it is appropriate for us ‘to assume that our elected representatives

. .. know the law’”’).

1° The courts of appeals have similarly rejected application of a

strict common law test for determining employee status for pur-

poses of social legislation, while in many instances relying upon a

variety of common law factors in fashioning a test. See, e.g.,

Donovan V. DialAmerica Marketing, Inc., 757 F.2d 1376, 1382 (3d

Cir.) (FLSA), cert. denied, 474 U.S. 919 (1985); EEOC vy. Zippo

Mfg. Co., 713 F.2d 32, 37 (3d Cir. 1983) (ADEA); Cobb v. Sun

Papers, Inc., 673 F.2d 337, 341 (11th Cir.) (Title VII of the 1964

Civil Rights Act), cert. denied, 459 U.S. 874 (1982); Clarkson

Constr. Co. Vv. OSHRC, 531 F.2d 451, 457-458 (10th Cir. 1976)

(OSHA): Brennan vy. Gilles & Cotting, Inc., 504 F.2d 1255, 1261

(4th Cir. 1974) (same); cf. Korea Shipping Corp. v. New York

Shipping Ass'n, 880 F.2d 1531, 1535 (2d Cir. 1989) (Title IV of

ERISA); Avis Rent A Car Sys., Inc. v. United States, 503 F.2d

423, 428-430 (2d Cir. 1974) (applying Silk and Bartels-type analysis

in a tax refund action).

15

manner designed “to accomplish the purposes of the

legislation,” id. at 712, but this Court has never departed

entirely from the common law test."

B. The Term “Employee” In Section 3(6) Of ERISA

Should Be Defined Primarily With Reference To The

Factors Of The Common Law Test, Which Should Be

Applied In Light Of The Remedial Purposes Of The

Act

As applied to ERISA, this Court’s decisions make clear

that “employee” should be defined with reference to the

11 In Silk, upon which the court of appeals relied as support for

departing from the common law test, Pet. App. 40a, the Court

stated that “degrees of control, opportunities for profit or loss,

investment in facilities, permanency of relation and skill required

in the claimed independent operation,” 331 U.S. at 716--all of which

are considered under the common law test, see n.1, supra—are

important in determining whether an individual is an employee

under the Social Security Act. In NLRB vy. Hearst Publications,

Ine., 322 U.S. 111 (1944), upon which the court of appeals also

relied, Pet. App. 40a, the Court departed from the common law

test to a greater extent than in any other case. But even there,

where the Court determined that the National Labor Relations

Board had not erred by determining that certain “newsboys” were

employees, the Court noted that “[i]n addition to effectively fixing

the compensation, [the publishers] in a variety of ways prescribe,

if not the minutiae of daily activities, at least the broad terms and

conditions of work.” 322 U.S. at 117-118. It added that the Board

had found that the publishers controlled the newsboys by “dictat-

[ing] their buying and selling prices, fixfing] their markets and

control[ing] their supply of papers,” supervising (and to some

extent prescribing) “{t]heir hours of work and their efforts on the

job,” and furnishing “[m]uch of their sales equipment and adver-

tising materials” —all factors that are relevant under the common

law test. Jd. at 131. Moreover, Hearst Publications is questionable

authority for the proposition that when Congress uses the word

“employee” without providing a specific definition it intends the

courts to construe the term without reference to the common law,

since Congress amended the National Labor Relations Act (NLRA)

following the decision to provide that “any individual having the

status of an independent contractor” under the common law test is

not an employee under the NLRA. See NLRB vy. United Insurance

Co., 390 U.S. 254, 256 (1968).

16

common law factors applied in lieht of the remedial pur-

poses of the statute."

l.a. In its advisory opinions issued with respect to

employee status under ERISA, the Department of Labor

has endeavored to apply a modified common law test of

the sort utilized by this Court in cases involving similar

statutes. For instance, in a recent opinion letter address-

ing whether the inquirer’s health plan constituted a

“multiple employer welfare arrangement” under ERISA,

the Department of Labor wrote that the existence of an

employer-employee relationship ‘will be determined by

applying common law principles, taking into account the

remedial! purposes of ERISA.” Dep’t of Labor, Op. Ltr.

No. 91-17A at 1, 3 (Apr. 5, 1991) (reprinted at Reply to

Br. in Opp. App. la, 4a). The Department continued,

echoing the common law test: “consideration must be

given to, among other things, whether the person for

whom services are being performed has the right to con-

trol and direct the individual who performs the services,

not only as to the result to be accomplished by the work,

but also to the details and means by which the result is

to be accomplished.” Ibid.

12 ERISA falls squarely within the tradition of remedial social

legislation which the courts have construed liberally. As this Court

has noted, “[olne of Congress’ central purposes in enacting

|ERISA! was to prevent the ‘great personal tragedy’ suffered by

employees whose vested benefits are not paid when pension plans

are terminated.” Nachman Corp. v. PBGC, 446 U.S. 359, 374

(1980) (footnotes omitted). Congress enacted ERISA to ensure,

among other things, that “if a worker has been promised a defined

pension benefit upon retirement—and if he has fulfilled whtatever

conditions are required * * * —-he actually will receive it.” Jd. at

375. See also Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504,

510 (1981); PBGC v. R.A. Gray & Co., 467 U.S. 717, 720 (1984):

Smith v. CMTA-IAM Pension Trust, 746 F.2d 587, 589 (9th Cir.

1984): Kross v. Western Elec. Co., 701 F.2d 1238, 1242 (7th Cir.

1983); Eaves v. Penn, 587 F.2d 453, 457 (10th Cir. 1978). “| T {his

overwhelming evidence of the remedial purpose of ERISA must be

given due weight in construing provisions whose language and

specific legislative history are susceptible of varying interpreta-

tions.” Rettig v. PBGC, 744 F.2d 133, 155 n.54 (D.C. Cir. 1984).

17

In that letter, the Department considered whethe per-

sons who worked for companies that subscribed to ..calth

care plans marketed by Synesis Service Corporation were

employees of Synesis. Even though the agreements be-

tween Synesis and its clients referred to the participants

in the plans as employees of Synesis, the Department

concluded that they were not Synesis employees since the

contract further specified that the clients, and not Syn-

esis, had “the sole responsibility for recruiting, hiring,

training, evaluating, replacing, supervising, disciplining

and firing” the partieipants. Op. Ltr. 91-17A at 2; Reply

to Br. in Opp. App. 2a. The primary reason for the con-

tractual provision reciting that the participants were

employees of Synesis appeared to be to evade Section

514(b)(6)(A) of ERISA, 29 U.S.C. 1144(b) (6) (A),

which provides that, despite ERISA’s broad preemption

provision, the States may regulate multiple employer wel-

fare arrangements. See Op. Ltr. 91-17A at 4; Reply to

Br. in Opp. App. 5a. Thus, the Department consulted

the common law factors—which pointed to the conclusion

that the employees were plainly not employees of Synesis

—and saw no reason to depart from the conclusion that

would be drawn from the application of those factors.

Similarly, in response to a request for advice as to

whether certain milk vendors were employees under the

Act, the Department noted that it did not appear that

“the relationship between the milk suppliers and the milk

vendors has any of the characteristics generally found

in the relationships of employers and employees.” Dep’t

of Labor, Op. Ltr. No. 81-88A, at 4 (July 9, 1981). The

Department sent the requester a copy of a recent decision

“applying a common law test in determining whether an

individual was an employee or an independent contrac-

tor,” which discussed “some of the factors which may be

relevant” to determining employee status under ERISA.

Ibid. While emphasizing common law factors, however,

the Department has stressed that the term “employee”

must be “interpreted broadly,” and may include persons

“who under common-law rules would not be deemed to

18

be ‘employees.’” Dep’t of Labor, Op. Ltr. No. 77-75A,

at 3 (Sept. 21, 1977).”

b. In its administration of Title II of ERISA, the

IRS has also applied a test based primarily on common

law factors.’* In Professional & Executive Leasing, Inc.

v. Commissioner, 89 T.C. 225, 230-231 (1987), aff’d, 862

F.2d 751 (9th Cir. 1988), a company devised a scheme to

evade the minimum participation rules of 26 U.S.C. 401

and 410 in order to allow professionals to make them-

selves, but not their staffs, eligible for pension benefits.”

Under the scheme, the professionals incorporated their

practices and entered into service contracts with an agency

that set up pension plans for the contracting professionals

and then “leased” the professionals back to their profes-

sional corporations. The IRS determined that the pro-

fessionals were not employees of the leasing agency, so

that the plan did not qualify for favorable tax treatment.

The Tax Court upheld that ruling, and agreed with the

IRS’s argument that “[t]o determine the existence of an

13 In the same opinion letter, the Department suggested that one

factor—whether a person is an employee under the Federal Insur-

ance Contributions Act (FICA)—was controlling. Dep’t of Labor,

Op. Ltr. No. 77-75A, at 3-4. However, in view of this Court's decision

in CCNV vy. Reid, which concluded that “[n]o one of these factors

is determinative.” 490 U.S. at 752, the Department now believes

that all of the factors must be considered.

44 This case turns on the meaning of Section 3(6), a matter

within Labor’s jurisdiction, but its resolution will affect the deter-

mination of whether pension rights have vested, a matter primarily

within the IRS’s jurisdiction, and with respect to which the Secre-

tary of Labor is to follow the IRS's approach. See Reorg. Plan No.

4 of 1978, § 101, 5 U.S.C. App. at 1374.

15The minimum participation rules prohibit employers from

qualifying a pension plan for the tax benefits available under Title

I! of ERISA if the plan does not provide benefits to a broad group

of employees. The statute provides alternative methods for qualify-

ing under the minimum participation standards; for example, a

plan may be qualified if 70° of all employees benefit from the plan.

. 26 U.S.C. 410(b) (1) (A).

19

employer-employee relationship we must look to common

law concepts.” 89 T.C. at 231."° As the Tax Court rec-

ognized (id. at 231 & n.10), the IRS generally has relied

on the common law test set out in its regulations under

the Federal Insurance Contributions Act (FICA), 26

C.F.R. 31.3121(d)-1(¢c), to determine employee status."

Thus, both agencies charged with interpreting ERISA

have relied primarily on the common law factors in

determining whether a person is an employee for cover-

age purposes. Yet as indicated by this Court’s deci-

sions construing analogous social legislation, the focus

is not strictly on “control” but on all of the factors con-

sidered as a whole. Especially in close cases, the com-

mon law test must be applied with reference to Congress’s

purposes in enacting ERISA."

2. Other than the court below, all of the courts of

appeals have looked primarily to the common law test to

determine who is an “employee” under Section 3/6) of

ERISA. In Wolcott v. Nationwide Mut. Ins. Co., 884

F.2d 245, 250 (1989), the Sixth Circuit expressly re-

16 See also Burnetta v. Commissioner, 68 T.C. 387, 397 (1977)

(“[{iJn determining whether or not an individual is an ‘employee’

for purposes of section 401, we must look to the common law con-

cepts used in making such a determination”); Rev. Rul. 75-35,

1975-1 C.B. 131 (where a doctor formed a professional corporation

with himself as the sole employee and a service corporation that

employed his staff, the staff members were employees of the pro-

fessional corporation for the purposes of ERISA’s minimum partici-

pation requirements). Congress has recently enacted a special pro-

vision, 26 U.S.C. 414(n), governing employee leasing.

17 The IRS elaborated on that regulation, and on the common law

test, in Rev. Rul. 87-41, 1987-1 C.B. 296. The Ruling sets out 20

factors to be used in determining whether a person is an employee.

18 For example, in a case such as the one involving the leasing of

professional employees, the IRS would properly look skeptically on

arrangements designed to mirror the appearance but not the reality

of an employer-employee relationship under the common law. See,

e.g., Holt vy. Winpisinger, 811 F.2d 1532, 1534 (D.C. Cir. 1987)

(clerical worker paid like, and listed as, independent contractor).

20

jected the approach taken by the Fourth Circuit in this

case, and concluded that “the better reasoned position on

{the} meaning of the term ‘employee’ is set forth in

Holt (|v. Winpisinger, 811 F.2d 1532, 1538 n.44 (D.C.

Cir. 1987)].” Accord Plazzo v. Nationwide Mut. Ins.

Co., 892 F.2d 79 (Table) (6th Cir. 1989) (applying com-

mon law principles to find that a Nationwide agent was

not an “employee” under ERISA), cert. denied, 111

S. Ct. 370 (1990).

In Holt, the District of Columbia Circuit held that “one

must look to the common-law rules of agency to determine

employee status” under ERISA. 811 F.2d at 1538.

Furthermore, in Mayeske, 905 F.2d at 1553-1555, the D.C.

Circuit affirmed its reliance on common law agency princi-

ples, noting that such reliance was particularly appropri-

ate in light of this Court’s-decision in CCNV v. Reid,

where the Court’s findings with respect to whether a

sculptor was an employee of the organization that com-

missioned his work “mirrored the Restatement (Second)

test.” Jd. at 1554 n.&8. Similarly, the Fifth Circuit re-

cently expressed its disagreement with the Fourth Cir-

cuit’s test, holding that “because Congress provided no

specific statutory definition of ‘employee’ under ERISA

we properly apply the common law of agency.” Penn V.

Howe-Baker Eng’rs, Inc., 898 F.2d 1096, 1102 n.6

(1990).'"

Thus, the other courts of appeals have properly em-

phasized reliance on the conventional common law test

set forth in Section 220 of the Restatement. See Mayeske,

1% The Seventh and Eighth Circuits have applied the common law

test in cases arising under ERISA, but appear to have done so in

order to determine the intended coverage of a particular plan,

rather than to determine what Congress meant in Section 3/6).

See Short v. Central States, S.E. & S.W. Areas Pension Fund, 729

F.2d 567 (8th Cir. 1984); Richardson v. Central States, S.E. &

S.W. Areas Pension Fiind, 645 F.2d 660 (8th Cir. 1981); Wardle

v. Central States, S.E. & S.W. Areas Pension Fund, 627 F.2d 820

(7th Cir. 1980), cert. denied, 449 U.S. 1112 (1981).

21

905 F.2d at 1554-1555; Penn, 898 F.2d at 1102-1103.°°

But while those courts have avoided the erroneous path

taken by the court below, it is unclear whether they are

giving appropriate weight to this Court’s decisions in-

volving remedial social legislation—such as Rutherford

Food, Silk, and Bartels—in cases where a rigid applica-

tion of the common law test may be inconsistent with

congressional intent.”

20To our knowledge, no court has strictly applied the common

law test in interpreting ERISA. That is, no court has expressly

restricted its analysis to whether the “employer” had the right to

control the “employee” such that it would be proper to hold the

“employer” vicariously liable for torts committed by the “employee”

while acting within the scope of his duties.

21In Penn, the Fifth Circuit relied almost exclusively on this

Court’s decision in CCNV y. Reid, which involved the Copyright Act

rather than remedial social legislation. See 898 F.2d at 1102-1103.

That focus may have led it to an erroneous result. The court con-

cluded that an individual who had been an employee of an engineer-

ing company for nine years and then left the company for a few

months returned to the company as an independent contractor, and

therefore his pension rights did not vest (as they did for all ‘“em-

ployees” pursuant to 26 U.S.C. 411(d)(3)) when the company termi-

nated its pension plan. The court reached that result even though

upon his return the individual did the same work (apparently at

the same desk and for the same supervisors) that he did while he

was unquestionably an employee, and even though he did that work

at the engineering company’s offices with the company’s tools. /d.

at 1098, 1103. The court emphasized as an especially “significant

factor” an agreement that the individual signed upon his return

that designated him as an independent contractor. Jd. at 1103 & n.9.

The decision was probably erroneous under the common law test.

See, e.g., Wright v. United States, 537 F. Supp. 568, 570 (N.D. Il.

1982) (“[t}he self-serving characterizations of the parties are irrele-

vant”); Singer v. Star, 510 So. 2d 637, 640 ( Fla. Dist. Ct. App. 1987)

(reversing a grant of summary judgment in favor of a newspaper

alleged to be responsible for the torts of a person who sold subscrip-

tions, where the trial court relied heavily on a contract designating

the person as an independent contractor). In any event, proper

consideration of the purposes of ERISA would likely have tipped

the scales in favor of the individual claiming to be an employee,

since ERISA’s vesting provisions are central to the statute’s

22

C. The Court Of Appeals Erred By Abandoning The

Common Law Test And Concluding That Darden Was

An Employee Of Nationwide

1. a. In this case, the Fourth Circuit said that “the

common-law test for the relationship of master and

servant is not the appropriate standard for application,”

Pet. App. 40a, and the test it devised bears no relation

at all to the test set out in Section 220 of the Second

Restatement of Agency. To the contrary, the Fourth

Circuit’s test is drawn entirely from the congressional

statement of purpose set out in Section 2 of ERISA.

While in our view such factors may be influential in a

close case, they do not by themselves constitute a defini-

tion of “employee.” To the contrary, as this Court has

repeatedly recognized, when Congress uses the term with

little or no elaboration, it does so against the background

of the common law meaning of the term. See CCNV v.

Reid, 490 U.S. at 739-740. The Fourth Circuit’s test ac-

cordingly conflicts with the principles of decisions adopted

by this Court in those cases.

b. The Fourth Circuit’s test also has little apparent

connection to the ordinary meaning of the word “em-

ployee.” That is, the factors of the common law test—

which show whether a person is subject to the control

of another in performing his tasks—plainly relate to

whether a person is an employee in common parlance.

But no ordinary definition of “employee” would focus on

the anticipation of retirement benefits, reliance on those

benefits, and relative bargaining power.”

remedial scheme. See J. Langbein & B. Wolk, Pension and Em-

ployee Benefit Law 82 (1990). That would be particularly so if,

for example, there was evidence that the company designated an

individual as an independent contractor solely for the purpose of

preventing his pension rights from vesting when the plan was

terminated.

*2 In fact, those matters seem to have little to do with whether a

person is an “employee.” First, whether a person who is eligible

for benefits under a program “anticipated” the receipt of benefits

ae

23

ce. The Fourth Circuit’s test could not have been in-

tended by Congress because it creates an unacceptable

degree of uncertainty, since employment status would

depend in large part on what the individual anticipated,

whether he relied on the retirement program at issue,

and whether he had bargaining power individually or

collectively. That uncertainty would prevent employers

from determining whether a benefit plan was subject to

ERISA, even though, for example, an insurance com-

pany establishing a plan for agents comparable to Na-

tionwide’s deferred compensation plan would reasonably

want to know, at the outset, whether it was required to

comply with ERISA’s funding, reporting, and disclosure

requirements, and whether it was entitled to the favorable

tax treatment accorded qualifying plans.

In applying the Fourth Circuit’s test and deciding that

Darden was an employee, the district court relied heavily

on the fact that Darden had saved only about $18,000

through other retirement programs; that fewer than half

of the Nationwide agents like Darden participated in a

Keogh Plan or had an individual retirement account:

and that Nationwide, by and large, had not followed the

suggestions o* an advisory council of insurance agents.

Pet. App. 18a-23a. Plainly, under the Fourth Circuit’s

standard Nationwide could not have known in advance

whether its plan was a “pension plan” under Section

3(2) (A) of ERISA—which states that a “pension plan”

is a plan that provides retirement income to employees

or results in a deferral of income by employees. In fact,

Nationwide’s plan would presumably cease to be a pen-

sion plan under the Fourth Circuit’s approach if, over

is not particularly helpful in distincuishing employees from others

who perform service. Second, it is not clear why a person who

participates in a retirement benefits program is an employee while

another person, who does the exact same work but prepares for

retirement through his own investments, is not. Third, persons

who negotiate through unions may have considerable bargaining

power, but that does not make them independent contractors.

24

the next few years, a large number of Nationwide agents

decide to participate in its Keogh plan and the sugges-

tions of the advisory council are generally implemented.

The legal status of a plan should not depend on the

occurrence of such events.

2. a. In our view, the district court approached this

case properly and reached the correct result in its initial

decision. As to approach, the district court considered

the various factors set out in the common law test but,

relying on this Court’s decisions in Silk and United In-

surance Co., assessed those factors in light of the “total

factual context.” Pet. App. 50a. As to result, although

it is clear that Darden relied on Nationwide to a signifi-

cant degree and represented that company exclusively for

20 years, it is also clear that he was an independent

contractor. Darden paid his own business expenses and

was free to incorporate his business, to set his own hours,

to solicit business as he saw fit, and to hire and fire his

own employees. Jd. at 49a. He was compensated through

commissions, reported his own income, and paid taxes as

an independent businessman, /bid. In sum, “it was pri-

marily through |Darden’s] own efforts, ingenuity, and

good business sense that he made money, and not through

any employment relationship with Nationwide.” bid.”

b. This construction of “employee” also conforms to

congressional use of that term in other contexts. In

FICA legislation, Congress has made clear that it under-

stands that insurance agents are often not “employees”

under common law principles. Congress provided that

23Jn Wolcott. the Sixth Circuit specifically disagreed with the

approach taken by the court below, and concluded that a Nationwide

insurance avent like Darden was an independent contractor. 884

F 2d at 250-251. Like the district court in this case, the Sixth

Cireuit held that the agent was an independent contractor because

he “hired his own employees and exercised managerial skill in the

eneration of his business,” as shown by the fact that he operated

his own office, managed his own staff, was paid on a commission

basis, and reported his income to the IRS as a self-employed in-

dividual. Jd. at 251.

25

“employee” means “any individual who, under the usual

common law rules applicable in determining the employer-

employee relationship, has the status of employee,” 26

U.S.C. 3121(d) (2), and added that the term embraces

certain others, including “a full-time life insurance sales-

man,” 26 U.S.C. 3121(d) (3) (B). But even in extending

FICA’s reach, Congress made clear that it did not intend

it to cover persons like Darden even if they sold only life

insurance, since Congress further provided that such

salesmen are not employees for FICA purposes if they

have “a substantial investment +n facilities used in con-

nection with the performances” of their services, 26

U.S.C. 3121(d) (3), and Darden “owned the building

housing his agency’s offices and the furniture used there,

as well as an automobile maintained for business pur-

poses,” Pet. App. 39a.

e. This result is also consistent with the purposes of

ERISA. ERISA does prohibit clauses such as Nation-

wide’s forfeiture provision, see Rev. Rul. 85-31, 1985-1

C.B. 153; Hummell v. S.E. Rycoff & Co., 634 F.2d 446,

449-450 (9th Cir. 1980), but forfeiture clauses were made

invalid in order to protect “employees” from the loss of

vested benefits as a sanction for disloyal conduct. See

H.R. Rep. No. 807, 93d Cong., 2d Sess. 60 (1974); H.R.

Conf. Rep. No. 1280, 93d Cong., 2d Sess. 271 (1974); 120

Cong. Rec. 29,197 (1974). Nothing in the Act or its legis-

lative history suggests that Congress intended to prohibit

forfeiture provisions in plans that provide benefits to

persons who are independent contractors running their

own businesses, rather than employees. And nothing

about the facts of this case suggests that Nationwide

attempted to disguise insurance agents like Darden as

independent contractors in order to evade ERISA’s re-

quirements. In such instances, where the plan in question

can fairly be regarded as part of a transaction between

business entities, the protection of ERISA’s nonforfeit-

ability rule should not be extended to cover independent

contractors.

26

If an agent such as Darden is an employee, then all

retailers operating under the provisions of an exclusive

dealing arrangement—including, for example, many auto-

mobile dealership owners and other franchisees—are po-

tentially employees. Such a result would stretch the com-

mon law test far beyond its limits and is not justified by

an analysis of the relevant ERISA policies.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted.

KENNETH W. STARR

Solicitor General

MAUREEN E. MAHONEY

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

MARSHALL J. BREGER

Solicitor of Labor

ALLEN H. FELDMAN

Associate Solicitor

ELIZABETH HOPKINS

Attorney

Department of Labor

NOVEMBER 1991