Illinois ERISA Lawyer Blog

Millions of Americans have lost a significant amount of their retirement savings due to the collapse of the subprime mortgage backed securities market. While several groups of plaintiffs (either plan participants or other plan fiduciaries) have challenged the prudence of plan fiduciaries' and money managers' decision to expose the plan to risks of those securities, those challenges have largely failed. A recent decision held that Citigroup did not breach its fiduciary duty to its retirement plan participants by leaving its own company stock in its retirement plan after it allegedly knew the stock price would tumble because of the company's heavy exposure to subprime mortgages. In re Citigroup ERISA Litigation, 662 F.3d 128 (2d Cir. 2011). But most recently, following a trial, a judge in New York determined that State Street Bank breached its fiduciary duty to its clients by ignoring stated risk guidelines and failing to diversify the assets in several of its bond funds because those bond funds were between 70% and 80% invested in mortgage backed securities. In re State Street Bank & Trust Co. Fixed Income Funds ERISA Litigation, 2012 U.S. Dist. LEXIS 13556 (S.D.N.Y. Feb. 3, 2012).

This decision is finally some consolation to the plan participants who lost so much money in their retirement savings. Prior cases have been distinguishable, though, because they largely involved claims that an employer imprudently continued to offer its own stock as a retirement investment despite knowing it would lose value. Unfortunately, where a plan explicitly states that offering employer stock is part of the plan, or so "hardwired," many courts imply a presumption of prudence on behalf of the administrator for leaving that stock in the plan, also known as the Moench presumption. While many pension practitioners have long questioned whether the typical retirement landscape today, which has transitioned from the traditional defined benefit pension plan to the individual account structure (such as a 401(k), can really provide the original stated objectives of ERISA--retirement income security. More and more baby boomers are delaying retirement to recoup investment losses because otherwise they will not have enough income to last them through retirement. Is this system really working?

If you have questions about the assets in which your retirement plan is invested and the prudence of such investments, contact an ERISA lawyer.

Employees in the Chicago area who participate in an employer-sponsored 401(k) or profit sharing plan almost never have to ask any questions about how to make contributions to the plan. Upon commencing employment, the employer provides you with paperwork including election forms that will designate how much of your salary you wish to defer into the plan. Most of these types of retirement plans, though, provide that if you leave that particular employer, you can either leave the money in that plan, or request a distribution. The plans typically provide a procedure for requesting a distribution. It is not usually as simple as telling Human Resources you want your account balance out. There will typically be at least one form you must fill out to properly make the request under the terms of the plan. But the question arises: where do you get the form? The answer is that the employer must provide it to you, and a failure to do so could result in the employer's liability for breach of fiduciary duty. Such was the case in Kujanek v. Houston Poly Bag I Ltd., 658 F.3d 483 (5th Cir. Sept. 27, 2011).

Mr. Kujanek left his employer and communicated his intent to take a distribution from the plan. The employer would not distribute the funds, because a distribution required completing a request for distribution form, but the employer would not give Kujanek the form. He contacted the plan's third party administrator to request the form. The administrator contacted the employer, but the employer still would not provide the form. In the meantime, the securities in which Mr. Kujanek's account was invested significantly dropped in value.

The United States Court of Appeals for the Fifth Circuit held that the employer breached its fiduciary duty, and was liable to Kujanek for the difference between the account balance when Kujanek tried to request a distribution, and the time when the distribution finally took place. The employer had a fiduciary duty to provide Kujanek with the forms and tools necessary to properly make his request for distribution, especially when it knew he was trying to make such a request.

If you have experienced problems obtaining a distribution from your plan, speak with an experienced ERISA lawyer today.

Employees of Chicago companies who participate in a 401(k) holding employer stock or an Employee Stock Ownership Plan are often attracted to owning stock in their employer because of the significant upside for the staff doing a good job for the employer. You are there at work every day, and you see how the business operates. So you can see how your (and your colleagues') efforts will pay off. But holding employer stock in your retirement plan does not come without its risks. For example, one might say you have all your eggs in one basket. If your employer goes bankrupt, you not only are out of a job, but your retirement savings could be decimated. Fiduciaries of an ERISA retirement plan owe a duty of prudence with respect to the investments in the plan, and failing to take employer stock out of the retirement plan can be a breach of your employer's, or some individuals who make such decisions, fiduciary duties.

Many employer plans "hard wire" the holding of employer stock into the terms of the plan. This means the plan document states one of the purposes of the plan is to hold employer stock. In such cases, the fiduciaries are given a broader deference in their decision over when they should make the decision to stop including employer stock in the plan, a so called presumption in favor of the retention of employer stock being reasonable. The seminal case on that point is Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995). Recently, the Second Circuit Court of Appeals (a significant court that sits in New York City) adopted that rule in Gearren v. McGraw-Hill Cos., 660 F.3d 605 (2d Cir. Oct. 19, 2011). Plaintiffs in that case alleged it was a breach of fiduciary duty for fiduciaries of the McGraw-Hill 401(k) plan to not remove employer stock from the plan when the stock dropped 64% in value following the subprime mortgage crisis. The Second Circuit held that this presumption applies at the pleading stage, meaning it can cause a case to be dismissed if the proper facts are not pled.

Where the plan is subject to the Moench presumption, a plaintiff will generally have to allege that the employer stock faced a dire situation that was foreseeable to the fiduciaries. This is, of course, pretty vague language, and what it means can only be discovered through the case-by-case examples. If you have questions about your retirement plan including your employer's stock, consult an ERISA lawyer.

Executives, professionals and other employees in Chicago frequently call my office to ask what the statute of limitations is in an ERISA case (i.e., the measure of how long the potential claimant has to file a lawsuit under ERISA). Depending on the type of case, employees can end up more confused after asking that question than before. One recent case discussed when a claim accrues (i.e., the clock on the applicable statute of limitations begins ticking) in the context of a cash balance plan that paid lump sum distributions pursuant to an illegal plan term that set the actuarial value of the distribution.

In Thompson v. Retirement Plan of S.C. Johnson & Son, Inc., No. 10-3917 (7th Cir. June 22, 2011), the United States Court of Appeals for the Seventh Circuit held that the limitations period began running when participants received their lump sum distributions from the employer's cash balance plan. Under a cash balance plan, participants receive "interest credits", rather than investment returns on their account balances. The interest credit was 4%, or 75% of the plan's rate of return on its investments. If a participant stopped participating early, though, the participant could take a lump sum distribution at the present "actuarial equivalent" value of what the participant would have received at age 65. ERISA law dictated how to calculate the "actuarial equivalent" as a value discounted by the 30 year Treasury rate. The plan sought to use the same 30 year Treasury rate to calculate the future accruals, rather than the 4% or 75% of plan rate of return.

The plan defendants claimed the statute of limitations should have begun running when the plan sponsor disclosed this in Summary Plan Descriptions as early as 1998 or 1999. The court disagreed. An "ERISA claim accrues when a plaintiff knows or should know of conduct that interferes with the plaintiff's ERISA rights." Young v. Verizon Bell Atlantic Cash Balance Plan, 615 F.3d 808, 817 (7th Cir. 2010). But in this case, the SPDs did not sufficiently put the employees on notice of the illegal way the plan would calculate the future interest credits a participant would not earn by taking an early distribution. The court called the various SPDs "a collection of hints". Thompson, Slip Op. at 12. Therefore, the statute of limitations began running when the plaintiffs actually took their lump sum distributions.

The actual limitations period in that case was 6 years. ERISA only provides for a statute of limitations for breaches of fiduciary duty--6 years, or 3 years from when the plaintiff has knowledge of the claim (though exactly of what the plaintiff must have knowledge differs across jurisdictions). The limitations period for benefit claims under ERISA § 502(a)(1)(B) will be, in the absence of a shorter period written in the plan, the most analogous limitations period in state law, which is usually the statute of limitations for breach of a written contract. The Thompson case originated in Wisconsin, which provides for a 6-year statute of limitation.

If you feel your retirement plan has miscalculated your benefits, consult an experienced ERISA attorney right away.

Executives and employees participating in employee benefit plans in Chicago received a reminder this week about why it is important to keep track of your benefit plans' beneficiary designations, and update those designations when appropriate. Many people may think they can enter into binding agreements with others, such as family members or former spouses, about entitlement to or waiver of benefits under an employee benefit plan, like a pension or life insurance. However, if the plan is one covered by ERISA, those agreements, even if part of an agreed court order, will have no bearing on what the benefit plan administrator does with any proceeds if inconsistent with the beneficiary designation.

The United States Court of Appeals for the Seventh Circuit reiterated this point in Jackman Financial Corp. v. Humana Insurance Co., No. 10-2112, Slip Op. (7th Cir. May 31, 2011). In that case, Mr. Torrence was a participant in a group term life insurance policy offered through his employer, and named his brother as the sole beneficiary. Mr. Torrence and his brother both died in the same car accident, at the same time. Mr. Torrence's mother, the executor of his estate, contracted with Jackman Financial for Jackman to finance the funeral, and accept assignment of the life insurance proceeds in return. The policy, however, contained a clause granting the administrator discretion to name a beneficiary from a class of family members in the event the named beneficiary died at the same time as the participant. Jackman Financial sued, alleging it had a right to the money. The District Court entered judgment in favor of the insurer, and the Seventh Circuit Court of Appeals upheld the decision.

Plan administrators, such as Humana in this case, have an obligations to follow the terms of the employee benefit plan. ERISA § 404(a)(1)(D). This case may not appear to present such an injustice, but it is a reiteration of Kennedy v. Dupont, No. 07-636, Slip. Op. (S. Ct. 2009). There, a state domestic relations court entered a qualified domestic relations order (QDRO) acknowledging a former spouse's disclaimer of any interest in her ex-husband's employer-sponsored retirement plan. However, the participant never removed his former wife's name from the beneficiary designation on file with the plan administrator. After the participant passed away, his children demanded the retirement plan's assets because the former spouse waived her interest. The administrator, however, administered the plan according to the documents and instruments on file--which included a beneficiary designation naming the former spouse. The children thus could not recover the proceeds from the plan.

The same thing happened this past week in the Jackman case, though admittedly in a less sympathetic fashion. However, it demonstrates the importance of monitoring your beneficiary designations, because the plan administrator will not try to figure out your true intentions if you pass away; it will distribute funds to whomever you last designated. If you need advice about your employee benefit plan, call an ERISA lawyer.

Employees in Chicago and the rest of Illinois lost another potential remedy in ERISA disputes yesterday, but may have gained others. The Supreme Court issued its opinion in Cigna v. Amara yesterday, which arrested any expansion of a remedy for a claim for benefits due under ERISA § 502(a)(1)(B), but may have expanded "other appropriate equitable relief" under ERISA § 502(a)(3).

Cigna v. Amara concerned an employer's conversion from a defined benefit pension plan to a cash balance plan. The new plan contained "a phenomenon known in pension jargon as 'wear away'". Id. at 8. In a "wear away," employees could be required to work for several years, or 6-10 in this case, for benefits accruing under the new plan to catch up to those existing under the old plan, effectively resulting in employees working for 6-10 years accruing no benefits. Cigna, however, failed to tell this to its employees in the required disclosures.

The employees claimed they were entitled to the benefits due pursuant to the summary plan description, which misrepresented the terms of the plan. This theory, dubbed the "but for" theory, asserts a claim for benefits due under ERISA § 502(a)(1)(B) but for the breach of fiduciary duty. The Supreme Court reasoned that this theory is inapplicable in this case, because the SPD is not the plan or part of the plan--it is a summary of the plan. Moreover, the plan pays the benefits, but the plan administrator is responsible for issuing the plan summary accurately describing the plan.

The Court went on to state that the lower court should consider whether the case is proper for "other appropriate equitable relief," and proceeded to give guidance on that remedy. According to the Court, a court could use § 502(a)(3) to reform a plan, estoppel, or surcharge. The last remedy discussed, however, came as a surprise because courts and defense lawyers have long held the position that monetary compensation was not available under ERISA § 502(a)(3). However, the Supreme Court appeared to bless a case by a participant or beneficiary against a plan administrator seeking monetary compensation under the surcharge theory. Justices Scalia and Thomas concurred in the judgment, stating that this § 502(a)(3) guidance was not necessary to resolve the issue presented to the Court and would not necessarily be precedent in future cases.

We expect the Court's guidance here to be discussed in a currently pending case in the Seventh Circuit Court of Appeals, Kenseth v. Dean Health. If you have questions about your rights to benefits under an employee benefit plan, contact an ERISA lawyer.

Many employers in Chicago seek for ways to add incentive to their executives and managers. Some accomplish this through Incentive Stock Options ("ISOs"), or Nonqualified Stock Options ("NSOs") depending on the structure of the options package. Other employers may provide a Supplemental Executive Retirement Plan ("SERP"), also commonly referred to in the benefits community as a "top hat" plan, that vests upon a certain number of years of service and/or attainment of certain goals. Yet other employers seek a more direct investment of the executive or manager's "skin in the game" by either providing a bonus that is equity based compensation, or asking the new executive to directly invest in employer stock. Occasionally, the only source of funds the executive will have liquid for such a purchase of stock will be a retirement account that he or she may rollover into the new employer's plan and then buy the stock with the plan assets.

Ever since the implosion of Enron, and decimation of participants' 401(k) accounts that were invested in Enron stock, many people wonder and ask me what the dangers are to the employee of investing plan assets in employer stock, and what the risks are to the employer of offering the employer stock on the menu of investment options. The answers to those questions could consume enough pages to fill a book, to say the least. Nevertheless, you should be careful about investing your nest egg in employer stock, especially anything more than a small percentage.

Recently, such an executive had been hired by a securities brokerage firm, and its bonuses were typically paid in employer stock. Peabody v. Davis, 2011 U.S. App. LEXIS 7449 (7th Cir. Apr. 12, 2011). In order to receive a bonus payment in cash, rather than in stock, the vice president had to invest funds in the stock. The only funds the VP had were in his IRA, which he rolled over into the employer's ERISA covered defined contribution retirement plan, and then used those plan assets to buy the employer stock. Several years thereafter, as a result of the changes of markets' pricing securities to the penny rather than in eighths of a dollar, commissions at such brokerages tumbled and the employer's stock significantly declined in value.

A question arises whether the fiduciaries of the plan breach their duty of prudence by offering employer stock on the menu of investment options, but generally the choice is presumed to be prudent under Moench v. Robertson, 62 F.3d 553, 571 (3d Cir. 1995). Allowing even a heavy investment in employer stock generally will not violate the fiduciaries' duty to diversify the plan assets in the case of Eligible Individual Account Plans, such as that in Peabody. But where there is a significant decline in the value of the employer stock, there will likely be a decision of questionable prudence by the fiduciaries to continue offering employer stock on the menu of investment alternatives.

If you with equity based compensation, or are investing retirement assets in employer stock, consult an ERISA lawyer.

Employees, executives and partners in Chicago who make elective deferrals to an employer-sponsored 401(k) retirement account are undeniably trying to save for retirement. Assuming the plan participant elects to put money into the plan, there will generally be two variables that will determine the size of the account balance upon the participant's retirement: the rate of return of the assets in which the account is invested, and the amount of fees and other deductions taken from the account. Quite naturally, the participant wants to maximize the return while minimizing the fees.

Fortunately plan fiduciaries, as defined in ERISA § 3(21), specifically are charged with exercising their duties regarding the plan in the sole interest of participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses. ERISA § 404(a). The employer must, therefore, try to pay only reasonable expenses, not excessive fees from plan assets. As with most issues of fiduciary responsibility in ERISA, it is less important what the ultimate result is and more important how the fiduciary arrived at it.

Many plan sponsors renegotiate their fee structures with service providers periodically. But if the sponsor is content with a service provider, the plan sponsor may renegotiate the service contract every few years, but be reluctant to change that service provider, for it does a good job. Some plan sponsors even retain a consultant to advise on the reasonableness of fees the sponsor allows the plan to pay for services. Certainly, this measure is more prudent than going it alone, though it comes at a cost to the employer. But is relying on a consultant's advice that fees are reasonable enough for the plan fiduciaries? A divided panel of judges on the United States Court of Appeals for the Seventh Circuit appear to demand more.

In George v. Kraft Foods Global Inc., No. 10-1469, at 26 (7th Cir. Apr. 11, 2011) (Slip Opinion), the court reversed a district court's entry of summary judgment in favor of the defendants. The class of plaintiffs in that case advanced a claim, among others, that the plan fiduciaries caused the plan to pay excessive fees to its recordkeeper, Hewitt. Hewitt had been the plan recordkeeper for 11 years before the lawsuit had been filed. While the evidence showed the defendants had renegotiated the plan's service agreement with Hewitt upon the conclusion of the term of each contract, there was no evidence that the plan fiduciaries ever solicited competitive bids for the recordkeeping service contract with the plan. The defendants stressed that they hired independent consultants who advised the fiduciaries that the fees they allowed the plan to pay Hewitt were reasonable.

Continue reading "Is Your Employer Shopping Service Providers to Ensure the 401(k) Plan Pays Competitive Rates?" »

Participants and beneficiaries of retirement plans in Chicago and the rest of Illinois will soon have opportunity to review the testimony presented to the Department of Labor ("DOL") regarding the DOL's proposed new definition of a plan "fiduciary" and submit comments on that testimony. The DOL announced the extension on March 8, 2011 in a press release. Once the DOL uploads the testimony to the site of its agency, the Employee Benefit Security Administration ("EBSA"), the testimony will be available for review for 15 days.

Prior to holding the hearings on March 1-2, 2011, the DOL received an abnormally high number of public comments regarding its proposed regulation, 199 to be exact. It further received 39 written requests to testify at the hearing.

Times have changed. The DOL's proposed new definition of fiduciary would modernize the 35 year-old definition that may have been appropriate in the 1970s, but has proven to be outdated today. The retirement plan industry has experienced a mass exodus from traditional defined benefit pension plans and gravitated towards defined contribution plans, such as a § 401(k) plan (where the account balance defines the amount of benefits the participant will receive). In addition, there are far more outsourced service providers to plans today than there were 35 years ago. These service providers' fees are often paid from the account balances of the very participants to whom the providers wish to owe no fiduciary duty.

In the 1970s landscape of defined benefit pension plans, the service providers' loyalty understandably may have been to the plan sponsors and employers, because a misfeasance by the service provider likely resulted in the employer paying more to fund the promised benefits. But today, the participants often directly pay for these services, thus lowering the participants' and beneficiaries' benefits. Should there not then be a higher duty of cared owed by service providers to participants and beneficiaries today than there was 35 years ago?

For more information regarding the proposed new definition, see DOL Issues Agenda for Hearing on Proposed Regulation Changing the Definition of "Fiduciary".

Today's edition of the Chicago Tribune contained an article describing Senate President John Cullerton's suggestion of placing an income tax on retirement income, both from plans covered by the Employee Retirement Income Security Act ("ERISA"), and exempt sources of retirement income (e.g., state pension plans, Social Security, etc.). Placing a greater tax burden on seniors will be a hard sale for legislators. But intelligent debate on the issue cannot even take place unless we educate constituents on the current tax treatment of retirement income, from the day the money is deferred or accrued, until distributed.

First, under Federal income tax laws, any contributions to a tax qualified retirement plan (e.g., 401(k), pension, profit sharing) are excludable from your adjusted gross income, whether you elected to defer the money or your employer makes a contribution to the plan. In addition, voluntary contributions you make to a traditional IRA (as opposed to a Roth IRA) are excluded from your adjusted gross income. These items are not taxed in the year deferred, contributed, or accrued.

Next, the Federal government also allows all money held in a qualified plan or IRA to grow tax-free, meaning there is no income tax paid on the yearly earnings of the account or plan. Finally, the money is subject to income tax upon distribution. There is an additional tax incentive to employers that sponsor a tax qualified plan in that the employer gets to immediately claim the deduction for the compensation deferred or contribution the employer made.

With few adjustments, the Illinois measure of taxable income is largely based on Federal adjusted gross income. So the same amounts that are excluded from Federal adjusted gross income, and thus not taxed, are also excluded from Illinois adjusted gross income and not taxed.

Now fast forward to retirement. Recognizing that some would wish to keep money in a tax-shelter as long as possible, Congress imposes rules on minimum distribution, meaning you must take out a certain amount each year and pay tax on that distribution. I.R.C. § 401(a)(9). Failure to take such a minimum distribution subjects you to a hefty excise tax of an additional 50% of the distribution you were required to receive, but did not. I.R.C. § 4974. After all, Congress is willing to defer income tax receipts, but did not want to forever forego them. While the Federal government does tax distributions from tax qualified retirement plans and accounts, the State of Illinois does not. Essentially, Illinois makes all money saved for retirement (by you or by your employer on your behalf) through a tax qualified vehicle completely income tax-free.

Continue reading "Illinois Legislators Mull a Tax on Retirement Income" »

Workers and retirees all over Chicago and the rest of Illinois may soon receive more protections from the Department of Labor. The Department of Labor has issued an agenda for the upcoming hearings on the proposed new definition of "fiduciary" for purposes of ERISA. In October 2010, the DOL issued a proposed regulation modifying the definition of "fiduciary" for purposes of ERISA. 75 Fed. Reg. 65,263 (Oct. 22, 2010).

Among other things, the regulation would expand the definition of fiduciary to include investment advisors and valuation experts it previously did not define as fiduciaries. Under ERISA, a person is a fiduciary with respect to a plan to the extent that "he renders investment advice for a fee or other compensation, direct or indirect, with respect to moneys or other property of such plan, or has any authority or responsibility to do so . . . ." ERISA § 3(21)(A)(ii). This is by no means the only way one can become a fiduciary of a plan, though.

The DOL promulgated regulations in 1978 refining what it meant to "render investment advice for a fee." 29 C.F.R. § 2510.3-21. The DOL noted that currently, in order to render "investment advice for a fee", an adviser who does not have discretionary authority or control with respect to buying and selling plan assets must satisfy a 5-part test, in that he must: (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary, that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan. 29 C.F.R. § 2510.3-21(c).

Under the proposed regulation, many investment advisers currently evading fiduciary status would fall under the fiduciary umbrella. The proposed regulation requires only that a registered investment adviser who does not have discretionary authority or control with respect to buying and selling plan assets: (1) Provides advice or recommendations regarding the value, buying, selling, holding, or management of securities or other property (2) to a plan, plan fiduciary, participant, or beneficiary. Should this proposed regulation become enacted, we can expect to see more investment advisers named as defendants in breach of fiduciary duty ERISA lawsuits. If you would like questions answered regarding who is a fiduciary of the plan in which you are a participant or beneficiary, speak to somebody knowledgeable about ERISA.

Workers in Chicago and the Midwest now have even more compelling of a reason to consult an ERISA lawyer before signing a severance agreement. In late January, the United States Court of Appeals for the Seventh Circuit rendered an opinion in Howell v. Motorola, Inc., No. 07-3877, 2011 U.S. App. LEXIS 1193 (7th Cir. Jan. 21, 2011) holding that any member who signed a release as part of a severance agreement after being terminated from employment could not pursue a claim against the former employer or the plan for a breach of fiduciary duty--even if that breach of fiduciary duty resulted in a denial of benefits due.

The case stemmed from Motorola's offering of employer stock as part of its participant-directed 401(k) plan. In 1999, Motorola involved itself, though an affiliate, in a lending deal with a Turkish telecom company, Telsim, whereby Motorola loaned Telsim $1.8 billion. Telsim pledged a number of shares of its own stock as security. Prior to July 1, 2000, Motorola only had 4 options in its 401(k) plan, employer stock being one of them, and the plan limited participants to investing no more than 25% of their account balances in employer stock. Thereafter, Motorola began offering 9 different options, including employer stock, but lifted the restriction so that employees could invest 100% of their retirement savings in Motorola stock.

In April 2001, Telsim missed the first repayment deadline and had diluted the stock that served as collateral for the Motorola loan, and as Motorola released more information about the Telsim deal, the stock price declined. The plaintiffs alleged that Motorola did not adequately disclose the terms of the Telsim deal or the risk to which Motorola was exposed, and that as more information was released regarding the deal, the stock price declined.

The Seventh Circuit held Howell's claims against Motorola were dismissed because he signed a release as part of a severance agreement that would release Motorola from any past breaches of fiduciary duties under ERISA. Even though Howell tried to argue that his claim was really one for benefits due under ERISA 502(a)(1)(B), the court nevertheless dismissed. This case demonstrates precisely why it is so important to consult an attorney versed in ERISA prior to signing any severance agreement.

Many employers in Chicago and the rest of Illinois misclassify workers as independent contractors in order to avoid paying payroll taxes for those workers and providing them with employee benefits. While there is nothing wrong with the use of independent contractors, if your employer has misclassified you as an independent contractor, it may be denying you employee benefits that would otherwise be due. For example, if your employer provides group health insurance to employees, or has a retirement plan, you will miss out on participating in these plans as a result of the misclassification.

Contrary to popular belief, it is not the employer's decision whether you are an independent contractor or employee. Whether you are truly a contractor or an employee is a question of law that depends on the facts and circumstances that essentially must answer the question: who directs and controls how your job is done? The IRS originally developed a 20-factor test to determine whether a worker is a contractor or employee. Rev. Rul. 87-41, 1987-1 C.B. 296. Because over the past 25 years, some of these factors have become less relevant, the IRS has simplified this test to a 3-category test of Behavioral Control, Financial Control, and the Relationship of the Parties.

It isn't just the IRS that is interested in worker misclassification. The Employee Misclassification Prevention Act is a bill pending in both the House and Senate that would impose criminal penalties on employers that misclassify workers. S.3254, HR 5107. While this bill is currently stalled in Congress, you can expect as implementation of the Patient Protection and Affordable Care Act of 2010 is increasingly implemented, this bill will get more attention because employers will try to evade requirements to provide health insurance by misclassifying workers.

Several people have asked me: "What if I signed an agreement stating I am an independent contractor?" The answer is that it likely does not matter that you agreed to a certain employment status. An employer once tried to use this exact argument to avoid retroactively providing benefits to misclassified workers. In Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996), workers signed agreements labeling them as independent contractors instead of employees. After an IRS audit determined Microsoft misclassified the workers, the workers successfully sued Microsoft for denying them benefits during the time the workers were misclassified (including participating in a lucrative stock purchase plan). If you think you have been misclassified as an independent contractor and that misclassification resulted in denying you employee benefits, call an experienced ERISA lawyer.