Sabbatical w/ Eventual Termination

[Guest lawkid]

Corporate officer is currently on a one-year sabbatical. The officer plans not to return to work following his sabbatical.

We are trying to determine whether we can classify this officer as an "employee" for income tax withholding purposes (W-2) and as an "employee" for qualified plan purposes while he is on sabbatical. I am assuming that Rev. Rul. 87-41 (20 factors) and the Darden case are the appropriate governing precedent as to these issues.

Two questions: (i) how does the one-year sabbatical + resignation immediately thereafter affect "employee" status for income tax withholding purposes (I am assuming that this fact would be included in the facts and circumstances test of Rev. Rul. 87-41) and (ii) how does the one-year sabbatical + immediate resignation thereafter affect "employee" status for qualified plan purposes.

The relevant plan documents do not address coverage in situations involving sabbaticals. I have looked for outside precedent covering situations where sabbaticals are followed by immediate resignation, but have not located anything helpful.

Citation to relevant statutory or judicial precedent would be greatly appreciated. Thank you.

[mbozek]

You really need to review the employer's policy on sabbatical leave and any documents signed by the employee. I thought that the purpose of a sabbatical leave was to give the employee some time off either with or without pay similar to a leave of absence and that the all rights of the employee to employee benefits continued during the sabbatical leave. If the ee is terminating employment when the sabbatical ends then the employee's termination date will be effective on the date of resignation and all benefits rights will cease on the same date. If the sabbitical leave is treated as a leave of absence from a specific position but not employment, e.g., the employment relationship continues but the employee has no specific duties, then the person on sabbatical leave is considered an employee until the leave ends.

[david rigby]

It is possible, maybe even likely, the employer's policy on LOA/sabbatical states that if the EE does not return to active employment at the end of the LOA/sabbatical, then the severance of employment will be considered as the beginning of the LOA/sabbatical. It is possible that plan documents could have similar language.

[Guest lawkid]

Thank you for the replies.

Your answers highlight the problem in that the employer does not have a sabbatical or leave of absence policy. The plan documents have typical language regarding leave of absences (up to 500 hours so that a break in service is not incurred), but nothing relevant beyond such language.

In the absence of a specific policy and relevant plan language, I am assuming that the individual's "employee" status should be evaluated in accordance with the tests set forth in Rev. Rul. 87-41 (withholding purposes) and the Darden case (ERISA purposes). In light of the fact that the employer will have little or no control over the individual on sabbatical (although a regular salary will be paid), the individual will likely be considered an independent contractor under the relevant tests.

[david rigby]

If there might be precedent, it might be prudent to include it in the analysis.

[QDROphile]

Consider the very real possibility that the arrangement is a farce, or has become a farce. Lots of employers try to get around all sorts of rules with sham employment arrangements. It is just a natural move for the business types. You need to view it with a very critical eye. If you don't have prearranged structures and policies to fit the situation, all the worse for supporting the conclusion that the person is still employed.

[mbozek]

OneQ: How is the employee currently being treated for tax purposes under the sabbatical. If it is as an employee how can the er justify changing the ee status for benefits after the ee announces resignation. EE could have a claim of discrimination under 510 of ERISA if any benefits are taken away by claiming that er is retaliating for ee decision to resign after sabbatical ends. Without a written policy on sabbiticals the er is at risk.