Who's the Employer?

Many employers have amended their retirement plans in the wake of this decision in an attempt to protect their plans against the uncertainty that may be created by retroactive determinations that workers are employees rather than independent contractor. Typically, such amendments provide that workers engaged as independent contractors, or workers not paid through the payroll system, will not be eligible to participate in the plan, even if the classification as an independent contractor is later determined to be erroneous.

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As indicated previously, employers have legitimate reasons to exclude from plans workers who were not engaged as common law employees. If the worker is in fact, an Independent [sic] contractor, the employer would be precluded from covering the individual under its plan, absent some specific statutory rule, such as the individual's status as a based employee under section 414(n) of the Code. Even if the worker is not, in fact, an independent contractor, the employer has a legitimate business interest in knowing the cost of the worker's compensation package at the time the worker is engaged.

A tax-qualified retirement plan that conditions participation on status as a common law employee need not define that term, for the standard articulated in Darden will be applicable absent some special definition in the plan. With respect to the case at issue, section 410(a) of the Code does not preclude a qualified plan from excluding retroactively reclassified employees from participating in the plan. A worker's status is based on facts and circumstances. Making a determination as to whether a common law employment relationship exists is not always straightforward. An employer, making the initial classification of a worker's status, has legitimate concerns in protecting its plan from the consequences of retroactive reclassifications if a mistake is made. Nothing in section 410(a) prevents an employer from addressing these concerns though preventative measures similar to the plan language provided by the taxpayer.