Printer Friendly

Nationwide v. Darden: restoring to the term "employee" its common-law meaning.

In Nationwide Mutual Insurance Co. v. Darden,(1*) the Supreme Court of the United States restored to the term "employee," at least for purposes of the Employee Retirement Income Security Act of 1974 (ERISA),(2) its historically recognized meaning. At the same time, the Court provided guidance for interpreting such term within the context of many other federal statutes. This article reviews the Darden decision and discusses its implications.


The Court's unanimous decision in Darden held that for purposes of ERISA the term "employee" means the master-servant relationship as defined under the common-law agency doctrine.(3) In addition, the Court explicitly adopted as a general rule of construction the following analysis set forth in its 1989 copyright decision in Community for Creative Non-Violence v. Reid:(4)

Where Congress uses terms that have accumulated

settled meaning under ... the common law, a court

must infer, unless the statute otherwise dictates, that

Congress means to incorporate the established meaning

of these terms .... In the past, when Congress

has used the term "employee" without defining it, we

have concluded that Congress intended to describe

the conventional master-servant relationship as understood

by common-law agency doctrine.(5)

While the Darden decision has implications for a number of other federal statutes, it has unique implications for purposes of ERISA, which among other things vests in an employee certain rights with respect to any covered employee benefit plan in which such employee participates.(6) The term "employee" defines the universe of individuals who are entitled to the protections afforded by ERISA.(7) ERISA defines an employee as "an individual employed by an employer."(8) Such a circular definition invites divergent interpretations - as is evident by the Darden case itself.



The Darden case involved an effort by Robert Darden, a former insurance agent who represented Nationwide Mutual Insurance Co. to nullify the effect of a noncompetition clause in his agent's agreement with the insurance company. Under the noncompete clause, Nationwide was free under certain circumstances to terminate certain payments to Darden that otherwise were owing under the Agent's Security Compensation Plan (the Plan) to which Darden was a party. The Plan was maintained by Nationwide to provide its former agents "post-termination" income.

The Plan consisted of two programs - the Deferred Compensation Incentive Plan and the Extended Earnings Plan. Darden's contract with Nationwide provided that he would forfeit all benefits under the Plan if he violated, among other things, a specific noncompetition provision in his agent's contract.

Notwithstanding the noncompete clause, Darden engaged in conduct that violated his agent agreement's noncompete provision almost immediately after his agency agreement with Nationwide was terminated. Upon learning of Darden's conduct, Nationwide stopped making payments under the Plan to Darden. Darden then brought suit against Nationwide claiming that the noncompete clause contained in his agent's agreement was unenforceable on account of ERISA's nonforfeiture provisions.



According to section 203 of ERISA, if plan benefits become "vested," they generally cannot be forfeited.(9) ERISA's nonforfeiture provisions, however, apply only to plans that are covered by ERISA.[10] What is more, an individual must be an "employee" to be eligible for ERISA's protections.

For purposes of determining whether the Plan in Darden was covered by ERISA, each of the Plan's two programs was examined separately. The U.S. Court of Appeals for the Fourth Circuit held that the Extended Earnings Plan was not covered by ERISA,[11] primarily on the basis of the court's 1986 decision in Fraver v. North Carolina Farm Bureau Mutual Insurance Co.[12] In contrast, the Fourth Circuit held that the Deferred Compensation Incentive Plan was covered by ERISA. Consequently, if Darden was found to be an employee of Nationwide, any benefits to which he was entitled under the Deferred Compensation Incentive Plan would qualify for protection by ERISA's nonforfeiture provisions. In other words, Darden's success or failure in nullifying the noncompete clause contained depended on his ability to demonstrate that he was an "employee" of Nationwide for ERISA purposes.



In interpreting what Congress intended by the term "employee" in ERISA, the Fourth Circuit devised a novel three-part test.(13) Under the court's test, Darden would be treated as an employee of Nationwide for purposes of ERISA if:

* Darden had a reasonable expectation that he would

receive Plan benefits;

* Darden relied on that expectation; and

* Darden lacked the economic barpining power to

"contract out" of the forfeiture [in this case, a non-compete]


Finding that Darden satisfied each of the tests, the Fourth Circuit held that he constituted an employse for ERISA purposes.

The Fourth Circuit's test represents an application of a rule of interpretation that the scope and definition of a term will be informed by, or be imbued with, the remedial purposes of the different statutes within which the term is used.(15) Thus, the three-part test for employee status devised by the Fourth Circuit represents the court's effort to incorporate into the term "employee" ERISA's remedial purposes (which are set forth in section 2 of ERISA).(16)

The Fourth Circuit's analysis of the meaning of the term "employee" contains no vestiges of the historically accepted meaning of the term.(17) Equally important, the general interpretative rule propounded by the Fourth Circuit runs the risk of ultimately draining from a term all semblance of its traditional meaning. Furthermore, such a rule deprives the affected parties of certainty, for it necessitates judicial review of legislation containing the term in order to divine its special contextual meaning.

The Supreme Court in Darden firmly rejected the Fourth Circuit's chameleonic rule for interpreting the term "employee.(18) In its place, the Court embraced the general rule that, for purposes of ERISA (and other federal laws), the term "employee" is to be accorded the common law definition unless the particular statute involved otherwise directs. The Court, however, did not address whether Darden satisfied the common-law test, but instead remanded the case to the Fourth Circuit for resolution of that issue. As stated in Darden, the Court's earlier decision in Reid "signaled our abandonment of ... construing [thel term [employee] "in light of the mischief to be corrected and the end to be attained.'"(19) Whereas Reid was the signal, Darden was the express pronouncement. Notwithstanding Darden, however, administrative difficulties with respect to the term "employee" persist.



Most employee benefit plans that are covered by ERISA are also affected by the Internal Revenue Code. For example, ERISA's nonforfeiture provision - which Darden sought to invoke in his effort to nullify the noncompetition clause - is also contained in section 451 of the Code. The Code, however, expands statutorily the definition of employee for purposes of many employee benefit provisions. Such expansion is accomplished through the "leased employee" rules of section 414(n).(20)

Section 414(n) provides that an individual who is not an employee under the common-law test but who meets the leased employee criteria will be treated as an employee for certain purposes. ERISA contains no parallel provision. The resulting asymmetry between the definition of employee for purposes of ERISA and the tax-law definition of the term can lead to anomalous results since many provisions - including the minimum participation requirements(21) and nonforfeiture provisions(22) - are common to both the Code and ERISA. Consequently, it is conceivable for a worker to be a participant in a plan covered by ERISA, but not be individually covered by ERISA. In other words, an individual could be a plan participant by virtue of the leased employee rules of section 414(n) (which are not recognized by ERISA) but not be personally covered by ERISA.

This raises interesting issues. For example, consider an individual who participates in an ERISA-covered health benefit plan solely by virtue of being a leased employee. By definition, the individual is not a common-law employee and, therefore, is not covered by ERISA. If the health plan administrator were to deny plan coverage for a medical procedure that the individual had good reason to believe the plan should cover, what would be that individual's ultimate remedy? Owing to ERISA's preemption of state-law remedies for claims pertaining to an ERISA-covered benefit plan, state law would likely provide no avenue of relief to the individual.(23) Hence, even though the individual enjoyed no rights under ERISA, he or she might be precluded from asserting any state law-based claim.

Another example of asymmetry between ERISA and other federal laws affecting employee benefit plans is the continuation coverage rules of section 4980B of the Code (which are commonly known as the COBRA rules). Briefly stated, the COBRA rules provide that a "covered employee" or members of such individual's immediate family must be provided the opportunity to purchase continued coverage under a group health plan upon the occurrence of a "qualifying event" otherwise causing a termination of health coverage under such plan.

COBRA, which is technically contained both in part 6 of title I of ERISA and also in the Code, defines a covered employee" as:

any individual who is (or was) provided coverage

under a group health plan by virtue of the performance

of services by the individual for 1 or more

persons maintaining the plan ....(24)

As the quoted language makes apparent, the distinction between employee and independent contractor, for purposes of interpreting the term 'covered employee," is irrelevant. Coverage under a plan and the performance of services, in whatever capacity, are the two requirements for COBRA coverage. Certainly, an individual could be entitled to COBRA protection, yet remain outside of ERISA.


Darden's enunciation of general principles for interpreting the term "employee" should be helpful to businesses that seek to ascertain the universe of workers covered under legislation pertaining to employees. Examples of such legislation include the Americans with Disabilities Act (ADA)(25) and the Age Discrimination in Employment Act (ADEA).(26)

The ADA tautologically defines the term "employee" as "an individual employed by an employer."(27) The purposes sought to be accomplished by the ADA are, much like ERISA, broad and remedial in nature(28). Consequently, absent Darden, the term "employee" in the ADA may have been susceptible to an overbroad interpretation. Likewise, the ADEA - which was enacted for a broad remedial purpose(29) - defines an "employee" as "an individual employed by an employer .... "(30)

Both the ADA and the ADEA contain the same type of circular definition of employee status, and both evince a remedial purpose. Under the Darden rule, the term "employee" as used in each statute is be determined by application of the common-law test, unlesS the applicable statute dictates otherwise. For purposes of these laws (and possibly others), then, Darden should provide solace to businesses concerned about the uncertain breadth of coverage of such laws.



Another problem historically associated with the multitude of federal laws affecting employees is the need for a business to examine its workforce separately for purposes of each law, in order to ascertain exactly which workers will be deemed "employees" and, therefore, covered by such law. By mandating that the definition of "employee" be generally the same for purposes of all federal laws, Darden accomplishes a great deal in reducing the administrative burden of complying with federal legislation. At least for purposes of such laws, a business may have some degree of confidence that the group of workers covered by one law will be covered by the others as well. Obversely, workers who are not covered by one will not be covered by the others.

The Supreme Court has now made clear how it will interpret the term "employee" when it is not expressly defined. The question becomes, however, whether Congress in the future will undermine the certainty made possible by Darden by expressly defining such term in new legislation in a manner that departs from the common-law test.


(1) 14 EBC (BNA) 2625, Opinion No. 90-1802 (March 24, 1992). (2) 29 U.S.C. [subsection] 1001, et seg. (3) The Court expressly stated it adopted "the general common law of agency, rather than ... the law of any particular state." 14 EBC (BNA) at 2627 n.3. The Court in Community For Creative Non-Violence v. Reid, 490 U.S. 730 (1989), stated that such choice "reflects the fact that |federal statutes are generally intended to have uniform nationwide application.'" 490 U.S. at 740. (4) 490 U.S. 730 (1989). (5) 14 EBC (BNA) at 2627, citing 490 U.S. at 739-40 (citations omitted and emphasis added). (6) ERISA [section] 4, 29 U.S.C. [section] 1003. (7) Specificafly, ERISA [section] 3(b) defines the term "employee" for purposes of title I of ERISA. Title I includes general provisions (subtitle A), reporting and disclosure requirements (subtitle B, Part 1), participation and vesting [nonforfeiture] requirements (subtitle B, Part 2), funding requirements (subtitle B, Part 3), fiduciary responsibilities (subtitle B, Part 4), provisions relating to the administration and enforcement of ERISA's provisions (subtitle B, Part 5), and rules relating to mandatory continuation coverage (COBRA) that must be provided with respect to group health plans (subtitle B, Part 6). (8) ERISA [section] 3(6), 29 U.S.C. [section] 1002(6). (9) 29 U.S.C. [section] 1053. Although certain technical exceptions exist to the nonforfeitability of vested benefits, but they are not relevant here. (10) Since ERISA's nonforfeiture provision is contained in title I of ERISA, the ERISA [section] 4 prerequisites must be met. The types of plans covered by title I of ERISA are described at ERISA [subsection] 3(1), (2), and (3), 29 U.S.C. [subsection] 1002(1), (2), and (3). (11) Darden v. Nationwide Mutual Insurance Co., 796 F.2d 701 (4th Cir. 1991). (12) 801 F.2d 675 (4th Cir. 1986), cert. denied, 480 U.S. 919 (1987). (13) The Fourth Circuit is the only federal circuit to have adopted such a test. Cf. Penn v. Howe-Baker Engineers, Inc., 898 F.2d 1096 (5th Cir. 1990); Wardel v. Central States Pension Fund, 627 F.2d 820 (7th Cir. 1980);, Short v. Central States Pension Fund, 729 F.2d 567 (8th Cir. 1984); Holt v. Winpisinger, 811 F.2d 152 (D.C. Cir. 1987). Although such a test has been applied at the district court level within the Sixth Circuit - see Waxman v. Hardaway Construction Co., 693 F. Supp. 587 (M.D. Tenn. 1988); Wolcott v. Nationwide Mutual Insurance Co., 664 F. Supp. 1533 (S.D. Ohio 1987) - the Sixth Circuit Court of Appeals itself ultimately rejected that test in favor of a common-law definition. Wolcott v. Nationwide Mutual Insurance Co., 884 F.2d 245 (6th Cir. 1989). (14) 796 F.2d at 706. (15) The Fourth Circuit did not itself devise the interpretative rule it applied; rather, the rule is the product of two previous Supreme Court decisions: United States v. Silk, 331 U.S. 704 (1947); and NLRB v. Hearst Publications Inc., 322 U.S. 111 (1944). (16) 20 U.S.C. [section] 1001. (17) Indeed, the court's definition actually closely resembles the contract-law concept of promissory estoppel, which holds that a promise becomes binding when the promisee suffers detriment in reliance on such promise, even if such detriment was not requested by the promisor as consideration. See generally 17A Am Jur 2d, Contracts [section] 120. (18) The Court's decision also put to rest any lingering vitality of Silk and Hearst, insofar as those decisions condoned interpreting the term "employee" in a way that effectuates the remedial purposes of the particular statute within which such term is used. 14 EBC (BNA) at 2628. (19) 14 EBC (BNA) at 2628. (20) Under section 414(n) of the Code, a leased employee is defined generally as an individual, not a common-law employee, who (1) provides services pursuant to an agreement between the service recipient and a "leasing organization," (2) performs such services for the recipient on a substantially full-time basis for a period of at least one year, and (3) the services performed are of a type "historically performed" by employees. (21) ERISA [section] 202, 29 U.S.C. [section] 1052; cf I.R.C. [section] 410. (22) ERISA [section] 203, 29 U.S.C. [section] 1053; cf I.R.C. [section] 411. (23) E.g., Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987). (24) ERISA [section] 607(2), 29 U.S.C. [section] 1167(2); I.R.C. [section] 498OB(f)(7). (25) 42 U.S.C. [subsection] 12101, et seq. (26) 29 U.S.C. [subsection] 621, et seq. (27) 42 U.S.C. [section] 12111(4). (28) The purposes for enactment of the ADA are set forth at 42 U.S.C. [section] 12101(b). (29) The purposes for enactment of the ADEA are set forth at 29 U.S.C. [section] 621(b). (30) 29 U.S.C. 630(f).
COPYRIGHT 1992 Tax Executives Institute, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:Nationwide Mutual Insurance Co.
Author:Hollrah, Russell A.
Publication:Tax Executive
Date:May 1, 1992
Previous Article:The new rules for accounting method changes.
Next Article:Debt restructuring alternatives for the financially troubled corporation: possible risks and benefits.

Related Articles
Treasurer of the seas.
Topping the Charts.
Certification Program Created For Long-Term-Care Advisers.
Nationwide Offers $1.64 Billion For Asset-Management Firm.
Nationwide to Sponsor Provident's Conversion.
Weathering the Storm.
Marriage: the under-30s prefer common-law status. (News in Brief).
Nationwide completes conversion, merger of Provident Mutual. (Briefing).
Profiting from experience: Nationwide Mutual's success formula is simple: manage risks and know your customers.
Nationwide at center of e-mail privacy ruling.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters