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August 23, 2001
Court: Part-owners Are Employees Under ERISA
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rofit-sharing plan and a pension plan may be covered by the Employee Retirement Income Security Act, even if all of the participants are part-owners of the company and members of the same family, a federal appeals court has ruled.

The plans are covered so long as the company is not entirely owned by a single person or a married couple, the 3rd U.S. Circuit Court of Appeals ruled.

In the latest ruling, Leckey v. Stefano, the court reversed a lower court's dismissal of the suit, finding that it had misinterpreted the 3rd Circuit's 1996 decision in Matinchek v. John Alden Life Insurance Co, according to the Legal Intelligencer, a Pennsylvania law journal.

In the earlier case, the court held that ERISA does not regulate a health plan that does not cover any "employees" but instead benefits only a sole business owner and his immediate family.

In the new case, U.S. District Judge Robert J. Cindrich of the Western District of Pennsylvania focused on a footnote in Matinchek that says: "This holding applies to all businesses solely owned by immediate family members, regardless of whether the owners are sole proprietors, sole shareholders, or partners."

Cindrich concluded that in the first case, the 3rd Circuit had effectively expanded ERISA's exclusion of plans covering only sole owners and their spouses to exclude any plans that cover only joint owners who are immediate family members.

As a result, the Intelligencer reports, Cindrich found that he had no jurisdiction to hear a suit over a pension plan and a profit-sharing plan at American Carbyde, a family-owned company in which the only participants in the plans were two related co-owners, a man and his stepdaughter.

Cindrich concluded that "shareholders of a company, all of whom are immediate family members, are owners, not employees, for purposes of determining whether a plan is covered by ERISA."

But the 3rd Circuit has ruled that Cindrich misinterpreted its first ruling.

"The court in Matinchek was called upon to decide only whether ERISA governed an insurance plan covering a husband and wife who co-owned a business. It was not asked to decide whether ERISA would also govern a policy that covered other immediate family who jointly owned a business," U.S. Circuit Judge Samuel A. Alito wrote.

"As a result, even if the court's footnote is read as suggesting that immediate family members who jointly own a company do not count as employees, that assertion is merely dictum," Alito added.

Alito said it was wrong to read Matinchek as extending ERISA's exclusion to immediate family members other than spouses.

Instead, Alito said, the distinction hinges on whether an owner can be considered an "employee." Under the exclusion, a sole owner or a married couple who jointly own a company cannot be considered employees.

Hence, if a benefit plan of any sort covers only such an owner, it does not trigger ERISA regulation because it does not cover any employee.

The confusion resulted from the court's discussion of health benefits that extended to the man's family. But Alito said the court was simply explaining that none of the family members in that case were employees.

To view the Legal Intelligencer article, click here.

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