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A government lawsuit sounds another warning that employers must be extremely careful if they exclude temporary employees or independent contractors from benefit plans.

The U.S. Department of Labor last week sued Time Warner Inc., Time Inc. and its subsidiaries, and plan administrators, alleging that Time Inc. and its various subsidiaries and divisions have misclassified workers as temporary employees or independent contractors. The misclassifications resulted in denying those workers participation in benefit plans, according to court papers.

The Labor Department also alleges that the companies "manipulated breaks in service" so that temporary workers could not meet the length of service that would put them in an employee class eligible for plan participation, according to the complaint, filed in U.S. District Court for the Southern District of New York.

The message employers should receive from the Labor Department's action is that plan sponsors must be "excruciatingly explicit" in stating in benefit plan documents which employees are included and which are excluded from participation, said Frank Cummings, a partner with LeBoeuf, Lamb, Greene & MacRae in Washington.

Pamela Scott, a principal with PwC Kwasha in Fort Lee, N.J., said the issue of worker classification is a long-standing one, though it has become more visible because of the increased use of temporary workers and independent contractors.

If employers can reduce costs by excluding certain categories of employees from benefit plan participation, "the government may feel it needs to stretch the boundaries of the employer-employee relationship in order to include more employees," she said. "Clearly, the government is trying to challenge employers' views of which workers they can include or exclude," she said.

The use of temporary employees or independent contractors is a trend that's here to stay, said Michael S. Gordon, an employee benefits attorney in Washington who represents both employees and benefit plans.

"We have people who may be evolving into a permanent class of temporary employee," Mr. Gordon said. What employers must realize is that "you can't write them off. You have to deal with them in the same responsible way as you do regular employees."

In its complaint, the Labor Department alleges that Time Warner and the administrative committee violated the Employee Retirement Income Security Act by failing to "ensure the consistent application" of the plans to all eligible employees. The department says they failed to identify all employees eligible to participate in the plans and did not ensure that all eligible employees were included as participants. The companies and plan administrators neither examined whether workers classified as temporary employees or independent contractors were eligible for participation nor did they provide misclassified employees with plan documents or information, according to the complaint.

A Labor Department spokes-man said the government does not know how many workers were allegedly misclassified.

The Labor Department has asked the court to appoint an independent fiduciary to, among other things, identify all misclassified employees and determine what plans they should have been eligible to participate in and to what benefits they were entitled. The department also has asked that the employees receive retro-active benefits.

Time Warner President Richard D. Parsons said in a statement in response to the lawsuit that "the Department of Labor's action has no basis in law or in fact and is beyond the scope of its authority." The company has filed a motion to dismiss the suit.

Additionally, the company also said it has filed three Freedom of Information Act lawsuits, alleging the Department of Labor "improperly has refused to provide" information in response to FOIA requests. Time says in its statement that it believes the information it is seeking "will demonstrate that the positions being taken by the DOL -- seeking benefits for independent contractors and temporary employees -- are unprecedented and represent a clear departure from the DOL's longstanding recognition of the limits to its jurisdiction."

Mr. Cummings of LeBoeuf, Lamb agrees that this action is "an unprecedented expansion" of the Labor Department's jurisdiction under ERISA.

"There's very little doubt that Congress did not expect the department to bring actions simply to contest plan administrators' determinations of the eligibility of coverage," Mr. Cummings said. He said the department has tried to maintain jurisdiction by restating as a fiduciary duty claim what actually is a claim for benefits that should be brought by employees.

The request for retroactive benefits is "gouging" a deep pocket, and appointing an independent fiduciary in this case would be a "wild extension" of the circumstances under which such a fiduciary is generally appointed, he said.

But Mr. Gordon said the Labor Department would have standing in cases where there is a pattern or practice of incorrectly carrying out the terms of the plan with regard to certain classes of employees. He did say that together, the call for an independent fiduciary and the retroactive benefits are an "unusually strong action."

The case resulted from an investigation conducted by the New York Regional Office of the Pension and Welfare Benefits Administration into alleged ERISA violations, the Labor Department said in a statement. That PWBA investigation was prompted by complaints from Time Warner workers who were not granted eligibility for benefit plans, a Labor Department spokeswoman said.

The suit raises issues brought out in the case of Donna Vizcaino et al. vs. Microsoft Corp. The 9th U.S. Circuit Court of Appeals ruled in that case that, based on Microsoft's plan language and an Internal Revenue Service determination, the workers were employees and not independent contractors. That determination was made even though the free-lancers had signed contracts that they were self-employed and responsible for paying their own insurance and benefits (BI, Oct. 21, 1996).

Last year, the 4th U.S. Circuit Court of Appeals found a former leased employee ineligible for benefits. In the case of Ann Navey Clark vs. E.I. du Pont de Nemours & Co. Inc., the court found the late husband of Ms. Clark "was not a (plan) 'participant' because he was not eligible to receive benefits under the plain language of the plans" (BI, Jan. 20, 1997).

Some observers say that while the U.S. Supreme Court declined to review the Microsoft decision, it ultimately will have to address the issue of worker classification as it relates to benefits eligibility.

Stephen K. Strong, a partner with Bendich, Stobaugh & Strong in Seattle who represented plaintiffs in the Microsoft case, lauded the Labor Department's action.

"We've been encouraging the Labor Department to do more work in this area," Mr. Strong said. He said he hopes one result of the action will be for "employers to take more note of their duty" to properly classify employees.

Mr. Strong said problems arise when employers include categories of employees in plan language in order to meet the requirements of tax-qualified plans but then try to find ways of excluding members of those categories by reclassifying them in some way.