Facts

In Scruggs v. ExxonMobil Pension Plan, 10th Circuit No. 08-6145, November 9, 2009, the Court upheld a plan administrator’s denial of the pension benefits claimed by a putative independent contractor.

Barbara Scruggs worked as a secretary for ExxonMobil for 22 years. She started with Exxon before its merger with Mobil and continued working after the merger until the facility where she worked was closed in 2005.

Ms. Scruggs began her secretarial career through a third party that contracted with Exxon. She later entered into a direct contract arrangement with Exxon and then finished her time with ExxonMobil through a third party. These arrangements all provided she was not eligible for employee benefits with Exxon and ExxonMobil. Nonetheless, when she lost her position, she filed a claim for a pension benefit. The plan administrator, an employee for ExxonMobil, denied the claim. Ms. Scruggs then filed suit.

Administrative Appeal Standard of Review

On appeal, the 10th Circuit analyzed the appropriate standard of review to apply to the plan administrator’s denial of benefits. The plan document explicitly granted the plan administrator with discretionary authority to determine eligibility for benefits and to interpret the terms of the plan. Therefore, the plan administrator was entitled to a deferential standard of review. This meant the plan administrator’s denial would be upheld unless it was arbitrary and capricious.

Because the plan administrator was an employee of the plan sponsor, the Court determined there was a conflict of interest. As provided by the Supreme Court in Metropolitan Life Insurance Co. v. Glenn, 128 S.Ct. 2343 (2008), the Court considered this conflict of interest as a factor when determining whether the denial of benefits was arbitrary and capricious.

The weight of this conflict of interest was minimal because:

• the assessment of the plan administrator’s job performance was not based on whether he approved or denied appeals;
• the plan administrator’s compensation was not related to his appeals decisions; and
• the financial incentive to deny Ms. Scruggs’ appeal was small because the cost of approving it would have been insignificant.

Next, the Court determined whether the plan language at issue was ambiguous. The language is ambiguous if it is reasonably susceptible to more than one meaning or there is uncertainty concerning the meaning of the plan terms.

The plan used several terms that included the word “employee” for determining the individuals eligible to receive benefits. A “covered employee” with sufficient service was eligible for a benefit. A "covered employee" was defined as a “qualifying employee” of a “participating employer.” The term "qualifying employee" did not include a “special-agreement person” which was defined as an individual performing service per an agreement. It appears that Ms. Scruggs’ arrangement fit within the plan’s definition of “special-agreement person.” Notwithstanding this seemingly applicable exclusion, the Court concluded that the plan language was ambiguous, primarily because the word “employee” was never defined.

Ms. Scruggs argued that “employee” was intended to refer to a common law employee. The plan administrator contended that the term “employee” was not intended to be used as a legal term of art, but rather it was intended to refer to the group of individuals performing services that reasonable business people would consider to be employees. A reasonable business person would consider individuals performing services to be employees who were paid through the payroll system. Ms. Scruggs was never paid through the payroll system.

The plan administrator offered the following in support of his interpretation:

• The benefit administrative system was designed only to support individuals paid through the payroll system.
• The accounts payable system, through which Ms. Scruggs and other similarly situated individuals were paid, was not designed to track and accumulate the kind of information needed to make benefit payments.
• Benefit communications were only provided to individuals paid through the payroll system.
• In 30 years experience, the plan administrator was not aware of anyone paid through accounts payable that was eligible for benefits.

Apparently, Ms. Scruggs did not submit evidence relating to her potential status as a common law employee. The Court did not make such determination either. In fact, the Court did not feel it necessary to make that determination. ERISA does not prohibit a plan from distinguishing among groups of employees regarding plan participation. Therefore, a plan may designate one group of common law employees as eligible to participate and another group as not eligible to participate. (Note: There are practical limits on the ability of a tax-qualified plan to make such distinctions under the time of participation rules and the minimum coverage rules in Code § 410.)

The Court concluded that the plan administrator’s denial of pension eligibility was not arbitrary and capricious. The plan administrator's application of the plan provisions was reasonable and supported. Therefore, the plan administrator’s denial was upheld.

Lessons Learned

There are several lessons that can be learned from this decision. The first is that the plan document should always explicitly delegate discretionary authority to the plan administrator to determine eligibility, benefit entitlement and interpret the provisions of the plan. This delegation preserves the arbitrary and capricious standard of review for benefit determinations made by the plan administrator. Second, if the plan administrator is subject to a potential conflict of interest, take steps to separate the plan administrator from the financial consequences of benefit decisions. Third, it is important to define the basic terms of the plan, like what is meant by “employee.” The plan drafter cannot assume that the meanings of terms and phrases are self evident. Nevertheless, even the most meticulous drafter cannot anticipate every term that will be brought into question at some undefined future date. Therefore, when such terms do come into question in a benefit appeal, the plan administrator must provide a reasonable, logical and documented basis for his or her decision.