ERISA-District Court Discusses Whether A Business Owner Is An Employee Under ERISA

In Silverman v. Unum Group, No. 14-CV-6439 (DLI) (SMG) (E.D.NY 2015), Neil Silverman (the “Plaintiff”) had brought suit against various insurance companies (collectively the “Defendants”). The Defendants had provided disability insurance coverage (all such coverage referred to below as the “Plan”) to the Plaintiff during his employment at Chip-Tech Ltd. The Plaintiff seeks long-term disability benefits from the Defendants, and alleges that his claim for benefits was calculated improperly and then terminated early. The Defendants move to dismiss the complaint, arguing among others that the Plaintiff’s claims are preempted by ERISA. Plaintiff counters by, among others, contending that ERISA does not apply to the case, as he is not considered an employee under ERISA.

On the issue as to whether the Plaintiff is an employee for purposes of ERISA, the Court said the following. Plaintiff was part owner and employee of Chip-Tech Ltd. He owned fifteen percent of Chip-Tech Ltd. and his siblings, Robert Silverman and Ivy Raffe, owned seventy and fifteen percent of Chip-Tech Ltd., respectively. The Plan covered only the three owners. The Court said further that it cannot consider the owner of a corporation an “employee” where the corporation is wholly owned by the individual or by the individual and his or her spouse. 29 C.F.R. § 2510.3-3.

The Court noted that the Second Circuit has not addressed whether a plan is governed by ERISA where the only participants are shareholder co-owners of a corporation who are not spouses. However, the Supreme Court has stated that Congress intended working owners to qualify as plan participants. Relying on the explicit language in ERISA regulation 29 C.F.R. § 2510.3-3, the Supreme Court held, in Raymond B. Yates, M.D., P.C. Profit Sharing Plan v Heldon, that:

–plans that cover only sole owners or partners and their spouses fall outside of ERISA’s domain; while
–plans covering working owners and their nonowner employees, on the other hand, fall entirely within ERISA’s compass.

Relying on the Yates decision, the Fifth Circuit held, in Provident Life & Acc. Ins. Co. v. Sharpless, that shareholder co-owners were considered employees under ERISA and that their plans, therefore, were ERISA plans because the definition of an employee in ERISA excludes owners of corporations only held by one individual and his or her spouse, not multiple shareholder co-owners of a corporation. The Court then said that the facts in the present case are closely analogous to those considered by the Fifth Circuit in Provident Life. Here, three shareholders owned Chip-Tech Ltd. and the Plan was available exclusively to them. Therefore, the Court concludes that the Plaintiff is considered an employee under ERISA, and that the Plan is subject to ERISA. Additionally, the facts show that the Plaintiff was paid a salary and hired by the corporation, further supporting his treatment as an employee for ERISA purposes.

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