Wednesday, January 25, 2017
Although by no means a new question regarding retirement, the noteworthy growth of gig companies in the sharing economy has renewed concerns that even more American workers will lack access to employment-based retirement plans. Although some argue that the gig economy offers workers advantages including more independence and flexibility, company-sponsored retirement saving is not one of them. This is a dangerous state of affairs, as employment-based retirement plans make up a critical part of an individual’s strategy for retirement security.
Such retirement plans, like the nearly-ubiquitous 401(k) plans, provide a necessary bulwark against destitution in old age, especially given that Social Security provides only partial income replacement and few Americans have put away much in private savings. Yet, independent contractors, which is how most gig companies classify their workers, are approximately two-thirds less likely than standard employees to have access to an employer-provided retirement plan.
Much academic and judicial ink has already been spilt over whether Uber drivers and other members of the sharing economy are members of the so-called “contingent” workforce or “precariat” (part-time, leased, temporary, and per diem workers), not entitled to receive retirement benefits as part of their employment. Whether these employees are statutory employees is of utmost importance because it largely determines whether gig workers are covered by employment laws, as most such laws center on the employer-employment relationship.
What all these jobs have in common is that the work activity is happening outside of the traditional safety net of employment and are highly unstable. Whereas statutory employees are covered in the United States by numerous labor and employment law statues that provide security and protection in the workplace, workers in these alternative work arrangements are not. Once stable employment relationships have given way to relationships that are much more arms-length, regardless of whether it is a contractor situation, temporary employment, or a one-time encounter.
Into the breach, a number of proposals have emerged to provide independent workers or independent contractors, who work for gig companies (see a recent law introduced in New York), with some form of portable, occupational retirement benefit. For instance, it has been proposed that retirement coverage be offered in the same way as health coverage has been under the ACA. An expanded Social Security could play the role of Medicaid for low income workers, employers could still offer retirement plans, but employees who lack access could purchase retirement plans on a “federal backstop plan.” The biggest problem with this approach is that it does not necessarily require workers to receive retirement benefits through their employer and therefore, such workers would not be employees entitled to the consumer protections of ERISA.
A different set of proposals involves private-sector companies stepping up to provide retirement programs on their own or in cooperation with gig companies. For instance, private internet companies, like Peers, Honest Dollar, and Betterment, are offering to provide retirement benefits, as well as other benefits and human resource services, to gig companies. However, if gig workers are offered retirement benefits by their employers under this model, such benefits are a mere gratuity, something that the employer has no responsibility for maintaining or administering as a fiduciary.
It is therefore essential that individuals who work in the sharing economy be considered common-law employees for retirement purposes under the control test established in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992), so as to qualify for consumer protections under the Employee Retirement Income Security Act of 1974 (ERISA). Indeed, the crux of ERISA relies upon the fact that plan assets are held in trust and those that discretionarily operate, manage, or administer them are fiduciaries and/or trustees of the plan. Such fiduciary status means that plan fiduciaries must put their own self-interest aside, and act for the sole interest of plan participants and beneficiaries.
The good news is that there is an increasing trend of finding gig workers to be employees under ERISA. Although not directly under ERISA, employing a similar control test in the United Kingdom, two Uber drivers were recently found to be employees for purposes of British minimum wage laws. In Switzerland, a Swiss insurance agency found an Uber driver to be an employee for whom the company must pay social security contributions. Similarly, in the United States, a recent decision from the California Employment Development Department, found an Uber driver to be an employee for purposes of eligibility for unemployment law. As these laws rely on similar factors as the control test under ERISA, there is good reason to believe that workers, especially those that receive a majority or their exclusive income from gig companies and work full-time hours, will also be considered employees and qualify for ERISA protections. In any case, and this issue is far from being definitively decided, there is at least a reasonable argument that some gig workers, including Uber drivers, qualify as employees under the common-law control test of Darden.
Assuming for the sake of argument that some gig workers will qualify for protection under ERISA as common-law employees, the best mechanism for providing these employment-based retirement benefits is through open multiple employee pensions (“open MEPs”). These open MEPs would allow unaffiliated employers to pool their resources and offer retirement plans to their employees under the statutory protections of ERISA. More specifically, open MEPs permit two or more unrelated private employers to adopt a defined contribution pooled employer plan (PEP) as long as the PEP has a pooled plan provider (PPP) as the named fiduciary to the plan. The only fiduciary duty that members of the PEP would retain would be to prudently select, and then monitor, the PPP, thus limiting their exposure to potential fiduciary liability. Additionally, the price tag of permitting the formation of these organizations is relatively low: 3.2 billion dollars over 10 years from loss of tax revenue from the additional tax deduction for employers and tax-exempt status for employee contributions.
Open MEPs are gaining traction legislatively. Senator Orrin Hatch introduced the Retirement Enhancement and Savings Act of 2016, which would have permitted open MEPs for private sector employees and allow multiple employers to pool retirement funds into a single 401k retirement plan starting in 2020. Under current law, independent employers who wish to pool funds for retirement plan purposes must demonstrate a common interest. Moreover, another difficulty under current law is the so-called one-bad-apple rule, that disqualifies the entire MEP from favorable tax treatment if one employer does not meet the applicable tax rules.
Senator Hatch’s open MEP proposal would remove the common interest requirement and the one-bad-apple rule. In the recent past, this proposed model has had wide bipartisan support. Unfortunately, Hatch’s bill was not enacted in 2016, yet it is not too far-fetched, given current legislative developments, that the open MEP bill will be reintroduced during the coming Trump presidency and will soon be available for multiple employers in the private sector.
As Senator Elizabeth Warren perceptively recognized during hearings on Hatch’s bill, this new approach is well-suited for gig employees. The bill would allow various gig companies to pool their contributions to a common 401k retirement plan, with all the advantages that come with belonging to a large fund. Most importantly, such funds would have the advantages of providing participating employees diversification, low costs, reporting and disclosure requirements, and fiduciary protections based on the trust-based status of such 401k plans.
I explore the topic and proposal in greater depth in a recently-published paper available via SSRN.