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GRANTHAM v. BEATRICE CO.

October 4, 1991

DON L. GRANTHAM, WALLACE, N. RASSMUSEN, WILLIAM W. GRANGER, JR., JOHN D. CONNERS, DONALD P. ECKRICH, T. MACKIN SEXTON, JAMES WEISS, JUAN D. METZGER, HARRY NEIMIEC, and WILLIAM G. KARNES, Plaintiffs,
v.
BEATRICE COMPANY, a Delaware corporation, and CONAGRA, INC., a Delaware corporation, Defendants


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 Plaintiffs bring this suit under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), 29 U.S.C. §§ 1001 et seq., and the common law of the state of Illinois, seeking a declaration of entitlement to retirement benefits, as well as compensatory damages, prejudgment interest, and costs. Their claims arise out of an Emeritus Benefits Plan devised by Beatrice Companies, Inc., as a retirement benefit for its directors. The defendants, Beatrice Company and ConAgra, Inc. ("ConAgra"), have filed a motion to dismiss the plaintiffs' complaint on the grounds that the Emeritus Benefits Plan is not an "employee pension benefits plan" within the meaning of Section 3(2) of ERISA, 29 U.S.C. § 1002(2) and that the plaintiffs' pendent state law count lacks an independent ground for federal jurisdiction. *fn1" For the reasons given below, defendants' motion to dismiss is denied.

 II. FACTS

 On a motion to dismiss, the court accepts as true all the well-pleaded factual allegations in the complaint and draws all reasonable inferences from the pleadings in favor of the plaintiff. E.g., Gillman v. Burlington Northern Railroad Co., 878 F.2d 1020, 1022 (7th Cir. 1989). Thus the account of the case that follows is that alleged by the plaintiffs.

 On or about March 4, 1969, the members of the board of directors of Beatrice Companies, Inc. ("Old Beatrice") created an Emeritus Benefits Plan ("Plan") which provided for the payment of Emeritus Benefits to qualified directors upon their retirement. Under the Plan, a director qualified for Emeritus Benefits by serving for ten years on the Board, or by ten years' cumulative service as a Board member and officer of Old Beatrice, or by ten years' cumulative service as a Board member and as an officer of a company acquired by Old Beatrice immediately prior to the director's election to the Board. Under the Plan, the amount of a director's annual Emeritus Benefits upon his retirement was to equal the annual stipend in effect for directors of Old Beatrice, and was to be increased each year by the same amount that the annual stipend of incumbent directors of Old Beatrice was increased. Each of the plaintiffs, upon his retirement from the board of Old Beatrice, qualified as a Director Emeritus and began to receive regular Emeritus Benefits payments, which were increased annually in accordance with the Plan. In April, 1986, as the result of a merger, Old Beatrice became a wholly-owned subsidiary of New Beatrice. Old Beatrice continued to be liable for all of the obligations of Old Beatrice, including the obligation to pay plaintiffs' Emeritus Benefits. New Beatrice pledged, as a condition of the merger, that where practicable and appropriate the existing benefit plans of Old Beatrice and its subsidiaries would be continued.

 From the date of the merger, New Beatrice made quarterly Emeritus Benefits payments to each plaintiff. In October 1987, when Old Beatrice was liquidated, New Beatrice made arrangements to continue plaintiffs' Emeritus Benefits payments by means of an annuity. However, although the amount of the annual stipend for incumbent directors of New Beatrice has increased since October, 1987, New Beatrice has frozen the amount of plaintiffs' Emeritus Benefits at the 1986 level. On or about June 7, 1990, New Beatrice and ConAgra entered into a merger agreement under which ConAgra or a wholly-owned subsidiary of ConAgra was to assume New Beatrice's liability for the Emeritus Benefits Plan. In response to the freezing of their benefit amounts, the plaintiffs have brought this suit against New Beatrice and ConAgra. They contend that under ERISA and the common law they are entitled to benefits which equal those received by incumbent directors. Consequently, they seek a declaration of entitlement to equal benefits, as well as compensatory damages, prejudgment interest and costs.

 III. ANALYSIS

 The defendants, New Beatrice and ConAgra, move for the dismissal of the plaintiffs' ERISA claim on the ground that the Emeritus Benefits Plan is not an "employee pension benefits plan" under ERISA. It is not such a plan, they argue, because directors are not employees for purposes of ERISA. The question of whether directors, in their capacity as directors, are employees under ERISA is one of first impression. The issue in this case is further complicated by the terms of the benefits plan in question. Although the Plan's title suggests that it is solely for directors, its terms are such that an individual could do much of what was necessary to earn the right to participate by working as an employee. *fn2"

 In order to determine whether the plaintiffs are in fact employees for purposes of ERISA, it will therefore first be necessary to consider the question of whether directors, in their capacity as directors, are employees under ERISA. As explained below, appellate courts have approached the general question of whether individuals are employees under ERISA in two different ways. The first approach, and by far the more widely accepted, has been to base the decision on whether the individual in question would be considered an employee at common law. The second, less favored, approach, is to examine the statute in question, and consider whether the inclusion of the disputed category of persons would effectuate the "declared policy and purposes" of the statue. As explained below, even under the more inclusive "declared policy and purposes" test, directors would not be employees for purposes of ERISA.

 Most of the appellate decisions which address the general question of how the term "employee" is to be interpreted for purposes of ERISA concern independent contractors. Because independent contractors arguably are not as closely affiliated with the business against which they file an ERISA suit as directors are, it is helpful to examine Department of Labor regulations and appellate decisions concerning partners, who are as closely affiliated as directors and therefore less likely to require the protections of ERISA. As explained below, Department of Labor regulations do not extend ERISA protection to partners, and the appellate courts have also held that partners are not employees for purposes of ERISA. These considerations, as well as the decision of the circuit courts not to extend the protection of the broadly-applied anti-discrimination acts to partners and directors, assist this court in concluding, consistent with the common law, that for purposes of ERISA directors are not employees.

 After determining the status of directors under ERISA, it will then be necessary to consider whether the plaintiffs in the case before us were in fact directors. It is well established in the Seventh Circuit that the mere designation "director" is not sufficient to make the object of the designation a director for purposes of legal analysis. Here, the plaintiffs assert that although they were called "directors," they in fact performed so many employee-like functions that they actually were, in fact, employees. As explained below, the Court concludes that the plaintiffs have made assertions which are sufficient to prevent their claim from being dismissed. However, this ruling does not definitely resolve a number of important questions concerning the benefits received by, and the actions of, the plaintiffs during their tenure as directors.

 A. The Status of Directors Under Erisa

 Under ERISA, an "employee pension benefits plan" is defined as

 
any plan, fund or program which was heretofore or is hereafter established or maintained by an employer . . . to the extent that by its express terms or as a result of surrounding circumstances such plan, fund or program (i) provides retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond.

 29 U.S.C. § 1002(2). However, ERISA provides "little guidance concerning the interpretation to be given the term 'employee.'" Darden v. Nationwide Mut. Ins. Co., 796 F.2d 701, 704 (4th Cir. 1986). The text of the statute cryptically defines "employee" as "any individual employed by an employer," 29 U.S.C. § 1002(6).

 As the defendants argue, it is hornbook law that a director is not an employee: "A director of a corporation is not, merely by virtue of his position, its employee." 18B Am. Jur. 2d § 1346 at 257 (1985) (footnote omitted). See Georgia Casualty & Surety Co. v. Seaboard Surety Co., 210 F. Supp. 644, 651 (N.D. Ga. 1962), aff'd, 327 F.2d 666 (5th Cir. 1964). This principle is based on a common-law test for employment status. However, this does not settle the matter. It is a subject of dispute among the circuits to what extent the common-law meaning of "employee" should govern in ERISA cases, and to what extent the common-law meaning might conflict with the intentions of Congress in enacting the statute. *fn3"

 1. The Common-law Interpretation of "Employee"

 In Holt v. Winpisinger, 258 App. D.C. 343, 811 F.2d 1532 (D.C. Cir. 1987), the plaintiff brought suit under ERISA seeking pension benefits for her years of clerical work at a union office. The district court found that the plaintiff had been employed as an independent contractor, not as an employee, for a crucial portion of her time at the union, and denied her ERISA claim. The court of appeals reversed, and in so doing, discussed the definition of "employee" under ERISA. It found that Congress intended to apply a common-law test of employment status in ERISA cases:

 
ERISA defines "employee" merely as "any individual employed by an employer." The statutory definition thus provides little or no guidance when the question is whether a party performing services pursuant to a particular work arrangement is an employee. However, both parties agree and the District Court held that one must look to ...

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