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Employee Classifications, Policy Manuals, and the Importance of Both

July 16, 2021

By Michael Burns, courtesy of SBAM Approved Partner ASE

Every couple of years (or less) a lawsuit ruling is published that reminds and confirms the importance of employer policies and handbooks for protecting the employer. A recent example is the case handed down by Michigan’s Court of Appeals (6/24/2021) about an employee of Emmett Charter Township that over the years had been both an employee and an independent contractor for the Township.

The Plaintiff was employed part-time by the Township having both received pay as an employee as evidenced by receipt of a w-2 form and at other times a contractor as evidenced by receipt of a 1099 plus formal action by the Township’s Board.

In 2018 Plaintiff brought a lawsuit against the Township alleging that he had been working over 35 hours a week, which should have made him a full-time employee as defined in the Township’s employee manual. This in turn entitled him to fringe benefits that would have included health insurance, vacation pay, life insurance, and any other benefit normally afforded a regular full-time employee. Recovery of said benefits was sought through various causes of action but mainly “violation of employment policies.” His claim also included a right to receive a benefit from the Township’s pension plan.

The Township moved for summary judgement which meant it disputed the employee’s claim and no question of fact existed to hold for the Plaintiff. The Township argued that the Plaintiff did not qualify as an employee who was eligible for these benefits, and therefore, it was not bound by the terms of its handbook.

The lower court looked to the Plaintiff’s independent contractor status and granted summary disposition in favor of the Township. This was found based upon the fact the Plaintiff received pay on a fee basis. Plaintiff appealed this decision and the Michigan Appeals Court reviewed the case.

The Appeals Court did see a question of fact existing to possibly overturn the lower court ruling and hold a trial on whether the Plaintiff was in fact eligible for some or all of the benefits as working a position that qualified him for benefits.

The Court looked closer at the employment arrangement. It looked to the employee manual and found that the manual provided for benefit qualifications. Just being employed did not necessarily entitle a worker to benefits. Under the pension plan a qualified worker is defined a “municipal employee” who is paid compensation for personal services rendered to a participating municipality.” The plan exempted a person “paid on a fee basis whether by W-2 or 1099 basis” which the Plaintiff had been. Plaintiff did not qualify for the pension.

The Plaintiff also argued that he had been employed on a full-time basis because he had worked at least 35 hours/week. The Township’s employee manual stated, “full-time employees are entitled to fringe benefits.” To this point the Court again looked to the employee manual and found that the handbook defined a full-time employee as one that was hired to work full-time and is normally scheduled to work 35 hours or more per week. The Plaintiff was not “salaried.” He was paid a fee for his work. Further, the Court held the employee provided no proof that he was “normally scheduled” to work 35 hours or more per week. He had just tried to show he had worked at least 35 hours in some weeks. The Court then upheld summary disposition for the Township based upon the “terms of the employee manual.”

The Court also pointed to other realities of the Plaintiff’s employment. The Plaintiff had worked for the Township for 20 years during which time he never received the benefits he was now seeking. The Court noted it was telling that the Plaintiff never alleged that he had continued employment all that time in expectation of receiving said benefits.

This case is not groundbreaking new law but is brought up as the most recent example of how a Court will use the employee manual to determine what an employer intended and did not intend to provide its employees as compensation, including benefits. Employers are advised to check their handbooks and make sure the definitions of employee classification clearly state the criteria for benefit eligibility.

Employer group insurance and retirement plans will normally have specific eligibility terms in the plan and the summary plan descriptions. However, fringe benefits such as vacation or paid time off (PTO), holiday pay, and other such benefits need to clearly state eligibility terms. These benefits are covered under Michigan’s Payment of Wages and Fringe Benefits Act that in effect makes the employer’s fringe benefit terms enforceable law.

Most handbooks also include an employee “Classifications” policy that outlines the different types of employment classifications such as full-time regular, part-time regular, temporary, seasonal, and even contractor basis that are in the workplace. This policy typically states whether the classification is benefit eligible. This policy may also address what is an Exempt and Non-exempt position for Wage and Hour compliance purposes.  The other important step beyond classifying the job is to make sure person’s that are in the job understand or are not mislead about what the job’s compensation eligibility is.

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