Garratt v. Walker

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
DEC 9 1998
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

LISBETH L. GARRATT,

Plaintiff-Appellant,
vs. No. 96-1470

JOHN S. WALKER, doing business as
John S. Walker, DMD,

Defendant-Appellee.

ON REHEARING EN BANC

Robert L. Liebross (Barry D. Roseman with him on the briefs), Denver, Colorado
for Plaintiff-Appellant.

Howard Bittman, Boulder, Colorado, for Defendant-Appellee.

Before SEYMOUR, Chief Judge, PORFILIO, ANDERSON, TACHA,
BALDOCK, BRORBY, EBEL, KELLY, HENRY, BRISCOE, LUCERO and
MURPHY, Circuit Judges.

KELLY, Circuit Judge.

We granted rehearing en banc and address when an employer in a

Simplified Employee Pension (SEP) plan can condition another employee’s
participation in the plan upon a reduction in salary without violating the

anti-discrimination provision (§ 510) of ERISA, 29 U.S.C. § 1140? 1 The panel

opinion affirmed summary judgment in favor of Defendant-Appellee Dr. Walker

(employer) 2 and against Plaintiff-Appellant Ms. Garratt (employee), holding that

the employee could not show discrimination prior to an actual contribution. See

Garratt v. Walker, 121 F.3d 565, 570 (10th Cir. 1997). According to the panel

opinion and the district court, because any contribution that an employer might

make on behalf of employees (including himself) was completely discretionary, a

newly eligible employee could not claim interference with a present right to

1
That statute provides:

It shall be unlawful for any person to discharge . . . or
discriminate against a participant . . . for exercising any right
to which he is entitled under the provisions of an employee
benefit plan [or] this subchapter . . . or for the purpose of
interfering with the attainment of any right to which such
participant may become entitled under the plan [or] this
subchapter . . . .
....
The provisions of section 1132 of this title [ERISA § 502] shall be
applicable in the enforcement of this section.

29 U.S.C.A. § 1140. Section 510 protects against two types of conduct: (1)
adverse action for exercising any right under a plan or ERISA, and (2)
interference with the attainment of any right under a plan or ERISA. This
protection is necessary to prevent the “circumvent[ion] of promised benefits.”
Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 143 (1990).
2
Dr. Walker as a self-employed individual is both an employer and
employee for SEP purposes. See I.R.C. §§ 408(k)(7)(A); 401(c)(1)(A). We refer
to him as the employer given the claims in this case.

-2-
participate in the plan prior to an actual contribution. Id.; Aplt. App. 278. We

vacate the panel opinion only on this issue and reverse and remand for a trial on

the employee’s discrimination and constructive discharge claims under § 510.

Background

In determining whether the evidence presents a genuine issue of material

fact, we view it in the light most favorable to the party against whom summary

judgment was entered, here the employee. See Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 250-52 (1986); Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59

(1970). Wherever possible, we construe the plan as complying with all applicable

requirements of ERISA and the Internal Revenue Code, particularly given the

employer’s assertion in his answer that the plan was to be so construed. See

Crouch v. Mo-Kan Iron Workers Welfare Fund, 740 F.2d 805, 809 (10th Cir.

1984). Finally, we follow the panel’s decision that a SEP is a pension plan within

the meaning of ERISA. See Garratt, 121 F.3d at 569.

Many of the operative facts involve salary discussions after the employer

requested that the employee switch to a salary arrangement, in lieu of hourly

wages. In 1993, the employee earned ten dollars per hour, with annual

compensation at $22,901. In January 1994, the employer agreed to pay the

employee $2,000 per month, but delayed a decision on the employee’s request to

-3-
be included in the SEP plan. The employee requested whatever contribution

percentage (based upon her salary) that the employer was making on his own

behalf. Aplt. App. 41. Although it was suggested at oral argument that the

employee was seeking an immediate contribution, the record does not bear that

out, and such an inference would be contrary to the standard by which we

evaluate the record.

It is undisputed that the employee was eligible to participate in the SEP

plan and that the employee was earning $24,000 per year. See Aplee. Reh’g Br.

at 4; Aplt. App. at 36. Some two or three weeks later, the employee rejected an

offer to split responsibility for a fifteen percent contribution (based upon her

salary) to the plan, with the employer and employee each paying one-half. See

Aplt. App. at 48. Thereafter, the employee rejected an offer of the employer

funding the entire fifteen percent contribution in exchange for reducing a

coworker’s hours. Id.

In March 1994, the employer gave the employee the following choice: a

$21,000 salary with a fifteen percent contribution to the pension plan, or a

$24,000 salary with no contribution. Aplt. App. 167. The $21,000 amount was

below the employee’s 1993 and 1994 compensation level and, according to the

employee, the employer conceded that he was asking the employee to take a cut in

pay and fund the plan. Id. at 51, 141. When she declined, the employer advised

-4-
that she should look for another job. She gave notice, but stayed on two weeks at

the employer’s request. The employer contends that managerial reasons supported

his actions. See Aplt. App. at 29-30.

Ultimately, the employer contributed to the plan on his own behalf. Having

done so, he also contributed on behalf of the employee, given the rules that

require allocation of contributions among SEP participants uniformly based upon

compensation, see I.R.C. § 408(k)(3)(C), (k)(5), and prohibit discrimination in

favor of certain highly compensated employees, see I.R.C. § 408(k)(3)(A). The

employer’s contribution on his own behalf was consistent with his past practice;

he contributed $30,000 to his own account in 1992 and 1993.

Discussion

We asked the parties to brief whether the employer violated § 510 of

ERISA in light of Inter-Modal Rail Employees Ass’n v. Atchison, Topeka &

Santa Fe Ry., 117 S. Ct. 1513 (1997). In Inter-Modal, the Supreme Court rejected

the view that, because an employer remains free to amend or eliminate a welfare

plan, an employee has no present right to future benefits and cannot maintain a

§ 510 action for interference with those benefits. Id. at 1515. Although an

employer may under some circumstances unilaterally amend or even eliminate its

welfare plan, the Court held that otherwise it may not act with a purpose that

-5-
contravenes § 510. Id. at 1516. Although this case involves a type of pension

plan, rather than a welfare plan, the district court’s result in this case cannot be

squared with Inter-Modal. Inter-Modal makes it clear that even though an

employee may lack a present legal right to receive benefits in the future, an

anticipated right to receive benefits may not be denied in a manner that would

contravene § 510. That means that an employer may not condition a critical

feature of plan participation, such as plan contributions, in a manner not

authorized by the plan and proscribed by § 510.

The dissent acknowledges that § 510 applies to vesting pension plans, but

contends that the principles in Inter-Modal can be applied only to the employee’s

participation in the plan, rather than entitlement to contributions because

employer contributions are discretionary. In other words, the dissent contends

that an employee’s lack of a present right to a plan benefit, here a contribution,

forecloses a § 510 action.

Inter-Modal rejected a distinction based upon vested and unvested rights

and rejected an employer’s discretionary power to amend or terminate a welfare

plan as foreclosing a § 510 action. Unless the plan provides otherwise, an

employee never has a present right to receive future benefits under a welfare plan

(because the employer may amend or terminate the plan), yet the employee still

may bring a § 510 action. Analogously, although the employee in this case lacked

-6-
a present right to a plan benefit, a contribution, she still is protected against

unilateral changes designed to interfere with that right. Whether a welfare plan or

a pension plan, an employer must operate within the terms of the plan, administer

the plan in a non-discriminatory fashion and not informally amend the plan a

participant at a time. See Inter-Modal, 117 S. Ct. at 1516.

The Supreme Court remanded Inter-Modal for consideration of the

employers’ argument that welfare plan eligibility was the only right protected

under § 510. Id. at 1516. In so doing, it noted that the court of appeals’ approach

precluded consideration of such an argument, and it is doubtful that “any right”

contained in § 502, or the terms “benefits,” “rights,” or “rights to future benefits,”

contained in ERISA’s civil enforcement mechanism, 29 U.S.C. § 1132(a)(1)(B),

can be read as limiting the anti-discrimination provision to plan eligibility only,

any more than § 502's language could be restricted to vested rights. Moreover,

such an approach is inconsistent with the rationale Inter-Modal and those cases

with similar holdings. See Inter-Modal, 117 S. Ct. at 1515 n.*.

A. Potential Rights under ERISA § 502 and § 510

The civil enforcement mechanism (§ 502) of ERISA, specifically 29 U.S.C.

§ 1132(a)(1)(B), allows a plan participant to bring a civil action not only for

recovery of plan benefits and enforcement of plan rights, but also “to clarify his

-7-
rights to future benefits under the terms of the plan.” Section 510 cross

references section 502 and the Court has recognized the relationship between the

two sections in safeguarding ERISA “rights and expectations.” See Ingersoll-

Rand Co. v. McClendon, 498 U.S. 133, 137 (1990); see also Humphreys v.

Bellaire Corp., 966 F.2d 1037, 1043 (6th Cir. 1992). In discussing that

relationship, the Fourth Circuit has explained:

[Sections] 502 and 510 together protect the panopoly of rights at risk
in the pension context: rights about to be earned but frustrated due to
unlawful employer action, benefits earned but not paid, other rights
due a participant but not fulfilled, and future benefits earned but not
yet due.

Conkright v. Westinghouse Elec. Corp., 933 F.2d 231, 237 (4th Cir. 1991).

Although the panel opinion acknowledged that § 510 could extend to rights

not yet earned, Garratt, 121 F.3d at 570, it declined to apply § 510 to the

employer’s conduct precisely because the employee lacked a present legal right to

receive plan contributions in the future. The employee’s right to such

contributions was “thoroughly contingent on the employer’s discretion and

entirely within the employer’s control.” Id.

While there may be “a point where an employee’s possible attainment of a

‘right’ is so speculative and contingent that it falls outside the bulwark of § 510,”

id., we do not think that point has been reached here. To be sure, an employer

may decide not to contribute to a plan, but that discretion “does not include the

-8-
power to ‘discharge . . . or discriminate against’ the plan’s participants and

beneficiaries ‘for the purpose of interfering with [their] attainment of . . . right[s]

. . . under the plan.’” Inter-Modal, 117 S. Ct. at 1516 (quoting § 510). Section

510 prohibits an employer from discriminating against an employee because she

may become entitled to a plan benefit, including an ad hoc change to the

allocation formula for a particular employee to avoid the cost of the pension

contribution.

B. Future Entitlement to Contributions and ERISA § 510

The employer characterizes the dispute as about entitlement to, rather than

eligibility for, a contribution. According to the employer, the conditions offered

by the employer did not relate to plan eligibility or participation, but rather the

terms under which the employee would become entitled to a contribution.

Because contributions are not required and may be made after the tax year, the

employer argues that the lack of entitlement to any contribution is dispositive of

the § 510 issue.

This analysis is inconsistent with §§ 502 and 510 of ERISA which plainly

allow an action based upon future entitlement to contributions. Moreover, the

record clearly contains evidence that the employer conditioned an essential

feature of plan participation on a salary reduction. A trier of fact could conclude

-9-
on the evidence that the employee’s right to any future contributions depended

upon her willingness to fund those contributions, notwithstanding the requirement

that contributions be allocated among participants uniformly based upon

compensation and pursuant to a written allocation formula clearly stating what

requirements an employee must satisfy to share in an allocation. See I.R.C.

§ 408(k)(3)(C), (k)(5). ERISA also requires that benefit plans be in writing. See

29 U.S.C. § 1102(a)(1). This enables participants and beneficiaries to be aware

of rights and obligations under a plan and those administering the plan to do so in

conformity with existing plan requirements. See Curtis-Wright Corp. v.

Schoonejongen, 115 S. Ct. 1223, 1230-31(1995).

An employer retains the right to make fundamental business decisions

about employee compensation and whether (and how much) to contribute to a SEP

plan. But there are limits on the use of a pension plan as a device to adjust

employee compensation. First, the employer must act in concert with the written

plan. See Teumer v. General Motors Corp., 34 F.3d 542, 548 (7th Cir. 1994)

(“Benefit plans are themselves contracts between employee and employer.”).

Second, if a SEP employer contributes to the plan on his own behalf (thereby

accepting the benefits of tax deferral), he must do so in the same manner for an

eligible employee absent a valid salary reduction election. See I.R.C.

§ 408(k)(3)(C); (k)(6). The observation of the Eleventh Circuit is apt: “If the

- 10 -
employer decides to offer benefits, it must allow its employees to take advantage

of the plan and must administer the plan in a nondiscriminatory fashion.” Seaman

v. Arvida Realty Sales, 985 F.2d 543, 547 (11th Cir. 1993) (constructive

discharge claim under § 510 upon allegation that employer required employees to

become independent contractors to eliminate cost of employee benefits). See also

Gitlitz v. Compagnie Nationale Air France, 129 F.3d 554, 559 (11th Cir. 1997)

(summary judgment not proper under § 510 where trier of fact could conclude that

company reclassified employees as independent contractors for the purpose of

interfering with future plan benefits).

Contrary to the dissent’s view, a small business owner is still free to

negotiate a compensation/benefit package with an employee. Requiring that he do

so in conformity with the terms of his pension plan is no more onerous than

requiring that he adhere to the terms of the plan, just as the employer did in this

case when he ultimately contributed on behalf of the employee. After all, the

employer created and benefitted from the plan, and should conform to its terms.

An employee eligible for deferred compensation under a small business owner’s

plan is no less deserving of ERISA protection than an employee of the largest

corporation.

Contrary to the district court’s view, the problem is not about committing to

a contribution in April 1994. See Aplt. App. at 277. Section 510 does not require

- 11 -
that an employee be entitled to a liquidated amount on a certain date; it plainly

prohibits discrimination on account of potential entitlements. Here the employer

had contributed to the plan in past years and a trier of fact could conclude that the

options offered to the employee were for the purpose of interfering with likely

and probable future contributions. Indeed, the employer made a contribution on

behalf of the employee for tax year 1994, and not on the terms he now advances.

C. Salary Reduction Plan

The employer also argues that the choice offered was permissible under a

variant type of plan, a salary reduction SEP, which allows an employer to make

the plan contribution by reducing the salary of an employee where fifty percent of

the eligible employees so elect. See 26 U.S.C. § 408(k)(6)(A)(ii). No evidence,

however, suggests any such election by all eligible employees, and a prototype

pension plan document adopted by the employer in 1993 left all information about

such a potential choice blank, and strongly implies that this is a regular SEP plan

where the employer contributes. See Aplt. App. at 94-95, §§ 7, 8; 190 (plan

document provided by employer was 1993 SEP adoption agreement); 272. It is

uncontroverted that the employee opposed such a salary reduction and the

eventual contribution made on behalf of the employee was not pursuant to such an

- 12 -
arrangement.

A unilateral oral decision to require a salary reduction would not satisfy the

requirement of a written allocation formula. See I.R.C. § 408(k)(5). Nor is it

consistent with other plan documentation, publication or amendment

requirements. See 29 U.S.C. §§ 1022(b), 1024(b)(1), 1102(b)(3); 29 C.F.R.

§ 2520.104-49 (1997). Indeed, the imposition of requirements not contained in

the plan has been held to be arbitrary and capricious. See Blau v. Del Monte, 748

F.2d 1348, 1354 (9th Cir. 1984). The employer’s contributions on his own behalf

were well in excess of the amount permitted under a salary reduction

arrangement; in short, neither the law nor the facts suggest such an arrangement

and we may neither imply one nor retroactively validate the employer’s offer to

his employee.

D. Discrimination Under § 510

A variation on the above argument is the employer’s contention that no

discrimination occurred because he funded his contributions in the same manner

as requested of the employee, specifically by contributing a portion of his earned

income to the SEP. This contention is unavailing because the employer and

employee were not similarly situated for this analysis. The employer was a sole

proprietor entitled to all revenues less expenses from his practice, not a salaried

- 13 -
employee. A salary reduction arrangement had not been elected, and the pension

plan was in addition to the regular compensation of salaried employees, not in

lieu of it. Even if the employer and employee were regarded as similarly situated,

the contention would be untenable because discrimination in this context is not

limited to disparate treatment of similarly situated employees; it also extends to

adverse employer action taken because an employee engages in protected activity,

including exercising, or attempting to attain, any right under a plan or ERISA.

See Mattei v. Mattei, 126 F.3d 794, 805-06 (6th Cir. 1997), cert. denied, 118 S.

Ct. 1799 (1998). Here, a trier of fact could find that a motivating factor behind

the employer’s terms was to discriminate in favor of himself and against the

employee in order to save the cost of the employee’s participation in the plan.

Similarly, a trier of fact could find that a motivating factor behind the employer’s

terms was the employee’s assertion of rights under the plan.

E. Power to Amend the Plan

The employer also reminds us that he had the power to amend the plan to

require employees to fund their contributions. As Inter-Modal makes clear in the

welfare plan context, an employer’s power to amend the plan does not render an

employee’s potential rights too illusory for § 510 protection. Id., 117 S. Ct. at

1516. The plan may be amended by following the formal procedures in the plan,

- 14 -
but the employer may not otherwise act for purposes prohibited by § 510. Id.

“The formal amendment process would be undermined if § 510 did not apply

because employers could ‘informally’ amend their plans one participant at a

time.” Id. The power to amend a plan consistent with limitations imposed by law

or by the plan should not be confused with the obligation to provide employees

with the benefits of the existing plan. Cf. Heath v. Varity Corp., 71 F.3d 256,

258 (7th Cir. 1995) (“ERISA draws a line between an employer’s right to modify

or abolish a [welfare] plan–which it may do without acting as a fiduciary for the

workers–and the employer’s duty to provide employees the benefits of existing

plans. Section 510 is only one manifestation of the fiduciary-duty side of the

equation.” (citations omitted)).

F. Adverse Action and Proof

According to the employer, no adverse action occurred. Section 510

proscribes changes in employment status based upon benefit motivations. See

Teumer, 34 F.3d at 545. If the employer required the employee to agree to a

reduced salary in order to receive a contribution, that constitutes adverse action.

It affects employment status and the employee otherwise would have been entitled

to receive the contribution. Depending on the facts, the failure to accede to the

employer’s condition could constitute a constructive discharge. See Gitlitz, 129

- 15 -
F.3d at 559; Seaman, 985 F.2d at 546-47; Mitchell v. Mobil Oil Corp., 896 F.2d

463, 467-68 (10th Cir. 1990); West v. Butler, 621 F.2d 240, 245 (6th Cir. 1980).

“To prove constructive discharge, the employee must show that her ‘employer by

[his] illegal discriminatory acts has made working conditions so difficult that a

reasonable person in the employee’s position would feel compelled to resign.’”

Burks v. Oklahoma Publ’g Co., 81 F.3d 975, 978 (10th Cir. 1996) (quoting Derr

v. Gulf Oil Corp., 796 F.2d 340, 344 (10th Cir. 1986)).

An employee may rely upon direct or indirect proof that an adverse

employment action “was motivated by an intent to interfere with employee

benefits protected by ERISA.” Phelps v. Field Real Estate Co., 991 F.2d 645, 649

(10th Cir. 1993); see also Maez v. Mountain States Tel. & Tel., Inc., 54 F.3d

1488, 1504 (10th Cir. 1995); Gavalik v. Continental Can Co., 812 F.2d 834, 851-

53 (3rd Cir. 1987). The employee is not required to show that the employer’s sole

motivation was to interfere with employee benefits, she need only show that it

was a motivating factor. See Shahid v. Ford Motor Co., 76 F.3d 1404, 1411 (6th

Cir. 1996); Conkright, 933 F.2d at 238; Dister v. Continental Group, Inc., 859

F.2d 1108, 1111 (2d Cir. 1988); Gavalik, 812 F.2d at 851. We have reviewed the

summary judgment record de novo; suffice it to say that plaintiff relies upon

direct and indirect proof, see Greene v. Safeway Stores, Inc., 98 F.3d 554, 560

(10th Cir. 1996) (ADEA case), and a trial will be necessary.

- 16 -
REVERSED and REMANDED.

- 17 -
No. 96-1470, GARRATT V. WALKER

BRORBY, Circuit Judge, with whom PORFILIO, ANDERSON, and TACHA,
Circuit Judges, join, dissenting.

The narrow issue before the en banc court is whether Dr. Walker violated

§ 510 of ERISA in light of Inter-Modal Rail Employees Ass’n v. Atchison, Topeka

& Santa Fe Ry., 520 U.S. 510, 117 S. Ct. 1513 (1997). I maintain the panel

decision is not foreclosed by Inter-Modal as the majority suggests. I therefore

respectfully dissent.

Inter-Modal held that § 510 applies to non-vesting employee welfare plans

as well as to vesting pension plans. The Supreme Court based that holding on the

fact the plain language of § 510 broadly refers to participation in a “plan,” and

makes no attempt to distinguish between rights that “vest” under ERISA and those

that do not. By relying on the statutory language itself to answer a specific issue

concerning employees’ interests in non-vesting welfare benefits under formalized

Railroad Retirement Act and Teamster benefit plans, the Supreme Court simply

had no occasion to address whether § 510 offers any protection once an employee

has attained the right to participate in an SEP, but can claim no entitlement to a

contribution to the SEP, unless and until the employer, at his sole discretion,

contributes to the SEP. See Inter-Modal, 520 U.S. at ___, 117 S. Ct. at 1516-17

(leaving to court of appeals on remand the issue whether § 510, “when applied to
benefits that do not ‘vest,’ only protects an employee’s right to cross the

‘threshold of eligibility’ for welfare benefits”). The majority nevertheless

extends the Inter-Modal holding to the unique facts of this case.

In my view, the non-vesting welfare benefits the Supreme Court deemed

protected under § 510 in Inter-Modal are fundamentally different from an

expectation in the mind of a single employee who requested an SEP contribution

in conjunction with her request for a raise, and then, because she administered the

payroll, implemented her own raise while the employer was still considering what

percentage contribution, if any, to offer as part of the employee’s overall

compensation package. The simple, undisputed fact overlooked by the majority is

that even as an eligible SEP participant, Ms. Garratt had no promise of nor right

to a contribution until her employer actually made a contribution. 1 Dr. Walker’s

1
The majority seems to place great significance on the fact Dr. Walker had
contributed to his SEP in the past and, in fact, contributed to both his and Ms.
Garratt’s SEPs after she left his employ. These facts are absolutely irrelevant to
the issue of whether Ms. Garratt had a protected right when she filed suit against
Dr. Walker. Dr. Walker’s contribution history has relevance if and only if it is
determined Ms. Garratt had a “right” to which she could claim entitlement under
§ 510. At that point such facts may be indicative of whether Dr. Walker had a
motive or intent to discriminate. Because the decision whether to contribute to
the SEPs for any given year was solely within Dr. Walker’s discretion, prior or
subsequent decisions cannot be used to create a “right” under § 510 where none
otherwise exists.

-2-
final compensation package offer, which included a percentage SEP contribution,

if, in fact, he made a contribution for that tax year, is not the same as the

contribution itself, and therefore, did not create the type of anticipated “right” or

“promised benefit” the Supreme Court found to be protected under § 510 in Inter-

Modal. 2 520 U.S. at ___, 117 S. Ct. at 1515, 1516.

By elevating an employer’s compensation offer to the status of a “right”

protected by § 510, the majority has created an onerous trap for the unwary small

businessman. An employer can no longer informally negotiate a

compensation/benefit package involving a potential SEP contribution with an

employee without subjecting himself to ERISA liability. The language of § 510

does not require such a result; nor do I believe Inter-Modal mandates such a

result. Accordingly, I would affirm the district court.

2
The majority quotes from Conkwright v. Westinghouse Elec. Corp., 933
F.2d 231, 237 (4th Cir. 1991), to identify the “panoply” of rights protected under
ERISA §§ 502 and 510. Protected rights are those

rights about to be earned but frustrated due to unlawful employer
action, benefits earned but not paid, other rights due a participant but
not fulfilled, and future benefits earned but not yet due.

For the reasons stated, even viewing the record in the light most favorable to Ms.
Garrett, she simply cannot identify any benefits due, earned or about to be earned.

-3-