Part One of this article, which was published in the Fall 2019 issue of the Newsletter, addressed issues regarding the constitutional legitimacy of judicial reclassification of independent contractors as employees covered by ERISA via the class action mechanism.
Part Two explores whether the prohibition on impinging “substantive rights” under the Rules Enabling Act (hereafter REAis triggered when Federal Rule of Civil Procedure 23 (hereafter Rule 23) is used to reclassify class members with independent contractor agreements into employees covered under ERISA. There is also a question as to whether in this context a Rule 23 certification prior to a merits determination on employee status conflicts with Federal Rule of Civil Procedure 82.
AN INTRODUCTION TO THE REA
The legal authority for the Federal Rules of Civil Procedure, including Rule 23, does not come from Article III of the Constitution. The authority is instead derived indirectly from Congress by delegation to the Supreme Court. Congress enacted the original “Rules Enabling Act” Pub.L. 73-415 (1934) to authorize the Court to create its own procedural rules and made some minor adjustments to that act in 1988. The Supreme Court’s authority in fashioning those rules was, however, limited as follows:
Such rules shall not abridge, enlarge or modify any substantive right. All laws in conflict with such rules shall be of no further force or effect after such rules have taken effect.
28 U.S.C. §2072. Once crafted by the Rules Advisory Committees of the Judicial Conference, the Federal Rules of Civil Procedure and any amendments are transmitted by the Supreme Court to Congress with little to no review. Rules of procedure become effective unless Congress acts to block them. 28 U.S.C. §2074. Thus, Rule 23, like the other rules, did not go through a conventional legislative process.
Where that leaves us is in yet another unsettled area. The Court has upheld the principle that Congress has the undoubted power to regulate the courts and exercise that power by delegation to the courts of the power to write their own rules of procedure. Sibbich v. Wilson and Company, 312 U.S. 1, 9-10 (1941). The REA provides that delegation but does so with the proviso that the rules adopted shall not abridge, enlarge or modify any substantive right. 28 U.S.C. §2072(b). “Abridge, enlarge or modify” are terms that can be grasped and applied. However, that still leaves us with what Congress meant by “substantive right.”
There is very little useful law on what constitutes a substantive right for purposes of 28 U.S.C. §2072. Moreover, much of the REA law that does exist is unhelpfully in the context of diversity jurisdiction and potentially conflicting state laws. E.g. Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010). However, the legislative history of the 1988 Amendments provide some guidance on what Congress was attempting to achieve with the REA restriction:
The protection extends beyond rules of substantive law, narrowly defined, however. At the least, it also prevents the application of rules, otherwise valid, where such rules would have the effect of altering existing remedial rights conferred as an integral part of the applicable substantive law scheme, federal or state, such as arrangements for attorney’s fees under 42 U.S.C. §1988. More generally, Section 2072 is intended to allocate to Congress, as opposed to the Supreme Court, exercising delegated legislative power, lawmaking choices that necessarily and obviously require consideration of policies extrinsic to the business of the courts . . . H.R Rep. 99-422, at 21-22 (1985).
Analytically, then, the first step is to identify a “right,” determine if it is substantive and then assess whether application of Rule 23 to it abridges, enlarges or modifies it.
As discussed in Part One, the right to contract and to operate in one of two equally lawful modes is a significant liberty interest. Frisbie v U.S., 157 U.S. 160,166 (1895) (“generally speaking, every citizen has a right freely to contract for the price of his labor, services, or property”). Liberty and property interests are not unlimited. Nonetheless, and discussed in Part One, it is generally recognized that before even state government can act to defeat that right to contract in whole or in part, some interest in public health, safety or welfare justifying setting aside the individual right must be evident. West Coast Hotel Co. v. Parrish, 300 U.S. 379, 392 (1937). (“Liberty implies the absence of arbitrary restraint, not immunity from reasonable regulations and prohibitions imposed in the interests of the community.”)
As noted in Part One, the Court in Stanley v. Georgia, 394 U.S. 557(1969), also acknowledged a general liberty interest to be free from government intrusion:
"The makers of our Constitution undertook to secure conditions favorable to the pursuit of happiness. They recognized the significance of man's spiritual nature, of his feelings and of his intellect. They knew that only a part of the pain, pleasure and satisfactions of life are to be found in material things. They sought to protect Americans in their beliefs, their thoughts, their emotions and their sensations. They conferred, as against the Government, the right to be let alone -- the most comprehensive of rights and the right most valued by civilized man. "Olmstead v. United States, 277 U. S. 438. 478 (1928) (Brandeis, J., dissenting). See Griswold v. Connecticut, supra; cf. NAACP v. Alabama, 357 U. S. 449, 462 (1958).
Stanley at 664. Although no case specifically addresses the issue, it would seem that the liberty interest in enforcing a contract, acknowledged to be protected by the Fifth and Fourteenth Amendments, is at least a “right” for Rules Enabling Act purposes.
There may be another right present and in conflict. That could be the right to ERISA protections. We know the named plaintiff in an ERISA case involving reclassification asserts that right. It seems no less substantive than the liberty interest in enforcing a contract. In a single plaintiff case, a plaintiff who asserts a claim to statutory ERISA coverage can do so without presenting an REA issue as is his or her “right” to assert. Defendant prefers to assert its liberty interest right to enforce the contract. This sets up the constitutional conflict discussed in Part One but is not problematic under the limitations imposed under the REA.
IS THE RIGHT SUBSTANTIVE?
It is here where the analysis gets a bit muddled due to the language of 28 U.S.C. §2072. One could look at “substantive” and conclude that the term is, in context, meant to contrast with things that are procedural. The quoted legislative history supports that view and a right to have a contract enforced is not procedural. One could also look at substantive to mean important as opposed to trivial. The dictionaries support that view and use liberty as an example of a substantive rightOther dictionaries interpret the term to mean a right flowing from substantive law Under this view, the right to have the independent contractor agreement enforced flows from the liberty interest referenced in the Fifth Amendment. The right to ERISA protections also seems substantive as well.
One could also perhaps conclude that ERISA protections are so important that a court is justified in saving the individual from his or her own agreement. That approach, however, seems inconsistent with the Court’s rejection of construing “employee” for ERISA purposes, in light of “the mischief to be corrected and the end to be obtained” in Nationwide Mutual Insurance Co., v. Darden, 503 U.S. 318, 325 (1992). Indeed, this is where the problem of language flowers a bit. If service provider X is an employee of Company Y and that company has benefit plans, then X has a right to ERISA protection. However, if X is an independent contractor than he or she has no such rights, as Congress chose to exercise its Commerce Clause power only as to employees. An issue is that the class certification issue will likely be resolved before the employee status question.
This question as to the contours of the statutory limitation has been around and largely unresolved for decades. For those interested in further exploring the topic there are some scholarly effortsThe basic problem with resolving the substantive/procedural distinction is that many rules can be characterized as being both. This duality concern motivated one scholar to note that the question was “inherently irresolvable.
THE ERISA CLASS ACTION RECLASSIFICATION PROCESS
The most typical way that ERISA class action reclassification occurs is that a current or former contractor or two find counsel (sometimes it’s the other way around) and sue on behalf of themselves and “all others similarly situated.” If brought as a class action, Rule 23 applies.
Under Rule 23(a), in order to bring a class action, the plaintiff must demonstrate:
- the class is so numerous that joinder of all members is impracticable;
- there are questions of law or fact common to the class;
- the claims or defenses of the representative parties are typical of the claims or defenses of the class; and
- the representative parties will fairly and adequately protect the interests of the class.
In addition to these prerequisites, a plaintiff must satisfy one of the prongs of Rule 23(b) in order to maintain a class action. Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). As the court explained in Amchem, these three prongs serve different purposes:
Rule 23(b)(1) covers cases in which separate actions by or against individual class members would risk establishing "incompatible standards of conduct for the party opposing the class," Fed. Rule Civ. Proc. 23(b)(1)(A), or would "as a practical matter be dispositive of the interests" of nonparty class members "or substantially impair or impede their ability to protect their interests," Fed. Rule Civ. Proc. 23(b)(1)(B). Rule 23(b)(1)(A) "takes in cases where the party is obliged by law to treat the members of the class alike (a utility acting toward customers; a government imposing a tax), or where the party must treat all alike as a matter of practical necessity (a riparian owner using water as against downriver owners)." Kaplan, Continuing Work of the Civil Committee: 1966 Amendments of the Federal Rules of Civil Procedure (I), 81 Harv. L. Rev. 356, 388 (1967) (hereinafter Kaplan, Continuing Work). Rule 23(b)(1)(B) includes, for example, "limited fund" cases, instances in which numerous persons make claims against a fund insufficient to satisfy all claims. See Advisory Committee's Notes on Fed. Rule Civ. Proc. 23, 28 U. S. C. App., pp. 696-697 (hereinafter Adv. Comm. Notes).
ERISA litigation that also entails reclassification of the class members will rarely if ever be appropriate under Rule 23 (b)(1).
Moving on to Rule 23(b)(2) the Amchem Court noted that this subsection of Rule 23:
. . . permits class actions for declaratory or injunctive relief where "the party opposing the class has acted or refused to act on grounds generally applicable to the class." Civil rights cases against parties charged with unlawful, class based discrimination are prime examples. Adv. Comm. Notes, 28 U. S. C. App., p. 697; see Kaplan, Continuing Work 389 (subdivision (b)(2) "build[s] on experience mainly, but not exclusively, in the civil rights field").
Although in theory this prong could be available, it tends to beg the classification question by assuming everyone is the same. In true civil rights cases, the class members frequently (but not always) have immutable characteristics (race or national origin for example).
In contractor classification under ERISA, there is no reason to presume everyone in the alleged “class” operates the same way. There is another interesting aspect to this. Being an employee is lawful. Being an independent contractor is lawful. ERISA applies to one status and not the other but ERISA’s legislative purpose is not impaired or altered by whether a service provider is in one legal status or the other. U.S. v. Silk, 331 U.S. 704 (1947) superceded by statute on other grounds. ERISA interests can be implicated when the parties “get it wrong” but, that begs the question raised in Part One as to whether overriding the contract is appropriate. In Andrea’s hypothetical case described in Part One of this article, some drivers may buy their trucks and some may lease. Some may hire helpers and others may not. Some may not drive at all. Moreover, a Rule 23(b)(2) class has the additional problem of begging the substantive legal question. It may be that the service recipient does treat all the service providers as independent contractors. It does not automatically follow that this classification is wrong for every single one of them.
Most often certification in ERISA cases is sought under Rule 23(b)(3). In Amchem, the court summarized the history of Rule 23(b)(3) as follows:
In the 1966 class action amendments, Rule 23(b)(3),. . . was "the most adventuresome" innovation. See Kaplan, A Prefatory Note, 10 B. C. Ind. & Com. L. Rev. 497, 497 (1969) (hereinafter Kaplan, Prefatory Note). Rule 23(b)(3) added to the complex litigation arsenal class actions for damages designed to secure judgments binding all class members save those who affirmatively elected to be excluded. See 7A C. Wright, A. Miller, & M. Kane, Federal Practice and Procedure §1777, p. 517 (2d ed. 1986) (hereinafter Wright, Miller, & Kane); see generally Kaplan, Continuing Work 379-400. Rule 23(b)(3) "opt out" class actions superseded the former "spurious" class action, so characterized because it generally functioned as a permissive joinder ("opt in") device. See 7A Wright, Miller, & Kane §1753, at 28-31, 42-44; see also Adv. Comm. Notes, 28 U. S. C. App., p. 695.
Framed for situations in which "class-action treatment is not as clearly called for" as it is in Rule 23(b)(1) and (b)(2) situations, Rule 23(b)(3) permits certification where class suit "may nevertheless be convenient and desirable." Adv. Comm. Notes, 28 U. S. C. App., p. 697. To qualify for certification under Rule 23(b)(3), a class must meet two requirements beyond the Rule 23(a) prerequisites: Common questions must "predominate over any questions affecting only individual members"; and class resolution must be "superior to other available methods for the fair and efficient adjudication of the controversy." In adding "predominance" and "superiority" to the qualification for certification list, the Advisory Committee sought to cover cases "in which a class action would achieve economies of time, effort, and expense, and promote . . . uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results." Ibid. Sensitive to the competing tugs of individual autonomy for those who might prefer to go it alone or in a smaller unit, on the one hand, and systemic efficiency on the other, the Reporter for the 1966 amendments cautioned: "The new provision invites a close look at the case before it is accepted as a class action . . . ." Kaplan, Continuing Work 390.
Rule 23(b)(3) includes a non-exhaustive list of factors pertinent to a court's "close look" at the predominance and superiority criteria:
(A) the interest of members of the class in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum;
(D) the difficulties likely to be encountered in the management of a class action.
In setting out these factors, the Advisory Committee for the 1966 reform anticipated that in each case, courts would "consider the interests of individual members of the class in controlling their own litigations and carrying them on as they see fit." Adv. Comm. Notes, 28 U. S. C. App., p. 698.
If the conditions are found satisfied, the claims are certified and a notice is typically sent to all of those who potentially satisfy the class definition. The purpose of the notice is to alert class members to their right to "opt out" of a Rule 23(b)(3) class. Rule 23 instructs the court to "direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." Fed. Rule Civ. Proc. 23(c)(2); see Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 173 -177 (1974) (individual notice to class members identifiable through reasonable effort is mandatory in (b)(3) actions; requirement may not be relaxed based on high cost).
Those to whom the notice is sent may have an opportunity to opt out of the case but must (a) have had a current address on file with either the Plaintiff or Defendant, (b) affirmatively read the notice to know they have the option and their contract enforcement rights are in play, (c) understand the significance to them personally of the decision and (d) affirmatively respond in a timely fashion, in writing, to be successful. The content of the notice is regulated by the court but neither the class counsel nor the class representative have an interest in fully explaining information that may cause a recipient of the notice to choose to send in an “opt-out” noticeIndeed, counsel for the class representative may find himself/herself conflicted in advising class members on whether participating in a judicial proceeding that may re-classify them as employees is in their best interest.
What is not required is proof, after informed consent, that each member of the class desires reclassification and understands the tax and liability consequences that flow with it. Employee benefits and tax lawyers know that switching from an independent contractor/self-employed model to an employment model has significant collateral impacts on everything from the retirement plan the self-employed person selected to the way business expenses are managed and the way taxes are managed and paid.
REA AS APPLIED
The Court has long held that for a rule to be upheld against an REA challenge, it must "really regulat[e] procedure, — the judicial process for enforcing rights and duties recognized by substantive law and for justly administering remedy and redress for disregard or infraction of them," Sibbach v. Wilson, 312 U.S. 1, 14,(1941); see also, Hanna v. Plummer, 380 U.S. 460,464 (1965). The test is not whether the Rule affects a litigant's substantive rights; most procedural rules do. Mississippi Publishing Corp. v. Murphree, 326 U.S. 438, 445, 66 S.Ct. 242, 90 L.Ed. 185 (1946). What matters is what the Rule itself regulates: If it governs only "the manner and the means" by which the litigants' rights are "enforced," it is valid; if it alters "the rules of decision by which [the] court will adjudicate [those] rights," it is not. Shady Grove at 446, 66 S.Ct. 242 (internal quotation marks omitted). The Court has also recognized there can be a large overlap in rules that can be substantive and procedural. Hanna at 472.
On its face, Rule 23 appears procedural and thus within the general scope of the REA. It is also true that the Court has never found an REA violation. Shady Grove Orthopedic Associates, P.A., v. Allstate Ins. Co., 559 U.S. 393(2010). Again, since the Court transmits the rules to Congress this uniformity is unsurprising.
The Court has however signaled at least some willingness to view rules in a way that is “in keeping with Article III constraints and with the Rules Enabling Act, which instructs that rules of procedure "shall not abridge, enlarge or modify any substantive right," 28 U.S.C. § 2072(b). See also Fed. Rule Civ. Proc. 82 ("rules shall not be construed to extend . . . the [subject-matter] jurisdiction of the United States district courts").” Amchem Products, Inc. v. Windsor, 521 U.S. 591, 612–613 (1997). See also,Ortiz v. Fibreboard Corp., 527 U.S. 815, 842, 845, (1999) (adopting “limiting construction” of Federal Rule of Civil Procedure 23 that, inter alia, “minimizes potential conflict with the Rules Enabling Act”). It has also from time to rejected a proposed construction or argument based on the view that accepting the proposition offered would violate REA. American Express Co. v. Italian Colors Rest., 570 U.S. 228(2013).
Undertaking reclassification under ERISA via a class action yields some significant anomalies. First, a procedural rule effectively transfers the class members’ liberty interest in preserving the contract to a class representative. Each putative class member would have to affirmatively act to get that right back. One could argue that taking one person’s liberty interest and effectively giving it to a class representative and his or her counsel is a transfer of a substantive right forbidden under 28 U.S.C. §2072(a). Second, the transfer of that liberty interest and any property rights affected by it is accomplished in a judicial proceeding to which the vast majority of those whose liberty and property interests are affected are not fully informed parties at the time they are included in the class. That is because notice to absent class members goes out after certification.
Where that leaves us analytically is with some unanswered questions impacting the superiority requirement of Rule 23(b)(3). As the court noted in Amchem:
We therefore follow the path taken by the Court of Appeals, mindful that Rule 23's requirements must be interpreted in keeping with Article III constraints, and with the Rules Enabling Act, which instructs that rules of procedure "shall not abridge, enlarge or modify any substantive right," 28 U.S.C. § 2072(b). See also Fed. Rule Civ. Proc. 82 ("rules shall not be construed to extend . . . the [subject-matter] jurisdiction of the United States district courts").
Amchem Products, Inc. v. Windsor, 521 U.S. 591, 611–6132, (1997).
As we know, the claims that can be brought under ERISA are limited and enumerated in 29 U.S.C. §1132(a). Generally, those claims must be brought by a participant or beneficiary and being a participant means demonstrating that the plaintiff is a current or former employee. 29 U.S.C.§1002(7).
In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) the Supreme Court first considered the employee requirement for standing. It found this term to include “employees in, or reasonably expected to be in, currently covered employment,” or former employees who “have . . . a reasonable expectation of returning to covered employment” or who have “a colorable claim” to vested benefits. The Court held that in order to establish that he or she may become eligible for benefits under ERISA Section 502, a claimant must have a colorable claim that (1) he or she will prevail in a suit for benefits or that (2) eligibility requirements will be fulfilled in the future. Id.
That expansion is subject to some concerns but even without those issues, there is ERISA Section 202 (29 U.S.C. Section 1052) and other provisions that require an examination, under the plan terms of the following:
- Is the employee a member of a classification that is eligible to participate?
- Has the employee satisfied any age requirement?
- Has the employee satisfied any service requirement?
- Has the employee reached an entry date?
If the individual cannot satisfy all four of these requirements, then reclassification for ERISA purposes preserves no right and provides no benefit to the class member. Then, of course, there are plan provisions implemented in the wake of Vizcaino v. Microsoft, 120 F.3d 1006 (9th Cir. 1997). Many plans now include a provision which provides that if an independent contractor is reclassified as an employee by a government agency or a court, then such worker shall not become eligible to become a participant in the plan by reason of such reclassification. To be sure, the efficacy of such provisions is contested, but they do add another layer of complexity to the analysis.
There are of course limits to what can be achieved as an advocate. The Supreme Court is unlikely to rule that Rule 23 violates the REA in the abstract. It is also unlikely to find the REA is an improper delegation of Congress power to the Advisory Committee. See A.L.A. Schecter Poultry Corp v. U.S., 295 U.S. 495, 529-530 (1935) (“Congress is not permitted to abdicate or to transfer to others the essential legislative function which it is thus vested).
One could however contest, in the proper case, whether litigating ERISA classification issues in a class action is a superior way to proceed or appropriately considers the individual rights. The parties right to contract liberty interest is substantive. If Rule 23 is applied to bring absent class members into the case before the contractor question is decided as to them, a substantive right is arguably affected. However, it practically speaking cannot be resolved as to putative class members until they have had an opportunity to participate. Moreover, federal courts are courts of limited jurisdiction. An individual with a facially valid independent contractor agreement is outside ERISA’s regulatory scope unless and until a court reclassifies. However, until the court does so, is there an Article III “case or controversy” as to the absent class member? Interpreting Rule 23 to permit that analysis effectively brings the absent putative class member into the case but does not seem consistent with Rule 82 prohibiting interpreting the federal rules to expand the court’s subject matter jurisdiction. As a non-plan participant, there is no ERISA claim the putative class member could bring.
As with Part One, the author does not purport to have answers to these questions. However, in trying times like these, it is worth considering first principles and the role the Constitution plays in sorting out important questions. Here, there is little question that there are REA and Constitutional limits on how far Rule 23 can be stretched in the employee reclassification context under ERISA.