Aberrant Sixth Circuit: Which Appellate Standard of Review Applies When Determining Employee Status Under ERISA?

Employees Only” by Thomas Hawk is licensed under CC BY-NC 2.0.

Blythe McGregor, Associate Member, University of Cincinnati Law Review

I. INTRODUCTION

The outcome of employee benefits cases often turn on the definition of “employee.” The distinction between employee and nonemployee is not clear under the Employment Retirement Income Security Act of 1974 (ERISA).[1] Circuits have split over which standard of review applies when a district court determines employee status.

ERISA was enacted to advance the interests of employees and their beneficiaries. The statute imposes uniform standards for employee pension and welfare plans. While the statute defines “employee,”[2] the Supreme Court has disparaged this definition as “nominal,” and “circular.”[3] Thus, the Court set forth twelve factors in Nationwide Mutual Insurance Co. v. Darden for lower courts to consider when making the employee/nonemployee distinction under ERISA.[4]  These factors have been regularly applied by lower courts. 

The appropriate procedure for the factors’ application has become disputed. The circuits are split regarding whether a lower court’s findings of each Darden factor are questions of fact or law. Specifically, the circuit courts disagree about what appellate standard of review is appropriate in employment status cases. In Jammal v. American. Family Insurance. Co.,the Sixth Circuit held that Darden factor conclusions are not entirely factual determinations.[5] Meanwhile, other circuits have held that a court’s conclusion on each Darden factor is a conclusion of fact.[6]  

II. BACKGROUND

A. APPELLATE STANDARD OF REVIEW

Generally, an appellate court subjects a district court’s finding of fact to the clear error standard. This standard is from Federal Rule of Civil Procedure 52, which states: “[f]indings of fact, whether based on oral or other evidence, must not be set aside unless clearly erroneous.”[7] This is a high bar for appellate review of factual findings, and deference is given to the district court. Only the district court has the opportunity to assess the factual record during a trial and appraise the credibility of a witness. An appellate court should uphold the district court’s factual record.[8] Alternatively, questions of law, or questions predominantly of law, are reviewed by the appellate court de novo, meaning the appellate court can review the legal conclusion without giving weight to the district court’s analysis.[9] In an interlocutory appeal, an appellate court faces an even bigger hurdle when reviewing a district court’s factual conclusions.[10] The appellate court must review the district court’s legal conclusions against the backdrop of the district court’s factual findings.[11]

Neither Rule 52 nor the Supreme Court have provided a clear test to determine how to distinguish between fact and law.[12] In fact, the Court has acknowledged the “vexing nature” of this distinction.[13] And it is common for circuit courts to apply the general appellate review standard and have different results. 

B. Nationwide Mutual Insurance Company v. Darden[14]

In Darden, the Supreme Court laid a foundation for the employee status analysis. Respondent Robert Darden operated an insurance agency and was bound to the terms of multiple contracts signed with petitioners Nationwide Mutual Insurance.[15] According to these agreements, Darden would only sell Nationwide policies and, consequently, would be enrolled in a Nationwide retirement plan.[16] Additionally, if Darden, after termination, sold insurance within twenty-five miles for one of petitioner’s competitors, Darden would not receive the benefits of the plan.[17] Darden broke his noncompete agreement and, after Nationwide notified Darden of the intent to withhold retirement plan benefits, Darden sued under ERISA claiming the benefits were nonforfeitable because these benefits had already vested.[18] The case depended on whether Darden should be classified as Nationwide Mutual’s employee or an independent contractor because ERISA only applies to employees.[19]

The Supreme Court held that the factors from Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989), controlled.[20] In Reid, the Court established several factors relevant, in light of the general common law of agency, to making the employee/nonemployee distinction in the context of the Copyright Act of 1976.[21]Specifically, considerations include: 

the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party,  the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.[22]

The Court noted that these factors are far from resolute.[23]  The weight a court should give to each factor differs depending on the legal context of each case.[24]However, because each factor “turns on factual variables within an employer’s knowledge,” employers are able to make judgments about the status of ERISA claimants.[25]

C. Divergent Sixth Circuit: Jammal v. American Family Insurance Company[26]

In Jammal v. American Family Insurance Company, the Sixth Circuit departed from the precedent provided by other circuits. This class action lawsuit originated when insurance agents claimed that American Family Insurance misclassified them as independent contractors to avoid providing those agents with benefit obligations imposed under ERISA.[27]At trial, compelling evidence was presented to support both sides. The defense argued that the agents’ positions within the company were structured as independent contractors.[28] Further, all agents had signed a contract which stipulated that the agents were independent contractors.[29] American Family Insurance treated the agents as independent business owners who established and operated their own offices.[30] The agents, on the other hand, presented evidence that agents were termed “employees” during interactions with American Family Insurance and that managers exercised control over the agents’ office operations.[31] The district court held that the agents were employees under ERISA.[32] Although the Darden factors were utilized in making this determination, the district court also engaged in a more sweeping analysis turning on the degree of control American Family Insurance managers exercised over the agents.[33]

On interlocutory appeal, the Sixth Circuit acknowledged that the lower court’s factual findings underlying each Darden factor could not be reviewed de novo.[34] The court also noted that the district court’s ultimate conclusion of employee status is a question of law.[35] Thus, the issue was with the district court’s applications of factual findings to each Darden factor. The Sixth Circuit admitted that some of its own precedent is incongruent with the outcome.[36]  The court came to the conclusion that the district court’s individual Darden factor conclusions, and the weight given to those conclusions, are not entirely questions of fact and thus may be reviewed de novo at the appellate level.[37]

The court contended that a de novo review of Darden conclusions is supported because a legal standard is often applied when making these determinations, such as when considering whether the skill required for the plaintiff’s position is separate from that of the business.[38] When determining the existence of this factor, the Sixth Circuit held,  a court must decide whether to assess the amount of skill required or if the skill is completely discrete from the business.[39] For this reason, the Sixth Circuit postulated that the Darden factors are legal standards that are applied to facts.[40] The court also emphasized language used in its U.S. v. Ware decision, expressing that the weight given to each Darden factor depends on legal context.[41] Therefore, how important a certain Darden factor is to the employee status analysis depends on the cause of action. This procedural outlook proved consequential: after weighing and reconsidering the district court’s Darden analysis, the Sixth Circuit reversed the district court’s decision and determined that insurance agents are independent contractors, not employees, under ERISA.[42]

In making the determination that insurance agents are independent contractors, the Sixth Circuit in Jammal strayed from longstanding precedent on the employee status appellate review issue. Prior to Darden, many circuits expressed that conclusions on individual factors in an employee/nonemployee determination were matters of law. Three circuits have addressed this issue in the context of the Fair Labor Standards Act.[43] First, applying factors used to determine employee status pre-Darden, the Fifth Circuit categorized findings of “historical fact” and findings as to the “factors themselves” as both based on the factual record and subject to the clear error standard.[44] Next, the Second Circuit, also using pre-Darden factors, held that the presence of each factor is a question of fact, while the overall conclusion based on those factors is a question of law.[45] Lastly, the Tenth Circuit cited the above Second Circuit decision to reiterate that the conclusions as to individual factors were subject to the clearly erroneous standard.[46]

After Darden, the clearly erroneous standard of review applied by the Fifth, Second, and Tenth circuits was upheld. Only four years post-Darden, the Eighth Circuit in Berger Transfer applied the clearly erroneous standard to a district court’s Darden conclusions in an ERISA context.[47] More recently, the Eighth Circuit relied on Berger Transfer and held that findings as to the Darden factors are subject to the clear error standard.[48]

III. Analysis

Viewing the judicial precedent with a commitment to pragmatism, the Sixth Circuit’s factor-weighing analysis is consistent with civil procedure tradition. It is important to note that this is a unique circuit split. One side of the split originates from cases decided during the late 20th century, while the splitting circuit did so in early 2019. Because of this gap in time, it is apt to reconsider the standards adopted decades ago in light of cases such as Jammal that may call for a more in-depth review of the district court’s conclusions. Jammal is a perfect example of the call for this higher standard of review. In that case, both the insurance company and the insurance agent presented compelling arguments, and the district court weighed the factors in the legal context of ERISA. A statute that creates a cause of action in a given case also creates a legal backdrop against which factual elements must be weighed. Thus, the Darden factors must be weighed within the legal context of ERISA. The appellate court should ensure that the relevant Darden factors are being considered in order to ensure a just outcome under the statutory scheme at issue. For example, in Jammal, the Sixth Circuit discussed the increased relevance of the “hiring party’s control” factor in a copyright case, but that this factor would not be as relevant for determining employee status in an ERISA case.[49] The court noted that, in the context of ERISA, the Darden factors related to the financial structure of the company should be given the most weight and favor independent contractor status.[50]The Sixth Circuit determined that if those factors had been given appropriate weight, the district court would have come to the opposite conclusion.[51] Thus, an appellate review of a district court’s conclusions on each Darden factor, weighed to support a certain legal conclusion within a particular legal context, is appropriate. This is especially true when the factual record provides a compelling argument for both plaintiff and defendant. The legal context matters and if appeals courts are not allowed to review the factors to be weighed in a given legal context, the purpose of appellate review would be undermined. 

The Sixth Circuit’s holding is also contrary to the legislative purpose of Rule 52. Among other justifications for the rule, the Advisory Committee notes list the maintenance of “stability and judicial economy,” upholding the legitimacy of district courts, and avoiding excessive appeals.[52]  District courts directly absorb the evidence and testimony from a trial. These courts are at an advantage when determining the existence of simple factors such as the skill required for a position or the source of instrumentalities and tools used by an employee. Each employer-employee relationship and company dynamic is unique. Only a district court is positioned to have a sufficient grasp on the facts of a case to determine the presence or absence of one of the Darden factors. 

The Sixth Circuit claimed that each Darden factor contains a legal determination and was not entirely off-base. For example, how many tools or instrumentalities must be provided by an employer to affirm the existence of this factor? In considering the separateness of skill required, should weight be given to the amount of skill required or the nature of the skill? However, this is still a fact sensitive determination. The Sixth Circuit’s not “entirely a question of fact” language itself implies that there is a factual element to determine.[53] A certain number of tools may suffice in a case where such tools play a major role in performing the occupational task, while the same number of tools may not fulfill the standard when the tools were collateral to occupational duties. The amount of skill required, and the nature of occupational duties are also factual conclusions. As noted above, only the district court has an intimate understanding of the company dynamic and complicated facts of a case. Therefore, the Sixth Circuit’s argument is crushed under the weight of Rule 52’s omnipresent legislative purpose.  

IV. Conclusion

Jammal pushed the envelope of the appellate standard of review. Although going too far, the Sixth Circuit accurately recognized a circuit court’s review to include the weight given to each Darden factor. The Supreme Court must provide lucidity to avoid asymmetrical application of the Darden factors. The Supreme Court should adopt a conclusion that upholds the functional distinction between district and circuit courts set forth in the Rules of Civil Procedure. This would allow appeals courts to conduct a thorough review of the district courts’ legal analysis to ensure employees are receiving the benefits they deserve. For this reason, appellate courts should review the weight assigned to each Darden factor de novo, while adhering to the district court’s conclusions on the existence or nonexistence of each factor.


[1]29 U.S.C.A. § 1001 et seq. 

[2]Id.at § 1002(6). 

[3]Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992).

[4]Id. at 323-24 (quoting Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 732 (1989)).

[5]Jammal v. Am. Family Ins. Co., 914 F.3d 449, 456 (6th Cir. 2019).

[6]See id.

[7]Fed. R. Civ. P. 52(a). 

[8]See Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, 855 (1982).

[9]See Wyner ex rel. Wyner v. Manhattan Beach Unified Sch. Dist., 223 F.3d 1026, 1028 (9th Cir. 2000).

[10]An interlocutory appeal is an appeal made before a final judgement has been rendered by a district court.

[11]See Foster Wheeler Energy Corp. v. Metro. Knox Solid Waste Auth., Inc., 970 F.2d 199, 202 (6th Cir. 1992). 

[12]Bose Corp. v. Consumers Union of U.S., Inc., 466 U.S. 485, 501 (1984).

[13]Id.

[14]Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992).

[15]Id. at 319-20.

[16]Id.at 320.

[17]Id. 

[18]Id.

[19]Id.at 321. 

[20]Id. at 323.

[21]Community for Creative Non-Violence v. Reid490 U.S. 730, 739-40, 751-52 (1989).

[22]Darden, 502 U.S. at 323-24.

[23]Id.at 327.

[24]Ware v. United States, 67 F.3d 574, 578 (6th Cir. 1995).

[25]Darden, 502 U.S. at 327.

[26]Jammal v. Am. Family Ins. Co., 914 F.3d 449 (6th Cir. 2019).

[27]Id. at 451-52.

[28]Id. at 452.

[29]Id. 

[30]Id.

[31]Id. at 452-53

[32]Id. at 455.

[33]Id.

[34]Id.

[35]Id.

[36]Id. 

[37]Id.at 456-57.

[38]Id.at 456. 

[39]Id.

[40]Id.

[41]Id.

[42]Id. at 460.

[43]29 U.S.C.A § 201 et seq.

[44]Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1044 (5th Cir. 1987).

[45]Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2d Cir. 1988).

[46]Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989).

[47]Berger Transfer & Storage v. Cent. States, Se. & Sw. Areas Pension Fund, 85 F.3d 1374, 1377-78 (8th Cir. 1996).

[48]Ernster v. Luxco, Inc., 596 F.3d 1000, 1005 (8th Cir. 2010).

[49]Jammal v. Am. Family Ins. Co., 914 F.3d 449, 456 (6th Cir. 2019).

[50]Id. at 458.

[51]Id. at 459.

[52]Fed. R. Civ. P. 52 advisory committee’s notes to 1985 amendment.

[53]See Jammal, 914 F.3d at 456.

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