## F I L E D United States Court of Appeals Tenth Circuit 

### DEC 9 1998 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

LISBETH L. GARRATT, Plaintiff-Appellant, vs. JOHN S. WALKER, doing business as John S. Walker, DMD, Defendant-Appellee. No. 96-1470

ON REHEARING EN BANC
Robert L. Liebross (Barry D. Roseman with him on th e briefs), Denver, Colorado for Plaintiff-Appellant. Howard Bittman, Boulder, Colorado, for Defendant-Ap pellee.

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 conditio n another employee’s1 That statute provides: It shall be unlawful for any person to discharge . . . or discriminate against a participant . . . for exerc ising 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 whi ch 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 pla n or ERISA, and (2) interference with the attainment of any right undera 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 cas e. - 2 - 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 Defen dant-Appellee Dr. Walker (employer) 2 and against Plaintiff-Appellant Ms. Garratt (emplo yee), 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 contrib ution that an employer might make on behalf of employees (including himself) was completely discretionary, a newly eligible employee could not claim interferenc e with a present right to- 3 -

participate in the plan prior to an actual contribu tion. Id. ; Aplt. App. 278. We vacate the panel opinion only on this issue and rev erse and remand for a trial on the employee’s discrimination and constructive disc harge claims under § 510.

Background In determining whether the evidence presents a genu ine 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 wa s 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 discussi ons after the employer requested that the employee switch to a salary arra ngement, in lieu of hourly wages. In 1993, the employee earned ten dollars pe r hour, with annual compensation at $22,901. In January 1994, the empl oyer agreed to pay the employee $2,000 per month, but delayed a decision o n the employee’s request to- 4 -

be included in the SEP plan. The employee requeste d whatever contribution percentage (based upon her salary) that the employe r 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 percentcontribution (based upon her salary) to the plan, with the employer and employee each paying one-half. See Aplt. App. at 48. Thereafter, the employee rejecte d 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 f ollowing choice: a $21,000 salary with a fifteen percent contribution to the pension plan, or a $24,000 salary with no contribution. Aplt. App. 16 7. The $21,000 amount was below the employee’s 1993 and 1994 compensation lev el 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 advi sed- 5 -

that she should look for another job. She gave not ice, but stayed on two weeks at the employer’s request. The employer contends thatmanagerial 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 emplo yee, given the rules that require allocation of contributions among SEP parti cipants uniformly based upon compensation, see I.R.C. § 408(k)(3)(C), (k)(5), and prohibit discri mination in favor of certain highly compensated employees, see I.R.C. § 408(k)(3)(A). The employer’s contribution on his own behalf was consi stent 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 be nefits 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- 6 -

contravenes § 510. Id. at 1516. Although this case involves a type of pe nsion 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 de nied in a manner that would contravene § 510. That means that an employer may not condition a critical feature of plan participation, such as plan contrib utions, in a manner not authorized by the plan and proscribed by § 510. The dissent acknowledges that § 510 applies to vest ing 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 otherwords, the dissent contends that an employee’s lack of a present right to a pla n benefit, here a contribution, forecloses a § 510 action. Inter-Modal rejected a distinction based upon vested and unves ted rights and rejected an employer’s discretionary power to amend or terminate a welfare plan as foreclosing a § 510 action. Unless the pla n provides otherwise, an employee never has a present right to receive futur e benefits under a welfare plan (because the employer may amend or terminate the pl an), yet the employee still may bring a § 510 action. Analogously, although th e employee in this case lacked- 7 -

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 in formally 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 w as 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 itis doubtful that “any right” contained in § 502, or the terms “benefits,” “right s,” or “rights to future benefits,” contained in ERISA’s civil enforcement mechanism, 2 9 U.S.C. § 1132(a)(1)(B), can be read as limiting the anti-discrimination pro vision 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, s pecifically 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 r ights, but also “to clarify his- 8 -

rights to future benefits under the terms of the pl an.” Section 510 cross references section 502 and the Court has recognizedthe relationship between the two sections in safeguarding ERISA “rights and expe ctations.” See IngersollRand Co. v. McClendon , 498 U.S. 133, 137 (1990); see also Humphreys v. Bellaire Corp. , 966 F.2d 1037, 1043 (6th Cir. 1992). In discussi ng that relationship, the Fourth Circuit has explained: [Sections] 502 and 510 together protect the panopol y of rights at risk in the pension context: rights about to be earned b ut frustrated due to unlawful employer action, benefits earned but not p aid, other rights due a participant but not fulfilled, and future ben efits 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 th e employer’s conduct precisely because the employee l acked a present legal right to receive plan contributions in the future. The empl oyee’s right to such contributions was “thoroughly contingent on the emp loyer’s discretion and entirely within the employer’s control.” Id. While there may be “a point where an employee’s pos sible attainment of a ‘right’ is so speculative and contingent that it fa lls 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 di scretion “does not include the- 9 -

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 again st 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 avo id the cost of the pension contribution.

B. Future Entitlement to Contributions and ERISA § 510 The employer characterizes the dispute as about ent itlement 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 entitle d to a contribution. Because contributions are not required and may be m ade 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 o f ERISA which plainly allow an action based upon future entitlement to co ntributions. 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- 10 -

on the evidence that the employee’s right to any fu ture contributions depended upon her willingness to fund those contributions, n otwithstanding the requirement that contributions be allocated among participants uniformly based upon compensation and pursuant to a written allocation f ormula 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 b enefit 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 ad ministering 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 b usiness decisions about employee compensation and whether (and how mu ch) 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 ac t 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 o n 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 e lection. See I.R.C. § 408(k)(3)(C); (k)(6). The observation of the Ele venth Circuit is apt: “If the- 11 -

employer decides to offer benefits, it must allow i ts employees to take advantage of the plan and must administer the plan in a nondi scriminatory 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 trie r of fact could conclude that company reclassified employees as independent contr actors for the purpose of interfering with future plan benefits). Contrary to the dissent’s view, a small business ow ner 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 planis 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 th e employee. After all, the employer created and benefitted from the plan, and should conform to its terms. An employee eligible for deferred compensation unde r 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- 12 -

that an employee be entitled to a liquidated amounton a certain date; it plainly prohibits discrimination on account of potential en titlements. Here the employer had contributed to the plan in past years and a tri er of fact could conclude that the options offered to the employee were for the purpos e of interfering with likely and probable future contributions. Indeed, the emp loyer made a contribution on behalf of the employee for tax year 1994, and not o n the terms he now advances.

C. Salary Reduction Plan The employer also argues that the choice offered wa s 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 19 93 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 adoptionagreement); 272. It is uncontroverted that the employee opposed such a sal ary reduction and the eventual contribution made on behalf of the employe e was not pursuant to such an- 13 -

arrangement. A unilateral oral decision to require a salary redu ction 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, publicati on 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 re quirements not contained in the plan has been held to be arbitrary and capricio us. See Blau v. Del Monte , 748 F.2d 1348, 1354 (9th Cir. 1984). The employer’s co ntributions on his own behalf were well in excess of the amount permitted under asalary reduction arrangement; in short, neither the law nor the fact s suggest such an arrangement and we may neither imply one nor retroactively vali date 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 contr ibutions in the same manner as requested of the employee, specifically by contr ibuting a portion of his earned income to the SEP. This contention is unavailing b ecause the employer and employee were not similarly situated for this analy sis. The employer was a sole proprietor entitled to all revenues less expenses f rom his practice, not a salaried- 14 -

employee. A salary reduction arrangement had not b een 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 discrimin ation in this context is not limited to disparate treatment of similarly situate d employees; it also extends to adverse employer action taken because an employee e ngages 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. denie d , 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 o f 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 for mal procedures in the plan,- 15 -

but the employer may not otherwise act for purposes prohibited by § 510. Id. “The formal amendment process would be undermined i f § 510 did not apply because employers could ‘informally’ amend their pl ans one participant at a time.” Id. The power to amend a plan consistent with limitat ions imposed by law or by the plan should not be confused with the obli gation 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 anemployer’s right to modify or abolish a [welfare] plan–which it may do withoutacting as a fiduciary for the workers–and the employer’s duty to provide employee s the benefits of existing plans. Section 510 is only one manifestation of th e fiduciary-duty side of the equation.” (citations omitted)).

F. Adverse Action and Proof According to the employer, no adverse action occurr ed. Section 510 proscribes changes in employment status based upon benefit motivations. See
Teumer , 34 F.3d at 545. If the employer required the emp loyee 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 fact s, the failure to accede to the employer’s condition could constitute a constructiv e discharge. See Gitlitz , 129- 16 -

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 mustshow 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 in terfere 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 t o 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 n ecessary.- 17 -

REVERSED and REMANDED.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 whethe r 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-Modalas the majority suggests. I therefore respectfully dissent.

Inter-Modalheld 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 welf are benefits under formalized Railroad Retirement Act and Teamster benefit plans, the Supreme Court simply had no occasion to address whether § 510 offers anyprotection once an employee has attained the right to participate in an SEP, but can claimno 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 wh ether § 510, “when applied to1 The majority seems to place great significance on the fact Dr. Walker had

contributed to his SEP in the past and, in fact, co ntributed to both his and Ms. Garratt’s SEPs after she left his employ. These fa cts are absolutely irrelevant to the issue of whether Ms. Garratt had a protected ri ght 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 deci sion whether to contribute to the SEPs for any given year was solely within Dr. W alker’s discretion, prior or subsequent decisions cannot be used to create a “ri ght” under § 510 where none otherwise exists.

-2- benefits that do not ‘vest,’ only protects an emplo yee’s right to cross the ‘threshold of eligibility’ for welfare benefits”). The majority nevertheless extends the Inter-Modalholding to the unique facts of this case.

In my view, the non-vesting welfare benefits the Supreme Court deemed protected under § 510 in Inter-Modalare fundamentally different from an expectation in the mind of a single employee who re quested an SEP contribution in conjunction with her request for a raise, and th en, because she administered the payroll, implemented her own raise while the employ er was still considering what percentage contribution, if any, to offer as part o f 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’s2 The majority quotes from Conkwright v. Westinghouse Elec. Corp ., 933

F.2d 231, 237 (4th Cir. 1991), to identify the “pan oply” of rights protected under ERISA §§ 502 and 510. Protected rights are those rights about to be earned but frustrated due to unl awful employer action, benefits earned but not paid, other rights due a participant but not fulfilled, and future benefits earned but not y et due. For the reasons stated, even viewing the record in the light most favorable to Ms. Garrett, she simply cannot identify any benefits du e, earned or about to be earned. -3- 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 pr otected under § 510 in InterModal

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

By elevating an employer’s compensation offer to th e status of a “right” protected by § 510, the majority has created an one rous 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 liabil ity. The language of § 510 does not require such a result; nor do I believe Inter-Modalmandates such a result. Accordingly, I would affirm the district c ourt.