The opinion of the court was delivered by: WEINFELD
This action was commenced by plaintiff,
Paul P. Swaida, Jr., a former employee of International Business Machines Corporation ("IBM"), individually and on behalf of all others similarly situated, against IBM's directors, its retirement plan (the "Plan"), the Retirement Plan Committee and others who play a role in the administration and enforcement of the Plan (collectively "the defendants"). Plaintiff seeks a judgment (1) declaring that IBM's use of the "elapsed time method" for computing service for vesting credit under the Plan violates the vesting standards of the Employee Retirement Income Security Act of 1974 ("ERISA" or "Act");
(2) enjoining the defendants from using the "elapsed time method" in the future; (3) declaring the plaintiff to be fully vested under the terms of the Plan; (4) directing the defendants to pay plaintiff benefits at such time as he become eligible to receive them; and (5) directing defendants to grant credit to each member of the plaintiff class for any applicable year in which such class member satisfied the vesting standards of ERISA, but was denied credit for such year by the defendants pursuant to the "elapsed time method."
The defendants move, and the plaintiff cross-moves, for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiff also moves for an order certifying the action as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The parties agree that there are no disputed issues of fact and that the matter is ripe for disposition under the Rule.
IBM has sponsored and maintained the Plan since 1945. At the end of 1981, 209,106 present and 25,634 former employees were participated in the Plan.
It was amended on May 1, 1977, effective as of January 1, 1976 in order to comply with the provisions of ERISA.
Two methods have been in existence for years to measure an employee's length of service for determining whether he has earned a vested right to a pension.
Under one, referred to as the "elapsed time method," an employee receives credit for the time elapsed between two dates -- the date of his hire and the date his employment terminates, including credit for time off, holidays, vacations, sickness, leaves of absences and interruptions in his employment that do not exceed one year. The other, the "hours of service" method, gives credit for a year of service if the employees completes a specified number of hours of service in a year.
The IBM plan uses the "elapsed time method." Specifically, the Plan provides that a regular "employee who completes 10 or more years of continuous service . . . will have a vested right to a monthly income" at age 65 and in an amount determined by his years of service and compensation.
"Continuous service" is defined as "the time commencing with the date a Regular Employee first works an hour for which he or she is paid or entitled to payment under the Company's Personnel and Payroll practices then in effect and continues until the date the Regular Employee severs from service with the Company."
The Internal Revenue Service has issued a favorable determination letter with respect to various versions of the Amended Plan, including that which is applicable to the plaintiff.
Swaida was employed by IBM on a full time basis as a professional employee. His last position was as a procedures specialist. His period of employment was from June 20, 1966 to April 9, 1976 -- nine years, nine months, and twenty-one days. He alleges that during the period from June 20, 1975 to April 9, 1976 he worked in excess of 1000 hours. Since Swaida was a professional employee and exempt from the Fair Labor Standards Act minimum and maximum hour provisions,
IBM was not required to, and did not, maintain records of his hours. Nevertheless, the defendants do not dispute Swaida's claim that he worked in excess of 1000 hours during the last nine months and twenty-one days of his employment with IBM.
Shortly after leaving IBM, Swaida requested that the Plan issue a certificate evidencing that he had a vested right to a pension. IBM refused on the ground that he had not completed ten years of service as required by the Plan. Thereupon plaintiff instituted this action.
Plaintiff, in seeking to overcome his failure to meet the Plan's rule conditioning a vested right to a pension at age 65 upon completion of 10 or more years of elapsed time service, relies upon the vesting provisions of ERISA. Congress, in enacting these provisions, took note that "many employees with long years of employment are losing anticipated retirement benefits owing to lack of vesting provisions"
in many pension plans. Accordingly, Congress declared the policy of the Art to require pension plans "to vest the accrued benefits of employees with significant periods of service."
To implement the policy, Congress established "minimum vesting standards." Section 203 of the Act specifies three alternative methods that a pension plan may use to satisfy ERISA's vesting requirement. One alternative, referred to as "10 year cliff vesting," is that used in the Plan here at issue. Subdivision (a)(2)(A) of section 203
A plan satisfies the requirements of this subparagraph if an employee who has at least 10 years of service has a nonforfeitable right to 100 percent of his accrued benefit derived from employer contributions.
The next subdivision, section 203(b)(2)(A)
. . . the term "year of service" means a calendar year, plan year, or other 12-consecutive month period designated by the Plan (and not prohibited under regulations prescribed by the Secretary of Labor) during which the participant has completed 1,000 hours of service.
Stripped to its essentials, plaintiff's position is that under the latter provision, if a participant completed 1000 hours of service in the "12-consecutive month period designated by the Plan," he would accrue one year of service for vesting purposes; that the vesting provision of the Act became applicable to the Plan in January 1976 and that the defendants were required to calculate plaintiff's service in accordance with the vesting provision of section 203(b)(2)(A), notwithstanding the elapsed time method as defined in the Plan, and had they done so he would be fully vested since, in addition to his nine years of previously credited service, he worked in excess of 1000 hours within the 12-consecutive month period following his ninth credited year of service. In sum, he argues that he is entitled to credit for a year of service even though he was not employed for an entire 12-consecutive month period. Accordingly, he contends that any regulation, whether issued by the Department of Labor or the Department of the Treasury, that permits the elapsed time method to measure service for vesting purposes is unauthorized and inconsistent with ERISA.
The defendants' position in broad terms is that prior to ERISA the elapsed time method was the predominant method in use for measuring length of service for vesting purposes in pension plans except in multi-employer industries such as the construction and building, trucking, and coal industries; that after ERISA it continued to be used and was authorized by both the Departments of Labor and of the Treasury; that the only purpose of the 1000 hour language in section 203(b)(2)(A) is to provide a minimum standard which, if met, entitles seasonal, intermittent and part time employees to a year's vesting credit if they complete their normally scheduled work year and that the history of the Act confirms that this was its only purpose. In sum, the defendants interpret the statutory provision as requiring both 12 months of employment and completion of 1000 hours of service during that year to obtain credit for a year of service for purposes of vesting.
At the heart of this controversy are Department of the Treasury regulations authorizing use of the elapsed time method of computing employees' vested rights. These regulations had been issued in temporary form by the Department of Labor
prior to a Presidential order reallocating responsibilities for administering various aspects of ERISA between the Departments of Labor and of the Treasury.
On June 17, 1980, the Department of the Treasury issued final regulations authorizing pension plans to credit service for vesting purposes according to the elapsed time method.
The temporary regulations issued by the Department of Labor were withdrawn. The Treasury regulations, which are still in effect, state that an employee's vested right to a pension is not contingent upon "the actual completion of a specified number of hours of service during a 12-consecutive-month period," but rather is determined "with reference to the total period which elapsed while the employee is employed (i.e., while the employment relationship exists) with the employer. . . ."
For a plan already in existence on January 1, 1974, such as IBM's,
the regulations were to apply retroactively to plan years beginning after December 31, 1975.
It is not disputed that IBM has been, since January 1, 1976, in compliance with the Treasury Department's "elapsed time" regulations.
Since the regulations issued by the Departments of Labor and of the Treasury were under attack and a ruling by this Court would necessarily affect hundreds of thousands of participants in many existing pension plans that use the elapsed time method, this Court suggested that the views of those agencies be solicited. In response the Department of Justice submitted a brief on behalf of the United States as amicus curiae. The government urges that the regulations authorizing an otherwise qualified plan to calculate years of service by the "elapsed time ...