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In ERISA Congress has created a “lock-box” in which it both carefully defines and limits state exclusions from the statute and aggressively sweeps up through preemption anything that remains. Thus, if an employee welfare benefit plan is not clearly and exactly excluded from ERISA, any state law “relating to” the plan is preempted.
By Michael C. Duff*
Introduction - Vasquez
As regular followers of the workers’ compensation scene know, the Vasquez decision, issued recently by the Oklahoma Workers’ Compensation Commission (WCC), has been appealed to the Oklahoma Supreme Court. As readers may also recall, Ms. Vasquez was denied benefits for an alleged workplace injury under an “alternative benefit plan,” authorized by the Oklahoma workers’ compensation opt-out statute, titled “the Injury Benefit Act.” The theory of the plan’s denial of benefits was that Vasquez’s injury resulted partially or completely from a preexisting condition and was thus not an “injury” within the meaning of the alternative plan. The WCC found that, while the plan was covered by ERISA, the denial of benefits under the plan violated the Oklahoma constitution (for a variety of reasons, but principally on a due process/equal protection theory).
There has been thinking in some quarters that because the WCC invalidated Vasquez on state constitutional grounds the ERISA issues in the case have somehow become moot. However, it seems difficult to argue that state law, even law arguably grounded in a state constitution, could overcome a federal preemption provision as broad as that found in ERISA. Present law very clearly holds that states may not regulate ERISA plans, like the one the WCC found applied in Vazquez’s workplace. See e.g. Hewlett Packard Co. v. Barnes, 571 F.2d 502 (9th Cir. 1978). A state command to an ERISA plan not to refuse to provide benefits is a state regulation regardless of the alleged origin of the command in the state’s constitution. See Alessi v. Raybestos-Manhattan, Inc, 451 U.S. 504, 524 (1981) (holding that state prohibiting an ERISA plan to engage in a practice allowed under ERISA triggers preemption); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139 (1990) (emphasizing ERISA’s broad language defining conflicting state law potentially subject to preemption as “all laws, decisions, rules, regulations, or other State action having the effect of law.”)
Lately, however, I have been puzzling through what may be an even more profound ERISA preemption problem, the potential facial preemption of all opt-out laws. ERISA recites, in its preemption provision §514(a), that state laws are preempted if they “relate to” an employee benefit plan. Subsequent federal cases have defined “relate to” extremely broadly, and I am about to argue so broadly as to preempt opt-out laws. Of course, if the Injury Benefit Act is preempted by ERISA, the Vasquez Court would seemingly be free to apply, without federal law considerations, the analysis it utilized in Torres v. Seaboard Foods, Case No. 113649 (OK 2016), (striking 180-day discovery rule of Administrative Workers’ Compensation” law on state due process/equal protection grounds).
Under ERISA preemption principles state laws are extremely broadly preempted. It is not necessary that a state law directly regulate an employee welfare benefit plan to be displaced. All such a law need do to be preempted is “relate to” an ERISA-covered plan. What does it mean for a state law to “relate to” an ERISA plan? Much less than you may think. To take the easiest case first, the Supreme Court has “virtually taken for granted that state laws which are ‘specifically designed to affect employee benefit plans’ are pre-empted under §514(a).” Ingersoll-Rand supra, at 140, citing Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 829 (1988). It can hardly be disputed that the principal subject of opt-out laws is ERISA employee welfare plans, which are very broadly defined under ERISA as,
. . . [A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, . . . medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services . . . ERISA, §1002(1).
The Oklahoma Injury Benefit Act, for example, applies to “qualified employers” that are required to adopt a written benefit plan. OK ST. 85A-203. The written benefit plan “shall provide for payment of the same forms of benefits included in the Administrative Workers' Compensation Act for temporary total disability, temporary partial disability, permanent partial disability, vocational rehabilitation, permanent total disability, disfigurement, amputation or permanent total loss of use of a scheduled member, death and medical benefits as a result of an occupational injury, on a no-fault basis, with the same statute of limitations, and with dollar, percentage, and duration limits that are at least equal to or greater than the dollar, percentage, and duration limits contained in [the traditional workers’ compensation Act] . . .” OK ST. 85A-203(B).
To me, it is difficult not to conclude that alternative plans of the kind authorized by opt-out laws like the Injury Benefit Act are covered ERISA welfare benefit plans, as very broadly defined above by ERISA §1002(1). OK ST. 85A-203(B) makes crystal clear that the very purpose of the Injury Benefit Act is to provide a substitute for workers’ compensation benefits, which themselves might have qualified as ERISA-eligible were they not specifically exempted from ERISA coverage by ERISA §1003(b)(3). Whatever else these “not-workers’-compensation-plans” may be, it seems clear that even their proponents assume they are ERISA-covered plans. See Howard Berkes, 'Darker Possibility' For Workers When Employers Opt Out of Workers' Comp, NPR (May 18, 2016) (“Minick and other opt-out promoters say the plans are governed by the federal Employee Retirement Income Security Act, or ERISA, which presumably pre-empts state law and regulation.”) Accordingly, I will make the same assumption, and making the assumption I can very comfortably conclude that opt-out plans are almost certainly preempted under the logic of Ingersoll Rand and Mackey, supra.
However, it might be argued that ERISA’s workers’ compensation exemption broadly carves out a zone of state authority to regulate workplace injury, including, if a state wishes, through ERISA-governed plans. Under §1003(b), ERISA does not apply to any benefit plan if “such plan is maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws.” Of course, if this were the case, there would be no preemption to discuss because the alternative plans would be entirely excluded from the operation of the statute. However, for reasons opt-out proponents have noted, this interpretation would read the phrase, “solely” for the purpose of complying with, inter alia, workers’ compensation laws, out of the statute, an outcome that is textually problematic. I have little difficulty agreeing that where “Congress does not clearly state in its legislation whether it intends to pre-empt state laws . . . the courts normally sustain local regulation of the same subject matter unless it conflicts with federal law or would frustrate the federal scheme, or unless the courts discern from the totality of the circumstances that Congress sought to occupy the field to the exclusion of the States.” Malone v. White Motor Corp., 435 U.S. 497, 504 (1978). But it seems to me that in ERISA Congress has created a “lock-box” in which it both carefully defines and limits state exclusions from the statute and aggressively sweeps up through preemption anything that remains. In other words, if an employee welfare benefit plan is not clearly and exactly excluded from ERISA, any state law “relating to” the plan is preempted.
Even if one takes issue with the premise that opt-out laws are “specifically designed to affect employee benefit plans,” see Mackey, supra, the Supreme Court has sweepingly discussed “relate to” in other language that is similarly problematic for opt out laws. The Court has said that a state law may “relate to” an ERISA plan (triggering preemption) if it “references” or has a “connection with” such a plan. Shaw v. Delta Airlines, 463 U.S. 85, 96-97 (1983). The Court has found state law reference to ERISA plans in non-obvious situations. In Mackey, supra, for example, the Court found preempted a Georgia garnishment law affording ERISA plans preferential collections treatment. It made no difference that the law arguably benefitted ERISA plans. ERISA’s sweeping preemption of the field of employee benefits meant that state law reference to the plans was sufficient to trigger preemption. In California Div. of Labor Standards Enforcement v. Dillingham Const., 519 U.S. 316, 325 (1997), the Court explained that, “[w]here a State's law acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law's operation . . . that ‘reference’ will result in pre-emption.” It is difficult to argue that opt-out laws do not act immediately and exclusively upon ERISA plans or that ERISA plans are not essential to opt-out laws’ operation.
A law that does not “refer” to ERISA plans may nevertheless be pre-empted if it has a “connection with” ERISA plans. New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). However, “[p]re-emption does not occur ... if the state law has only a tenuous, remote, or peripheral connection with covered plans, as is the case with many laws of general applicability.” Id. at 661 citing Washington Board of Trade, supra. Of course, “[i]f ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes pre-emption would never run its course.” Gobeille v. Liberty Mutual Ins. Co., 136 S.Ct. 936, 943 citing Travelers, 514 U.S. at 655. Accordingly, the need for workable standards has led the Court to reject “uncritical literalism” in applying the clause. Gobeille at 943 citing Travelers at 656. But where, as with opt-out, a law’s very essence is to create and define employee welfare benefit plans it surely has more than a tenuous, remote or peripheral connection with those plans. Ultimately, opt-out laws seem “related to” covered employee benefit plans whether one considers the “reference” or “connected with” side of the “related to” analysis.
Finally, some observers have questioned whether the Supreme Court’s decision in Shaw v. Delta Airlines, Inc., 463 U.S. 85 (1983) alters the starkness of the analysis I am describing. In Shaw, employers challenged two New York statutes, a state human rights law and a state disability law, each of which would have effectively required the challenging employers’ benefit plans to begin providing pregnancy “disability” benefits that had not previously been provided. The Court found that each law was obviously covered by ERISA and subject to preemption—because of the already-discussed breadth of ERISA’s preemption provision, §514(a)—unless somehow saved by other ERISA provisions. The Court concluded ERISA did not preempt the human rights law because it was a necessary component of federal anti-discrimination law, which has a dual federal-state design. §514(d) directs that ERISA may not “impair” other federal laws, and there was an unacceptable risk that preempting the state law would have led to such prohibited impairment. Id. at 103. (Though any portion of the state law not impairing federal antidiscrimination law would in theory be preempted. Id. at 103-104). With respect to the disability benefits provided under the multi-benefit plans, the Court concluded that because the plans were not created “solely” to comply with the state disability benefits law, they were not excluded from ERISA. As I have explained, state laws related to non-excluded benefit plans are broadly preempted, and it is therefore not surprising the state disability law was preempted insofar as it “related to” a non-excluded multi-benefit plan. The Court additionally found that New York might permissibly require disability benefits mandated by its law to be paid by the multi-benefit plan, perhaps through creating a separate administrative unit for payment. Id. at 108.
Shaw may mean that states could prevent employers from avoiding workers’ compensation mandated payment of workers’ compensation benefits through creative packaging of those benefits with other benefits in a multi-benefit plan. A state could probably insist that the workers’ compensation portion of an employer multi-benefit plan be segregated in such a way that it would not be covered by ERISA (because of the 1003(b) exemption) and could, therefore, continue to be regulated by the state. Opt-out, however, presents a situation in which states are attempting to create “not-workers’-compensation” benefit plans. There is no provision in ERISA for exclusion of such plans and thus, if the alternative benefit plans are indeed ERISA plans, no escape from ERISA preemption. By contrast, in Shaw the Court did not intimate that New York might have created separate administrative units for “not disability insurance” benefits. Only the specific types of benefits mentioned in ERISA may enjoy the §1003(b) exclusion.
For the reasons I have discussed, I think that workers’ compensation opt-out laws are preempted by ERISA. If federal courts somehow determined that opt-out laws are “workmen’s compensation laws” within the meaning of ERISA, plans established under the opt out laws might be exempted from ERISA’s coverage, and state laws “relating to” the excluded alternative plans would not be preempted. But the reason we are having this discussion is that opt out proponents (and apparently the Oklahoma WCC) insist that alternative benefit plans ARE covered by ERISA. In the end, one cannot have it both ways: either opt out laws are “workmen’s compensation” laws, in which case alternative plans created under them are excluded from ERISA’s coverage; or opt out laws are not workmen’s compensation laws, in which case they relate to “employee welfare benefit plans” and are preempted by ERISA. It seems clear that If opt out laws are preempted, state law suits based on state law theories could be brought against alternative plans in state courts. If opt out laws are not preempted, alternative plans are governed by ERISA, and we would be back in the difficult situation the Oklahoma Supreme Court is facing in Vasquez, in which Oklahoma is attempting to tell an ERISA plan what it can and cannot do. I suspect the ultimate resolution of that question, and perhaps all of these questions, can only be accomplished in the federal courts.
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* Michael C. Duff is Centennial Professor of Law at the University of Wyoming College of Law in Laramie, Wyoming, where he teaches torts, labor law, workers’ compensation law, and alternative dispute resolution in the workplace. Prior to entering academia, he practiced law with the National Labor Relations Board. He has written extensively on labor law and administrative law matters and recently authored a textbook, Workers’ Compensation Law: A Context and Practice Casebook (Carolina Academic Press 2013). He may be reached at Michael.Duff@uwyo.edu.