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California: ERISA and Federal Preemption Claims vis-à-vis Workers’ Compensation State Requirements

April 10, 2024 (11 min read)

By William Tappin, Esq., Law Offices of Tappin & Associates, Sierra Madre, CA

There has been a lot of confusion with respect to whether ERISA preempts state laws regarding numerous programs, including mandatory workers’ compensation coverage by employers.

By way of background, it should be noted that some brokers were selling programs as a replacement for workers’ compensation coverage. These were often deemed multiple employer welfare arrangements. Some of the parties involved, the American Labor Alliance, CompOne USA and Omega Community Labor Association, asserted that the replacement workers’ compensation program they sold through brokers is exempt from California regulation. The brokers who sold these types of “programs” are at risk because there was no certificate of authority to operate and sell such a program as a replacement for state mandatory workers’ compensation coverage. These programs were sold primarily in the agricultural area and staffing industry areas in the state of California.

However, ERISA clearly does not preempt California workers’ compensation law if one merely reads the federal statute with respect to ERISA. 29 U.S.C. §1003(b)(2) stated that ERISA “shall apply to any employee benefit plan if it is established or maintained by any employee organization or organizations representing employees engaged in commerce or in any industry or activity affecting commerce.” However, 1003(b)(3) allows for exceptions to certain plans and ERISA shall not apply to any employee benefit plan if…“(3) such plan is maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws.”

It is clear as reflected in Title 29 U.S.C. §1003(b)(3) no ERISA based plan could preempt California State workers’ compensation mandatory coverage laws.

In the case of Employee Staffing Services, Inc. v. Aubry (9th Circuit 1994) 20 F.3d 103, the Federal Court confirmed that ERISA did not preempt California State workers’ compensation law even where workers’ compensation benefits were provided as part of an employee welfare benefit plan. The assertion in that case and the complaint was that ERISA opened a loophole so that employers could avoid buying workers’ compensation insurance. The Court stated, “IT DOES NOT.” (Emphasis added) The obligation of California workers’ compensation insurance cannot be avoided by substituting an ERISA plan’s coverage for work-related injuries.

Labor Code §3700 permits workers’ compensation coverage to be offered in one of two forms. Workers’ compensation coverage can be provided through an insurance policy or self-funded plan approved by the state as meeting state requirements. The statutes relating to California workers’ compensation law require employers to maintain separately administered workers’ compensation insurance or self-insurance programs distinct from all other types of insurance. These correspond to the exemption of §1003(b)(3), as these policies are distinct from “all other types of insurance.” See also in support of this position, Fuller v. Norton (10th Cir.1996) 86 F.3d 1016, which asserted very clearly state workers’ compensation laws pertaining to self-insured plans were not preempted by ERISA. Also, see Contract Services Employee Trust v. Davis (10th Cir.1995) 55 F.3d 553; Combined Management, Inc. v. Superintendent of Bureau of Insurance for the State of Maine (1st Cir.1993) 22 F.3d 1).

Due to the fact that California requires an employer to obtain workers’ compensation coverage only from an admitted insurer or a state-approved self-insured plan, ERISA cannot apply to workers’ compensation coverage held by a California employer. [The exception to this may be Insurance Code §11590, requiring any comprehensive liability policy written in the state have coverage for residential employees under §3352(d).] FAIR insurance plan for surplus line carriers are not admitted to write workers’ compensation in California, but they are “mandated” to provide workers’ compensation coverage/a comprehensive liability policy exclusively for residential employees as defined by Labor Code §3351(d).

There are no cases that in the recent past have supported the assertion that ERISA preempts state workers’ compensation laws. 29 U.S.C. §1003(b)(3) is absolutely unambiguous and unequivocally states that ERISA does not preempt any state plan maintained solely for the purpose of complying with applicable workmen’s (workers’) compensation laws or unemployment compensation or disability insurance laws.

Any argument to the contrary is specious and without any merit whatsoever, in clear violation of Title 8, California Code of Regulations §10421. Any party making such an assertion has done so recklessly without adequate research and is clearly making an assertion that is inconsistent with existing law with literally no chance of overturning said law based upon the specific language found in 29 U.S.C. §1003(b)(3). As a result, any party making such an assertion would be subject to Labor Code §5813 sanctions for doing so.

If additional information is necessary upon further research on this issue, I can provide additional information if required. However, it seems that the above-referenced cases in conjunction with 29 U.S.C. §1003(b)(3) should be adequate to resolve any assertions relating to an ERISA presumption relating to California mandatory workers’ compensation coverage laws.

Additionally, any broker or organization attempting to sell such a program submits the “beneficiaries” of such program to multiple legal issues. If they purchased the program which asserted that ERISA preempted California workers’ compensation Law, the underlying party/employer could be prosecuted for a misdemeanor punishable by imprisonment of up to one year and/or by a fine of up to $10,000.00 or both fine and imprisonment. (Labor Code §3700) Additionally, any injury that occurred could be subject to civil negligent lawsuit with presumption of employer negligence and no affirmative defenses. (Labor Code §3708) Any employer who has failed to have coverage based on an assertion of ERISA preemption could be subject to an administrative order or Court injunction/stop order, stopping all business operations. (Labor Code §3710.1)

Please also note that a little used provision exists, which is significant in terms of uninsured employers who might rely on such an assertion of ERISA preemption. Pursuant to Labor Code §3722(d), any such employer could face a penalty of $2,000.00 per employee working at the time of the alleged injury for a noncompensable injury after hearing, which is mandatory, or $10,000.00 per employee for a compensable injury up to $100,000.00 maximum. This requires a hearing effectively on all uninsured employer cases to determine what penalty should be applicable.

The uninsured employer relying on ERISA preemption also would be liable for the injured worker’s attorney fee pursuant to Labor Code §4555. The uninsured employer relying on the ERISA preemption could also face an assessment of 200% of the workers’ compensation premium for the period of non-insurance up to a maximum of three years pursuant to Labor Code §3722(c).

A lien is allowable and can be imposed upon property without further hearing and before issuance of an award where an employer is uninsured due to reliance on ERISA preemption. (Labor Code §3720)

If the Appeals Board makes an award against the uninsured employer relying on ERISA preemption, the owner of the uninsured employers home or other dwelling or property may be taken to satisfy the award in a nonjudicial sale with no exemptions from execution pursuant to Labor Code §3720.

Unfortunately, the Appeals Board seems to prefer to resolve these issues without enforcing the above-referenced Code sections and penalties, which only encourages the professional employment organizations that usually assert such issues. If the Appeals Board utilized the above Code sections, it would serve as a huge deterrent to the actions of those entities asserting ERISA preempts California workers’ compensation law and would serve to protect innocent employers who are misled as to ERISA and the current state of the law with ERISA preemption regarding state workers’ compensation programs. In fact, leaving aside ERISA for a moment, if the Appeals Board enforced the above Code sections and imposed the fines outlined above or threatened a stop work order, perhaps the PEOs would be limited in their business activity in the state of California and we would have far fewer uninsured employers. There are arrows in the quiver of the Appeals Board to deter the type of conduct reflected both in the ERISA preemption argument as well as employee “leasing agencies.”

Any lawyer making assertions that out-of-state union activity or application of ERISA exemptions to workers’ compensation of California should be concerned with violation of the California Rules of Professional Conduct, effective 2023, Rule 3.1 through 3.3. In particular, Rule 3.2 headed the delay in litigation states in representing a client, “A lawyer shall not use means that have no substantial purpose other than to delay or prolong the proceeding or to cause unnecessary expense.” This is consistent with Title 8, California Code of Regulations §10421. See also Business and Professions Code §6128(b).

Rules of Professional Conduct, effective 2023, Rule 3.3 reflects the requirement of Candor Toward the Tribunal in subsection (a) and specifically and unequivocally indicates a lawyer shall not:

(1) knowingly make a false statement of fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;

(2) fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel, or knowingly misquote to a tribunal the language of a book, statute, decision or other authority; or

(3) offer evidence that the lawyer knows to be false. If a lawyer, the lawyer’s client, or a witness called by the lawyer has offered material evidence, and the lawyer comes to know of its falsity, the lawyer shall take reasonable remedial measures, including, if necessary, disclosure to the tribunal,* unless disclosure is prohibited by Business and Professions Code section 6068v, subdivision (e) and rule 1.6…” (Emphasis added)

Additionally, the new rules of professional conduct, effective 2023, Rule 8.3 Reporting Professional Misconduct indicates:

“(a) A lawyer shall, without undue delay, inform the State Bar, or a tribunal with jurisdiction to investigate or act upon such misconduct, when the lawyer knows of credible evidence that another lawyer has committed a criminal act or has engaged in conduct involving dishonesty, fraud, deceit, or reckless or intentional misrepresentation…that raises a substantial question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects.” (Emphasis added)

Significantly, under the comments relating to rule 8.3, comment (6), it is very clear and relates to tribunals and states:

“The rule permits reporting to either the State Bar or to a tribunal with jurisdiction to investigate or act upon such misconduct. A determination whether to report to a tribunal, instead of the State Bar, will depend on whether the misconduct arises during pending litigation and whether the particular tribunal has the power to ‘investigate or act upon’ the alleged misconduct. Where the litigation is pending before a non-judicial tribunal, such as a private arbitrator, reporting to the tribunal may not be sufficient. If the tribunal is a proper reporting venue, evidence of lawyer misconduct adduced during those proceedings may be admissible evidence in subsequent disciplinary proceedings. (Caldwell v. State Bar (1975) 13 Cal.3d 488 at 497) Furthermore, “a report to the proper tribunal may also trigger obligations for the tribunal to report the misconduct to the State Bar or to take other appropriate corrective action.” (Emphasis added) [See Business & Professions Code, §§ 6049.1, 6086.7, 6086.8; and California Code of Judicial Ethics, Canon 3D(2).]

Rule 8.4 outlines the various types of misconduct in the comments relating to that conduct. It is professional misconduct to violate the rules of the State Bar to knowingly assist, solicit or induce another to do so or do so through acts of another. It is misconduct to commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects or engage in conduct involving dishonesty, fraud, deceit or reckless or intentional misrepresentation or engage in conduct that is prejudicial to the administration of justice. It is also misconduct to knowingly assist, solicit or induce a judge or a judicial officer in conduct that is in violation of an applicable code of judicial ethics, code of judicial conduct or other law.

Any attorney associated with asserting the appropriateness of a process, such as ERISA preemption, in order to avoid an employer’s required workers’ compensation coverage is subject to the above-referenced rules.

These arguments are easily expandable with citations to specific cases, and the Appeals Board should consider utilizing the available remedies to correct the uninsured employer problem reflected in temporary employment agency types of cases, which we are seeing much more often than we used to.

© Copyright 2024 William Tappin. All rights reserved. Reprinted with permission.

Any information or opinions contained in this commentary are solely those of the author and are not necessarily endorsed by LexisNexis® or its affiliates.