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Federalization of Workers’ Comp: Politics, Opt-Outs and Survival of the State-Based Status Quo

February 19, 2016 (9 min read)

By Karen C. Yotis, Esq., Feature Resident Columnist for the LexisNexis Workers’ Compensation eNewsletter

A chronicle of workers’ compensation in the United States tells the story of a persistent (but failing) federal advocacy that gives  way to entrenched special interests . . . Every . . . Single . . . Time. And in spite of the countless efforts to change the system—and even irrespective of the economic and social welfare reform catalysts that are being created via the growing national opt-out movement—it appears as if the current state-based system is bound to endure. This is Judge David B. Torrey's message in his contribution to The Pennsylvania Workers’ Compensation Centennial: A Narrative and Pictorial Celebration, a compendium that commemorates 100 years of workers’ compensation in Pennsylvania.

Inconsistent Remedies, Bottom Feeders and Conflict of Laws

Torrey’s chapter titled Efforts to Impose Federal Standards in Workers’ Compensation: An Historical Account, goes to great lengths to demonstrate the serious and deep-seated inadequacies inherent in state-based workers’ compensation schemes by examining the issues relating to parity and coordination of remedies, and exposing the phenomenon of dysfunction known as the “race to the bottom.

His discussion about the efforts that financially strapped States make to attract employers by reducing the cost of doing business via worker benefit reductions is particularly instructive. Referencing a Yale University article which demonstrates that the race to the bottom is directly attributable to the inevitable increase in overall costs that occurs alongside improvements to a state system, Torrey hones in on the political reality that makes the implementation of sufficient workers’ compensation systems downright remote where a State in total control of its own compensation system is backed up against the economic wall and is forced to respond to complaints about not being competitive from employers drowning under benefit costs. But rather than favoring outright preemption to shore up existing state systems, Judge Torrey establishes his preference for a solution founded upon “a regime of federal standards.”

Around the Comp World in 80 Years

Judge Torrey’s chapter carefully traces the slew of legislative efforts over the decades to federalize workers’ compensation. Starting with the Longshore & Harborworkers’ Compensation Act of 1927 (which, lo and behold, actually IS a federally-administered workers’ compensation program) and proposals that accompanied the social reforms of the 1930’s and 1950’s, continuing on to more specific legislation like the 1975 Williams-Javits bill and the 1979 National Workers’ Compensation Standards Act of 1979, and concluding with proposals made during the Carter and Clinton administrations, Judge Torrey recounts the historical cavalcade of vested interests that have perennially blocked nearly a century of federalization efforts.

After Judge Torrey’s Pennsylvania WC compendium published, some members of Congress, including presidential hopeful Bernie Sanders (D-VT), wrote to the Department of Labor to encourage DOL’s greater involvement in the oversight of workers’ compensation programs. When this author asked Judge Torrey to comment upon this latest move towards federalization—which was motivated in large part by ProPublica's expose into the apparent nation-wide dilution of worker benefits—Judge Torrey stated:

“In this day and age of shrinking federal government (if not spending) enterprises, it is hard for me to conceive of Congress preempting the states and enacting a federally-overseen WC Act for all U.S. workers. Also, the same lobbies that have historically blocked such efforts are certainly still around. The academic proposition that the subject of workers’ compensation remains ‘preempted policy space’ is accurate.”

Remember the Alamo—and the National Commission

Torrey’s recap of the place that the 1972 National Commission on State Workmen’s Compensation Laws, occupies in the federalization story emphasizes how politics—in the guise of a federal enforcement mechanism that would give teeth to the 19 recommendations favored in the place of preemption and federalization—ensured defeat of the Commission’s well-considered approach. Judge Torrey even quotes that venerable statesman Arthur Larson, who explains that no federal sanctions were ever adopted, “in part because no device could be invented that would be both effective and politically acceptable.”

Trumping SCOTUS and the “New Federalism”

Judge Torrey also reviews the series of U.S. Supreme Court decisions espousing a “New Federalism,” that prescribe limits around the congressional power (1) to regulate under the Commerce Clause and (2) to tax and spend for the general welfare. In spite of National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (2012) and its application of what he refers to as “the New Federalism ‘anti-commandeering’ precedents,” the Judge nevertheless remains convinced that Congress has the power not only to impose federal standards but to completely preempt state workers’ compensation laws by invoking its powers. 

Federalization through the Opt-Out Back Door

Judge Torrey addresses the hot button issue of whether programs that allow employers to opt-out of workers’ compensation are actually permitting federalization of our existing state systems “through the back door.”

Judge Torrey dismisses as “rhetorical” the term “Obamacomp,” which was adopted by the opponents of Oklahoma’s opt-out legislation.  Judge Torrey told this author the term Obamacomp “was seized upon by opponents [of H.B. 2155] because Obamacare was so troubled” and “because it sounds in general trivializing.”

But even though he agrees generally with the position of opt-out opponents, Judge Torrey was quick to remind, “opt-out proponents want federal oversight of their plans because they know how hard it is to sue in federal court under ERISA.”

Oh “Solely” Mio

One potential path to federalization of workers’ compensation may arise from what Michael Duff, Associate Dean of Student Programs and External Relations and Centennial Distinguished Professor of Law at the University of Wyoming College of Law (and a colleague of Judge Torrey’s) described as “an interesting case of de-federalization of law accomplishing federal objectives.” The potential aspect of federalization to which Dean Duff refers involves the niche issue of whether opt-out schemes will eventually be excluded under ERISA. And according to Duff, everything hinges upon the single word “solely.”

The precise matter at stake here is the difference between plans created or maintained solely (see, there’s that word) for the purpose of complying with workers’ compensation laws and plans that are created—even in part—for any other reason. Plans that are solely for workers’ compensation are completely excluded from ERISA, but plans with another purpose are not excluded from ERISA. This distinction is important because ERISA plans need not comply with any external substantive benefit amount (say, for example, legislatively imposed benefit levels). That is why employers who opt out of workers’ comp in favor of an ERISA plan can potentially save billions of dollars.

According to Dean Duff, who met with congressional leaders several weeks ago to discuss these concerns:

“[T]he main federal driver to this process might be the Department of Labor’s interpretation of ERISA. If the DOL were to determine that alternative benefit plans under opt-out schemes were not covered by ERISA, a great deal of the impetus for creating the plans in the first place would be neutralized. Currently, the single word ‘solely’ is holding up exclusion.”

As Duff further pointed out, the problem with blindly accepting the effect that opt-outs can potentially have (are having) on worker benefits under ERISA’s current statutory posture is that:

“[T]he word ‘solely’ is a remnant from a 1958 federal benefits statute that operated in a very different way from ERISA. It makes no sense that this entire controversy is being driven by a single word that is left over from a half-century old statute that then-Senator John F. Kennedy promoted from the Senate floor. My sense is that this might wind up being an interesting case of de-federalization of law accomplishing federal objectives. Either the DOL, or perhaps even Congress, may develop a strategy to excise that one troublesome word from ERISA.”

The Buck’s Gotta Stop Somewhere

In a recent article that appeared in the LexisNexis Workers’ Compensation eNewsletter, Medicare Secondary Payer expert Jennifer Jordan argued that the escalating discussion about federalization of workers’ comp could become a reality if the opt-out pendulum is allowed to swing too far in favor of employers, particularly with respect to proposals that call for somewhat parallel state “systems” with limits on med payments, with benefits tied to employment status, and the like. Both Judge Torrey and Dean Duff commented upon the astonishing amount of intentional cost-shifting that takes place when opt-outs transfer the high price of work injury and death from workers’ compensation schemes to federal and other programs. 

Duff didn’t pull any punches when he explained:

“The dynamic is simple. Alternative benefit plans would over time result potentially in billions of dollars in reductions of benefit payments to injured workers. The reality is that someone will bear those costs. Maybe it will be the injured workers themselves. Maybe it will be the social security disability structure in tandem with Medicare, but someone will pay for these ‘externalities.’”

Irrespective of his view that “federalization is better than a patchwork of state programs which allow asocial opt-outs,” Judge Torrey was careful to point out that too much federalization isn’t a good thing when he stated:

“If these [cost-shifting] efforts involve federal standards, this would be positive. If the efforts involve preemption, however, I would not view that as a positive. I don’t think the federal government would run a better system at all. The troubled roll-outs of the MSPA oversight and the ACA programs have certainly informed my view on this issue.”

Never Say Never?

Just as the 2008 global market collapse led to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the consequent creation of the Federal Office of Insurance, could a similar catalyst—say, for example the complete disintegration of the Grand Bargain as outlined in the recent NPR/Pro Publica expose—impact workers’ compensation in a like fashion and create the type of political environment that would permit (or perhaps even require) federalization of that failed system?

Duff could not conceive federalization of workers’ compensation in the current political environment and stated:

“Unlike ACA, the issue is too arcane for progressive Democrats (the likely opponents of opt-out) to be able to whip up significant support in the general electorate. Republicans (and many Democrats) in both houses of Congress would defeat any Federal initiative for the creation of a federal substantive workers’ compensation law. But, if cost shifts occasioned by opt-out become so significant as to become easily demonstrable to the general public, the political environment could become transformed. I do not see that happening over the short term.”

Ever the political realist, Judge Torrey concluded:

“The same lobbies that blocked federal efforts in the 1930’s, 1950’s, and 1970’s are certainly still around. Does the party that controls Congress really have an interest in a massive overthrow of the existing state scheme in favor of federal intervention? It is hard to conceive that this is so.”

For now at least, it appears as if the song will remain the same, as political winds continue to blow in favor of a state-based workers’ compensation system.  

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