Opt-Out Lessons From Lone Star State

Shining the Real Light on So-Called Texas Opt Outs

By Thomas A. Robinson, co-author Larson’s Workers’ Compensation Law

As Lex Larson and I point out in the opening article in Workers’ Compensation Emerging Issues Analysis, 2015 Edition, 2016 will shape up to be an important one in determining whether the workers’ compensation “opt-out” phenomenon currently going on in Oklahoma spreads to other states, particularly Tennessee and both Carolinas. Not only is opt out talk the focus of our cover story, it was featured prominently at the 24th Annual National Workers’ Compensation and Disability Conference held last November in Las Vegas, as well as in recent LexisNexis eNewsletter articles this year about the Oklahoma agency decision that ruled part of the opt out statute unconstitutional, and which is now on appeal. The Las Vegas conference included an informative, fast-paced session entitled “Opt-Out Lessons From Real Lone Star State Business Cases.” Moderated by Stuart D. Colburn, attorney in the Austin office of Downs Stanford, P.C., the expert panel also consisted of attorneys Joseph W. (“Joe”) Gagnon and A. Kevin Troutman, both with the Houston office of Fisher & Phillips, LLP.

Texas was the focal point of the discussion since the Lone Star state’s workers’ compensation system is seen by many as the opt out model to follow, particularly from the employer’s perspective. As the discussion got underway, Colburn reminded the audience that the purpose of the session was to review the Texas experience, not debate the pros and cons of opt out statutory schemes themselves. That debate had already taken place, at least to some extent, in a separate Las Vegas session held the day before.

Two Types of Texas Employers

Gagnon and Troutman stressed that with regard to workers’ compensation law in Texas, there are two basic categories of Texas employers:

> “Subscribers”—those employers that carry a traditional workers’ compensation policy covering employees [for further details, see Texas Workers’ Compensation Handbook (LexisNexis), and

> “Nonsubscribers”—those employers that have not purchased traditional workers’ compensation insurance coverage

That there can be such a differentiation is due to the fact that Texas is the only state that does not require employers to secure workers’ compensation coverage for employees. In that regard, all three speakers—Colburn, Gagnon and Troutman—told the audience that those who call Texas an “opt out” state are actually misspeaking: a Texas employer need not opt out of the standard, familiar workers’ compensation system. Those that want to be covered must actually “subscribe” or opt in. Those who do not want the benefits, limitations and responsibilities of the standard Texas workers’ compensation system need do nothing. Hence, they are referred to as nonsubscribers.

Two Types of Texas Nonsubscribers

Gagnon and Troutman noted that among nonsubscribers, there are two subgroups:

> Those employers that “go bare”; that is to say, who do not purchase workers’ compensation coverage and who also make no other arrangements to cover—even partially–injured employees; and

> Those employers who “favor” their employees with some sort of employee benefit plan providing some basket of medical and/or indemnity benefits.

Nonsubscribers May Not Interpose Exclusive Remedy Rule and Certain Common Law Defenses

The experts indicated that from their own perspectives, nonsubscribing employers in the second subgroup were “responsible,” whereas those that opted to “go bare” were not. The experts were quick to add that in Texas, both nonsubscribers who “go bare” and those who adopt benefit plans are subject to civil actions sounding in negligence; neither type of nonsubscribing employer may take advantage of the exclusive remedy provisions of the state’s Workers’ Compensation Law. Moreover, within any such civil action filed by an injured employee, the nonsubscribing employer may not utilize a number of common law defenses, such as contributory negligence, assumption of the risk, or co-employee negligence in causing the employee’s injury.

Vast Majority of Benefit Plans Quality Under ERISA

Prompted by a query from Colburn, Gagnon and Troutman indicated that the vast majority of employee benefit plans adopted by Texas nonsubscribers qualify under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA generally applies to all employee benefit plans. It ordinarily preempts state law and specifies the minimum features required to qualify under the federally-mandated system:

> A written plan;

> A Summary Plan Description (SPD)–a shortened (though still somewhat technical) summary of the plan’s provisions;

> An Annual Report;

> A Plan Administrator (who functions as a fiduciary for all plan participants);

> Distribution of the plan and SPD to all employees;

> Posting of various notices at the work site or sites.

Texas ERISA Plans Offer Advantages

The experts stressed that comparing such ERISA plan arrangements and those of a traditional insurance-funded workers’ compensation program is like comparing apples and oranges. The experts stressed that in spite of the up-front costs associated with the creation of any ERISA plan, in Texas the use of such a plan offers a high degree of customizable cost control, including:

> Higher legal standards

> Short time frames for injury reporting

> Special treatment protocols

> Limited indemnity benefits

> Exclusion of certain injuries from recovery altogether

Special Limitations in Typical Texas ERISA Plan

As to heightened legal standards, for example, the experts pointed out that a Texas ERISA plan could adopt a higher legal standard for causation, such as requiring the workplace accident to be the “major producing cause” or requiring the injury to flow “directly and solely” from the accident. They added that while the time frame for providing notice of injury under most statutory schemes is 30 days or longer, under most Texas ERISA plans, the time frame is considerably shorter. Some plans require it within 24 hours; others require it by the end of the shift or prior to the time the employee leaves the employment premises.

Texas ERISA plans also typically require special treatment protocols. For example, many plans call for the forfeiture of future benefits if the injured worker misses a medical appointment. Gagnon and Troutman stressed that most plans have “good faith” clauses that would save a worker from too arbitrary a forfeiture.

Under virtually all ERISA plans, the Plan selects the treating physicians. Gagnon and Troutman indicated this provision provided a high degree of control and was a true cost-saver. They also said many plans saved by capping either the time frame within which medical care would be provided or the amount of total medical coverage (or both).

Just as most Texas ERISA plans contain medical costs by carefully managing medical expenses, most Texas ERISA plans save employers through customizable indemnity benefits. For example, wage replacement may be capped by weeks or amount (or both). Most Texas plans do not provide for lifetime indemnity nor do they typically cover significant payment for permanency.

Other Customization in Texas ERISA Plans

Since workers’ compensation coverage is not compulsory in Texas, and since the nonsubscribing employer is not provided with the exclusive remedy defense, even it if provides some worker protections, the Texas employer is free to craft the ERISA plan in order that particularly troublesome conditions, such as repetitive trauma injuries, heart attacks and mental injury claims are excluded altogether. The plan can restrict recovery for employees with pre-existing conditions and can restrict or deny claims altogether if the employee has failed to follow set safety practices. As one might imagine, the experts indicated the level of attorney involvement from the claimants’ side was minimal when it came to ERISA plans.

Most ERISA Plans Require Arbitration of Negligence Claims Filed Against Nonsubscribing Employers

As mentioned above, the nonsubscribing employer does not enjoy the exclusive remedy defense. Texas courts have, however, allowed ERISA plans to contain binding arbitration clauses that prohibit an injured worker from litigating his or her negligence claim in state court. The Texas experts saw this as an important component of the Texas ERISA option. Substantial freedom is given the nonsubscribing employer in fashioning the arbitration mechanism. Plans can even require a sharing of arbitration costs, although the experts cautioned against drafting plans that were too onerous on injured employees. A court might then be tempted to find the provision improperly restrictive of the injured employee’s rights.

Suggested Takeaways From the Texas Experts

Gagnon and Troutman stressed that most Texas nonsubscribers following the ERISA plan option have been pleased with the overall performance of the plans. They point to reduced costs, both from a medical and an indemnity standpoint. They indicate the employer has a much greater level of control over medical care than under the standard state-run system. The speakers contended that under the ERISA arrangement, employers and employees tended to work together a little more directly than under the state system (in all candor, this point seemed somewhat inconsistent with the experts’ early statement that they only handled nonsubscriber ERISA plans and had little experience with claims processed through the state-run system).

They concluded by indicating that as is the case in many legal arrangements, the devil is in the details when it comes to ERISA plans. Any ambiguity within plan provisions is typically construed against the employer. Any Texas employer contemplating an ERISA plan should carefully consider the strengths and weaknesses of providing a plan. They should not be quickly adopted where the employer faced a significant risk of tort claims as a nonsubscriber. ERISA plans, said the experts, were an effective alternative for many Texas employers.

Can Lessons Learned in Texas Actually Be Applied Beyond the Borders of the Lone Star State?

At various intervals, Colburn, Gagnon and Troutman were careful to note that the discussion was quite “Texas-centric,” that what worked in Texas might not be easily translated into an opt out program in another state. I thought it particularly important that each indicated one of the reasons the Texas ERISA plan system seemed to work so well was that since the employers still faced tort liability, they all had an incentive to make plan provisions reasonable and not heavy-handed.

Of course, in the Oklahoma opt out arrangement, the opt out employer continues to enjoy the exclusive remedy defense just as it would if it were within the Oklahoma state-run system. Under the latest version of Tennessee’s opt out bill and under two of three bills introduced last year in South Carolina, the employer would continue to be exempt from suit in spite of the fact that it adopted an opt out arrangement and did not provide the type of insurance coverage required of other employers within the state. Does the Oklahoma (or South Carolina/Tennessee) opt out employer have an incentive, therefore, to be less reasonable from an employee-rights standpoint than its Texas neighbors to the south?

The Texas experts also pointed to the flexibility that is possible in Texas nonsubscriber plans. Again, that flexibility stems from the fact that workers’ compensation coverage is not required for Texas employers. Since a Texas employer need not provide any benefits at all, it can choose what level of benefits to include in the Texas ERISA plan. Such is not the case for Oklahoma employers. Such would not be the case under the proposed opt out arrangements in South Carolina and Tennessee.

As previously noted, the Texas experts provided a cogent overview of how things work in the Lone Star State. I’m not convinced that lessons learned there can easily be translated into similar performance and equity in other states.

Texas ERISA Plans Appear to Save Money for Nonsubscribing Employers

Since the Las Vegas conference, Stanford University law professor, Alison Morantz, has released an important paper describing the results of her examination of the impact of Texas nonsubscription on 15 large, multistate employers. Her conclusion: nonsubscription results in considerable cost savings for nonsubscribing employers [see Morantz, Alison D., “Rejecting the Grand Bargain: What Happens When Large Companies Opt Out of Workers’ Compensation? Social Science Research Network, March 18, 2016 (last revised, March 29, 2016, last accessed April 4, 2016 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2750134]. In fact, Professor Morantz suggests that employer costs per worker hour fell by about 44 percent among nonsubscribing employers.

Morantz points to a number of factors that may be driving the savings: e.g., non-coverage of permanent partial disabilities, categorical exclusion of many diseases and some non-traumatic injuries, capped benefits, and lack of chiropractic care. She posits, however, that data suggests that these features account for little of the estimated cost savings to employers. She acknowledges that limited medical provider choice and 24-hour reporting requirements—two features in virtually every Texas ERISA plan—could be important factors driving employer savings, but she indicates data limitations prevent her from assigning a positive or negative correlation to those factors.

Morantz also allows for the possibility that the cost “savings” enjoyed by the nonsubscribing employers might only result in cost shifting to others, particularly onto Medicare and Medicaid. Morantz cites, for example, a recent paper [Jordan, Jennifer C. "Opt Outs to Workers’ Compensation: The Real Disconnect in What Is Being Said and What Is Being Implemented, LexisNexis, January 22, 2016. Accessed on April 4, 2016, from https://www.lexisnexis.com/legalnewsroom/workers-compensation/b/recent-cases-news-trends-developments/archive/2016/01/22/opt-outs-to-workers-compensation-the-real-disconnect-in-what-is-being-said-and-what-is-being-implemented.aspx?Redirected=true] in which Ms. Jordan allows that the pendulum of “reforms” may have swung too far in favor of employers and that the result may be to undergird the “already escalating national discussion” about the federalization of workers’ compensation.

Texas ERISA Plans Save Money: “A Dog Bites Man Story”

One of the core points offered by opt out proponents at the Las Vegas conference was that Texas employers who adopt ERISA workers’ compensation nonsubscriber plans save money. That is also the essential takeaway from Professor Morantz’ paper. In her abstract, Morantz indicates that economic theory would lead one to expect just that: savings. With all due respect to opt out proponents and particularly to Professor Morantz, whose study is thorough and well reasoned, this is a dog bites man sort of story—i.e., just not newsworthy.

Texas employers need not provide any level of workers’ compensation benefits to their employees; they need do nothing at all with regard to coverage. Those who subscribe to the Texas state-run system must provide a relatively full gamut of medical and indemnity benefits. Those benefits cost money. They must allow an employee more than 24 hours within which to file his or her claim. They subject the covered employer to liability if it fires the injured worker for filing a claim (not so for a nonsubscribing employer).

If saving workers’ compensation costs is the goal of the Texas employer, there is an easier way to save even more than experienced under the ERISA plan scheme. Just do nothing. Don’t opt in, don’t craft an ERISA plan. Just “go bare.” Get some liability insurance to cover the potential tort liability (you are going to need it anyway if you adopt an ERISA plan). As Jordan eloquently points out, part of the appeal of the ERISA plan is that if offers a mirage: that the employer is actually invested in the life of the injured worker. Going bare, there is no such allusion, but it is, at least in my mind, a more straightforward position.

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