This article has been published in "The Advocate", a monthly publication of the Arizona Association for Justice/Arizona Trial Lawyers Association, June 2010 issue, @2010 by Steven J. Bruzonsky, Esq.
ERISA LIENS : "THE "PAYROLL PRACTICE" EXEMPTION
We already know that if an employer pays a premium and purchases traditional premium based health insurance, that ERISA preemption is inapplicable and our Arizona anti-subrogation caselaw applies. The same is true if an employer pays a premium and purchases short or long term disability insurance.
How about when the employer self-pays short and/or long term disability income benefits to employee? Bassin v. Xerox Corp., 463 F.3d 927 (9th Cir. 2006) is instructive in answering this question.
In Bassin, supra, a former Xerox employee sued Xerox for a remedy under ERISA as the Xerox plan was an "employee welfare benefit plan" under section 3(1) of ERISA, and also for breach of contract, fraud and negligent misrepresentation under state law as Xerox's plan was a "payroll practice" exempt from ERISA. The District Court dismissed the state law claims as preempted by ERISA, rejecting the contention that the plan was a "payroll practice" exempt from ERISA because it concluded that the plan did not pay "normal compensation" under 29 C.F.R. § 2510.3-1(b)(2). In this case, the plan paid full salary for Bassiri's short term disability over the first five months, 60% of normal salary for the next twenty four months, and any remaining disability period would be covered under the extended Prudential policy. Under the plan, the disability payments lasted only as long as the recipient was a full-time permanent employee of Xerox. The Ninth Circuit reversed and remanded the lower court's dismissal on the basis that the disability payments may fall within the scope of the "payroll practice" exemption to ERISA.
The Ninth Circuit discussed the "payroll practice" exemption to ERISA in detail. A "payroll practice" includes: "Payment of an employee's normal compensation, out of the employer's general assets, on account of periods of time during which the employee is physically or mentally unable to perform his or her duties, or is otherwise absent for medical reasons (such as pregnancy, a physical examination or psychiatric treatment) - - - " According to the preamble to the regulation, such plans are exempted from coverage under ERISA because they are more closely associated with normal wages or salary. The Ninth Circuiit noted that since 1979, the Department of Labor has penned eleven opinion letters advising that the respective employer programs are "payroll practices" because they pay "not more than normal compensation", and that as the Department of Labor "interpreted its own regulation, even through an informal process, its interpretation of an ambiguous statute is controlling unless â€˜plainly erroneous or inconsistent with the regulation'." . Employer programs which constitute "payroll practices" in these opinion letters included one program paying 65% of regular salary; and other programs which paid "a significant portion of an employer's normal compensation" but which no more than "one hundred percent of regular salary". The Ninth Circuit stated that "under the interpretation of the Department of Labor, payment of 60% of an employee's regular salary may constitute â€˜normal compensation'." The Ninth Circuit deferred to the Department of Labor's interpretation and found that Xerox's plan may qualify as an exempt payroll practice under 29 C.F.R. § 2510.3-1(b)(2) even though it pays less than an employee's full salary, especially since the payments come in regular paychecks, in an amount tied to the employee's salary and not to the variable performance of a fund; and like salary, the benefits end upon termination of employment.