About a month ago, the Ninth Circuit issued its troubling Alaska Airlines, Inc. v. Oregon Bureau of Labor decision, (See Footnote 1.) holding that Alaska Airlines' funded paid leave plan was not subject to the Employee Retirement Income Security Act of 1974 (ERISA). ERISA coverage was at issue because Alaska Airlines was asserting that ERISA preemption precluded an Oregon sick pay law from applying to its funded paid leave plan.
Apart from the irrelevant fact that the Alaska Airlines' plan did not provide vacation pay, only sick pay, that plan and its mode of funding and operation appear indistinguishable from the paid leave plans of many other employers that are funded through trusts. This means that the Alaska Airlines decision poses a grave threat to such plans, at least throughout the western United States (i.e.,within the Ninth Circuit's jurisdiction): Without ERISA coverage, ERISA cannot shield paid leave benefits from state laws, such as California's vacation pay accrual and vesting law.
This Alert describes the Alaska Airlines decision and recommends steps employers should consider taking at the earliest possible time to minimize the possible impact of Alaska Airlines on their funded paid leave plans. If your company does not have a funded paid leave plan that purports to be covered by ERISA, you need read no further.
Alaska Airlines apparently established its paid leave plan for tax reasons (See Footnote 2.) and not, as some employers have done, to secure ERISA protection from state laws. Like many other employers with funded paid leave plans, "Alaska Airlines pays the benefits directly to employees from its general funds, and then seeks reimbursement from the trust." (See Footnote 3.)
Also like many employers that maintain funded paid leave plans, Alaska Airlines funds its trust in a discretionary manner:
"At the end of each fiscal year, Alaska Airlines partially 'prefunds' the trust, to the extent that the IRS allows, in order to shift tax deductions from one year to the next. The airline also periodically transfers monies to the trust throughout the year. The airline then immediately begins removing that money on a monthly basis as reimbursement for the employee benefits that the airline pays. . . . The trust's monthly balance therefore fluctuates greatly, but over time does not tend to increase. The airline's payments from its general assets for employee benefits have at times exceeded the trust fund's balance, and the fund sometimes contains less than $1,000." (See Footnote 4.)
The court first focused on whether the use of Alaska Airlines' payroll system as payment agent for the trust precluded ERISA coverage. By way of background, ERISA generally covers private employers' paid leave plans, but only if the Department of Labor's payroll practice regulation does not exempt them from ERISA coverage. This regulation exempts from ERISA coverage the payment of normal compensation out of the employer's general assets while an employee is on a paid leave.
Thus, the first key holding in Alaska Airlines was that, notwithstanding the existence of the paid leave trust, the payment agency arrangement itself precluded ERISA coverage by paying paid leave benefits out of the employer's general assets: "Alaska Airlines pays the employee directly, and it draws from its general assets to do so. It is not transmitting funds the trust has given it to pay the employee. It is paying first and seeking reimbursement later. Its payment, from general assets, qualifies as a payroll practice under the plain words of the regulation." (See Footnote 5.) The court's underlying rationale was that:
"the substance of the airline's procedure is not necessarily one of a funded benefit program. There is no clear relation between the amount of funds in the trust and sick leave liability accrued by the airline's employees. When, as is sometimes the case, the trust's assets are as low as $1,000, the airline is free to advance many times that amount in sick leave payments. It can then make a large 'payment' to the trust which in turn, is offset by its 'reimbursement,' with a net cash flow of zero into or out of the trust. Under this scenario, the employee is relying on the financial health of Alaska Airlines, not that of the trust, for his or her regular sick leave payments." (See Footnote 6.)
The Ninth Circuit panel clearly was influenced by its conclusion that "the fund is not maintained in a manner designed to protect employee sick pay benefits." (See Footnote 7.) The court further noted that:
"Under the repayment agreement, the airline's employees would still receive their benefits if the trust fund were mismanaged or held no assets, but they might not receive their benefits if the airline itself became insolvent. They depend on their employer for sick pay in the same way that they depend on it for wages." (See Footnote 8.)
For support, the court cited the only other reported decision to address ERISA coverage of funded paid leave plans, Czechowski v. Tandy Corp., (See Footnote 9.) in which a sham paid leave trust was disregarded for ERISA coverage determination purposes. Seemingly, the Ninth Circuit regarded the sham paid leave trust in Czechowski as indistinguishable from Alaska Airlines' paid leave trust:
"We recognize that the fund in Czechowski never contained more than $1,000 and that the Alaska Airlines trust fund at times contained millions of dollars. In both cases, however, the trust funds held assets only briefly, without consistent relation to accruing liability for benefits, and for the purpose of reimbursing the employer for payments made. In both cases, the degree of risk to the employees depended on the financial health of the employer, not the fund." (See Footnote 10.)
Because Alaska Airlines' paid leave plan so closely resembles many other employers' paid leave plans, there is a very real chance that Alaska Airlines will jeopardize their plans' ERISA coverage and even trigger plaintiff attacks on them. To preserve ERISA coverage, some or, preferably, all of the following steps should be taken promptly:
- Have the trust pay benefits directly. This change in payroll procedures will likely be inconvenient, but it is the best thing an employer can do to preserve ERISA coverage for its paid leave plan.
- Fund the trust in a more defensible fashion. If an employer funds its paid leave trust so that it always has assets roughly equivalent to its outstanding paid leave benefit liabilities, the trust would have a benefit security justification. Such funding, especially coupled with a provision that precludes paid leave benefits from being payable except to the extent funded, may by itself be sufficient to secure ERISA coverage, thereby permitting the employer to continue to act as payment agent for the trust. Unfortunately, tax and other financial considerations may make this type of funding unattractive.
- Merge the paid leave plan with other ERISA plans. An omnibus, funded ERISA welfare plan may be harder to attack than a stand-alone paid leave plan. (See Footnote 11.)
These measures, however, will do little or nothing to secure ERISA coverage retroactively. With respect to the past, the best defense an employer may have to an Alaska Airlines-type attack in the Ninth Circuit will be to argue that its plan's funding was much more substantial than the Alaska Airlines' plan's funding.
1/ 1997 U.S. App. LEXIS 21482 (9th Cir. 1997). return
9/ 731 F. Supp. 406 (N.D. Cal. 1990). return
10/ 1997 U.S. App. LEXIS 21482, at *11 (citations omitted). This suggests that the Alaska Airlines' trust may have been a sham that held assets only briefly. However, little else in the decision suggests that the Alaska Airlines' trust was a sham or dry trust, as was the trust in Czechowski. return
11/ But see Kemp v. IBM, 109 F.3d 708, 20 EB Cases 2814 (11th Cir. 1997) (holding that a non-ERISA benefit -- education expense reimbursements -- did not become an ERISA benefit by being included in an ERISA-covered plan). return