In recent years there has been an increased focus on employer-provided, paid sick leave benefits. Certain politicians in this current election cycle have pointed out on numerous occasions that the United States is one of the few developed countries that lack a national leave law requiring employers to provide paid sick leave to their employees. While President Obama has taken executive action to encourage paid sick leave benefits and has called on Congress to pass federal legislation, it is unclear whether Congress will pass federal sick leave legislation in the near future.

In the absence of federal action, five states, 27 cities and one county have passed local sick leave laws. The types of employees covered, waiting periods, maximum leave permitted and rate at which leave accrues differs greatly among the various laws. This patchwork of state and local leave laws creates challenges for employers whose employee populations span across these jurisdictions. With the potential for additional state and local paid sick leave laws, the challenge of complying with the multitude of laws is only going to get harder.

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Terry A. Lang Jr.

Employers interested in simplifying their obligation to provide sick leave benefits may wonder whether they can use an ERISA plan to preempt the state and local sick leave laws. While the idea of using ERISA to preempt state and local laws sounds promising, as discussed below, relying on ERISA for preemption will not guarantee that result.

Does ERISA preempt sick leave laws?

ERISA preempts any and all state laws that “relate to” any employee benefit plan, unless the plan is specifically exempted from ERISA. An “employee benefit plan” includes both welfare benefit plans and pension benefit plans. An employee welfare benefit plan includes any plan, fund or program established or maintained by an employer (or an employee organization or both) to provide benefits such as medical, dental, disability, vacation and sickness benefits. Thus, at a distance, the strategy of relying on ERISA preemption appears straightforward: plans sponsored by an employer to provide sickness benefits fall within ERISA and ERISA preempts state laws that relate to such plans. However, the analysis does not end here.

Is the sick leave program an ERISA plan or non-ERISA covered payroll practice?

A benefits program, including a sick leave plan, that pays an employee’s normal compensation, or less, out of the employer’s general assets while the employee is physically or mentally unable to perform his/her duties or is otherwise absent for medical reasons is not an employee welfare benefit plan for purposes of ERISA. Such a program is instead a “payroll practice,” which is not subject to ERISA and cannot claim preemption of state or local laws.

What if the sick leave payments are paid from a separate trust fund?

Some courts have determined that a sick leave plan funded by a separate trust will not be an ERISA plan — and cannot take advantage of ERISA preemption — where the trust is not ultimately liable for the payment of the benefits.

In Alaska Airlines v. Oregon Bureau of Labor, a 1997 case out of the Ninth Circuit, an airline established a trust, separate from its general assets, in which it held the funds related to its sick leave benefits. When an employee took paid sick leave, the airline would pay the employee directly through its payroll and would obtain reimbursement from the trust. The Ninth Circuit ruled that Alaska Airlines’ sick leave plan was not an ERISA plan (and did not qualify for ERISA preemption) because, under the arrangement between the company and the trust, the company was ultimately responsible to pay the sick leave benefits to the employees. While the trust held funds for the payment of the sick leave benefits, the court determined the trust itself was merely a pass through funding vehicle and had no obligation to pay the benefits to the employees.

Similarly, in Airline Pilots Association International v. United Airlines, a more recent case from 2014, United Airlines funded its sick leave benefits through a separate trust. However, United retained a reversionary interest in the trust’s funds such that it was accessible by United’s creditors. The court held that because the risk of employees receiving their sick leave benefits was tied to the financial health of United, and not the trust, the trust was not established in a manner consistent with ERISA and preemption of California’s Kin Care Law was not available.

What if the sick leave benefits are funded by a separate, actuarially determined trust, which is liable for the payment of benefits?

Even if an employer implements a sick leave plan that is funded through a separate, actuarially determined trust, ERISA preemption may still not be available.

In Shaw v. Delta Airlines, a 1983 case, Delta adopted a disability benefits plan that provided benefits to its employees different from those required under a New York state disability benefits law. Delta asserted that New York’s disability benefits law was preempted by ERISA and therefore Delta was not required to comply with it. The Supreme Court ruled that Congress did not intend to shield employers from all state-mandated benefits laws through the adoption of an ERISA plan. On the contrary, the court noted that states are free to give employers flexibility in providing state-mandated benefits as part of a multibenefit ERISA plan. Permitting employers to have that flexibility, however, does not mean that the state law is then made unenforceable by ERISA.

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Similarly, in Golden Gate Restaurant Association v. City and County of San Francisco, in 2008 the Ninth Circuit ruled that a local ordinance establishing minimum healthcare spending requirements was not preempted by ERISA because it did not require employers to establish or modify an ERISA plan. The court found that employers had a meaningful alternative to establishing or modifying an ERISA plan; employers could make the required payments directly to the city and county.

Despite the challenges that employers face in complying with the patchwork of state and local sick leave plans, adoption of an ERISA plan to provide sick leave benefits does not provide a guaranteed method of preemption of state and local sick leave laws. Therefore, unless Congress takes action to pass federal sick leave legislation that specifically preempts state and local requirements, employers should ensure the sick leave benefits they are providing conform to the laws in which their employees are located.

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