The Impact of ERISA on the Massachusetts Paid Family and Medical Leave Law
Massachusetts Paid Family and Medical Leave, M.G.L c. 175M (“MAPFML”) establishes a system of paid leave of up to 12 weeks for birth, adoption or foster care, 12 weeks to care for a family member, 20 weeks for an employee’s own illness, and 26 weeks to care for a covered service member. MAPFML benefits are funded through employer and, if an employer chooses, employee contributions to a program operated by the Massachusetts Department of Family and Medical Leave (the “DFML”). MAPFML also includes an alternative funding mechanism, which is referred to as the “private plan exemption.” Under the private plan exemption, employers may choose to provide benefits under an employer-sponsored plan, program or arrangement that has been approved in advance by the DFML rather than pay into the DFML’s government-sponsored program.
The Employee Retirement and Income Security Act of 1974 (“ERISA”) is the federal law that broadly governs, and for the most part preempts or renders inoperative, most state laws governing employee benefit plans. In instances in which paid leave laws are governed by ERISA, there are a handful of statutory and regulatory exemptions that may apply. Some paid leave laws qualify under these exemptions, other do not. This post examines the impact of ERISA on the MAPFML.
The MAPFML
Beginning October 1, 2019, the MAPFML requires employers to either deduct amounts from employees’ wages or from payments to independent contractors (if required), or otherwise subsidize contributions that fund the new benefits. Deductions from wages or employer subsidy payments must be deposited quarterly with the DFML using the Department of Revenue's MassTaxConnect system beginning in January 2020. Employers must also notify workers about the program. These requirements, which we outline at length in our earlier posts (here and here), include identifying covered individuals, quarterly reporting, collecting payroll deductions, making payments to the Commonwealth (sometimes out of the employer’s own assets) and providing written notices to covered individual. The tax that pays for it begins in 2019 and leave will be available beginning in 2021.
The MAPFML is comprised of two component benefits—family leave and medical leave, both of which are presumptively paid out of a fund maintained by the DFML. An employer may, however, be excused from having to collect and remit MAPFML contributions under a “private plan exemption.” Among other requirements, to qualify for this exemption:
- Benefits offered to employees under the private plan must be greater than or equal to the benefits provided by MAPFML; and
- Employers must submit the plan (under and through the employer’s MassTaxConnect account) to the DFML for approval.
The Employee Retirement Income Security Act (ERISA)
ERISA comprehensively regulates employee benefit plans, including health, disability and other welfare benefits, and pension plans and programs. Welfare plans generally include:
[A]ny plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, [ ] medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability [ ].” (Emphasis added).
Benefits provided under paid family and medical leave laws typically provide the sort of benefits that fit within the definition of “welfare” plan for purposes of ERISA.
Where ERISA applies to a benefit plan, program or arrangements, there must among other things be a plan document and summary plan description, reporting is required (i.e., an annual Form 5500), and the ERISA fiduciary standards would apply. This latter requirement imposes on those with discretionary authority over the plan a duty to act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to the plan participants; to carry out their duties prudently; follow the plan documents (unless inconsistent with ERISA); and pay only reasonable plan expenses.
ERISA section 514 preempts or renders void all state laws that relate to employee benefit plans. The Supreme Court has interpreted the preemption clause broadly to further the congressional objective of national uniformity in rules for employee benefits programs. The text of ERISA’s preemption clause says that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” This provision makes ERISA the sole source of rules governing the maintenance and operation of employee benefit plans by preempting, or rendering inoperative, all state laws relating to such plans. (ERISA does, however, include an exception under which state laws regulating insurance, banking, and securities are saved from preemption.)
ERISA section 514(b) states the general rule, with certain exceptions: “[T]he provisions of this title and Title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) and not exempt under section 4(b).” ERISA section 4(b) identifies a handful of limited exceptions, which include (ERISA section 4(b)(3)) plans “maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws.” For ERISA to apply to a state’s paid family and medical leave law, the law must first require the establishment of a “plan.” And where a state law does require the establishment of a plan, ERISA may not apply by virtue of regulatory safe harbors for certain payroll practices and voluntary benefits.
MPFMLA as an ERISA-Regulated Welfare Plan
Paid family and medical leave laws are becoming commonplace. Typically, these laws establish a state-operated program that is funded with contributions from employers. The California paid leave law, for example, provides (among other things) up to six weeks of partial pay to employees who need to take time off work to care for a seriously ill child, parent, parent-in-law, grandparent, grandchild, sibling, spouse, or registered domestic partner. The threshold question that any paid leave law presents is whether the law establishes an ERISA-covered plan. The controlling precedent on this score is Fort Halifax Packing Co., Inc. v. Coyne, which involved a Maine statute requiring employers to provide a one-time severance payment to employees in the event of a plant closing. The statute generally required employers that terminated operations to provide one week’s pay for each year of employment to all employees with at least three years’ job tenure. At issue was whether the statute required the employer to “establish or maintain” a state-mandated employee welfare benefit plan. The Supreme Court determined that it did not, based on the absence of “an ongoing administrative program to meet the employer’s obligation.”
In contrast to the Maine law in issue in Fort Halifax Packing Co., the MPFMLA appears to require an ongoing administrative scheme. Someone must determine who is eligible for the benefit, whether the employee satisfies plan requirements for taking paid leave, how much leave has accrued, how much leave has been taken, and how the benefit will be calculated. So, it appears to us that the benefit program mandated by the MPFMLA requires the establishment of a plan that is subject to ERISA unless some other exemption applies.
In general, any welfare plan that is funded at least in part by employee contributions is subject to ERISA. Arrangements that are funded entirely with employer contributions are also funded for ERISA purposes where assets are irrevocably set aside for the purpose of paying benefits. The extent to which the MPFMLA requires an arrangement to be funded is not yet clear. There is speculation that the final MPFMLA regulations might require that contributions be segregated in some manner, which may or may not rise to the level of funding. If funding required contributions to a trust, then the arrangement would be funded, in which case the arrangement would appear be subject to ERISA.
ERISA Payroll Practices
The ERISA “payroll practice” exemption (29 C.F.R. § 2510.3-1(b)(2)) applies to;
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. (Emphasis added).
To qualify for this safe harbor, the arrangement must be unfunded, i.e., benefits must be paid out of an employer’s general assets. Employee contributions are treated as plan assets, which generally must be held in trust, i.e., funded, in which case the safe harbor would be unavailable and ERISA the arrangement would be subject to ERISA.
Voluntary benefits
Most employee benefit plans offered through private sector employers are subject to ERISA. There is, however, a safe harbor for certain voluntary plans (under 29 CFR § 2510.3-1(j)). A “voluntary benefit” safe harbor that applies to benefits sold directly to employees where (i) the employer makes no contributions, (ii) participation is completely voluntary, (iii) the employer’s involvement is limited to permitting the insurer to publicize the program and to collecting and remitting premiums, and (iv) the employer receives no consideration for collecting and remitting premiums, other than reasonable compensation.
This exemption appears unavailable on its face, since the employer must make some contribution under the MAPFML.
Plans maintained solely for the purpose of complying with applicable workmen’s compensation laws, etc.
ERISA section 4(b) describes certain types of plans that otherwise would be covered by Title I, but that are specifically exempt from coverage. Among the types of employee benefit plans exempted by section 4(b) are those “maintained solely for the purpose of complying with applicable workmen’s compensation laws or unemployment compensation or disability insurance laws.”
In Advisory Opinion 97-21A, the DOL responded to a request concerning the applicability of ERISA to a disability benefit program maintained by an educational consortium. The plan in this instance provided both state-mandated disability income benefits and additional disability benefits to cover the first seven days of disability due to accident, which were not required in order to comply with New Jersey law. The DOL opined that, because a plan provides benefits that are not required for compliance with the New Jersey disability insurance law, that plan was not “maintained solely for the purpose of complying with” such law. The holding in Advisory Opinion 97-21A would appear to undercut any attempt to apply ERISA section 4(b) to the MAPFML, since that law provides benefits that are not required for compliance with a state disability insurance law, i.e., an arrangement adopted for the purpose of complying with the MAPFML is not “maintained solely for the purpose of complying with a state disability law.”
ERISA section 514(d)—Is there a “Federal Exemption?"
In Ad. Op. 2005-13A, the Department of Labor held that ERISA does not preempt the application of certain leave substitution provisions in the Washington State Family Care Act (Family Care Act) to the Northwest Airlines, Inc. Sick and Occupational Injury Leave Plan for Employees. The Family Care Act generally provides that employees entitled to sick leave or other paid time off may use their paid time off to care for certain relatives of the employee who have health conditions or emergency conditions. The DOL reached this result circuitously, starting not with ERISA but by looking to the federal Family and Medical Leave Act (FMLA). Citing FMLA legislative history, the DOL determined preemption would “impair” the FMLA under ERISA section 514(d). (ERISA section 514(d) provides that: “[n]othing in this title shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States . . . or any rule or regulation issued under any such law.”) Thus, said the DOL, the Wisconsin law, which is more generous than FMLA is saved from preemption by ERISA.
The DOL buttressed its holding in Ad. Op. 2005-13A by citing the FMLA’s legislative history in the form of colloquy on the Senate floor between the FMLA’s chief sponsor, Senator Dodd, and Wisconsin Senators Feingold and Kohl:
Mr. Feingold.
A few years ago a Wisconsin administrative law judge concluded that the provision of the Wisconsin FMLA enabling employees to substitute accrued paid leave for unpaid family leave was preempted by ERISA to the extent it impacted an employer's ERISA plan that paid out sick leave. Is it the intent of the sponsors of this bill that the provisions of the Employee Retirement Income Security Act of 1974, as amended, shall not prevent the substitution of accrued paid leave, regardless of the source of funding for the paid leave?
Mr. Dodd.
Yes. This Federal legislation provides that either an employer or an employee may elect to substitute accrued paid leave for unpaid family and medical leave, although the scope of an employee's rights in that regard are more generous under the Wisconsin law. The provisions of this Federal Family and Medical Leave Act are intended to supersede ERISA and any Federal law. The authors of this legislation intend to prevent ERISA and any other Federal law from undercutting the family and medical leave laws of States that currently allow the provision of substitution of accrued paid leave for unpaid family leave, regardless of the nature of the family leave, so long as those State law provisions are at least as generous as those of this Federal legislation. Certainly, if Wisconsin law allows either an employer or an employee to substitute accrued paid leave to care for a newly born or adopted child on terms at least as generous as in this legislation, it is our intent that no Federal law prevent Wisconsin law from making this allowance. (139 Cong. Rec. 2254 (Feb. 4, 1993)).
The reasoning of Ad. Op. 2005-13A seems at the same time both compelling and circuitous. Stated as a categorical syllogism, the DOL starts with an indisputable major premise, i.e., ERISA does not preempt other Federal law; adopts a perhaps less than indisputable minor premise, i.e., the Family and Medical Leave Act is protected by another Federal law; and thereupon concludes that the state law is saved. Can a state law that is protected by the Federal FMLA be saved from preemption under ERISA’s Federal Exemption? The Sixth Circuit Court of Appeals thought not.
In Sherfel, et al. v. Newson, et al, 768 F.3d 561 (2014), which also involved the Wisconsin Family and Medical Leave Act, the Sixth Circuit determined that ERISA section 514(d) saves only Federal, and not state, laws from preemption. The court also pointed out that FMLA did not mandate the substitution of employer-provided leave benefits the way the Wisconsin Act does. The Court was unable to see how federal law would be impaired by preempting a state law prohibiting conduct that federal law permitted. The Court was particularly dismissive of arguments based on legislative history, which the Court viewed is not relevant since “the FMLA actually recites its purposes—and this one [saving a state law] is not among them.” It was also unimpressed with the above cited colloquy, saying:
Colloquies of this sort get inserted into the Congressional Record all the time, usually at the request of a lobbyist; and here virtually the same colloquy, with verbatim much of the same stilted phrasing, appeared in the Congressional Record two years before, in connection with a predecessor bill that the President vetoed. See 137 Cong. Rec. 25,019-20 (1991). . . . [O]ne can reasonably conclude, at most, that the Wisconsin Senators sought to protect their State's Act from preemption by ERISA, and that Senator Dodd was willing to oblige by lending his name to the colloquy—though not, apparently, by amending the FMLA to that effect.
Harsh, to be sure, and unwarranted in our view. Paid family and medical leave laws don’t fit neatly into the ERISA statutory and regulatory scheme. Are the rights that ERISA establishes for the benefit of plan participants and beneficiaries in pension and welfare plans the same rights that paid family and medical leave laws seek to protect? The Department of Labor, the Federal agency with primary interpretational jurisdiction over ERISA thinks not. We are inclined to agree.
Conclusion
If not well-settled law, then there at least appears to be broad consensus that garden-variety state and local paid family and medical leave laws should not be preempted by ERISA. This consensus, if it even exists, rests on less than solid footing, however. As these laws continue to proliferate, challenges are inevitable.
Because Massachusetts is in the First rather than the Sixth Judicial Circuit, we are inclined to follow the lead of the Department of Labor. Provisionally at least, we are of the view that employers subject to the MAPFML should not be faulted for failing to conform their programs to ERISA. We express this view with some trepidation, however. The question of the extent to which, if any, state paid leave laws are preempted by ERISA is best described as an “emerging” area of the law.
