Amicus Curiae Brief — California Hospital Ass'n v. Henning

7. [wan ED Ff

“4 MAY 30 1986

No. 85-1648

In the Supreme Court of the Gnited States

OCTOBER TERM, 1985

CALIFORNIA HOSPITAL ASSOCIATION,

ET AL., PETITIONERS

Vv.

PATRICK W. HENNING, LABOR COMMISSIONER,

DEPARTMENT OF INDUSTRIAL RELATIONS,

STATE OF CALIFORNIA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION FOR THE

UNITED STATES AS AMICUS CURIAE

CHARLES FRIED

Solicitor General

CAROLYN B. KUHL

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

GEORGE R. SALEM

Deputy Solicitor of Labor

ALLEN H,. FELDMAN

Associate Solicitor .

BETTE J. BRIGGS °

Attorney

Department of Labor

Washington, D.C. 20210

Le RY AOC OE EEF EOE PEL I LSNALEES OMT TEINELE TE EID AE: TERE A

QUESTION PRESENTED

Whether the Department of Labor’s “payroll practices”

regulation, which defines the term “employee welfare

benefit plan” in the Employee Retirement Income Security

Act of 1974 (ERISA), 29 U.S.C. (& Supp. II) 1001 et seq.,

to exclude arrangements for granting employees paid

vacation leave out of an employers’ general assets, is a per-

missible construction of the statute.

(I)

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Abelia v. W.A. Foote Memorial Hospital, Inc., 557 F.

a 9, 14, 15

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 ...... 12

Barry v. Dymo Graphic Systems, Inc., 394 Mass. 830, 478

Le eee they ease ew kbaces sex ks 14, 15

Biakeman v. Mead Containers, 779 F.2d 1146 .......... 14

Chevron U.S.A. Inc. v. Natural Resources Defense

ee cove cs Sead Ch wk an sae ene cee s 6

Delta Air Lines, Inc. v. Kramarsky, 650 F.2d 1287, modi-

fied, 666 F.2d 21, aff'd in part and rev’d in part sub

nom. Shaw v. Delta Air Lines, Inc., 463 U.S. 85 ...... 13

Donovan v. Dillingham, 688 F.2d 1367 ..... Sia ea ewes 8, 15

Franchise Tax Board v. Construction Laborers Vacation

RE ar a ee 8

Gilbert v. Burlington Industries, Inc., 765 F.2d 320 ...... 8,9

Holland v. Burlington Industries, Inc., 772 F.2d 1140.... 8,9

Holland v. National Steel Corp., No. 83-0033-W(M)

ey OU cas aces n aw vevebaves> 15

James v. T.G. & Y. Stores Co., No. 85-0113 (W.D. La.

eee eae a's kb Ke RRR SO 15

Massachusetts Mutual Life Insurance Co. v. Russell, No.

Is a dan 6 4 Wise sa 6k d Aad San One OO 13

Nachman Corp. v. Pension Benefit Guaranty Corp., 446

RE TORTIE a age ey UR ak rene rae ee 7

National Metalcrafters v. McNeil, 602 F.Supp. 232, aff,

Es ern ot ring eae, gh a a oS 15

Richardson v. St. Mary Hospital, 6 Kan. App.2d 238, 627.

LL eg ag ee 15

moor ¥. Coes CO Corp, 795 F.20 1GOD . wc cece eae 9

Shaw v. Delta Air Lines, Inc., 463 U.S.85...... arte 12, 13, 14

Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774, 647 P.2d

rr eh yards haa eben bss ee ene esses 2

IV

Page

Statutes and regulation:

Employee Retirement Income Security Act of 1974, 29

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ee Re ES 6 ate ho hs 60k kee Re daWaak eo eoees 5

a ME an 6 his aks senda becuse kee eases ~ 10

as SE os oc La Ven chads eetenceaes 10

BP ices. PUD oo iv 6k vane be ewes Wweenee “ 10

PE et ees Gis ereew edhe’ oo 10

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ee I kt Ue Saaags Garena weiss 10

EE oie ba Car sccuk ek oaeeeeaes 10

eR EE keen CE cd han koe coe kek wR 6

rp BRS Cp Pree 3

Labor-Management Relations Act, 1947:

Ae Ann WEE OD DUDE no ccs cewnessuseucnvs 5

SE ona sac Geek bac ce kseda Renee ees

eR TS Socieo «he Cok Mk ea ode eG eek 11

ae EE cess dcle edie thee alee ene

Cal. Lab. Code § 227.3 (West Supp. 1986) .............

29 C.F.R.:

OE yn acc cws bcsue Geek ced awaaee ca 1, 3,6

SE: BIE 3 os eck vce eee khedeewasdene 13

Sn Se EE ic ol skewed ba kode bea es 6

SENT, ZOOM MMIID ois oea snc vcccecescinccccs 9

Miscellaneous:

SOC E, TOE. TP RUDOD oven veer scccewuvesneeeas 7

120 Cong. Rec. (1974):

i; Pe oe Okc GS a caw GRRE R EMU ARE LOS 7

i ole. ovine a re eeu eee nada bake tana 7

a —"

Miscellaneous — Continued: | Page

40 Fed. Reg. (1975):

CSRS err? ere eye ee. cee ec 6

Se) AP roerrr ny erry vere rr Trek reese 6

IRS Private Let. Rul. 8335087 (June 1, 1983) ........... 11.

1 Legislative History of the Employee Retirement Income

Security Act of 1974 (Comm. Print 1976):

et eee reer rere eee a 7

Private Welfare and Pension Plan Legislation: Hearings

on H.R. 1045, H.R. 1046, and H.R. 16462 Before the

General Subcomm. on Labor of the House Comm. on

Education and Labor, 91st Cong., Ist & 2d Sess.

CODED n.d Kd eddie rc dee hese ee Peewee ont ue eees es 7

me Se So Ce ee: ae 11

S. Rep. 93-127, 93d Cong., Ist Sess. (1973) ............. 7

In the Supreme Court of the Anited States

OCTOBER TERM, 1985

No. 85-1648

CALIFORNIA HOSPITAL ASSOCIATION,

ET AL., PETITIONERS

Vv.

PATRICK W. HENNING, LABOR COMMISSIONER,

DEPARTMENT OF INDUSTRIAL RELATIONS,

STATE OF CALIFORNIA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF IN OPPOSITION FOR THE

UNITED STATES AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This case concerns the validity of a Department of

Labor regulation defining the scope of coverage of Title I

of the Employee Retirement Income Security Act of 1974

(ERISA), 29 U.S.C. (& Supp. II) 1001 et seg. The regula-

tion (29 C.F.R. 2510.3-1(b)), identifies certain “payroll

practices,” such as paid vacation, holiday, and sick leave,

as outside the scope of “employee welfare benefit plans”

covered by the statute. The district court in this case con-

cluded that the payroll practices regulation is invalid. The

Department of Labor participated as an amicus curiae in

the court of appeals, which reversed the decision of the

district court and upheld the Department’s construction of

ERISA as inapplicable to routine vacation leave ar-

rangements. Since the Secretary of Labor is-charged with

enforcing the reporting and disclosure and the fiduciary

obligations that Title I of ERISA imposes on employee

(1)

2

benefit plans covered by the Act, he has a substantial in-

terest in the interpretation of ERISA’s coverage and

definitional provisions. The Secretary also has a substan-

tial interest in defending the interpretation and application

of the Department’s regulation in this case.

STATEMENT

1. California, by statute, requires that when an in-

dividual’s employment terminates before the employee has

taken paid vacation leave provided under an employer

policy, “all vested vacation shall be paid * * * as wages at

[the employee’s] final rate” (Cal. Lab. Code § 227.3 (West

Supp. 1986)). The statute forbids the forfeiture of vested

vacation time upon termination of employment. /bid.

Construing these provisions, the California Supreme

Court has held that a proportionate right to paid vacation

“vests” as labor is rendered. See Suastez v. Plastic Dress-

Up Co., 31 Cal. 3d 774, 647 P.2d 122, 183 Cal. Rptr. 846

(1982). Respondent, the California Labor Commissioner,

is responsible for administering the state vacation wage

law. In September 1982, he issued a policy memoranduia

explaining that under the statute, as interpreted in Suastez,

“an employee who is terminated or who terminates before

an eligibility date for vacation pay, is entitled to pro rata

vacation pay for time served up to the date of termination”

(Pet. App. Gl-G2).

Petitioners — various California trade associations — and

many of their employer members have established vaca-

tion leave policies that provide for the payment of com-

pensation out o; the employers’ general assets while

employees are On vacation. Contrary to California law,

however, the policies forbid payment of prorated vacation

pay and require the forfeiture of vacation pay ac-

cumulated by employees who are not actively employed on

a specified eligibility date, typically the anniversary of hire

(Pet. App. B2).

3

2. Petitioners brought suit in the United States District

Court for the Central District of California seeking to en-

join the California Labor Commissioner from enforcing

the state law against the Associations and their members.

Arguing that their vacation leave policies fell within

ERISA’s definition of the term “employee welfare benefit

plan” as “any plan, fund, or program * * * established or

maintained by an employer * * * for the purpose of pro-

viding * * * vacation benefits” (29 U.S.C. 106°(1) (em-

phasis added)), they sought a declaration that Section

514(a) of ERISA, 29 U.S.C. 1144(a), preempted Califor-

nia’s vacation wage law as applied to their practices. The

district court accepted the Association’s argument based

on what it considered to be the “plain language” of the

statute. In so doing, it expressly rejected a Department of

Labor regulation (29 C.F.R. 2510.3-1(b)) which inter-

preted the definition of “employee welfare benefit plan” to

exclude certain unfunded “payroll practices,” including

the “[p]Jayment of compensation, out of the employer’s

general assets, * * * while an employee is on vacation or

absent on a holiday * * *.” The court coicluded that “{i]f

that reguiation does indeed intend ERISA exemption of

every unfunded vacation program, it is at clear odds with

the language of the statute itself and an invalid arrogation

of power by the Department” (Pet. App. C7-C8).

3. The United States Court of Appeals for the Ninth

Circuit reversed (Pet. App. B1-B21). Contrary to the

district court’s decision, the court of appeals found that

the term “plan * * * providing vacation benefits” in the

statutory definition of “employee welfare benefit plan”

has “no precise and immutable meaning” (id. at BS). The

court held that it is “a reasonable and permissible con-

struction of the statute to exclude from its coverage, as [29

C.F.R. 2510.3-1(b)] does, programs providing for the

traditional vacation during which the employee continues

4

to receive ordinary wages paid from the general assets of

the business” (Pet. App. B6). The court determined that

the regulation reasonably distinguishes between “wage”

compensation in the nature of cash wages or other

analogous payments such as paid vacation leave made dur-

ing the period of employment, which ERISA does not

cover, and deferred “benefit” compensation, which Con-

gress sought to regulate through the statute (id. at B8,

B10-B11).

The court rejected petitioners’ argument that because

ERISA generally covers unfunded benefit plans, unfanded

vacation payments must also be covered by the statute. In

this regard the court found that nothing in the statute or

its legislative history suggests that Congress intended

ERISA to regulate routine vacation leave payments when

made from an employer’s general assets (Pet. App. B7,

B18-B19). Coverage of such arrangements would not pro-

vide redress for the two principal abuses addressed by

ERISA: mismanagement of funds accumulated to finance

benefits and failure to pay employees the benefits prom-

ised. Thus, because vacation “[w]ages are ordinarily paid

in cash out of the resources of the business * * * [t]here is

no fund to administer and no special risk of loss or non-

payment” (id. at B7). Accordingly, the court explained

that the Department’s interpretation that paid vacation

leave arrangements are not covered by the statute “is not

based on the funded/unfunded distinction alone,

however, but also on the wage/benefit compensation

distinction” which inheres in the statute (id. at B18).

Finally, the court concluded that ERISA coverage of

routine vacation leave arrangements would impose “a

substantial and needless burden upon employers and the

federal courts” since ERISA requires employers to comply

with numerous statutory requirements and permits an

employee claiming denial of vacation leave to sue the

employer in federal court (Pet. Apo, B11-B12).

5

ARGUMENT

The judgment of the court of appeals is correct and does

not conflict with any decision of this Court or any other

federal court of appeals. Review by this Court is therefore

unwarranted.

1. a. Congress sought through ERISA to protect the

interests of participants and beneficiaries of employee

benefit plan[s] “by establishing standards of conduct,

responsibility, and obligation for fiduciaries of employee

benefit plans, and by providing for appropriate remedies,

sanctions, and ready access to the Federal courts” (29

U.S.C. 1001(b)). Coverage of the statute extends, with cer-

tain exceptions not applicable here, to any employee

benefit plan established or maintained by an employer in

interstate commerce (29 U.S.C. 1003). The “employee

benefit plan[s]” covered by the statute encompass both

“pension benefit plan[s]” and “welfare benefit plan[s]” (29

U.S.C. 1002(3)). Section 3(1) of ERISA defines “employee

welfare benefit plan” or “welfare plan” as “any plan, fund,

or program * * * established or maintained * * * for the

purpose of providing * * * (A) medical, surgical, or

hospital care or benefits, or benefits in the event of

sickness, accident, disability, death or unemployment, or

vacation benefits * * * or (B) any benefit described in sec-

tion 186(c) of this title * * *.”' 29 U.S.C. 1002(1) (em-

phasis added).

The statute does not define the term “vacation benefits.”

Contemporaneous with the passage of ERISA, and in

response to “numerous inquiries” concerning coverage of

various forms of general asset compensation, however, the

' The cross-reference is to Section 302(c) of the Labor-Management

Relations Act, 1947 (LMRA), 29 U.S.C. 186(c), which describes, in

addition to many of the same benefits enumerated in the ERISA

definition, “pooled vacation, holiday, severance or similar benefits

*** ” See 29 U.S.C. 186(c)(6).

Department of Labor promulgated regulations construing

the definition of “employee welfare benefit plan” to ex-

clude certain types of “payroll practices” including the

“[p]jayment of compensation, out of the employer’s

general assets * * * while an employee is on vacation or

absent on a holiday * * *.” 29 C.F.R. 2510.3-1(b)(3); 40

Fed. Reg. 24642 (1975) (proposed regulations); 40 Fed.

Reg. 34526 (1975) (final regulations). Based on the pur-

poses and legislative history of the statute, and given the

“substantial and needless burden” that would be imposed

under the position urged by petitioners, the court of ap-

peals correctly upheld the regulation as a “reasonable and

permissible” construction of the statute. In reaching this

conclusion the court below properly accorded the regula-

tion “persuasive weight because it was formulated contem-

poraneously with the passage of ERISA” by the agency

charged with administering the statute (Pet. App. B4). See

also 29 U.S.C. 1135 (authorizing the Secretary of Labor to

promulgate “necessary or appropriate” regulations and to

define “technical and trade” terms used in Title I of

ERISA). As the court correctly held, in these cir-

cumstances the appropriate standard of review for regula-

tions interpreting an ambiguous statutory provision is

“ ‘whether the agency’s answer is based on a permissible

construction of the statute’ ” (Pet. App. BS) (quoting from

Chevron U.S.A. Inc. v. Natural Resources Defense Coun-

cil, 467 U.S. 837, 843 (1984)).

b. Petitioners contend (Pet. 24-27) that 29 C.F.R.

2510.3-1(b) is “nonsensical” beczuse it accords different

treatment to “identical vacation benefit[s]” based “solely

on whether the vacation benefits under those plans or pro-

grams are financed through a trust fund or through the

employer’s general assets.” But, as the court of appeals

correctly concluded (Pet. App. BS), the term “vacation

benefits” has no plain meaning, and the Department’s

regulation reasonably distinguishes vacation “payroll

7

practices” from ERISA-covered “vacation benefits” based

not only on the absence of a separate fund, but also

primarily on the close affinity between paid vacation leave

and ordinary cash wages.

As the court below recognized, the Department’s payroll

practices regulation gives effect to Congress’s intent not to

subject to federal regulation ordinary cash wages, such as

traditional vacation leave, paid from an employer’s

general assets. Congress sought in ERISA to regulate the

wide variety of fringe benefit programs that had developed

as “a means of compensating workers in lieu of increased

wages” as a result of wage freezes imposed during World

War II and the Korean conflict. S. Rep. 93-127, 93d

Cong., Ist Sess. 3 (1973), reprinted in | Legislative History

of the Employee Retirement Income Security Act of 1974,

at 587, 589 (Comm. Print 1976) (hereinafter cited as Leg.

Hist.). In enacting ERISA, Congress was principally con-

cerned with evidence of mismanagement of funds ac-

cumulated to finance such benefits and with failure to pay

employees promised fringe benefits. As the court of ap-

peals pointed out, however, “[t}]raditionai vacations dur-

ing which the employer continue[s] to pay the employees’

2 As this Court has acknowledged, “[o]ne of Congress’ central pur-

poses in enacting this complex legislation was to prevent the ‘great per-

sonal tragedy’ suffered by employees whose vested benefits are not

paid when pension plans are terminated.” Nachman Corp. v. Pension

Benefit Guaranty Corp., 446 U.S. 359, 374 (1980) (footnote omitted)

(quoting from a statement by Senator Bentsen, reprinted in 3 Leg.

Hist. 4793). See also, 120 Cong. Rec. 4279-4280 (1974) (statement of

Rep. Brademas); id. at 4277-4278 (statement of Rep. Perkins); 119

Cong. Rec. 30003 (1973) (statement of Sen. Williams). Evidence

before Congress also reflected abuses involving misuse and mismange-

ment of welfare and pension benefit funds. See, e.g., Private Welfare

and Pension Plan Legislation: Hearings on H.R. 1045, H.R. 1046,

and H.R. 16462 Before the General Subcomm. on Labor of the House

Comm. on Education and Labor, 91st Cong., Ist & 2d Sess. 464,

470-472 (1970) (statement of George Shultz, Secretary of Labor).

8

regular wages present[] neither of the evils Congress in;

tended to address” (Pet. App. B7). Since vacation wages,

like other ordinary wages, are generally paid in cash from

the employer’s business resources, “[t]here is no fund to

administer and no special risk of loss or non-payment”

(ibid.).

The Department’s interpretation of the statute to cover

funded vacation payments is also consistent with the

significant historical fact of which Congress was plainly

aware that collectively bargained vacation benefit funds

have historically been the practice in a number “of in-

dustries, most notably construction and longshoring,

where employees frequently do not work for the same

employer throughout the year. See, e.g., Franchise Tax

Board v. Construction Laborers Vacation Trust, 463 U.S.

1, 4 & n.2 (1983). It was certainly reasonable for the

Department, in construing the term “vacation benefits” in

ERISA, to keep in mind Congress’ likely concern with

these specialized funded vacation benefit programs.

c. The distinction between traditional cash wages and

specialized forms of fringe benefit compensation also

refutes petitioners’ reliance (Pet. 32-38) on cases holding

that unfunded plans providing severance pay and group

health insurance benefits are covered by ERISA. While we

agree with petitioners that the existence of a separate fund

in not required for ERISA coverage of employee benefit

plans, see, e.g., Donovan v. Dillingham, 688 F.2d 1367,

1372-1373 (11th Cir. 1982) (en banc), it does not follow

that Congress intended ERISA to regulate all forms of

general asset compensation. Indeed, in _ rejecting

arguments that severance benefits should be considered

“payroll practices” when paid from general assets, the

courts in Gilbert v. Burlington Industries, Inc., 765 F.2d

320, 326 (2d Cir. 1985), and Holland v. Burlington In-

dustries, Inc., 772 F.2d 1140, 1146 (4th Cir. 1985), ex-

pressly concluded that severance pay is distinguishable

9

from the types of general asset compensation identified in

the payroll practices regulation because it occurs only after

termination of employment, whereas the payroll practices

regulation concerns types of compensation that are nor-

mally received during the course of employment.} Vaca-

tion leave payments are “easily analogized to ordinary

wages” that ERISA was not intended to cover (Pet. App.

B10, quoting Scott v. Gulf Oil Corp., 754 F.2d 1499, 1503

(9th Cir. 1985)). Cf. Abella v. W.A. Foote Memoria!

Hospital, Inc., 557 F. Supp. 482 (E.D. Mich. 1983), aff’d

per curiam, 740 F.2d 4 (6th Cir. 1984) (accumulated paid

sick leave provided during the term of employment is not

the type of “benefit[] in the event of sickness” (29 U.S.C.

1002(1)) Congress intended ERISA to cover).* In contrast,

severance pay is available only upon termination of

employment and constitutes a specialized form of deferred

compensation that Congress sought to regulate through

ERISA.‘

3 This Court has been asked to review the decisions in Gilbert (Nos.

85-441 atid 85-460) and Holland (Nos. 85-929 and 85-944), and the

Court has invited the views of the United States in Gilbert. As dis-

cussed in the government’s submission supporting summary affirm-

ance in that case, every court of appeals that has considered the ques-

tion has concluded that an employer’s unfunded severance pay policy

is an employee welfare benefit plan covered by ERISA and the

Department of Lator has consistently interpreted the definition of

“welfare plan” to include such unfunded plans.

* Of course this analysis applies equally to holiday leave and to the

other types of paid leave arrangements included in the “payroll prac-

tices” regulation. Petitioners are flatly wrong in their repeated asser-

tions (Pet. 35, 36 & n.11) that the regulation illogically accords dif-

ferent treatment to holiday and vacation leave arrangements. In a

single clause, the regulation identifies payroll practices consisting of

“(p]ayment of compensation while an employee is on vacation or ab-

sent on a holiday” (29 C.F.R. 2510.3-1(b)(3)(i) (emphasis added)).

> The fact that the vacation wages at issue in this case were payable

upon termination of employment does not matter. The distinction the

Department made was between severance pay, which is always

payable after termination of employment, and compensation, such as

10

Moreover, the court of appeals found that “[nJot only.

would inclusion of routine vacations-with-pay within

ERISA contribute nothing to solution of the problems

Congress sought to solve, it would also impose a substan-

tial and needless burden upon employers and the federal

courts” (Pet. App. Bll). As the court explained,

employers would be required to formulate plans, establish

procedures, give notices to employees, and file reports

with the Department. See 29 U.S.C. 1022, 1024(a)(i) and

(2)(A), 1024(b), 1026(a), 1133(1) and (2). And “[ajny

employee claiming denial of vacation leave could ste his

employer in federal court” (Pet. App. B12). See 29 U.S.C.

1132(a). As the court below aptly concluded, “[iJt is

unlikely Congress intended to create burdens of this

magnitude without evidence of need, and without com-

ment” (Pet. App. B12).

d. Petitioners argue against the distinction drawn by

the regulation on the ground (Pet. 27-28) that it would per-

mit an employer to avoid more “onerous” state laws simp-

ly by establishing a trust “overnight,” funding it “with one

dollar,” and “funnel[ing] all vacation benefit payments

from its general assets through an otherwise hollow vaca-

tion benefit trust fund.” This argument overlooks the

safeguards that ERISA establishes for funded plans and,

accordingly, the disincentive for engaging in such a

scheme. While there is no requirement ab initio to set aside

assets or Otherwise fund a welfare benefit plan (see 29

U.S.C. 1981(a)(1)) once an employer undertakes to

separately fund a plan, Section 403(a) of ERISA requires,

with certain exceptions not applicable here, that “all assets

of an employee benefit plan shall be held in trust by one or

more [named] trustees” (29 U.S.C. 1103(a)). Thus, with

wages, that usually is payable during the course of employment. While

vacation payments are sometimes payable at the time employment is

terminated, wages are sometimes payable then too, so vacation

payments are not distinguishable from ordinary wages in that respect.

11

respect to any funded welfare benefit plan, there will be an

independent trustee who is responsible, inter alia, for

assuring that trust funds are collected and that par-

ticipants and beneficiaries receive the benefits to which

they are entitled. See 29 U.S.C. 1103(¢1), 1104(a)(1) (im-

posing standards of trustee and other fiduciary conduct).

Because welfare funds, like pension funds, must be held

by independent fiduciaries operating under strict fiduciary

duties, it is not true, as petitioners suggest, that the

transfer of funds to an ERISA trust would contribute

nothing to the protection of participants and beneficiaries

of welfare benefit plans.°®

Nor is there any merit to petitioners’ related argument

(Pet. 28) that Congress did not intend to permit employers

in effect to choose ERISA coverage based on their choices

6 Petitioners mistakenly rely (Pet. 26) on Internal Revenue Service

Private Letter Ruling 8335087 (June 1, 1983) for the proposition that

an employer can establish a “hollow” vacation benefit trust under

ERISA. This issuance, however, is limited to the tax consequences of

particular circumstances involving a holiday and vacation benefit

trust; it does not address the application or requirements of ERISA,

and in any event “may not be used or cited as precedent.” 26 U.S.C.

6110(j)(3). Moreover, the letter does not in any way sanction an empty

trust as postulated by petitioners. It discusses an arrangement whereby

a vacation and holiday benefit trust fund is deemed to be the statutory

employer for purposes of income tax withholding under 26 U.S.C.

3401(d)(1), even though the common law employer responsible for

funding the trust may also be authorized to act as an agent of the trust

for tax withholding purposes in accordance with Rev. Proc. 70-6,

1970-1 C.B. 420. Under the described arrangement, the company

agent would handle benefit payments and tax withholding through

payroll administration, subject to periodic reimbursement from the

trust, thereby reducing overall administrative costs. Even for tax pur-

poses, however, the letter points out that such-an arrangement is

possible only where “(t]he Company irrevocably obligates itself to

provide certain funds to the trust” and “the trust, not the Company,

has legal control and responsibility over the funds.” As we have

shown, ERISA imposes strict fiduciary duties on trustees in these cir-

cumstances.

12

concerning the structure of the wage and benefit package

offered to their employees. In ERISA, Congress neither

mandated nor prohibited any particular type of benefits.

The statute establishes requirements and sets minimum

standards for existing plans, but leaves to employers the

discretion to determine what benefits to offer. It is true

that an employer who creates a trust to pay vacation

benefits and separately funds it in advance thereby

establishes a plan governed by the federal statute, whereas

an empioyer who merely continues to make ordinary wage

payments from general assets while employees afe on

vacation remains subject to state law. But, whether those

structures are devised to avoid one or the other of the

statutory schemes or, as is more likely, to respond to other

business concerns, the employer’s motives are irrelevant to

the determination of ERISA coverage. Rather, coverage

under the statute is determined from the objective facts

concerning the plan.

e. Finally, petitioners argue (Pet. 45-51) that Congress

intended to occupy the field of employee benefit plan

regulation and thereby sought to protect multi-state

employers from the burden of conflicting state regulation

in this area. But, as the court of appeals incisively con-

cluded, “federal exclusivity is a corollary of regulatory

coverage, not an independent statutory goal, and the

Secretary has reasonably concluded that Congress did not

intend to regulate unfunded vacations-with-pay” (Pet.

App. B15). See also Shaw v. Delta Air Lines, Inc., 463

U.S. 85, 97 n.17 (1983) (state laws are preempted “only in-

sofar as they relate to plans covered by ERISA”); Alessi v.

Raybestos-Manhattan, Inc., 451 U.S. 504, 523 nn.19, 20

(1981) (““ERISA’s pre-emption clause exempts state laws

relating to * * * plans that do not fall within the Act’s

coverage”). In short, the policies underlying ERISA’s

preemption provision “do not throw light on what matters

Congress intended to cover by ERISA in the first place”

(Pet. App. B15-B16).

13

2. a. Petitioners argue (Pet. 29-31) that the court of

appeals’ decision is inconsistent with the implicit holdings

of this Court in Massachusetts Mutual Life Insurance Co.

v. Russell, No. 84-9 (June 27, 1985), and Shaw v. Delta

Air Lines, Inc., supra, that disability benefits funded from

employers’ general assets are governed by ERISA.’

Coverage of the plans, however, was not an issue in

Russell or Shaw. Accordingly, this Court had no occasion

to consider the applicability of the payroll practices

regulation or otherwise to discuss the legal principles that

apply to questions of ERISA coverage. Nor does it appear

that the facts in those cases were developed sufficiently to

permit meaningful consideration of the question.® Indeed,

the Court in Shaw limited its decision in a manner consis-

tent with the payroll practices regulation, noting that since

7 The payroll practices regulation excludes the payment of short-

term salary continuation payments on account of disability from

coverage under ERISA by providing that “welfare plan” does not in-

clude “[{p]ayment 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” (29 C.F.R. 2510.3-1(b)(2)).

8 In Shaw, the plaintiff employers alleged only in general terms that

they maintained various types of employee benefit plans which were

“funded and administered in several different ways.” See Delta Air

Lines, Inc. v. Kramarsky, 650 F.2d 1287, 1307, modified, 666 F.2d 21

(2d Cir. 1981), aff'd in part and rev’d in part sub nom. Shaw v. Delta

Air Lines, Inc., 463 U.S. 85 (1983). The plaintiff in Russell sought

benefits under both a short-term salary continuation program and a

long-term disability benefits plan. Her employer initially granted

benefits for a period of five months, then terminated benefits for 132

days, and finally reinstated her benefits retroactively (slip op. 1-2).

Contrary to petitioners’ contentions (Pet. 30 & n.6), however, it is not

clear that her claims involved only short-term saldry continuation, a

type of general asset compensation that would be excluded from

ERISA coverage under the payroll practices regulation (see note 7,

supra). The decisions in Russell simply do not reflect what type of

benefits were provided by the employer’s disability plan.

14

ERISA preempts state laws only to the extent that they,

relate to covered plans, the state law at issue “would be

unaffected insofar as it ‘regulates] * * * hiring, promo-

tion, salary, and the like” (463 U.S. at 97 n.17 (emphasis

added)).

b. Petitioners also contend (Pet. 31-32) that the court

of appeals’ decision is in “direct conflict” with the decision

of the Sixth Circuit in Blakeman v. Mead Containers, 779

F.2d 1146 (1985). In Blakeman, the Sixth Circuit con-

cluded without discussion that the severance and vacation

pay plans at issue were covered by ERISA and accordingly

held that the participants’ state common law contract

claims for benefits under those plans were preempted by

the federal statute. The Blakeman decision, however, does

not reflect whether the vacation benefit plan at issue was

separately funded. Nor did the Sixth Circuit cite, let alone

discuss the applicability of, the payroll practices regula-

tion. Petitioners assert a conflict based upon an unex-

plained “but see” citation to the court of appeals’ decision

contained in a footnote to the Blakeman opinion. See 779

F.2d at 1149 n.2. Given the Sixth Circuit’s approval of the

payroll practice regulation in Abella, 740 F.2d at 5, and in

the absence of any discussion or analysis of the coverage

issue, the court’s decision cannot be viewed as necessarily

in conflict with the decision below.

c. Petitioners further argue (Pet. 38-41) that review is

warranted because the decision below conflicts with the

decision of the Massachusetts Supreme Court in Barry v.

Dymo Graphic Systems, Inc., 394 Mass. 830, 478 N.E.2d

707 (1985). In Barry the court followed the ruling of the

district court in this case and held that an unfunded vaca-

tion pay arrangement is a welfare benefit plan under

ERISA. The court rejected the opposite conclusion

because of its misconception that to do so “would cause

the incongruous result of allowing an employer tu avoid

the broad scope of ERISA coverage by adopting a plan

which ignores the fiduciary responsibilities required under

15

ERISA.” 478 N.E.2d at 713. But, as the very case it relied

upon, Dillingham, 688 F.2d at 1372, makes clear, com-

pliance or noncompliance with ERISA’s fiduciary obliga-

tions “are not prerequisites to coverage under the Act.”

Moreover, the Barry court focused exclusively on the

funded/unfunded distinction and did not direct itself to

the wage/benefit distinction asserted in the regulation and

found critical by the Ninth Circuit in overruling the

district court in the instant case. Given these considera-

tions, and the fact that the Barry court did not have the

benefit of the Ninth Circuit’s well-reasoned decision, we

do not believe that the conflict between Barry and the in-

stant case warrants further review.°

®° The decision here is also in accord with the decisions of other

courts that have agreed with the Department that routine paid vaca-

tions (and other common forms of paid leave) are properly excluded

from coverage by the regulation. See Abella, 740 F.2d at 5; National

Metalcrafters v. McNeil, 602 F. Supp. 232, 236-237 (N.D. Ill. 1985),

aff'd on other grounds, 784 F.2d 817 (7th Cir. 1986); Richardson v.

St. Mary Hospital, 6 Kan. App.2d 238, 627 P.2d 1143 (1981); but see

James v. T.G. & Y. Stores Co., No. 85-0113 (W.D. La. May 13, 1985)

(Pet. App. HI1-H8); Holland v. Nationa! Steel Corp., No.

83-0033-W(M) (N.D. W.Va. June 10, 1985) (Pet. App. 11-110).

16

CONCLUSION :

The petition for a writ of certiorari should be denied.

Respectfully submitted.

CHARLES FRIED

Solicitor General

CAROLYN B. KUHL

Deputy Solicitor General

CHRISTOPHER J. WRIGHT

Assistant to the Solicitor General

GEORGE R. SALEM

Deputy Solicitor of Labor

ALLEN H. FELDMAN

Associate Solicitor

BETTE J. BRIGGS

Altorney

Department of Labor

MAY 1986

U.S. GOVERNMENT PRINTING OFFICE: 1986— 491-507/20237