# Amicus Curiae Brief — California Hospital Ass'n v. Henning > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_1700%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1986 - **Citation:** 477 U.S. 904 ## Text 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 rr CP OD ce cb own ccssevseseseuesses EET el os» ee Coe COE va ce cha She ED Kb wack DR eK 5 eee Wag ssl Ne baS-F dd kde 40.0 e es 16 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 OC. Ge See, EE) BGI OE BOM... ccc cacavense l I oa ees oa nh ov bse chee hee eea ts 5 Be eas SD SUMED dk ce-cxs cn cecesboenstuase a, 3 ee Eo os oon cc coin Nxndinenh hea neue 5 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 Re CA ke cbus eaake bk oak Soeur en 10 Se Se SN o/b 5s es oa Gn ka XS OREN K RRO OS 10 pg rr 10 a EE nek as BA cease WA 11 Be Ss PEED 6k Kau 64950004300 e cake ween ll es Ms ko a ah kk ans keen eke eeas 10 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385018_1700%3A4. Public record. Not legal advice.