Monday, February 3, 2014
C.A. Says State Sick Leave Law Not Always Preempted by ERISA
By MICHAEL J. PEIL, Staff Writer
Federal law regulating employee benefits does not always preempt state law requiring an employer who grants paid sick leave to allow employees to use that leave to care for ill family members, the, the First District Court of Appeal ruled Friday.
The court, in an opinion by Justice Timothy A. Reardon, said that United Airlines’ employee sick leave plan and trust did not come within the scope of the Employee Retirement Income and Security Act.
San Francisco Superior Court Judge Charlotte Woolard said United Airlines trust assets were reachable by creditors and therefore were not part of a “bona fide separate trust,” thereby failing to comply with the Department of Labor’s criteria for ERISA trusts.
The trial court granted summary judgment to the Airline Pilots Association International on the claim that the airliners’ plan violated California’s Kin Care Law, and the Court of Appeal affirmed.
Labor Code §233—Kin Care Law—provides that an employer who provides sick leave to employees must permit employees to use their paid sick leave, accrued over six months, to attend to an illness in the family. ERISA §514 preempts state laws “insofar as they…relate to any employee benefit plan.”
In 1989, United created a “Sick Leave Plan” and “Sick Leave Trust.” United asserted that it maintained the sick leave plan as an ERISA plan, so that it could better provide benefits in a uniform fashion to its employees. The trust stated that it was a grantor trust, and provided that United retained the ability to cease making contributions to the trust if it was deemed inadvisable.
In November 2007, three pilots and their union, Pilots Association, filed suit against United. United contended that the pilots’ claims of state laws violations were preempted since the company’s plan qualified as a federal benefit plan.
Pilots argued that the plan did not qualify under ERISA because the trust was a mere “pass-through” pay structure which did not offer real protection from creditors. The money held in trust, they explained, remained the property of United and as a result was vulnerable in the case of the company’s insolvency.
To determine whether United’s plan fell under ERISA, Reardon examined several Department of Labor advisory opinions which articulated a test for determining whether paid vacation benefits came within ERISA’s welfare benefit plan.
The advisory opinions made clear that an ERISA trust must impose an obligation to pay benefits and entail a bona fide separate trust that is independent of a creditors claims.
United did not dispute that its trust was a grantor trust, but it argued that the trial court incorrectly assumed that the availability of trust’s assets to creditors is an inherent feature of any grantor trust. It contended that only “rabbi trusts” make assets available to creditors as an inherent feature, and that its airline trust was not of the rabbi trust variety.
“[T]he critical issue is the ownership of the trust. Here, it is undisputed that United is the owner of the trusts and it has included the trusts’ income on its own tax returns, and has paid taxes on that income. Equally established is that United employees are not taxed on this income until the time of distribution. United’s position that the trusts’ assets are not subject to United’s creditors is fundamentally inconsistent with the tax treatment of United as the owner of the trusts.”
Tax law, he said, remains beneficial to grantor trusts, but such advantageous treatment requires that trusts remain subject to creditors as if those assets were part of the general assets.
“The assets in the trusts must [therefore] be available to United’s creditors in the event of insolvency, thus leaving employees’ sick leave benefits at risk until the moment the benefits are actually paid.”
Woolard concluded that since the trust assets rely on the financial health of the company and not the trust itself, United’s plan is outside of ERISA.
The case is Airline Pilots Association International v. United Airlines, 14 S.O.S. 566.
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