The federal Employee Retirement Income Security Act (ERISA) [1] applies to most, but not all, employee benefits provided by private sector employers under a regime of very broad preemption that supersedes all state laws that relate to employee benefits.[2] While the scope of ERISA preemption is exceptionally broad, ERISA does not apply to plans offered by governmental employers or plans sponsored by religious entities [3] unless an election has been made under the Internal Revenue Code to have the plan treated as an ERISA plan. [4] ERISA’s reach also does not extend to “payroll practices,” which the Department of Labor has excluded. [5] According to a regulation issued by the Labor Department, payroll practices encompass:
(1) Payment by an employer of compensation on account of work performed by an employee, including compensation at a rate in excess of the normal rate of compensation on account of performance of duties under other than ordinary circumstances, such as –
(i) Overtime pay,
(ii) Shift premiums,
(iii) Holiday premiums,
(iv) Weekend premiums;
(2) 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 (such as pregnancy, a physical examination or psychiatric treatment); and
(3) Payment of compensation, out of the employer’s general assets, on account of periods of time during which the employee, although physically and mentally able to perform his or her duties and not absent for medical reasons (such as pregnancy, a physical examination or psychiatric treatment) performs no duties; for example –
(i) Payment of compensation while an employee is on vacation or absent on a holiday, including payment of premiums to induce employees to take vacations at a time favorable to the employer for business reasons,
(ii) Payment of compensation to an employee who is absent while on active military duty,
(iii) Payment of compensation while an employee is absent for the purpose of serving as a juror or testifying in official proceedings,
(iv) Payment of compensation on account of periods of time during which an employee performs little or no productive work while engaged in training (whether or not subsidized in whole or in part by Federal, State or local government funds), and
(v) Payment of compensation to an employee who is relieved of duties while on sabbatical leave or while pursuing further education.[6]
Table of Contents
Payroll Practices Versus Employee Welfare Benefit Plans
Despite the comprehensiveness of the regulation’s description of what types of payments constitute payroll practices, it can sometimes be a challenge to distinguish between a payroll practice and an “employee welfare benefit plan.” [7] However, a recent federal district court ruling from the Eastern District of Wisconsin sheds light on the difference between a welfare benefit plan and a payroll practice. In Hansen v. Laboratory Corp. of Am., [8] the court rejected an employer’s claim that its short-term disability program was governed by ERISA and found instead that the benefits payable under the plan fell within the definition of a payroll practice rather than an employee welfare benefit plan.
In Hansen, an employee of Laboratory Corporationof America (“Labcorp”) filed a wage claim lawsuit in Wisconsin state court pursuant to Wis. Stat. § 109.03 [9] when she was denied short-term disability benefits. Labcorp removed the case to federal court, claiming ERISA preemption, but the court granted the plaintiff’s motion to remand, finding the district court lacked subject matter jurisdiction after it concluded the benefits constituted a payroll practice.
Despite the ERISA statute’s inclusion of benefits for disability within the broader definition of employee welfare benefit plans, the court determined that some programs providing salary replacement on account of disability fall within the definition of a payroll practice and are exempted from ERISA. In Massachusetts v. Morash, [10] the Supreme Court ruled the payroll practice exemption was intended to distinguish between “benefit programs covered by the Act and [other] types of regular compensation, including vacation pay, that are not covered,”[11] recognizing that the payment of wages, including sick pay and vacation pay, is traditionally regulated by the states. [12] The Supreme Court’s rationale in Morash was that when compensation is paid directly by an employer through payroll and not out of a separate fund, the protections of ERISA, including reporting and disclosure requirements, are unnecessary. [13]
Hansen also cited another ruling in support of its conclusion, McMahon v. Digital Equip. Corp., [14] which explained, “Where an employer pays occasional, temporary benefits from its general assets, there is no benefits fund to abuse or mismanage and no special risk of loss or nonpayment of benefits.” The court deemed the First Circuit’s analysis dispositive.
The court placed the burden of establishing that its short-term disability plan was governed by ERISA on Labcorp, [15] and concluded the defendant failed to prove that its short- term disability payments were not a payroll practice despite its arguments to the contrary. In addition to arguing that the short-term disability payments were not a payroll practice, Labcorp also asserted that its short-term disability benefit program could not be uncoupled from its group benefits plan governed by ERISA, and additionally maintained that the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo,[16] permitted it to challenge the payroll practice regulation as exceeding the Secretary of Labor’s authority. The court rejected all of Labcorp’s arguments.
With respect to its contention that its short-term disability plan was an ERISA-governed welfare benefit rather than a payroll practice, Labcorp asserted that it sponsored several employee benefit plans which included short-term and long-term disability benefits and issued a summary plan description (SPD) describing both programs as being subject to ERISA. However, the SPD described the shortterm disability benefits as self-funded, while the long-term disability plan was insured. Based on the difference in funding, the court found the short-term disability payments met the requisites of a payroll practice since the benefits (1) represented an employee’s normal compensation, (2) were paid out of the employer’s general assets, and (3) were due to an absence for medical reasons.[17]
Labcorp maintained that language in McMahon actually supported its position due to its finding that even a self-funded STD plan may be subject to ERISA rather than viewed as a payroll practice “so long as the employer treated the plan as one covered by ERISA; the employer assured employees they were entitled to ERISA’s protections; and the plan was funded, in part, by an insurance contract and trust fund and was secured by a fidelity bond.” [18] However, the court distinguished Labcorp’s plan from the plan at issue in McMahon because Digital’s short-term disability benefits were partially funded by insurance and benefits were secured by a fidelity bond, while Labcorp’s benefits were not.
The court also observed that McMahon found ERISA coverage is not created merely because an employer labels the plan as such or even if it meets IRS requirements by filing an annual Form 5500 report for the plan. Thus, even though Labcorp treated its STD plan as governed by ERISA, the court explained the “vital distinction” between Labcorp’s plan and the plan in McMahon was that “Labcorp’s plan is funded solely from the employer’s general assets thus constitute[ing] a ‘payroll practice’ under the regulation’s express terms.” [19] (emphasis in original). The court further pointed out that the payroll practice regulation’s intent is to exempt from ERISA certain plans that meet the criteria specified in the regulation, and determined that Labcorp’s short-term disability program met the definition of a payroll practice rather than an employee welfare benefit plan.
The court also rejected Labcorp’s reliance on Postma v. Paul Revere Life Ins. Co. [20] Postma held that in determining whether a plan is governed by ERISA, if the plan at issue is part of a broader package of welfare benefits, it should not be unbundled. The plaintiff in Postma argued that an insured long-term disability plan was exempt from ERISA because the plaintiff was responsible for paying the premium charges, relying on a safe harbor regulation that, like the payroll practice regulation, exempts certain plans from ERISA’s scope. According to 29 C.F.R. § 2510.3 -1 (j), certain group insurance plans are excluded if:
(1) No contributions are made by an employer or employee organization;
(2) Participation the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.
The Seventh Circuit found that although the plaintiff paid the premiums herself, the safe harbor was not met because the employer purchased the plan, paid for the employees’ premiums with respect to other components of the overarching welfare plan, and the long-term disability benefit was not voluntary. Thus, since the long-term disability benefits were part of a broader comprehensive welfare benefit program, the court found the safe harbor inapplicable.
While Labcorp, like Paul Revere in Postma, argued that its STD plan was part of a broader welfare benefit package, the court in Hansen focused on the payroll practice regulation and maintained that Postma does not override the payroll practice regulation or hold that “so long as one benefit in an overall benefit plan is covered by ERISA, it follows that the exempt practices listed in § 2510.3-1 are no longer exempt.” [21] Consequently, the court found Labcorp’s STD plan was a payroll practice, which meant the court lacked subject matter jurisdiction to hear Hansen’s claim.
Payroll Practices After Loper Bright
The court then turned to Labcorp’s challenge to the regulation itself based on the Supreme Court’s Loper Bright ruling. Labcorp maintained that the Department of Labor exceeded its statutory authority in enacting the payroll practice regulation, asserting the regulation conflicts with ERISA’s statutory language. The court disagreed, though, finding “Labcorp reads Loper far too broadly. Loper does not stand for the proposition that all regulations promulgated by federal agencies must be disregarded.” [22]
The court explained that Loper Bright overruled the precedent established in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., [23] that courts are to defer to agency regulations that do not conflict with unambiguous statutory language. The change effected by Loper Bright was its ruling that courts, not agencies, are to interpret statutes, but when “a particular statute delegates authority to an agency consistent with constitutional limits, courts must respect the delegation, while ensuring that the agency acts within it.” [24]
Based on Loper Bright’s holding, the court in Hansen deemed Labcorp’s argument that the Department of Labor lacked statutory authority to promulgate the payroll practice regulation unfounded. The court pointed out, “ERISA specifically confers on the Department of Labor the authority to prescribe regulations the Secretary finds ‘necessary or appropriate to carry out the provisions of this subchapter,’ including defining “technical and trade terms used in such provisions.” [25] Because 29 C.F.R. § 2510.3-1 clarifies the definition of an “employee welfare benefit plan,” the court in Hensen determined it was within the Department’s authority to exclude payroll practices that are not encompassed in the statutory definition of “welfare benefit plan.” [26]
The court added that in Loper Bright, the Supreme Court “acknowledged that Congress has often enacted statutes that give an agency a degree of discretion, including giving the agency the authority to give meaning to a particular statutory term.” [27] The Supreme Court’s decision also reinforced the proposition at “the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, fixing the boundaries of the delegated authority, and ensuring the agency has engaged in reasoned decision making within those boundaries.” [28]
Despite Labcorp’s assertion that the Department of Labor’s adoption of the payroll practice regulation exceeded its authority under the Loper Bright analysis, Hansen found the argument was foreclosed by Morash, which upheld the payroll practice regulation. [29] Loper Bright also made it clear that even though Morash was issued prior to Chevron being overturned, prior decisions that upheld various agency regulations remain “subject to statutory stare decisis despite our change in interpretive methodology.” [30] Consequently, the payroll practice regulation was found unchallengeable in Hansen under Loper Bright
When Doesn’t ERISA Apply
Hansen provides an excellent illustration of the application of the payroll practice regulation and its impact on an unfunded short-term disability plan. However, as the decision makes clear, due to ERISA’s pervasive application to employee benefit plans, the question of when ERISA applies and when it does not has often bedeviled the courts. Another safe harbor issue that received analysis from the Supreme Court involved a regulation stating that there is no ERISA-governed plan if no employees participate. [31] In Yates v. Hendon, [32] the Supreme Court ruled that “working owners” qualify as participants in employee benefit plans, and so long as one other common law employee is covered by a plan, ERISA applies. [33] Thus, benefits payable to working owners are not exempted from ERISA.
The applicability of the safe harbor for voluntary plans has been the most litigated issue, however. In one instance, even though, as in Postma, the plaintiff paid her own premiums for her disability coverage, the First Circuit ruled that such coverage could not be unbundled from a comprehensive welfare benefit plan that also included health and other benefits that were subsidized by the employer. [34] In other rulings, courts have found that even if the employees paid their own premiums for coverage, an employer’s endorsement of the coverage as company sponsored coverage precluded the applicability of the safe harbor. [35] The Sixth Circuit also found the safe harbor for voluntary coverage inapplicable where the employer paid the premium costs for some employees but not for all. [36]
With respect to the payroll practice issue, the court in Hansen was not alone in reaching a finding that uninsured short-term disability benefits constitute a payroll practice rather than an employee welfare benefit plan In Bassiri v. Xerox Corp., [37] the Ninth Circuit held that continuation of salary, even at a reduced amount, under a disability benefit plan where payments cease upon employment termination, constitutes a payroll practice exempt from ERISA’s scope. Thus, the distinctions drawn by the court in Hansen were well-founded and consistent with other rulings.
Conclusion
The lesson that can be drawn from these cases is that despite ERISA’s applicability to nearly all employee benefits offered by private sector employers, there are limits, and not all benefits offered by employers are governed by ERISA. Employee benefit plans come in all shapes and sizes, sometimes raising uncertainty as to when ERISA applies and when it does not. For example, some severance plans are governed by ERISA, while one-time negotiated severance agreements between an employer and employee generally do not. The payroll practice regulation is a common sense recognition that there is no reason to invoke the complexities of ERISA for payments to employees that are made through payroll such as allotted sick days, vacation days, or other paid leave. On the other hand, plans that require separate administration such as
health benefits or long-term disability plans call for greater protection to insure that employees receive the benefits promised to them.
One can also ask why fully insured plans do not have their own safe harbor since employees have protection through other means such as legal protections afforded by state insurance laws that in some jurisdictions include “bad faith” laws which allow insureds to collect punitive damages in cases of egregious denials. [38] However, with respect to that issue, if the Department of Labor were to create such a safe
harbor, an accusation of regulatory overreach would likely succeed, since the ERISA statute explicitly includes insured plans within the ambit of employee welfare benefit plans, which are defined as programs “established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services.” (emphasis added). [39] The Supreme Court addressed whether fully insured plans were governed by ERISA in Pilot Life Insurance Company v. Dedeaux [40] and firmly held that such plans fell within ERISA’s purview. Thus, it would require Congress to amend ERISA to bring about such a change.
With respect to the safe harbor for payroll practices, Hansen provides an excellent explanation as to what constitutes a payroll practice; and since the court determined that the burden rests on the party invoking ERISA preemption to prove a plan meets the requisites of an employee benefit plan, it was able to address Labcorp’s arguments seriatim. The court also made it clear that calling a plan a welfare benefit plan, and even complying with reporting requirements such as filing a Form 5500, is insufficient to establish ERISA coverage.
Hansen also offered litigants a bonus by addressing the validity of the Department of Labor’s payroll practice regulation in a post Loper Bright environment. The court’s dismissal of Labcorp’s arguments based on Morash, and the Supreme Court’s explanation in Loper Bright that it would treat its prior rulings upholding regulations as stare decisis, effectively ended any debate on that score.
The final takeaway is that while ERISA can often be confounding and represent “Everything Ridiculous Imagined Since Adam,” [41] reason and sensibility sometimes prevail. The Department of Labor’s exclusion of payroll practices from the definition of what constitutes an employee welfare benefit plan gives claimants rights under state law to seek redress when their employers fail to provide promised wage payments. Wage claims are typically the province of state law; and the Hansen ruling makes sure that such claims remain where they belong.
Mark DeBofsky is a shareholder at DeBofsky Law Ltd.
This article was first published by Bender’s Labor & Employment Bulletin on February 2025.
[1] 29 U.S.C. § 1001 et seq.
[2] 29 U.S.C. § 1144(a).
[3] 29 U.S.C. §§ 1003(a) and (b).
[4] 26 U.S.C. § 410(d).
[5] 29 C.F.R. § 2510.3-1(b)(2).
[6] 29 C.F.R. § 2510.3-1(b)(2).
[7] 29 C.F.R. § 2510.3-1(a)(2) repeats the statutory definition of an employee welfare benefit plan contained in 29 U.S.C. § 1002(1) which is a plan providing: medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (ii) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions).
[8] Hansen v. Laboratory Corp. of Am., 2024 U.S. Dist. LEXIS 193350 (E.D. Wisc. Oct. 24, 2024).
[9] Wis. Stat. § 109.03 creates a cause of action permitting employees to sue for wages claimed due and owing.
[10] Massachusetts v. Morash, 490 U.S. 107, 112, 109 S. Ct. 1668, 104 L. Ed. 2d 98 (1989).
[11] 490 U.S. at 117.
[12] 490 U.S. at 119.
[13] 490 U.S. at 120.
[14] McMahon v. Digital Equip. Corp., 162 F.3d 28, 36 (1st Cir. 1998).
[15] Citing Havey v. Tenneco, Inc., No. 98 C 7137, 2000 U.S. Dist. LEXIS 1694 (N.D. Ill. Feb. 11, 2000).
[16] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 219 L. Ed. 2d 832 (2024).
[17] 29 C.F.R. § 2510.3-1(b)(2).
[18] 2024 U.S. Dist. LEXIS 193350 at *8.
[19] 2024 U.S. Dist. LEXIS 193350 at *11.
[20] Postma v. Paul Revere Life Ins. Co., 223 F.3d 533 (7th Cir. 2000).
[21] Hansen, supra n.8, at *15.
[22] Hansen, supra n.8, at *16.
[23] 467 U.S. 837, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984).
[24] 144 S. Ct. at 2273.
[25] Hansen, supra n.8, at *17 (citing 29 U.S.C. § 1135).
[26] 29 U.S.C. § 1002(1).
[27] Hansen, supra n.8, at *18 (citing Loper Bright, 144 S. Ct. at 2263).
[28] Loper Bright, 144 S. Ct. 2244, 219 L. Ed. 2d 832 (2024).
29] “It is sufficient for this case that the Secretary’s determination that a single employer’s administration of a vacation pay policy from its general assets does not possess the characteristics of a welfare benefit plan constitutes a reasonable construction of the statute.” 490 U.S. at 120-21.
[30] 144 S. Ct. at 2273.
[31] 29 C.F.R. § 2510.3-3(b).
[32] Yates v. Hendon, 541 U.S. 1 (2004).
[33] If a working owner is the sole employee of a business, though, any benefit plans purchased by the business are not subject to ERISA according to Janopoulos v. Salus Claims Management, 518 F.Supp.3d 973 (S.D. Tex. 2021).
[34] Gross v. Sun Life Assur. Co. of Canada, 734 F.3d 1 (1st Cir. 2013).
[35] Anderson v. UnumProvident Corp., 369 F.3d 1257 (11th Cir. 2004).
[36] Helfman v. GE Group Life Assur. Co., 573 F.3d 383 (6th Cir. 2009).
[37] 463 F.3d 927 (9th Cir. 2006).
[38] See “Insurance Bad Faith” at https://en.wikipedia. org/wiki/Insurance_bad_faith.
[39] 29 U.S.C. § 1002(1).
[40] Pilot Life Insur. Co. v. Dedeaux, 481 U.S. 41 (1987).
[41] Florence Nightingale Nursing Serv. v. Blue Cross and Blue Shield of Ala., 832 F.Supp.456, 1457 (N.D. Ala. 1993).
