New Case Explains ERISA Payroll Practice Exemption
In a recent case from the Northern District of California, Behjou v. Bank of Am. Group Benefits Program, Omid Behjou filed suit against his employer, Bank of America, after his disability insurance benefits were denied when he became injured. The issue before the court was whether Behjou’s disability insurance plan was an ERISA plan, which would preempt his California state law claims, or whether the disability insurance plan was exempt as a payroll practice under 29 C.F.R. § 2510.3–1(b)(2). The court in California held that the plan was not subject to ERISA-application. It reasoned as follows:
1. A regulation from the Secretary of Labor, 29 C.F.R. § 2510.3–1(b)(2), excludes certain “payroll practices” from application of ERISA.
2. Under this regulation, an ERISA plan does not include: “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. . . .” 29 C.F.R. § 2510.3–1(b)(2) (emphasis added).
3. To determine whether regulation or ERISA applies, a court must look to the actual method of payment to see if it constitutes “normal compensation.” The payment need only “closely resemble wages or salary to constitute normal compensation.” If the payment method constitutes normal compensation, then the court must next determine whether it is paid out of the employer’s general assets. The “salient inquiry here is the source from which the benefits are actually paid.”
4. In this case, the court in the Northern District of California determined that Bank of America’s method of payment constituted normal compensation because payments “[were] made through the regular payroll process with deductions taken for tax withholding, insurance coverage, 401(k) contributions, and [were] considered taxable income.” After making this initial determination, the court in California then looked to whether payment came out of the employer’s general assets. It did in this case: “the uncontroverted evidence shows that the payment of short term disability benefits is made from Bank of America’s general assets.”
The court order can be found here.
California Insurance Commissioner Petitioned to “Kick [UnumProvident] the Hell Out” of California
Disability insurer UnumProvident was recently fined $15 million and ordered to reopen 115,000 claims in a multi-state regulatory settlement, and the California Department of Insurance separately fined Unum $8 million and ordered the insurance company to reopen an additional 26,000 claims. The fines against UnumProvident were the largest in insurance regulatory history. Now one of the San Francisco attorneys who assisted in the three-year investigation of Unum, Ray Bourhis, has petitioned California Insurance Commissioner John Garamendi to “make good on his promise to kick the Company the hell out of the largest insurance market in the world. And that’s what I’m calling on Garamendi to do. Period.”
Bourhis tells the Insurance Journal:
John Garamendi was right last October when he called UnumProvident an “outlaw company.” That’s exactly what they are. And Garamendi should make good on his promise to kick them out of California if they continue breaking the law.
The investigation of Unum concluded that the disability insurance company was engaged in widespread violations of state insurance regulations and bad faith claim denials and terminations. According to Bourhis, “The truth is that no matter how much you fine them, it still pays for them to do this. . . The company is making the disabled destitute, policyholders whose claims it was ordered to reopen, wait — often for years — for their reevaluations. This is despite the fact that the law requires claims to be handled ‘promptly, fairly and expeditiously.”
