Salary Continuation Plans Provide Short Term Disability Benefits and May Be Exempt from ERISA as a Payroll Practice

October 29, 2012

The Employee Retirement Income Security Act of 1974, otherwise known as ERISA, regulates employee welfare benefit plans, which include plans that provide employees with benefits in the event of sickness, accident or disability. 29 U.S.C. § 1002(1). The primary purpose behind the enactment of ERISA was to protect workers from the mismanagement by the plan administrator of funds accumulated to finance employee benefits. Stern v. International Business Machines Corporation (IBM), 326 F.3d 1367, 1372 (11th Cir. 2003). However, when an employer pays occasional, temporary benefits from its general assets, there is no benefits fund to abuse or mismanage, and therefore no special risk of loss or nonpayment of benefits. McMahon v. Digital Equipment Corp., 162 F.3d 28, 36 (1st Cir. 1998). To that end, the Secretary of Labor has promulgated a regulation that excludes certain "payroll practices" from ERISA's oversight. That regulation provides that an employee benefit welfare plan shall 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 the duties of his or her occupation or is otherwise absent for medical reasons. 29 C.F.R. § 2510.3-1(b)(2). Accordingly, many short term disability plans offered by employers are considered payroll practices, which are governed by state law. So long as the disability benefits are paid from the employer's general assets, paid when the employee is absent for medical reasons, and paid as normal compensation, the plan is a payroll practice rather than an ERISA plan.

When an employer fails to pay short term disability benefits as a payroll practice to an employee who meets the plan's terms for eligibility, the employer may be violating one of Indiana's wage statutes. Indiana has enacted two separate wage statutes: (1) the Indiana Wage Claims Statute at I.C. § 22-2-9, and (2) the Indiana Wage Payment Statute at I.C. § 22-2-5-2. The statutes set forth two different procedural frameworks for wage disputes, and each statute applies to different categories of claimants. The Wage Claims Statute references employees who have been separated from work by their employer or whose work has been suspended as a result of an industrial dispute, and such employees must pursue their claims through the Department of Labor. I.C. § 22-2-9. By contrast, the Indiana Wage Payment Statute references current employees and employees who have voluntarily left employment either permanently or temporarily. I.C. § 22-2-5-1(b); St. Vincent Hospital and Health Care Center, Inc. v. Steele, 766 N.E.2d 699, 705 (Ind. 2002).

Violations of short term disability benefits plans (also sometimes known as salary continuation plans) that are payroll practices are subject to the Indiana Wage Payment Act. In addition to payment of the wages, the Act allows for liquidated damages in the amount of two times the unpaid wages and attorneys' fees and costs when an employer fails to make payment of wages. Questions often arise as to whether a particular disability plan is governed by ERISA or is a payroll practice, and employers have the burden of establishing that their short term disability plan or salary continuation plan is subject to ERISA and not, in fact, a payroll practice. An employer's representation that the short term disability plan offered to their employees is an ERISA plan does not necessarily mean that the plan falls within the scope of ERISA. The determination of a plan as an ERISA plan does not rest on the employer's conduct, but rather whether the plan is exempt from ERISA by the payroll practices regulations.

The O'Ryan Law Firm has successfully litigated both ERISA disability claims and payroll practices violations. If you have had salary continuation benefits or short term disability benefits denied or terminated by your employer, contact O'Ryan Law Firm.