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Is the Right to Substitute Paid Leave Under the Wisconsin FMLA Preempted by ERISA or Not?

October 2014

By: Alan E. Seneczko, Esq. and Peter E. Hansen, Esq.

One of the biggest, and most problematic differences between the Wisconsin Family Medical Leave Act and the Federal FMLA is the right to substitute paid leave for unpaid leave under the FMLA. Under Federal law, an employee can only substitute paid leave if it is otherwise applicable. Under Wisconsin law, an employee has the right to substitute, for portions of FMLA leave, "paid leave of any other type provided by the employer." This means, for example, that an employee can use sick pay or short term disability benefits for family leave after the birth of his child, without having to satisfy any waiting periods or other eligibility requirements under the applicable benefit plan (e.g., actually having the baby or being disabled from work).

The difficulty and absurdity that this "right of substitution" presented to Wisconsin employers led to the argument that ERISA, the Federal law that governs employer-sponsored health and retirement plans, preempted the substitution right under the Wisconsin FMLA. However, in Aurora Med. Group v. Dep't of Workforce Dev. (2000), the Wisconsin Supreme Court rejected this argument. In Aurora, an employer refused to allow an employee who took leave to adopt a child to substitute paid leave under its ERISA-governed sick pay plan because she was not ill and the plan only provided benefits to employees who were ill - an action that violated the WFMLA. The employer argued that ERISA preempted the right to substitute under the WFMLA, and thus, precluded a finding that it interfered with the employee's rights under the law. The court disagreed, finding that ERISA did not preempt the WFMLA because it did not "relate to" employee benefits plans, a prerequisite to preemption. As a result, the right of substitution has remained relatively unhindered for the last 14+ years.

End of story? Perhaps not. On September 30, 2014, the Sixth Circuit Court of Appeals, which covers Kentucky, Michigan, Ohio, and Tennessee, disagreed with the Wisconsin Supreme Court and held that ERISA did, in fact, preempt the right of substitution under the WFMLA.

In Sherfel v. Newson, the Sixth Circuit found that the WFMLA's substitution right could "mandate the payment of benefits contrary to the terms of an ERISA plan," which would violate ERISA's requirement of a uniform administrative scheme. The ERISA plan in question denied benefits to an employee who attempted to substitute short-term disability benefits under the plan following the birth of her child because she no longer met the plan's definition of "short-term disabled." The State found that she had a right to substitute the benefits even though she did not meet the plan's eligibility requirement; i.e., she was not "disabled." The employer argued that providing benefits under such circumstances would violate the benefit plan's terms and ERISA's uniform administration requirement, since the Wisconsin law effectively required the plan to provide disability benefits to non-disabled employees located in Wisconsin, but not non-disabled employees located in the other 48 states in which the plan operated. The Sixth Circuit agreed, holding that ERISA preempted the WFMLA to the extent that it required a benefit plan to pay benefits in a manner contrary to the plan's written terms.

What does this mean? Good question. Do

October 2014

By: Alan E. Seneczko, Esq. and Peter E. Hansen, Esq.

One of the biggest, and most problematic differences between the Wisconsin Family Medical Leave Act and the Federal FMLA is the right to substitute paid leave for unpaid leave under the FMLA. Under Federal law, an employee can only substitute paid leave if it is otherwise applicable. Under Wisconsin law, an employee has the right to substitute, for portions of FMLA leave, "paid leave of any other type provided by the employer." This means, for example, that an employee can use sick pay or short term disability benefits for family leave after the birth of his child, without having to satisfy any waiting periods or other eligibility requirements under the applicable benefit plan (e.g., actually having the baby or being disabled from work).

The difficulty and absurdity that this "right of substitution" presented to Wisconsin employers led to the argument that ERISA, the Federal law that governs employer-sponsored health and retirement plans, preempted the substitution right under the Wisconsin FMLA. However, in Aurora Med. Group v. Dep't of Workforce Dev. (2000), the Wisconsin Supreme Court rejected this argument. In Aurora, an employer refused to allow an employee who took leave to adopt a child to substitute paid leave under its ERISA-governed sick pay plan because she was not ill and the plan only provided benefits to employees who were ill - an action that violated the WFMLA. The employer argued that ERISA preempted the right to substitute under the WFMLA, and thus, precluded a finding that it interfered with the employee's rights under the law. The court disagreed, finding that ERISA did not preempt the WFMLA because it did not "relate to" employee benefits plans, a prerequisite to preemption. As a result, the right of substitution has remained relatively unhindered for the last 14+ years.

End of story? Perhaps not. On September 30, 2014, the Sixth Circuit Court of Appeals, which covers Kentucky, Michigan, Ohio, and Tennessee, disagreed with the Wisconsin Supreme Court and held that ERISA did, in fact, preempt the right of substitution under the WFMLA.

In Sherfel v. Newson, the Sixth Circuit found that the WFMLA's substitution right could "mandate the payment of benefits contrary to the terms of an ERISA plan," which would violate ERISA's requirement of a uniform administrative scheme. The ERISA plan in question denied benefits to an employee who attempted to substitute short-term disability benefits under the plan following the birth of her child because she no longer met the plan's definition of "short-term disabled." The State found that she had a right to substitute the benefits even though she did not meet the plan's eligibility requirement; i.e., she was not "disabled." The employer argued that providing benefits under such circumstances would violate the benefit plan's terms and ERISA's uniform administration requirement, since the Wisconsin law effectively required the plan to provide disability benefits to non-disabled employees located in Wisconsin, but not non-disabled employees located in the other 48 states in which the plan operated. The Sixth Circuit agreed, holding that ERISA preempted the WFMLA to the extent that it required a benefit plan to pay benefits in a manner contrary to the plan's written terms.

What does this mean? Good question. Do Wisconsin employers follow the Wisconsin Supreme Court's decision in Aurora and allow employees to substitute paid leave under an ERISA-governed plan regardless of its eligibility requirements, or, reject any such request in reliance on the Sixth Circuit's recent decision in Sherfel? Who knows? The law is not really clear about what to do in such cases of clear conflict. For now, however, the safest bet would be to follow the requirements of the Aurora decision, since it is the interpretation that will most likely be followed by the Department of Workforce Development when addressing this question. As they say, however, "stay tuned."

Wisconsin employers follow the Wisconsin Supreme Court's decision in Aurora and allow employees to substitute paid leave under an ERISA-governed plan regardless of its eligibility requirements, or, reject any such request in reliance on the Sixth Circuit's recent decision in Sherfel? Who knows? The law is not really clear about what to do in such cases of clear conflict. For now, however, the safest bet would be to follow the requirements of the Aurora decision, since it is the interpretation that will most likely be followed by the Department of Workforce Development when addressing this question. As they say, however, "stay tuned."