Monkhouse v. Stanley Associates, Inc. Short Term Disability Income Plan, 2010 U.S.Dist.LEXIS 40555 (S.D.Tex. April 26, 2010)(Issue: ERISA Preemption – Who’s Covered).  After becoming disabled, the plaintiff, George Monkhouse, sought short-term disability benefits from his employer, Stanley Associates, Inc..  When benefits were denied, Monkhouse brought an action against his employer in state court; however, Stanley removed the case to federal court alleging that ERISA preempted his claim.  Monkhouse then moved to remand, contending the short-term disability plan was not an “employee welfare benefit plan” covered by ERISA (29 U.S.C. §1002(1)), but was instead a payroll practice exempt from ERISA under regulations issued by the Department of Labor, 29 C.F.R. § 2510.3-1(b)(2).  The court agreed with the plaintiff and remanded. 

The court acknowledged that if the claim arose under a welfare benefit plan, it would be completely preempted by federal law and thus removable to federal court.  However, the court found the short-term disability plan was a “payroll practice” which the regulation defines as: 

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).   The court cited Bassiri v. Xerox Corp., 463 F.3d 927, 929 (9th Cir. 2006), which found that while Xerox’s disability benefit plan resembled an ERISA-governed welfare benefit plan, because it fit within the payroll practice regulation, it was exempt.  The court also pointed to Stern v. IBM Corp., 326 F.3d 1367, 1373 (11th Cir. 2003) (stating that the issue was "when a program would clearly qualify as an ERISA plan but for its specific exemption by a reasonably justified regulation") and McMahon v. Digital Equip. Corp., 162 F.3d 28, 36 (1st Cir. 1998) ("[N]ot all plans that fall within the literal definition in § 1002(1) are included within the scope of ERISA. Regulations promulgated by the Secretary of Labor provide that the term 'employee welfare benefit plan' excludes certain enumerated 'payroll practices' . . . .").  The court also flatly rejected the Defendant’s argument that the payroll practice regulation conflicted with the statute, pointing to Chevron USA, Inc. v. Natural Resources Defense Counsel, Inc., 104 S. Ct. 2778 (1984). Chevron would require deference to the agency’s position unless it conflicted with “the unambiguously expressed intent of Congress." Id. at 2781-82.  The court found there was no unambiguous Congressional intent for ERISA to encompass self-funded short-term disability plans.   

Examining the STD program as against the regulation, the court found the STD plan fell squarely within the payroll practice regulation since it paid “normal compensation,” albeit at less than full salary, and because the funds were paid out of the employer’s general assets and were paid "on account of periods of time during which the employee is physically or mentally unable to perform his or her duties." The court was unpersuaded that the short-term disability benefit plan had been held out and treated as an ERISA plan, citing Stern v. IBM for the proposition that even if the plan were held out to be an ERISA plan and the employer filed Form 5500 with the Department of Labor and the Internal Revenue Service identifying the plan as ERISA-governed, “mere labeling of the plan should not determine whether ERISA applies.” The court also noted that CIGNA, the plan’s third-party administrator, labeled the plan as “non-ERISA.” 

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