Paid sick leave – you either love it or hate it, right? As of this writing, seven states,1 the District of Columbia, and more than 25 cities and counties have passed paid sick (and often, family) leave laws. However, 14 states have banned cities and counties from adopting such laws.2 And, paid sick leave is mandatory for federal contractors.
Further, a mandated paid sick leave plan or policy is typically subject to the Employee Retirement Income Security Act of 1974 (ERISA), which sets minimum standards for most voluntarily established pension and health plans to provide protection for individuals in these plans.
This article will explore when paid sick leave is subject to ERISA, and how potential benefits may win you over.
Benefits Subject to ERISA
ERISA covers “any employee benefit plan if it is established or maintained by any employer engaged in commerce or in any industry or activity affecting commerce, by any employee organization [e.g., a labor union], or organizations representing employees engaged in commerce…, or by both.”3
An employee benefit plan is either “an employee welfare benefit plan or an employee pension benefit plan or a plan which is both.”4 And since a sick pay plan is an employee welfare benefit plan,5 unless exempted, a mandated paid sick leave plan or policy would be subject to ERISA.
Exceptions to ERISA
Standard Exemptions
ERISA does not apply to government plans; church plans; plans maintained solely for the purpose of complying with applicable worker’s comp laws, unemployment compensation, or disability insurance laws (note that this exception does not include applicable paid state or local sick or family leave laws); plans maintained outside of the U.S. primarily for the benefit of nonresident aliens; and unfunded excess pension benefit plans that provide certain employees contributions or benefits in excess of IRC § 415 (the maximum limitation on contributions or benefits in retirement plans).6
An exception also exists for 100% employee-paid voluntary group insurance programs where the employer does not endorse or administer the program, but merely permits the insurer to publicize the program to employees or members, collects and remits the premiums to the insurer, and receives no consideration in connection with the program (other than reasonable compensation for administrative services).7
Payroll Practice Exception
The “payroll practice” exception from ERISA coverage is the most relevant exemption for employer-paid sick or family leave plans. Most often, sick, vacation, and other paid-time-off (PTO) compensation is disbursed from an employer’s general assets. Spared from the definition of an “employee welfare benefit plan” is the “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).”8
This exemption applies only if the benefits are paid from the employer’s general assets; if benefits are paid from a trust or an insurance contract (and not merely reimbursing the employer for benefits paid from its general assets9), then the benefit likely will be governed by ERISA, unless it is bound by the Fort Halifax exemption or other exceptions.