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May 8, 2012

Oklahoma Opt Out Legislation Fails: A Post Mortem

By Thomas A. Robinson

Late last Wednesday evening (April 25th), supporters of a controversial bill that would have allowed some Oklahoma employers to “opt out” of the state’s traditional workers’ compensation system [see Oklahoma House Bill 2155] fell short of having sufficient votes to move the legislation through the Oklahoma House of Representatives and on to the state’s Governor. The measure would have allowed qualifying employers to establish written benefit plans pursuant to the Employment Retirement Income Security Act of 1974 (ERISA) in lieu of the existing state system. While the ERISA plans would have been required to provide benefits at the same or higher level as under current law, critics, pointing to somewhat similar plans established by opt out employers in nearby Texas, said the practical effect of House Bill 2155 would have been to diminish significantly the disability and medical benefits injured workers might receive in Oklahoma.

The vote–42 in favor and 50 against—surprised many since an earlier version, containing many of the same provisions, had passed in the House in mid-March by a margin of greater than 3 to 1. Following that favorable House vote, the bill eased its way through the Oklahoma Senate on April 18 by a 28-17 vote, although in a somewhat different form. I’ve held off writing the H.B. 2155 obituary—a last minute legislative maneuver as the bill was going down in defeat allowed for the possibility that the measure might be brought back up for a vote at any time through the close of yesterday’s House session. That deadline has now passed without a new vote; the bill has now officially succumbed.  

Why Talk About a Defeated Bill?

I don’t ordinarily make a point of commenting extensively on failed legislation. I’m making an exception for House Bill 2155 for two reasons. First, a number of the bill’s proponents were crowing about how its passage was a “done deal” and, buoyed on by the Oklahoma success, we’d see a wave of similar legislation in other states. So, we see the importance of counting our chicks only after they’ve hatched. Second, and more importantly, the bill provides us with a provocative example of how states are pulling out all the stops when it comes to attracting and keeping businesses within their borders. Employment investment grants, small business credits, and the like are being supplemented by so-called legislative “reforms.” Reform, like beauty, is generally in the eye of the beholder. This sort of workers’ compensation opt out legislation will likely rise and live again.

Oklahoma: “What Are We Going to Do About Texas?”

In its most basic terms, the Oklahoma opt out legislation was designed by supporters as an offensive maneuver in the state’s continuing battle with Texas and other nearby states over business and employment—one of several stated purposes of the legislation was to “[a]ssist the state in attracting and retaining business, thereby contributing to the overall economic development and well-being of its citizens”. Anecdotally, many Oklahoma employers have concluded that the state’s current workers’ compensation system is attorney-driven, unnecessarily contentious, and fraught with delays and needless expense. Nearby Texas, the only state with a truly voluntary workers’ compensation system, is generally seen as enjoying a significant, and unfair, advantage.

Proponents of H.R. 2155 thought the bill would help level the playing field. Yet, in spite of all the comparisons between H.B. 2155 and the long-established workers’ compensation system in her sister state to the south, the bill was not a copy of the Texas system. For example, under H.R. 2155, Oklahoma would have allowed only some employers to opt out of the existing state system; in Texas all employers who fail to “opt in” by securing coverage for employee injuries remain outside the existing system. The Texas Act, unlike H.B. 2155, also allows employees to opt out of coverage (assuming somewhat rigorous conditions are met). In Texas, the so-called “non-subscribing” employer may be sued in tort by the injured worker and it may not take advantage of most common law defenses (contributory negligence, assumption of risk, etc.). Had H.B. 2155 become law, the Oklahoma employer who opted out would nevertheless have enjoyed exclusive remedy protection. The bottom line: While there are some similarities between the Texas system and Oklahoma’s defeated H.B. 2155, the compensation schemes have significant differences.

Specific Provisions of H.B. 2155

As noted above, the opt out provision contained within H.B. 2155 would not have been available to all employers. In fact, most existing Oklahoma employers would not have been able to take advantage of the law, even if such an election made economic sense for them. This is because the bill’s definition of “qualifying employer” favored only two groups of firms: (a) those who have a workers’ compensation experience modifier, as reported by the National Council on Compensation Insurance, Inc. (NCCI), greater than one (1.00) for the preceding Oklahoma workers’ compensation insurance policy year, or (b) those who had total annual incurred claims, as reflected in an NCCI workers’ compensation experience modifier worksheet or their workers’ compensation carrier loss runs, greater than $50,000.00 in at least one of the preceding three Oklahoma workers’ compensation insurance policy years. The vast bulk of employers would not, therefore, have qualified for the opt-out election. For those non-qualifying employers, life within the workers’ compensation setting would have continued as is.

Under the bill’s provisions, opting out would not have meant that a qualified employer quit the existing system (as is more or less possible under the Texas system); the Oklahoma employer would have been required to substitute a written ERISA plan providing specified benefits in its stead. Section 5 of H.B. 2155 required that all benefit plans created by electing and qualified employers provide essentially the same (or greater) medical benefits and disability indemnity that the injured employee would otherwise receive under the existing state system. Section 5 also contained a provision that echoed existing law for total or partial loss of use related to a “scheduled member” (e.g., arm or leg, thumb, eye, etc.). Death benefits, funeral benefits, and other compensation provided for in H.B. 2155 were all comparable to the existing Oklahoma Workers’ Compensation Act. Proponents of the bill argued that the savings that would have been enjoyed by electing employers would have come from the streamlined administrative process and not from a decrease in benefits paid to injured employees (more about that later).

It is also important to note that the exclusive remedy provision contained in H.R. 2155, like the provision already in place within the state’s workers’ compensation system, would have bound not only the employee, but the employee’s dependent family members. Derivative tort actions filed by others would have had no more (or less) success than under current law.

Substitution of an ERISA Plan Administrator for the Oklahoma Workers’ Compensation Court

For qualifying and electing employers, the most provocative provision of House Bill 2155—and perhaps the most important factor in the failure of the bill—was its tacit substitution of a plan administrator, as that term is defined and used within ERISA, for the state’s Workers’ Compensation Court. All plans put in place by opt out employers would have been required to comply with and be subject to the employee benefit plan requirements of ERISA. Indeed, H.R. 2155 went so far as to condition the availability of the exclusive remedy protection on ERISA compliance. As practitioners are aware, ERISA preempts all state laws when it comes to employee benefit plans. Once in place, therefore, the opt out ERISA plan would have been beyond the jurisdiction of the state of Oklahoma. H.R. 2155 acknowledged this in Section 4(D), wherein it specifically stated that “[t]he Oklahoma Workers’ Compensation Court, the state courts of Oklahoma, the Commissioner, and all other Oklahoma administrative agencies, shall not promulgate rules, regulations or any procedures related to design, documentation, implementation, administration or funding of a qualified employer’s benefit plan.”

Where Did Support for the Bill Go?

In spite of initial broad-based support in the Oklahoma House and success in the state Senate, two things seemed to doom the legislation in the end. First, there was a sense among many that under the bill’s provisions, it was “good to be bad,” that the bill rewarded those with poor safety experience records and punished those with good ones, when the opposite should have been the case. Several cynical Oklahoma colleagues have indicated that this may well have been by design, that the legislative plan may have been to allow the opt out first for large employers and those with poor safety records—if the system worked, allowing it later for small and “safe” employers would have been easy—whereas, the opposite might not have been true.

Second, as more and more light was shined on the provisions of the bill and as the full ramifications of the legislation began to be fully considered, particularly the parts dealing with ERISA, many in the House became uncomfortable punting the issue toward what they perceived was a federalized solution. Putting it a different way: Under H.B. 2155, while some Oklahoma employers would be allowed to opt out of the current comp system, the full state Legislature, in assigning so much unfettered power to ERISA plan administrators, would have been performing an “opt out” of its own. It would have been moving the plight of many Oklahoma injured employees beyond the protections of state law. Consider the following hypotheticals:

Federal ERISA Hypotheticals

Suppose an Oklahoma employer qualified to opt out under H.R. 2155, that it did so, and that it established a plan that met all the requisites of ERISA. Suppose further, that the plan required an injured employee to prove legal causation (that the claimant sustained an accidental injury arising out of and in the course of the employment) by clear and convincing evidence, instead of by a preponderance of the evidence, as might be the standard under an existing state Act. Suppose the plan administrator found that the injured employee failed to meet this enhanced burden of proof. The injured employee would have no recourse before the Workers’ Compensation Court, or any Oklahoma court for that matter. He or she would have been required to initiate an appeals process through the federal system. What would be the basis of the appeal, however, since the plan administrator, under the terms of the plan, was entitled to adjudge the disputed claim using that heightened level of proof?

Or suppose, for ease of administration and to reduce overall costs, the ERISA plan required all claims to be filed with the plan administrator within, say, 30 days, instead of the one-year period provided by state law. Would state law trump the plan provision? No. Congress has declared ERISA to preempt state legislation in this regard. What if state law allowed, but the ERISA plan refused to acknowledge mental injury claims? Or suppose a plan provision prohibited the reopening of a claim if more than 180 days had passed since the payment of last compensation (a time frame shorter than in many state acts), what controls, state law or the plan provision? Again, it’s my understanding that the plan provisions would control.

H.R. 2155 seemed to set up two classes of injured employees: (1) those under the existing system, with its checks and balances; and (2) those under ERISA opt out plans. Two employees, with nearly identical injuries, might enjoy completely different levels of benefits. A number of opponents to H.R. 2155 pointed out the likelihood of litigation on constitutional grounds as aggrieved employees made their equal protection and due process arguments.

Some bill proponents countered that the opt out legislation shouldn’t be considered any more controversial than efforts by the states a decade or so ago in enacting various methods of alternative dispute resolution. But state ADR programs applied generally to everyone and, more importantly, they were administered by the state and not by an ERISA plan administrator. Indeed, ADR processes were (and are) generally bound up within an existing state Workers’ Compensation Act. ADR provides for some streamlining of processes without assigning authority of claims administration to an administrator which is not bound by pronouncements by the state legislature or state courts.

Are ERISA Opt Outs Inevitable?  Is the Use of ERISA a Subtle Form of Federalization Within the Comp World?

There’s been talk over the past few years that the federal government means to take over the workers’ compensation system; it’s already done so for large swaths of the coal industry, for nuclear weapons industry employees (see the Energy Employees Occupational Illness Program Act of 2000), for Longshore Workers, and America’s entire health care system.  Why not for the payment of disability indemnity benefits and the like for all injured employees? Opponents of such federal expansionism argue that the states should be allowed to continue to formulate their own workers’ compensation programs, that some state schemes will succeed better than others, that eventually good ideas will be adopted and bad ideas jettisoned. “Stay out of our states,” is the common cry.

I’m left thinking that any federalization of state workers’ compensation programs won’t so much come from on high in the form of imperial edicts from Congress. Rather, the take-over, if it occurs at all, may well come via special invitation from the various state legislatures, as they chase elusive jobs and employers, as they play what some apparently think is a zero-sum game of economic expansion. H.R. 2155, if it had become law, might well have allowed, for good or bad, the federal camel’s nose into the tent. At least that was a strenuous argument presented by the Oklahoma bill’s opponents as it went down to defeat. At least one House member publicly referred to the opt out legislation as “Obama Comp.” Some say this was the argument that tipped the scales against passage.

Yesterday, Delta Airlines announced that it is buying an oil refinery outside Philadelphia for $150 million. As you can imagine, it will “specialize” in refining jet fuel. To help with the purchase, Delta received a $30 million grant from the state of Pennsylvania. My home state, like many others, provides Job Development Investment Grants to employers relocating to the Tar Heel State. It offers Small Business Technology Funding Grants and the like to others. What does any of that have to do with ERISA, with Oklahoma, or with workers’ compensation law? Nothing—we really aren’t talking about those issues. We are, however, talking about how one state can gain an edge over another. That’s what was going on in Oklahoma. Some folks think an opt out provision with an ERISA plan that substitutes a plan administrator for a judge would give a state an edge? House Bill 2155 may be dead; the issue isn’t.

© Copyright 2012 LexisNexis. All rights reserved. Reprinted with permission.