Who’s “Opting Out” of Workers’ Comp—Employers or the States Themselves?

Recent Federal District Court Discusses ERISA’s Strong Preemption Provisions

As I have noted on multiple other occasions, one of the distinctive features of the workers’ compensation “opt out” scheme is the employer’s establishment of an employee benefit plan (“EBP”) that not only meets the basic requirements of the opt out legislation, but also provides some additional benefits—e.g., periodic blood pressure screening, health club discounts, and/or flu shots—in order that the plan qualify under ERISA. By adding such benefits to the state law’s core workers’ compensation provisions, the employer’s plan should qualify under ERISA. ERISA qualification is important since with such qualification comes ERISA’s strong preemption provisions. Any dispute arising out of the plan’s administration will not be arbitrable in the Oklahoma courts and administrative bodies.

Of course, Oklahoma’s opt out scheme is too new to have spawned jurisdictional disputes (and Tennessee’s proposed opt out legislation has stalled for the moment), so the courts have not yet been called upon to determine just how the strong ERISA preemption will interact with opt out plans. Moreover, many workers’ compensation practitioners are understandably inexperienced in maneuvering through the federal court system—opt out proponents: isn’t taking advantage of that fact part of the overall plan? Well, in any event, a recent federal district court decision, Terry v. Pepsi Bottling Group, Inc. Long-Term Disability Plan, 2015 U.S. Dist. LEXIS 48753 (E.D. Ky., Apr. 14, 2015), provides at least a beginner’s course in what sorts of disputes can be determined by the states and what sorts must be passed on to the federal system.


Terry sustained a workplace injury while working for Pepsi. In addition to providing the required Kentucky workers’ compensation coverage, Pepsi also had established a separate long-term disability (“LTD”) plan for the benefit of its employees. The plan had a provision that allowed the plan administrator to offset any LTD benefits by the amount a plan participant received in Social Security Disability benefits.

Terry settled his workers’ compensation case with Pepsi by means of a settlement agreement. The settlement agreement contained the following promise regarding Terry’s ERISA benefits: “In further consideration of this settlement, the [Pepsi LTD plan] agrees that it will not seek nor be entitled to any recoupment/offset/reduction in regard to LTD benefits due to other benefits paid. Plaintiff’s eligibility for LTD benefits is not offset.”

Subsequently, the plan began to offset Terry’s LTD benefits by the amount he received in Social Security Disability benefits. He filed a complaint in Kentucky state court and Pepsi removed it to federal court. Terry contended the matter had been improvidently removed and that Pepsi’s duties to not offset the LTD benefits arose from the workers’ compensation settlement agreement, not from the terms of Pepsi’s LTD plan. After considering the issue, the district court agreed, stating:

He is correct. Assume that the Plan provides for a payment to Terry of $1000 in LTD benefits each month and that Terry also receives $500 each month from Social Security. The parties do not dispute that the terms of the Plan require the offset of LTD benefits by the Social Security Disability benefits received by the beneficiary. Applying those terms, Terry may receive only $500 each month in LTD benefits. Now, add the wrinkle of the separate promise between Terry and Pepsi: the settlement agreement states that the PBG Plan will not offset the LTD benefits [reference to record omitted]. What is the effect of that agreement? No party suggests that the agreement altered the terms of the Plan itself, and accordingly the Court will assume that the Plan terms remained the same. Because the Plan’s terms have not changed due to the agreement, it follows that the duty of PBG under the terms of the Plan also has not changed—to offset benefits if Terry receives other income. While the agreement does not change PBG’s duty under the Plan, it does create a separate duty under state contract law [citation omitted].

The court concluded that since the sole source of PBG’s duty to pay the specific benefits at issue was the settlement agreement, ERISA did not completely preempt the complaint and the case had to be remanded to state court.

Implications for Opt Outs

As I have said on a number of occasions, I’m no ERISA expert. My reading of the Terry case tells me, however, that if a Pepsi LTD plan provision had actually been in dispute, the district court would have come down on the other side of the issue: removal would have been required by ERISA.

Hypothetically, assume an Oklahoma opt out plan requires a claimant to prove his or her level of disability by “clear and convincing evidence” and assume further, that the claimant produces expert witness testimony that the claimant’s impairment and, therefore, disability exists and yet the plan’s finder of facts—which, under a separate plan provision, could be one or more “arbitrators” chosen by the employer—determines that the claimant failed to meet the required burden of proof, what recourse does the claimant have? My reading of Terry and my understanding, though cursory at this point, of ERISA tells me any state civil action filed by the claimant would have to be removed to federal court.

Readers: tell me how I’m wrong! For those that follow Oklahoma’s lead, who’s really opting out of the workers’ compensation traditional benefit scheme—the employers or the states themselves?

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