SHORT-TERM DISABILITY CLAIM PROPERLY DISMISSED AS AN ERISA-EXEMPTED PAYROLL PRACTICE

In Foster v. Sedgwick Claims Management Services, Inc., 2016 U.S. App. LEXIS 21274 (D.C. Cir. Nov. 29, 2016), the District of Columbia Circuit held, among other things, that the district court’s dismissal of plaintiff’s ERISA claim regarding short-term disability benefits was proper because that benefit fell under the “payroll practice” exemption under ERISA regulations promulgated by the Department of Labor.

Kelly Foster, who was employed as a mortgage loan closer at SunTrust Bank, submitted claims for short-term disability benefits in January and August 2012 after missing work for several ailments. Sedgwick, which was the third-party administrator for both SunTrust’s short-term and long-term disability plans, denied the claims based on its determination that Foster had failed to provide “sufficient objective medical documentation” to support her claim. In September 2012, Foster was terminated based on her work absences and she subsequently appealed Sedgwick’s decision to deny short-term disability benefits, which Sedgwick upheld in early 2013. After her termination, she also filed a long-term disability claim which was also denied and upheld on appeal.

In July 2014, Foster sued both Sedgwick and the SunTrust plan under 29 U.S.C. § 1132(a), ERISA’s civil enforcement section, regarding the denial of both long-term and short-term disability benefits. Defendants filed a motion for summary judgment, claiming, among other things, that as to the short-term benefits, Foster could not seek review under ERISA because that plan was an “ERISA-exempt payroll practice,” under the DOL regulation set out at 29 C.F.R. § 2510.3-1(b)(2), which Foster conceded. Despite the concession however, the district court still analyzed defendants’ argument and independently determined that because the short-term disability benefits were “paid from SunTrust’s general assets and [were] ‘entirely separate’ from the Employee Benefits Plan,” it was a payroll plan, exempt from ERISA and since Foster’s complaint only invoked ERISA as the basis for her claims, it had no alternative but to grant summary judgment on the claim. Foster first moved for reconsideration in the district court and in that motion raised for the first time, the argument that the short-term plan was not an exempt payroll procedure and that was denied.  (The court also granted summary judgment to the defendants on the long-term claim).

The circuit court began its analysis of the short-term benefit denial by stating that without the Department of Labor’s regulation, the short-term benefit plan would be a welfare benefit plan under ERISA but that DOL exempts certain “payroll practices” from ERISA including: “[p]ayment 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.”

Analyzing the facts that were before the district court, the circuit court noted that SunTrust’s short-term disability plan clearly fit within the regulatory definition of “payroll practices” because it 1) was payment of an employee’s normal compensation; 2) paid from the employer’s general assets; and 3) was paid on account of time during which the employee was absent for medical reasons. The court went on to opine that it appeared “that SunTrust drafted its short-term disability plan to match the regulatory exemption.” As such, the appeals court affirmed the district court’s grant of summary judgment based on the payroll practices exemption on the merits, while it also rejected the appeal because the argument had not been preserved in the district court because it had not been raised prior to the motion for reconsideration. (It is worth noting that the circuit court also affirmed the denial of long-term benefits based on Sedgwick’s discretion to interpret the terms of the plan and its determination using that Sedgwick had not abused that discretion when it denied those benefits).