Funkhouser v. Wells Fargo Bank, N.A.

Citation: 289 F.3d 1137Docket: Nos. 00-35397, 00-35410

Court: Court of Appeals for the Ninth Circuit; May 15, 2002; Federal Appellate Court

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A federal court must determine whether it can rule on the ERISA preemption of a state law claim after declining to exercise supplemental jurisdiction. Following Wells Fargo Bank's merger with Northwest Bank in December 1998, significant changes were made to employee sick-time and vacation policies. Previously, employees accrued one sick day per month with a cap of 120 days per year and could take up to ten sick days annually for family care. Vacation days ranged from five to twenty-five per year, were carryover eligible, and payable at termination. These were replaced by a Paid Time Off (PTO) program, providing 25-35 days annually for both sick and vacation time, with restrictions on carryover and payout. A Short Term Disability (STD) program accompanied the PTO program, allowing for extended illness leave but with limitations on family care usage.

Karla Funkhouser and Suzanne Pearce filed a class action against Wells Fargo, alleging violations of the Family Medical Leave Act (FMLA) and state law breach of contract due to the policy changes. Wells Fargo moved to dismiss these claims, arguing that the state law claim was preempted by ERISA. The district court dismissed the FMLA claim for failure to state a claim but found that the state breach of contract claim was not ERISA-preempted and chose not to exercise supplemental jurisdiction, dismissing it without prejudice. Both parties filed timely appeals. The FMLA mandates at least twelve weeks of unpaid leave for specific family and medical reasons, which the employees allege Wells Fargo violated by eliminating their accumulated sick days, despite the current programs exceeding FMLA requirements. The employees assert that the transition to a less favorable benefits package constitutes a violation of the FMLA.

Employees failed to establish a claim under the Family and Medical Leave Act (FMLA). An employer complies with the FMLA by meeting or exceeding its minimum requirements, and can amend leave and benefit programs as long as they remain compliant. Employees' reliance on 29 U.S.C. § 2612(d)(2)(B) is misplaced, as this provision only allows the substitution of accrued paid leave for FMLA leave without creating an entitlement to sick time. The district court correctly dismissed the FMLA claim since Wells Fargo's benefits exceed statutory minimums.

Wells Fargo contended that the district court lacked jurisdiction to address the ERISA preemption issue due to its refusal to exercise supplemental jurisdiction over the state law breach of contract claim. If a claim is completely preempted by ERISA, it invokes federal jurisdiction under 28 U.S.C. § 1331. Thus, the district court needed to assess complete preemption to determine if a federal question existed. If preempted, the court could not dismiss without prejudice. The court was justified in evaluating complete preemption, despite Wells Fargo's claim that it focused on conflict preemption.

A claim is completely preempted under ERISA if it falls within the statute's civil enforcement provisions and is also subject to conflict preemption. The district court did not exceed its jurisdiction, and Wells Fargo’s argument that the breach of contract claim is not preempted by conflict preemption was deemed erroneous, as ERISA preempts state laws related to any covered employee benefit plan.

Wells Fargo argues that its pre-merger sick-time and vacation policies qualify as “employee benefit plans” under the Employee Retirement Income Security Act (ERISA), which would preempt the employees’ breach of contract claims related to these policies. ERISA preempts state laws that relate to “employee benefit plans,” as defined in 29 U.S.C. § 1002(1) and § 1002(3). The Department of Labor's regulations clarify that “employee benefit plans” do not include “payroll practices,” which involve the payment of normal compensation from the employer's general assets during periods of employee absence due to medical reasons. 

In previous cases, such as Alaska Airlines, Inc. v. Oregon Bureau of Labor and Massachusetts v. Morash, sick-time and vacation policies that paid full salary and were funded by an employer's general assets were classified as payroll practices. Wells Fargo's sick and vacation policies fit this definition since payments were made at full pay from general funds. 

Wells Fargo's assertion that the pre-merger sick-time policy is not a payroll practice due to its complex accrual conditions is unconvincing; despite the conditions, payments remained fixed and predictable. The employees’ reference to the sick-time policy as “insurance protection” was merely for damage calculations and did not imply that it was recognized as an ERISA plan. Lastly, Wells Fargo's reliance on McMahon v. Digital Equipment Corp. is incorrect, as the pre-merger policy was fully funded by its general assets, and Wells Fargo did not declare it as an ERISA plan to the Department of Labor.

Wells Fargo's pre-merger sick-time and vacation policies are classified as payroll practices, thereby exempt from being defined as an “employee benefit plan.” Consequently, the relevance of Wells Fargo's breach of contract claim related to these policies is deemed insignificant. Additionally, Wells Fargo argues that the employees’ breach of contract claim is preempted because it involves the Short-Term Disability (STD) program, which is recognized as an ERISA benefit plan. According to established precedent, a claim is considered to “relate to” an employee benefit plan if it has a connection or reference to it. Wells Fargo contends that damages calculations for the employees’ claim would necessitate referencing the STD program. Should the employees succeed, they would likely not recover the full value of the pre-merger policies, as Wells Fargo would possibly receive an offset for the value of the STD and Paid Time Off (PTO) programs. However, a claim does not automatically “relate to” an ERISA plan simply because damage calculations reference it. Courts have ruled that the mere consideration of ERISA benefits in damage calculations does not justify preemption, as such a stance would lead to unreasonable consequences, affecting a wide array of wrongful termination claims. Furthermore, the recent Supreme Court ruling against a specific subsection of ERISA relating to employer notice does not impact the relevant provisions at issue here. The court does not express any opinion on the merits of the employees’ breach of contract claim.