Langham: Opt-Out Statute Declared Unconstitutional

Tuesday, March 1, 2016 | 0

In 2013, battle lines were drawn. Finding the union no longer to their liking, a small but powerful band withdrew from the world of workers’ compensation and sought to form a new system and alliance. Like the shots at Fort Sumter in 1861, the enactment of the Oklahoma Opt-Out was a shot heard round the workers’ compensation world. For three years battles have raged, and many in workers’ compensation have watched, mesmerized, waiting for the next bit of news from the front lines.

On Friday, the workers’ compensation world began a series of phone calls and emails. Rumors came from the front that the Oklahoma Workers’ Compensation Commission had ruled Oklahoma Opt-Out unconstitutional. There were various somewhat vague “confirmations,” from those who knew someone who knew someone who was there, but no one had the order, and the “what if” conversations continued through the afternoon.

WorkersCompensation.com and WorkCompCentral.com each broadcasted the confirmatory news late in the day. I received a copy of the order at about 4:30 p.m. It is an interesting decision. I am certain that the analysis and discussion of this will consume many people’s first work week of March.

The “Oklahoma Opt-Out” entered our workers’ compensation vernacular in 2013. It was a curiosity and generated a great deal of conversation. I recall industry insiders' reaction of disbelief and curiosity. It caused some to question the reality of workers’ compensation’s future. Many great minds scratched their heads, asked questions, and prognosticated on where this could or would or should lead. The buzz was deafening at times.

Texas has been a voluntary workers’ compensation system for years. In Texas, an employer can elect to subscribe to workers’ compensation or not. The employer’s benefit of subscribing is “exclusive remedy,” a protection or immunity from tort liability. The Texas employer may elect instead not to participate and forego exclusive remedy, thus taking its chances in the tort system.

The Oklahoma Opt-Out is not the same as Texas’. Under the Oklahoma statute, an employer may opt out of workers’ compensation and retain the protection of exclusive remedy. As one industry expert said to me, the Oklahoma opt-out allows the employer to “have its cake and eat it too.” A workers' compensation regulator told me in 2014 that the “Oklahoma opt-out is too good to be true for employers; you know what they say about things that are too good to be true?”

Oklahoma enacted this opt-out as part of a workers’ compensation reform effort. There were many changes in this reform, including the end of the Court of Compensation Claims. A new administrative hearing process for workers’ compensation claims was created, and benefits were changed with the Administrative Workers’ Compensation Act, or “AWCA.” See, Coates v. Fallin, 316 P.3d 924 (Okla. 2013). And for the last three years, the old litigation process, now called the “Court of Existing Claims,” has diminished as the new administrative law process has grown. That process also has not been without friction, but is for another day.

Much was changed by reform. And as a result, there are a number of constitutional challenges being prosecuted regarding various aspects of it. Constitutional challenge has, in the perception of some, become a cottage industry in Oklahoma.  

Since Oklahoma enacted this new AWCA process and the opt-out, the opt-out has been discussed in a myriad of venues. Workers’ compensation educational programs across the country have presented the experts and perspectives. The champions and critics have been heard from sea to shining sea. At the 32nd Workers' Compensation Research Institute's Annual Issues & Research Conference in March, there are presentations focused on this scheduled yet again. One industry analyst Friday suggested to me that the March WCRI Conference just became a “must see,” in light of Friday’s decision in Oklahoma. WCRI seems the incidental beneficiary of timing in this event.

The Association for Responsible Alternatives to Workers’ Compensation (ARAWC) has championed the opt-out in Oklahoma and has since pursued an Oklahoma style opt-out in other states. The subject has been debated in Tennessee extensively for two years. It was mentioned in South Carolina briefly also. Each of these states has seen the filing of legislation, but neither has come close to passing an Oklahoma-style opt-out. There has been ample discussion of the perceived reasons that the legislation has not moved in either state. There have also been rumors of the probability of such legislation in other states.

Friday’s case is Vasquez v. Dillard’s Inc., heard by the Oklahoma Workers’ Compensation Commission. It was argued on February 25, 2016 and the decision was rendered Feb. 26. There is parallel litigation apparently being pursued in the courts.

Explaining the conflict, the Oklahoma Commission said “Dillard's chose to take advantage of the benefits of the Opt-Out Act (EIBA) to become a ‘Qualified Employer’ by ‘opting-out’ of the provisions of” Oklahoma workers’ compensation. Dillard’s prepared its own workers’ compensation substitute, a plan “governed under the provisions” of “the Employee Retirement income Security Act (ERISA).”

Ms. Vasquez worked at Dillard’s and claimed an injury at work in 2014. She unsuccessfully sought medical benefits through the approved opt-out plan. The Commission noted that Vasquez is “the first appeal from a denial of benefits under an employee's Benefit Plan,” an “opt-out.” Because of that novelty, the Commission discussed jurisdiction, or authority, issues extensively in Friday’s order. It noted that Dillard’s contended that its substitute benefit plan is “governed by the Federal Employee Retirement Income Security Act (ERISA),” and the Commission agreed. However, this election did “not automatically leave Dillard's ‘completely free to circumvent’ Oklahoma law.”

There are those who disagree. They contend that the preemption doctrine holds that when the federal government acts, contrary state law must yield. This argument is predicated upon the Supremacy Clause of the U.S. Constitution. Preemption has been discussed before in workers’ compensation, in terms of immigration status distinctions and other regulatory issues. Many will be curious whether Friday’s state decision stands against a preemption argument.

The Commission concluded that ERISA affords “concurrent” jurisdiction, for appeals regarding claims, to “state courts of competent jurisdiction, and district courts of the United States.” The Commission concluded that Oklahoma, enacting its reforms, clarified “that the Commission constituted a state court of competent jurisdiction.” It therefore concluded that the Commission had authority to hear Ms. Vasquez’s constitutional challenge.

The Commission concluded that it generally lacks authority regarding questions of constitutionality. In this regard, Florida is the same. The lack of authority over constitutional issues here could result in an interesting procedural issue if certain potential outcomes of the current Florida constitutional challenges come to pass. However, the Oklahoma Commission concluded that the legislative language that labelled it a “court of competent jurisdiction” likewise rendered it “empowered” to hear the challenge to constitutionality in the context of “a statute that affects a Claimant's right to benefits as an injured worker.”

Ms. Vasquez asserted that the exclusive remedy set forth in Section 209 of the opt-out violated her rights to equal protection and “access to courts.” She also claimed “that the Plan as constructed violates her right to due process,” because it deprived her of “an independent tribunal and the right to cross-examine witnesses and present testimony.” The Commission did not address the “due process challenges,” disposing of the challenge on other grounds.

The Commission noted that the “Opt-Out Act requires that injured workers under” such plans must have “benefits equal to or better than those under the Administrative Workers' Compensation Act” (AWCA), and so facially equal protection is assured. But, it concluded that actually, “this is decidedly not so” in the case before it. It explained that the opt-out allows the establishment of “a dual system under which injured workers are not treated equally.” The Commission waxed eloquent, saying that “the appearance of equal treatment under the dual system is like a water mirage on the highway that disappears upon closer inspection,” an interesting analogy.

The commission next addressed Section 203 of the Act, which sets forth requirements regarding what benefits are required to be provided by any “benefit plan” adopted by an employer that opts out. This section also says that only some specific “provisions of the Administrative Workers’ Compensation Act” apply to those whose employers have opted out and adopted instead a Qualified Benefit Plan (QBP). So, the Commission concluded, there is a parity of benefits “to some extent,” but employers under a QBP “can remove the right to benefits, because under Section 203 the employer -- the very party who will have to pay the compensation -- is authorized to define ‘injury.’" So, if an injury is compensable, the benefit stream may be identical under either path, but the distinction in what is or is not compensable may be unequal at the outset.

The commission cited specific examples of disparity such as asbestos exposure, which is irrelevant to the injuries alleged by Vasquez, and then addressed the “Dillard’s Plan's definition of ‘injury,’ which differs from that in the Administrative Workers' Compensation Act.” The distinction regarding “aggravation” was seen as relevant; according to the Commission, the “Dillard's Plan's definition of aggravation of a pre-existing injury is more restrictive than that under the Administrative Workers' Compensation Act.” Because of the difference in definitions, the Commission concluded that the Dillard’s Plan makes “it more difficult for a claimant to be entitled to benefits.”

Having thus described the manner in which the opt-out creates a “dual and differing system of compensation,” the Commission turned to the Oklahoma Constitution and its “prohibition against special laws,” which states "that where a general law may be made applicable, no special law may be enacted." Using a three-part test previously delineated by the Oklahoma Supreme Court, the Commission undertook review of the opt-out and whether it violates the “special laws” prohibition.

The Commission concluded that the “general purpose” of both the AWCA and the EIBA (opt-out) is similar. The EIBA is not a “general law,” according to the decision, because it addresses only a portion of injured workers, those whose employers have opted-out. Thus, the Commission labelled the EIBA a “special law,” (part one of the test). Finding next that a “general law,” the AWCA, is otherwise applicable to “all injured workers,” the Commission concluded that the second element of the test was likewise satisfied. Concluding that a “general law” is applicable, the Commission noted that should be the end of the analysis.

However, the Commission proceeded to analyze the third portion of the test: “whether the Opt-Out Act is a permissible special law.” Avoiding inquiry into whether the separate classification is logical, smart or desirable, the Commission addressed “whether the classification is reasonable and pertinent to some particularity in the subject of the legislation,” and whether there is “some distinctive characteristic upon which different treatment is reasonably found." Doing so, the Commission concluded that the EIBA “is not a valid special law.” The Commission noted there is (italics are quoted direct from opinion):

no rational basis upon which to establish a separate system for providing workers' compensation benefits under which a subclass of injured workers is subjected to a Benefit Plan in which their employer, by defining "injury" as authorized under the Act, can determine when it will be liable and when it will not be liable, by excluding from the definition of injury the damages or harm to their workers for which it will not be responsible.

The Commission concluded, therefore, that the EIBA is an unconstitutional and “non-permissible, special law,” in that it creates an “impermissible, unequal, special treatment of a select group of the class of injured workers.”

Curiously, the Oklahoma Constitution “does not have an equivalent to the federal Equal Protection clause,” but its courts have created a “functional equivalent.” Dillard’s defended the “rational basis” of the EIBA in this regard, noting the “higher workers' compensation premium rates in Oklahoma, higher permanent partial disability payments in Oklahoma, and other economic data that workers' compensation reformers have annually trotted out for the past decade or more.” The Commission conceded that such arguments might well support efforts to reform the AWCA, but concluded this does not likewise support the creation of an alternate system.

In this regard, it is pertinent to note that some have championed the EIBA concept, claiming that it is a solution to perceived problems with workers’ compensation. In response, several critics have contended that the EIBA is abandoning workers’ compensation rather than facing the challenges of fixing it. This illustrates a fundamental difference of opinion regarding the reform issue.

The Commission was dismissive of arguments that the EIBA enhance efficiency. Noting that EIBA determinations and conclusions can thereafter be appealed to the Commission for essentially a new trial, the Commission concluded that “as opposed to being more efficient, as Dillard's claims, under the current statutory scheme, the entire employer-in-house adjudicatory process may be mere prologue,” that is less efficient.

Alluding to the constitutional analysis of delegation, the Commission concluded that the legislature, enacting the EIBA, “defined a qualified Plan in such a manner that the employer acts as the Legislator, by defining the ‘injuries’ for which benefits will be available.” The Commission compared this to allowing a particular group of “tortfeasor to define what constitutes a tort.” Finding no rational basis for this delegation of authority, the Commission concluded it was improper.

Finally, the Commission turned to Section 6 of the Oklahoma Constitution, which says “the courts of the State are required to be open to every person for remedy of wrongs.” It concluded that the EIBA “create(s) a monetary barrier to access to the courts” and establishes “a system which creates absolute barriers to seek compensation, when the bodily harm at issue does not fall within the employer's chosen definition of injury.”

The U.S. Constitution protects due process in the Fifth Amendment. However, the protection of the U.S. Constitution against state, as opposed to federal, action is in the 14th Amendment, which coincidentally also protects the right of equal protection under the law. This congruence may render equal protection and due process inextricably intertwined in the event of state action.

Some may find the commission's due process comments and conclusions unnecessary, noting the Commission’s statement at the outset that it would not address due process, instead disposing of the case on other grounds. Nonetheless, the commission discussed issues that implicate due process analysis in its closing thoughts. It concluded that this definition of compensability creates the potential for disparity. As such, the employer’s exclusive remedy benefit is balanced against an uncertain benefit for injured workers, one which is subject to the employer’s definition and grace, delegated to it by the legislature.

The one positive conclusion of the order for Dillard’s is in the final conclusion. There, the commission states that Dillard’s shall be treated as if it had procured workers’ compensation coverage, as would be required had it not opted out, and that its “liability is limited to that of an employer who had complied with the provisions of the Administrative Workers' Compensation Act.” Thus, despite its attempt through the EIBA to escape the AWCA, it ultimately remains essentially protected by the provisions of the AWCA.

With little doubt, this case will proceed next to the Oklahoma Supreme Court for further review. Few predict that this is the battle of Sailor’s Creek or Appomattox in the war of opt-out, or that the parties will anytime soon meet at Appomattox Courthouse to end hostilities. But Friday’s decision may ultimately be viewed in retrospect as one of the significant battles of the war of opt-out, regardless of which side eventually prevails.

David Langham is deputy chief judge of the Florida Office of Judges of Workers' Compensation Claims. This column was reprinted with his permission from his Florida Workers' Comp Adjudication blog.