Class Action Lawsuit Filed Against Washington State’s Long Term Cares Act - Dismissed!

Seyfarth Synopsis: A federal judge has dismissed a class action lawsuit that challenged the Washington Long-Term Cares Act (“Cares Act”), ruling that because the Cares Act is not established or maintained by an employer and/or employee organization, it is not an employee benefit plan and therefore not governed or preempted by ERISA.  The Court also held that the premiums assessed by the Cares Act constitute a state tax.  As such, only state courts, not U.S. federal courts, have jurisdiction to rule on the Cares Act.

Background

As we discussed in our prior blog post and legal update, the Washington Cares Act passed in 2019 and was set to begin collecting payroll taxes from Washington employees in January 2022 to help pay for the long-term care (“LTC”) expenses of the State’s residents. However, Governor Inslee announced in December 2021 that the State would pause collection of the tax from employers until lawmakers reassessed revisions to the program.

For more information on the class action lawsuit and the revisions to the program, see our blog posts and legal updates here, here, here, and here.

Latest Developments

On April 25, 2022, Judge Zilly of the U.S. District Court for the Western District of Washington dismissed a class action lawsuit that challenged the Cares Act, holding that the Court does not have jurisdiction for two reasons: (1) the Cares Act is not governed or preempted by the federal Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and thus ERISA does not confer jurisdiction on the federal courts; and (2) the Cares Act’s premium constitutes a tax, and the Tax Injunction Act drastically limits federal district court jurisdiction to interfere with local concerns as to the collection of taxes. As a result, the Court dismissed the action as any legal challenges to the Cares Act must be brought in state court.

Not Pre-Empted by ERISA

In its opinion, the Court noted that ERISA applies to employee benefit plans that are established or maintained  by an employer and/or employee organization. The Court determined that the Cares Act was a creation of the Washington legislature, which is neither an employer or an employee organization as defined by ERISA; therefore, the Cares Act is not an ERISA-covered employee benefit plan.

In so doing, the Court rejected plaintiffs’ assertion that the State acted as an employer when it passed the Cares Act.  This was because the Cares Act assesses a premium on all covered employees in the State, not just those employed by the State.  Consequently, the Court determined that the State acted as a sovereign when it adopted the Cares Act, unlike when it adopts employee health or pension benefit plans that extend or accrue benefits only to individuals while they are employed by the State.

Cares Act’s Premiums Constitute a Tax

The State’s motion to dismiss the lawsuit argued that the Cares Act’s premiums were a tax imposed on employees’ wages and thus, the federal court lacks jurisdiction as state tax challenges must be brought in state courts. To determine whether the Cares Act’s premiums are a tax or insurance premium, the court reviewed three factors set forth in prior case law:

1. The entity imposing the premium assessment was the State legislature (not an administrative agency), making it more likely to be a tax;
2. The parties required to pay the premium assessment include a large group of people, and the broader the group affected, the more likely it is to be a tax; and
3. The ultimate use of the premium assessment is to directly benefit all members of the public who paid premiums for the requisite period and meet the criteria for receiving LTC services. Therefore, the Cares Act provides a general benefit to the public, making it more likely to be a tax, even if the amounts collected under it are segregated in special funds.

The Court agreed with the defendants that the Cares Act is analogous to the unemployment insurance scheme, payments which are undisputedly taxes. Therefore, the federal Court lacked jurisdiction pursuant to the Tax Injunction Act, under which state courts have exclusive jurisdiction over challenges to state taxes.

Takeaways for Employers

The ruling in Pacific Bells LLC et al. v. Inslee et al. demonstrates that despite the challenges to the Cares Act in federal court, further challenges may very well be made in state court. During oral arguments, plaintiffs sought a ruling from the Court that the Cares Act premiums constitute an income tax that is barred by the Washington State Constitution. The Court noted that such arguments should be litigated within the State’s administrative and/or judicial system.

Seyfarth will continue to monitor and report on developments with respect to the Cares Act. For additional guidance, please contact the authors of this legal update or your attorney for more information.