Workers' Compensation Opt-Out, Opt-In, Exclusivity, and State Constitutionality

Workers’ compensation commentators have again been discussing the possible (or probable) revival of workers’ compensation opt-out, a development that I predicted in 2016 (more accurately, I have argued there is no reason to believe that national supporters of opt-out would be permanently deterred by a single “loss” on narrow Oklahoma state constitutional grounds).

The current discussion appears to center on the revival of opt-out without an exclusive remedy provision. That, of course, would simply mark a return to the predominant workers’ compensation model from 1911 to 1917. Most systems were “elective.” (see here at page 93). Employers were permitted to decline participation, but in event of declination were liable in negligence and unable to avail themselves of the affirmative defenses contributory negligence, assumption of the risk, and the fellow servant rule.  

The actual national legal problem with “opt-out” was not resolved in the Oklahoma constitutional case. The original elective systems—like the current Texas system—were “opt-in.” Employers were presumptively “out” unless they wanted to be “in.” The defunct Oklahoma system was “opt out.” Employers were presumptively “in” unless they wanted to be “out.” The problem was that in telling employers how to be “out” the Oklahoma “opt out” statute created a hybrid workers’ compensation/employee benefits regime that creates a very difficult ERISA preemption problem. With due respect to the Oklahoma Supreme Court, I continue to think that it never properly had jurisdiction of the case (my Fed Courts professor would be proud of me for sticking to my guns!). In any event, future challengers of opt-out on ERISA grounds are very likely to utilize declaratory judgment mechanisms rather than a sloppy removal and remand process (think of the Airline Deregulation cases). Such challengers would have a much cleaner appeal of a federal court’s determination that an opt-out law was just a plain old workers’ compensation law (and therefore not covered by ERISA). I realize that federal district judges don’t want to hear workers’ compensation cases, but the decision about ERISA coverage will be made over their heads.

If “opt-out” is addressed solely on state-law grounds, the determination of its viability on state constitutional grounds would depend heavily on the details of individual state constitutions. (see here at pp. 161-184). The lawfulness of the differential treatment of opt out versus non-opt out employers and employees will turn on the structure of states’ equal protection, due process, right to remedy, access to courts, and special laws’ constitutional provisions. There is tremendous variability with respect to these provisions, but the key point has to do with the level of scrutiny applied to an opt-out law: does the enacting state or the challenger have the burden of persuasion in justifying/challenging the statute and what level of explanation will be required by courts? For example, if a state claims that opt-out is more “efficient,” will the challenger have to demonstrate the claim is untrue, or will the state have to prove the claim is true and show that there was no better way to achieve the efficiency? If heightened constitutional scrutiny is imposed, the latter will be true.

One is still at a loss to know what “opt-out without exclusive remedy” means. If it means merely that employers have the choice not to participate in workers’ compensation without a state attempting to dictate the details of ERISA-governed plans, that will return us to 1911. Why might employers be willing to do this? I have had a continuing sense that it has a lot to do with the Federal Arbitration Act. (see here at page 3). Employers going bare in Texas can compel their employees to sign arbitration “agreements” as a condition of employment, and the evidence has become very clear how poorly employees do in such a regime. Still, opt-out without exclusive remedy in this sense could avoid many of the state constitutional problems that plagued the Oklahoma model, particularly if both employers and employees were able to elect participation (no exclusive remedy). As a matter of state law, that would leave employees with the historical common law remedy for injury. Whether this would be good for employees in the long run is a separate question. While it is true that many states have significantly weakened, or eliminated, the affirmative defenses that originally led to the Grand Bargain, it is also true that prima facie cases are not easy to establish (especially the nature of the employer’s duty of care) and court-based litigation is a long and expensive process.

It goes without saying that I continue to think that opt-out relating to employee benefit plans (with or without exclusive remedy) would be in great jeopardy of violating ERISA.

Michael C. Duff