Wisconsin’s substitution rule called into question by recent Sixth Circuit decision

Recently, the U.S. Court of Appeals for the Sixth Circuit held that the Wisconsin Family and Medical Leave Act (WFMLA) substitution provision is preempted by the federal Employee Retirement Income Security Act (ERISA). In doing so, the Sixth Circuit directly contradicted an earlier decision by the Wisconsin Supreme Court, which held that the WFMLA’s substitution provision is not preempted by ERISA. Although the Sixth Circuit decision is not binding precedent in Wisconsin, employers should be aware of this recent decision, as it presents a favorable and persuasive argument while raising questions regarding the law that governs employee leaves of absence.

WFMLA’s substitution provision and ERISA
The WFMLA requires employers to provide employees with certain amounts of leave for various reasons, including the birth of a child. Under the WFMLA’s “substitution provision,” employers must permit employees to substitute their unpaid WFMLA leave with any other accrued paid leave. In order to constitute “accrued” leave within the meaning of the WFMLA’s substitution provision, the leave rights must (1) arise from a contract; (2) be specified and quantifiable; (3) have a “draw-down feature” by which the amount of leave decreases as the employee uses it; and (4) be the type of leave that may be accumulated over time, even if it does not carry over from year to year.

Wisconsin courts have interpreted the substitution provision to permit an employee to substitute accrued paid leave even if the employee does not meet the eligibility criteria set forth in the more generous benefit plan provided by the employer. However, the federal law governing employee benefits plans (i.e., ERISA) broadly preempts all state laws that “relate to any employee benefit plan covered by ERISA.” In Aurora Medical Group v. DWD, the Wisconsin Supreme Court addressed the interplay between the WFMLA’s substitution provision and ERISA’s broad preemption after an employee was denied substitution of her WFMLA leave with accrued paid sick leave because she was not “ill” under the terms of her ERISA-governed short-term disability plan. The Wisconsin Supreme Court held that ERISA does not preempt the WFMLA and the employee was wrongfully denied substitution of unpaid maternity leave with paid sick leave. As further detailed below, these circumstances were precisely at issue in the recent decision from the Sixth Circuit.

Sixth Circuit case background
In Sherfel v. Newson, an employee requested substitution of her unpaid WFMLA maternity leave with paid leave under her employer’s short-term disability program, which is subject to ERISA and provides partial income replacement benefits to employees that are “disabled” within the meaning of the plan. The employee had already exhausted her six weeks of maternity leave provided under the short-term disability plan. Nationwide Mutual Insurance Co. denied the employee’s request because she was not “disabled” per the terms of the plan and because the income replacement benefits did not constitute “accrued” leave under the WFMLA.

The Wisconsin Department of Workforce Development (DWD) determined that the maternity leave provided by the plan as well as an additional three weeks of short-term disability benefits for the unpaid leave provided by the WFMLA.

After a Wisconsin administrative law judge found in favor of the employee, Nationwide removed the case to federal district court where the company is headquartered, seeking a declaration that ERISA preempted the WFMLA and the DWD wrongfully required the payment of benefits to employees that were not eligible under the terms of the plan. On appeal, the Sixth Circuit found in favor of the employer and held that the substitution provision of the WFMLA “relates to” ERISA plans as required for federal preemption pursuant to the Supremacy Clause of the U.S. Constitution. The court noted that the WFMLA is expressly and impliedly preempted because it interferes with the uniform administration of benefit plans and creates an alternative enforcement mechanism, in contradiction to the stated purposes of ERISA. Accordingly, the plan administrator was required to comply with ERISA rather than the WFMLA.

Practical implications for employers in Wisconsin
Until the U.S. Court of Appeals for the Seventh Circuit addresses the interplay between ERISA and the WFMLA’s substitution provision, Wisconsin employers should continue allowing their employees to substitute unpaid WFMLA leave with any other accrued leave, even if the employee does not meet the eligibility criteria set forth in the benefit plan. However, the Sixth Circuit decision presents a persuasive argument that would be beneficial to employers if adopted by the Seventh Circuit. If ERISA is held to preempt the WFMLA’s substitution provision, Wisconsin employers would no longer be required to substitute unpaid WFMLA leave with paid leave available to employees under ERISA-covered benefit plans when the employee does not satisfy the plan’s eligibility criteria. However, benefit plans that are not covered by ERISA would still remain subject to the WFMLA’s substitution provision.

Even though Sherfel is not binding precedent in Wisconsin, employers should be aware that the law appears to be changing in this area and the Sixth Circuit’s decision may be persuasive to the Seventh Circuit moving forward. Employers should carefully review their policies and procedures regarding the WFMLA’s right of substitution to ensure compliance and be sensitive to this changing landscape.

Frank Gumina and Laura Malugade are attorneys on the Labor & Employment Team at Whyte Hirschboeck Dudek S.C. in Milwaukee.

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