The issues before the United States Court of Appeals, Ninth Circuit, in Funkhouser v. Wells Fargo, N.A., 2002 WL 987530, were whether: (1) Wells Fargo’s change in its leave policy violated the Family and Medical Leave Act (FMLA), and; (2) the original vacation and sick leave policy came under the terms of the Employee Retirement Income Security Act (ERISA) and thereby preempted the breach of contract claim.
FACTS
Employees of Wells Fargo instituted a class action lawsuit alleging Wells Fargo’s new employee sick leave and vacation policy violated the FMLA and amounted to a breach of contract. Prior to the change in policy, Wells Fargo allowed varying amounts of vacation based on seniority. Vacation leave could be carried over to succeeding years, and was payable at termination. Sick leave accrued at one day per month, could be carried over, was paid at full pay, but was not payable at termination. Employees were allowed to take up to ten days of sick leave per year to care for sick family members.
After Wells Fargo merged with Northwest Bank, it revised its leave policy and replaced the vacation and sick leave programs with a Paid Time Off (PTO) program and a Short Term Disability (STD) program. Under the PTO program, employees receive between twenty-five and thirty-five days a year for both sick and vacation leave; the days are paid at full salary and are payable at termination. Only five days can be carried over to the next year, but the five days must be used before March 15th. The STD program allows up to twenty-one weeks per year for extended leave due to employee illness. The first five days of STD leave are unpaid and no STD leave days can be used to care for family members. When Wells Fargo instituted the policy change, employees lost their stock of unused sick days. However, unused vacation days were converted to PTO days.
The trial court dismissed the employees’ FMLA claims and found that the breach of contract claim was not preempted by ERISA.
APPELLATE COURT HOLDING
The Court of Appeals found that the employees failed to make a valid claim under the FMLA. The Court noted that employers are free under the FMLA to change their leave programs, even if the amount of leave is reduced. The Court concluded that section 2612(d)(2)(B) of the FMLA, which allows employers to require employees to use accrued leave for part of the twelve-week family leave period, does not create an entitlement to accrued sick time.
The Court also found that the employees’ breach of contract claim is not covered by ERISA. ERISA preempts state law relating to employee benefit plans. Employee benefit plans are those employer-maintained plans that provide medical, sick leave, and vacation benefits. However, ERISA does not apply to “payroll practices” which are “payment of an employee’s normal compensation, out of the employer’s general assets” when an employee is absent for medical reasons. The Court found that Wells Fargo’s original sick leave and vacation leave policy was not an employee benefit plan because it fell within the definition of “payroll practices.”