The New Federalism: Employee Benefits in the Laboratory

The past year has seen a number of articles describing new state laws covering a range of benefits-related areas. Examples include New York State’s new paid leave act and Nevada’s law regulating fiduciary behavior. And more such laws are around the corner – a recent Kaiser Health News article noted that at least nine states were considering proposals to respond to federal efforts to dismantle elements of the Affordable Care Act. This activity, spanning a range of employee benefit and HR topics, is part of a larger pattern. This blog will connect some of the dots in this pattern.

“It is one of the happy incidents of the federal system,” Justice Louis D. Brandeis wrote in 1932, “that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” New State Ice Co. v. Liebmann, 285 U.S. 262 (1932). It appears that the benefits and HR community have become the guinea pigs of choice as the state laboratories have attempted to push back at the policies (or lack thereof) emanating from Washington, D.C. Moreover, these state initiatives are likely to accelerate in the coming months – and may not be limited to legislatures. Some more examples of state-based initiatives include:

•      Regulators in Massachusetts recently filed charges under state securities laws against Scottrade, based on the U.S. Department of Labor’s controversial fiduciary rules. The charges filed, in effect, maintain that Scottrade failed to adhere to new policies that were included in Scottrade’s compliance manual as a part of Scottrade’s response the DOL’s fiduciary rules.
•      Legislation has been introduced in six states to allow the importation of prescription drugs from Canada, in an effort to address the challenges faced by rising drug costs.
•      A number of cities and counties (including Chicago, Austin, and Minneapolis) have enacted ordinances requiring paid time off to care for sick family members.

This activity stirs the supporters of these policies, who praise state and local initiatives as steps toward new federal policies.

Be Careful What You Wish For

However, this legislative and regulatory patchwork has a downside for employers. If the recent pattern continues (as is likely), employers with multiple locations are going to become increasingly frustrated with keeping track of difference requirements. For example, employers already face this challenge in developing paid leave policies to comply with the (ever growing) list of state and local requirements.

If the proliferation of state and local mandates continues, do not be surprised if we see a backlash. The backlash could come in two forms. Under one scenario (a “replacement” scenario) employers and advocates of these policies convince Congress that a uniform national policy benefits both employers and employees and Congress should create such a policy and replace the patchwork of state and local requirements. In the other scenario (the “blockade” scenario) Congress chooses to block state and local action, but without a federal replacement. Indeed, it should be noted that the observation from Justice Brandeis, about states serving as laboratories, was made in a dissenting opinion. The majority decision blocked an Oklahoma law regulating certain manufacturers and, in effect, rejected the state’s effort to develop its own regulatory framework.

One of the great benefits of ERISA was that employers could maintain a uniform set of employee benefit plans, subject to one set of federal rules. Let’s hope that recent events do not foretell the unravelling of that framework.