Morrison-Knudsen Construction Company v. Director, Office of Workers’ Compensation Programs

PETITIONER:Morrison-Knudsen Construction Company
RESPONDENT:Director, Office of Workers’ Compensation Programs
LOCATION:U.S. Court of Appeals for the Fifth Circuit

DOCKET NO.: 81-1891
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the District of Columbia Circuit

CITATION: 461 US 624 (1983)
ARGUED: Mar 21, 1983
DECIDED: May 24, 1983

ADVOCATES:
Alan I. Horowitz – on behalf of Respondent Director supporting Petitioners
Arthur Larson – on behalf of the Petitioners
George S. Leonard – on behalf of the Respondent

Facts of the case

Question

Audio Transcription for Oral Argument – March 21, 1983 in Morrison-Knudsen Construction Company v. Director, Office of Workers’ Compensation Programs

Warren E. Burger:

Thank you gentlemen, the case is submitted.

We will hear arguments next in Morrison-knudsen construction against the Director.

Mr. Larson, I think you may proceed whenever you are ready now.

Arthur Larson:

Mr. Chief Justice, and may it please the Court:

The question in this case is under the Longshoremen’s Compensation Act should employer contributions into union trust funds for health and welfare, pensions and training for the first time in history be included in the concept of the individual’s average weekly wage for purposes of calculating his benefits, adding on the average of 30 % to 40 % to those benefits which now stand at 88 % of take-home pay?

The legal issue, of course, is the intent of Congress.

Unfortunately, all the three major indicators of that intent, the clear language of the statute, the legislative history of the Act and of its amendments, and above all, the fact that Congress could not possibly have intended an interpretation of the Act that would severely damage the functioning of the Act and its ability to carry out its purposes.

First, I would like to say just a word about why this case came as such a bombshell to the compensation community.

Workers’ compensation has been with us for 70 years and the Longshoremen’s Act for 55.

During that time literally tens of millions of cases have been disposed of on the understanding that wages meant wages along with traditional non-cash wage substitutes such as board and lodging.

Now, suddenly we are being told that all those thousands of judges and administrators and lawyers and employers and employees and unions were wrong all along in what they thought wage included and overnight we are supposed to accept a new meaning of wage which, believe it or not, will raise benefits above pre-injury take-home pay and all this by judicial, not legislative action.

Sandra Day O’Connor:

Mr. Larson, would you tell us what happened to the legislation that had been introduced in the Congress, I guess, to overrule the decision below?

Arthur Larson:

Yes.

There is a bill pending in Congress right now… There was a bill last year which passed the Senate.

The bill pending in Congress now has a small clause in there which in effect would undo the effect of this for the future.

Sandra Day O’Connor:

Did the House take any action on the bill?

Arthur Larson:

So far this year I don’t think anything has happened.

Sandra Day O’Connor:

And last year the House took no action?

Arthur Larson:

No, they took no action last year.

Now, of course, there are two reasons at least why this doesn’t really affect this decision very much.

The first is, as we all know, it is a long distance between introducing a bill, especially on workers’ compensation, and getting it passed.

But, the other is that even if it were passed, enormous damage would be done just in cases now pending.

A lot of them are hanging fire right at the moment.

But, even more seriously, under the very permissive reopening provisions of the Longshoremen’s Act, tens of thousands of cases would be reopened on the theory that there was a mistake of fact in the determination of the benefits.

So, most of the damaging consequences, as we have outlined in our brief, would happen.

Sandra Day O’Connor:

Assuming you are correct, what happens to things like medical insurance premiums that might be paid to a fund by the employer in the future?

Arthur Larson:

There are, of course, all kinds of benefits under this plan and the various others that occur and under some plans the medical payments go on during disability and others they don’t.

Of course, in the case of death cases, they would not go on.

But, what we keep coming back to in this case is, of course, the intent of Congress and the intent of Congress is very well expressed in this case in the short but very specific definition we have been provided which is that wages means the money rate at which the service rendered is recompensed under the contract of hire in force at the time of injury, including the reasonable value of board, room, housing, lodging, or similar advantage received from the employer and gratuities received in the course of employment from others than the employer.

Now, the simplest way for the Court to dispose of this–

Sandra Day O’Connor:

Of course, that is the problem.

So, if you are right, how do we distinguish in the future between payments such as rent and board and, on the other hand, medical insurance?

I mean, what is the line?

Arthur Larson:

–The principal distinction… This is the one that has always controlled these cases of so-called similar advantage.

There are two things: Similar advantage means, if it means anything, having a clear and present cash value now and also being paid directly by the employer to the employee.

Those are the distinctions under which… For example, vacation pay is included and overtime and under certain circumstances transportation.

Well, obviously, the fund payments aren’t the money rate.

That, in the common term, is the cents per hours paid to the employee.

It certainly isn’t board, it isn’t lodging, it isn’t housing, and, as I have just indicated, it isn’t similar advantage.

Now, there is another way this Court–

Sandra Day O’Connor:

Mr. Larson, I suppose that some payments by an employer of board or lodging might not be paid directly to the employee at all.

Arthur Larson:

–Well, I think in almost every case it is either furnished directly or the money is furnished directly, but it has a present cash value and this is a traditional thing and it is written, of course,… It is written right into the statute so it can’t be controversial.

Sandra Day O’Connor:

Would certain medical benefits have a present cash value then?

Arthur Larson:

They might, yes, but they are not paid by the employer to the employee.

That is one of the difficulties.

And, they are not written into the statute as part of the definition which makes a crucial distinction.

I think another… A simply way the Court could dispose of this case would be by direct application of the rationale of Potomac Electric Power Company against the Director decided by this Court just two terms ago.

There this Court held that since the Longshoremen’s Act was copied verbatim from the New York one and since it employed terms which had accepted meaning in 1927 when the Longshoremen’s Act was passed, Congress should be deemed to have intended the meaning that prevailed at that time.

Now, to carry out over to the present situation, it is only necessary to observe that when the Longshoremen’s Act was first passed the meaning of wages that we are talking about was not only dominant, which is the word in Pepco, it was absolutely universal.

But, now I think we can carry this down to the present more cogently by applying the Pepco principle to the 1972 amendments which were in effect, the re-enactment… they were such massive amendments… particularly because the central concern of the 1972 amendments was exactly what we are talking about here, the benefit level.

The remedy chosen by Congress to deal with that benefit level problem was to make the ceiling flexible and, indeed, the benefits went from $70 a week to $500.

Now, as you recall, the heart of the 1972 amendments was a sort of trade off between the longshoreman giving up his rights of unseaworthiness against a ship in exchange for a dramatic increase in compensation benefits.

Now, the point, for present purposes, is that in striking this balance everybody had to start from a common understanding of what wages included.

If it had ever occurred to anybody that a new meaning of wage was going to come along that would in itself raise the benefits 30 % to 40 %, can anybody suppose that this same balance would have been struck.

This was not an oversight.

By 1972, these fund contributions into union plans were a very conspicuous feature of the labor sea and Congress had just a few years before had to deal with it in connection with the Davis-Bacon Act which has a sort of parallel history to the Longshoremen’s Act and it dealt with it by simply writing a detailed provision into the Davis-Bacon Act spelling out that union fund contributions are included in the concept of wage.

Now, in ’72, Congress, in connection with the Longshoremen’s Act, theoretically could have done the same thing.

William H. Rehnquist:

Mr. Larson?

Arthur Larson:

Yes.

William H. Rehnquist:

When was the Davis-Bacon Act amended to include–

Arthur Larson:

’64.

William H. Rehnquist:

–’64?

Arthur Larson:

Yes.

Congress could have theoretically done this, but in the thousand pages of testimony, no one even thought of suggesting it, not because they weren’t aware of it, but it just didn’t occur to anybody as being even remotely practical and there were a lot of reasons for that, but I think the most obvious is that while the Davis-Bacon Act is a collective figure for a whole area, under the Longshoremen’s Act you have to determine an individualized figure for every single employee and that would have been administratively absolutely impossible.

Now, as to the third and final part of the congressional intent, I am going to take again as my text a passage from Pepco in which this Court said it is not to be lightly assumed that Congress intended the Act to produce incongruous results.

Well, the decision below would produce results that are not only incongruous but severely damaging to the entire functioning of the system.

The first most serious damage that I would briefly mention and that is that benefits would actually go above pre-injury take-home pay.

Now, this is the ultimate nightmare of workers’ compensation or any social insurance system.

A couple of quick ways to demonstrate this–

John Paul Stevens:

May I ask you a question, Mr. Larson?

When you are making that argument, would the benefits go above… you say above take-home pay.

Arthur Larson:

–Take-home pay.

John Paul Stevens:

But not above gross pay?

Arthur Larson:

Well, they would even do that in some cases, but I am making the mildest–

John Paul Stevens:

And clearly they wouldn’t go above gross pay if you included the fringe benefits as part of gross pay?

Arthur Larson:

–In many cases they would go above gross pay.

In high salary brackets, they definitely would.

John Paul Stevens:

Even if you include in gross pay the payments to the pension funds and the like?

Arthur Larson:

Yes.

They would definitely… There are elaborate calculations in some of our briefs, full tables of what would happen.

And, since the disparity as to take-home pay obviously has a lot to do with taxes, the higher you go in salary brackets, the–

John Paul Stevens:

If that is true, if it is higher than gross pay even including fringe benefits, I suppose it is possible, even under your view, that benefits may… If you define wages the way you argue, benefits may in some cases exceed wages.

Arthur Larson:

–They do now, yes.

John Paul Stevens:

They do now?

Arthur Larson:

They do now, yes.

John Paul Stevens:

So there would be no difference under–

Arthur Larson:

There would be a great difference in the amount by which they exceeded.

John Paul Stevens:

–But, the mere fact that they exceed is not a critical difference.

Arthur Larson:

Well, the Comptroller General pointed this out in his report a couple of years ago and I am simply quoting him when he says that in some cases it is at least theoretically possible to show that the present thing could go above.

But, what would happen under this decision below is practically all of the benefits, and certainly on the average, would go above prior take-home pay.

Arthur Larson:

Take the Atlantic and Gulf contract for example.

Under the Atlantic and Gulf contract, which is typical of the longshoremen’s contracts, the take home pay for a year averages $20,200.

The compensation benefit payable on that is $24,100 a year.

William H. Rehnquist:

Under the decision of the Court of Appeals?

Arthur Larson:

Under the decision of the court below.

Now, needless to say, the impact–

John Paul Stevens:

Well, in that example, $20,200 is the take-home pay and–

Arthur Larson:

–Twenty thousand two hundred is the take-home pay.

John Paul Stevens:

–What would the comparable figure be if you included the amounts paid to the pension funds on behalf of that employee?

Arthur Larson:

That… I can give you the exact figures.

The amount paid into the pension fund, the contributions, on a wage of $12.80 was 4.59.

John Paul Stevens:

Well, what is the figure comparable to the $20,200 figure?

Is it more than $4,000?

I think it is.

So, you actually have an example that doesn’t support your case.

Arthur Larson:

Well, the–

John Paul Stevens:

You are really comparing oranges with apples when you include the payments for one purpose but not for the other.

Arthur Larson:

–I am including them all, of course.

John Paul Stevens:

The $20,200 figures, does that include the amounts paid into the pension fund?

Arthur Larson:

No, no, it doesn’t.

John Paul Stevens:

Whereas the $24,000 does?

Arthur Larson:

But, you see, what we are concerned with is in the last amounts of this incentive to the worker and what he sees obviously is if he works he gets $20,200 and if he doesn’t work he gets $24,100 and no amount of talk about the employee’s value of what goes into the fund will make much difference to him, because, you see, there is not a direct pipeline of that fund contribution from the employer into the pockets of the employee.

It goes into a trust fund and he may or may not some day profit by it.

John Paul Stevens:

You could have made a similar argument in 1927 if the employee had a very low take-home pay, but got free room and board and a lot of tips.

Arthur Larson:

Well, they wrote this into the Act definitely because room and board… And, of course, they had to write tips in.

William H. Rehnquist:

Of course, the employee in 1927 saw a right with his monthly paycheck the benefit of a rent payment or a food payment.

And, an employee today doesn’t see on a monthly basis the pension payment.

Arthur Larson:

He doesn’t see it as in many cases he never will see it.

There is a very indirect relation between what goes into these funds and what comes out.

For example, in Mr. Hilyer’s case, he didn’t work long enough to get anything.

Arthur Larson:

Some of the people who were working side by side with him got credit for years and years.

No contributions were ever paid.

That is the nature of the plan.

Harry A. Blackmun:

Of course, it is hard to compare, Professor Larson, this man because he will not be working any more, he is dead, he is killed.

Arthur Larson:

That is right.

Probably the most damaging–

Harry A. Blackmun:

You speak of massive… I think that was the word you used… on the one side, but imposed death is also rather massive.

Arthur Larson:

–I didn’t hear that.

Harry A. Blackmun:

I say imposed death, being killed on the job is also massive.

Arthur Larson:

I want to say with all my heart that nothing in the world can compensate people for the loss of a husband and the Compensation Act never has pretended to do anything like that.

It doesn’t even pay for pain and suffering.

It doesn’t pay for loss of consortium.

It doesn’t even pay all your wages back that you lose.

It is a very arbitrary and rough and ready scheme mainly designed so that it will be virtually automatic and self-executing.

Less than a month ago this Court in the Lockheed case put its finger right on it.

It said the purpose of workers’ compensation is to pay benefits that are fixed and immediate and without litigation.

Well, as for being fixed, they won’t be fixed at all because there is going to have to be an individual, tailor-made calculation for each employee in relation to each employer as to each fund, and some employers have ten of them, against the backdrop of controversy about what kinds of benefits should go in.

We just have a small sample here.

There are many, many others.

And, the worst controversy of all is how do you evaluate all these assorted plans?

Some are on a per-hour basis, some are on a per-tonnage basis, some of them are on an arbitrary actuarial basis in which the employee simply pays in whatever is necessary.

So, far from being immediate, the benefits would be delayed by years, and as for being without litigation, of course, litigation will be enormously increased.

There is another very direct way in which the worker is going to get hurt.

Let me just say here I think everybody realizes that this whole system of compensation is all about the worker.

It is not about insurance companies, it is not about employers, it is about the worker.

And, if the system gets undermined, the worker and his dependents are going to be the ones that ultimately lose and this is one of the ways they are going to lose, by the delay in their payments for years, whereas now, at least so far as this item is concerned, they are virtually automatic.

But, there is another way that could even be more seriously damaging to particular employees.

In New York Harbor, for example, the compensation premium is $84 to $87 per hundred of payroll.

In some Canadian ports that are competitive, it is $3.00.

Three to four thousand jobs have already been lost from New York Harbor to Canadian points.

Arthur Larson:

Now, that may partially explain the fact that neither the International Longshoremen’s Association nor any other union of longshoremen has joined in this litigation.

In the District of Columbia, about 15,000 jobs were lost in six years largely for the same reasons which may explain the fact while the [=AFL-CIO] District Council filed a brief in a petition for certiorari, they have not filed a brief on the matter.

Warren E. Burger:

Your time has expired now, Mr. Larson.

Arthur Larson:

Thank you.

Warren E. Burger:

Mr. Horowitz?

Alan I. Horowitz:

Thank you, Mr. Chief Justice, and may it please the Court:

I would like to discuss what I believe is the underlying premise of the Respondent’s contention in this case and that is looking at wages contemporaneously any common sense notion of wages must include the contributions and, therefore, whatever the intent of Congress was in 1927, the statute today must be construed to cover them.

This premise is false.

In fact, common sense does not dictate that these contributions must be covered and that is particularly true in the workers’ compensation context.

Such contributions are generally not treated as wages in other contexts and they have never been so treated under the Longshoremen’s Act.

This is so, because the contributions, even as viewed in the abstract, are quite different from ordinary wages.

They are paid to union administered funds and they benefit particular employees only in an uncertain and indirect way.

Moreover and more important, in the specific workers’ compensation context, they are unlike wages in that they generally do not represent income loss to the employees’ beneficiaries by reason of his disability or death and, therefore, income that must be made up by the longshoremen’s benefit in order to pay expenses that the widow will have to pay later.

I would like to speak first to Justice O’Connor’s question earlier about whether there is really value to some of these things that must be replaced.

One thing that is important to note is that the Court of Appeals itself never attempted to value these benefits.

It is true that something like medical insurance does have a value to the worker and to his family, but the Court of Appeals never made any effort to assess that value.

It just arbitrarily picked these contributions that are made by the employer to these funds.

These contributions are not made to the benefit of a particular employee.

They are just made to the funds in general.

Now, the fund invests those contributions in a way that does rebound to the benefits, to the benefit of employees as a whole but not in a way that rebounds the benefit of a particular employee.

I think that can be seen by looking at the pension plan involved here.

Employees make contributions or… Excuse me, the employer makes contributions for every hour worked by and employee, but an employee does not necessarily receive pension credit for each of those hours.

There is a certain minimum level he must reach before any pension credits are accrued.

He may receive the same pension credit for different levels of hours that he works and unless he vests, which in this case, I believe, requires ten years of service, something Mr. Hilyer never had, he does not ultimately receive any pension.

Now, as far as… in the specific longshoremen’s context, whether it makes sense to consider these contributions within the wage base, I think it is important to look at the question of whether there is going to be a double recovery by including these benefits in the wage base.

The fact that they may have value to the employee at the time he is working for the employer does not necessarily mean that his beneficiaries need money to cover those expenses once he has become disabled or died.

I think it would be instructive to look at each of the benefits on their own in assessing this.

Life insurance is the most obvious example.

It is true that Mr. Hilyer received a benefit when the union-administered funds were used to purchase a life insurance policy on his life.

But, now that he has passed away, there is certainly no need for his beneficiary here to receive a benefit to cover the expenses of purchasing such a policy on her own.

Alan I. Horowitz:

There is no need to have a policy on Mr. Hilyer’s life.

In fact, she has already received the benefits of that policy which was paid out when he died.

The same is true of other types of benefits that are purchased by these employer contributions through the union-administered funds.

Disability insurance, unemployment insurance, there is certainly no need for Mrs. Hilyer to go out and purchase on here own.

The training fund that is specifically referred to in the Court of Appeals’ opinion is certainly not for the benefit of Mrs. Hilyer.

Indeed, it seems to be not for the benefit of particular employees at all.

The same is true of pensions.

And, I would like to focus on pensions to some extent, because the Court of Appeals specifically mentioned pensions as something that Mrs. Hilyer would have to go out and purchase on her own later.

The purpose of a pension fund is to provide for the replacement of income upon retirement.

Now, the need to receive these pension payments is triggered by a specific event, retirement or the ending of a person’s employment.

That has already happened in this case.

Mr. Hilyer is not going to retire in the future and the death benefit that he received under the Longshoremen’s Act begins upon his death and will continue up through the period that he would have been working and beyond the period when he would have retired.

So, in that sense, the death benefit itself is its own pension.

So, there is no reason for Mrs. Hilyer to go out now and invest in an annuity or something like that to provide a pension.

The Longshoremen’s Act has already provided that pension for her.

So, for her to receive an additional benefit by including the pension contributions in her wage base is nothing more than a double recovery.

Harry A. Blackmun:

Mr. Horowitz, the Director has switched sides in this case, hasn’t he?

Alan I. Horowitz:

Well, the Director–

Harry A. Blackmun:

Do you have any comment on that?

Alan I. Horowitz:

–The Director… Well, we mention that in our brief.

The Director took a different litigating position in the Court of Appeals.

I think I should say though that the administrative practice under this Act has always been consistent.

It dates back to well before 1968 when this memorandum was written.

These contributions have never been included in the wage base by employers, by claimants, or by the agency.

Harry A. Blackmun:

He just got out of line?

Alan I. Horowitz:

Pardon me?

Harry A. Blackmun:

He just got out of line in the Court of Appeals?

Alan I. Horowitz:

Well, the decision was made to take this position in the Court of Appeals.

Probably there wasn’t adequate consultation at the time, but since it has been rethought–

Byron R. White:

Who represented him in the Court of Appeals?

Alan I. Horowitz:

–Who represented the Director?

Yes.

Alan I. Horowitz:

The Department of Labor, I believe.

I would like to speak to Justice O’Connor’s question about whether rent payments, which are specifically authorized by the statute should perhaps, under the theory propounded by Petitioner, really ought not be considered in the wage base either if they are paid, say, directly to the apartment building rather than the employee.

I think there is a big difference between that situation, where there is essentially a shortcut taken in the payment, rather than paying the money to the employee who then passes it on to the apartment building, the money is paid directly to the apartment building.

That is nothing more than a shortcut, but what we have here is a detour and a very long and uncertain detour.

The money is not paid directly to the employee.

It is paid to these funds.

But, as we explained in our brief, the funds are not simply a channel like the Court of Appeals said, for the money to be passed on to the employees.

Sandra Day O’Connor:

How about the medical benefits for the family?

Alan I. Horowitz:

Well, in a case like this where the employee has died and if the union had given him an insurance policy to cover the medical benefits for his entire family, that probably is an expense that the beneficiaries would have to pick up afterwards.

In a disability case I am not sure that would be so because these insurance policies often continue for disabled employees.

I think my answer to that question has to be that you have to look at the Act as a whole and at these benefits as a whole.

There is no way under the statutory definition really to distinguish between life insurance, medical insurance, training funds, et cetera, et cetera.

Sandra Day O’Connor:

I guess the question is whether it is a similar advantage.

Now, how would you treat that to the extent that it would go to the family for their medical care?

Alan I. Horowitz:

Well, I don’t think it is a similar advantage for many of the reasons specified.

The money is not paid directly, the benefits received by the employee are very uncertain.

What I would say is that it does make some economic sense for medical insurance benefits to be included in the wage base as I think it does not make economic sense for pension and life insurance benefits.

Sandra Day O’Connor:

How should we treat it then?

Alan I. Horowitz:

Well, I think there has to be a general rule for the totality of cases.

And, if the question is whether there is a slight under-recovery by the claimant because in some cases there may be medical insurance that she perhaps should get credit for or whether there is going to be a very significant under-recovery because a lot of fringe benefits are going to be lumped in that make no economic sense.

I think the Court has to follow, I think, what is the best reading of the statutory definition and not include these benefits.

Now, the fact that there is some need to pay for medical insurance may be something that Congress took into account in setting the percentages of wages that the employees are actually going to receive for benefits.

I would also like to note that in numerous other contexts–

Warren E. Burger:

Your time has expired now.

Mr. Leonard?

George S. Leonard:

Mr. Chief Justice, and may it please the Court:

The case we have before us has hardly been described to you.

We are talking about a death benefit case.

George S. Leonard:

We are not talking about a compensation case.

You have heard great things about the Atlantic and Gulf contract which, of course, has no place in the record.

You have heard about tens of millions of cases without one being named.

You have heard of tens of thousands of reopened cases which are about to happen which aren’t going to happen as far as we know, because, after all, very few people have died.

Vacation pay and overtime was described to you as coming within the field of similar advantage when, in fact, they are perfectly ordinary pay.

They are the money rates at which the contract in effect at the time of the death takes place.

We have Exhibit Three in this case in the record.

It is a contract between the union that Hilyer belonged to and the employers including this employer.

It is, in fact, three multi-employer trust plans.

That is what we are talking about.

We are not talking about some indefinite cloud called fringe benefits.

We are not talking about compensation for disability, and as I believe one of the gentlemen before me argued, we don’t want to encourage them not to come back to work.

But, Hilyer isn’t about to come to work.

He is in an entirely different category.

If this Court recalls the Rasmussen opinion, the history of the ’72 amendments was gone into in great detail to show that the death benefit and compensation were two entirely different things in the mind of Congress at the time they passed–

William H. Rehnquist:

Mr. Leonard, I didn’t read the Court of Appeals’ opinion to suggest that it would treat the computations differently in the case of death benefits than in the case of–

George S. Leonard:

–No, they don’t make the distinction in the Court of Appeals, but as far as the record is concerned, there is such a distinction; namely, it is a death benefit under Section 9 of the Act.

Sandra Day O’Connor:

–The principle is exactly the same.

I mean, if we were to affirm, you would have exactly the same calculation for benefits for those who were injured.

George S. Leonard:

Well, let me put it this way.

In one case the employee gets it and in the other case the beneficiaries or relics get it.

That, to me, seems to be a significant legal difference and that is what the statute provides.

It may be that the fact they are calculated in much the same way is the overruling factor but we must remember, as in the Potomac case which was cited to you, Congress has specifically provided for the length of time that any disability may continue and that isn’t the case in a death benefit.

Sandra Day O’Connor:

But, I suppose the question under the statute… you are dealing with a statute… is whether these contributions to the funds constitute a “similar advantage” under the statutory language.

George S. Leonard:

No.

May I… There is every effort on the Petitioners’ side to make it appear that it comes under the similar advantage language.

Actually what the statute says in plain terms is that it is the money rates at which the employment is compensation, is recompensed, I believe, is the actual word used by the statute.

It is every form of recompense.

There is nothing about the employee having to receive it.

He has to receive a similar advantage from the employer, but he doesn’t have to receive the money rates.

William H. Rehnquist:

Mr. Leonard, what if the contract in this case had provided, in addition to the things it does provide for, that the employer would contribute five cents an hour for each worker to a fund to build a gymnasium for the workers on his property?

Would you say that would be–

George S. Leonard:

The answer is, yes, they could because, number one, in the case that you decided in January of this year, the Bowen case, you held that a negotiated contract such as this one was considerably superior to the old employment contract.

In effect, what you were saying there was that this is part of modern labor practice and it is.

William H. Rehnquist:

–What case was that?

George S. Leonard:

That is the Bowen case which you decided on January 11, I believe.

William H. Rehnquist:

Who is the other party?

George S. Leonard:

Well, I can look–

William H. Rehnquist:

No, don’t bother.

George S. Leonard:

–The point was… You pointed out at that time–

William H. Rehnquist:

That was a case involving whether or not a union was liable for damages resulting from failure to properly represent.

That had nothing to do with workmen’s compensation.

George S. Leonard:

–In Alessi and one other case you have already held that the union has an absolute right as a trustee to come into court and see to it that the employer does pay into the fund as he is required to do by the contract.

William H. Rehnquist:

But, that to me does not stand for the proposition that an employee who has a contract with the… a collective bargaining contract with the employer is necessarily on the same footing as the union would be.

The union is a direct recipient of–

George S. Leonard:

No, I don’t think the employer is, but the employee is because that is what Congress said.

William H. Rehnquist:

–Do you think the employee could come into court–

George S. Leonard:

The employee can come–

William H. Rehnquist:

–Would you wait and let me finish my question, please?

George S. Leonard:

–I am sorry.

William H. Rehnquist:

Do you think that the employee would have the same standing to come into court in a situation such as that raised in the Alessi case?

George S. Leonard:

Yes, I do.

Under the Labor Management Relations Act, the employee has a right to go into court to ascertained that the money is being put into the trust in his name, the amount of it, that is the value of it, and if it is not being, to take such steps as he needs to to see to it that the employer contributes.

Lewis F. Powell, Jr.:

Mr. Leonard?

George S. Leonard:

This comes back to a fact–

Warren E. Burger:

Mr. Leonard, Justice Powell is addressing you.

George S. Leonard:

–I am sorry.

Lewis F. Powell, Jr.:

Have you finished responding to Justice Rehnquist?

George S. Leonard:

Mr. Justice.

Lewis F. Powell, Jr.:

I wanted to ask whether or not the benefits are fully vested.

George S. Leonard:

No, Your Honor, and never will be.

Lewis F. Powell, Jr.:

Is there any other benefit received–

George S. Leonard:

Well, he didn’t have the life… I am sorry.

Are there any other benefits did you say?

Lewis F. Powell, Jr.:

–Are there any other benefits to which the term “wages” applies that are not vested?

George S. Leonard:

I would not be surprised if the time he took off for coffee breaks constituted part of his wages, but we have not sued for it.

Lewis F. Powell, Jr.:

What is the answer to my question?

George S. Leonard:

The answer, I think, is probably so.

There are certain what are known in one legislative history as bona fide fringe benefits which would be part of wages even if not in the particular union contract.

Lewis F. Powell, Jr.:

If this employee had left the employment to take an entirely different job, a non-union job, would he have any interest whatever in the funds?

George S. Leonard:

That would depend on the terms of ERISA.

Lewis F. Powell, Jr.:

Terms of what?

George S. Leonard:

The Employee Retirement–

Lewis F. Powell, Jr.:

Well, under the terms, whatever are applicable, would this employee, had he walked away rather than died–

George S. Leonard:

–No.

I believe these funds are handled on an insurance basis.

They pay off the people for whom they are vested.

Lewis F. Powell, Jr.:

–Are they only insurance benefits?

George S. Leonard:

Well, the insurance benefits, of course, are applicable immediately.

In other words, every employee is covered by the insurance benefit.

He is covered at all times by the training benefit.

The pension, of course, he does not vest until a certain amount of time.

And, the question, of course… That is the question in this case.

How do you value the future of a person who has been killed?

I don’t know.

To be perfectly frank with you, I can’t find any cases that are specifically on it.

I can find a section of the tax statute that refers to it, but it is the only one I can find and that is highly indefinite and we will get to that in a moment.

Now, what I wanted to say is that the compensation community, I believe it was described by Dr. Larson, some 800 insurance companies, 65 employers and the United States now are opposed to me.

And, I represent only the Claimant in this case.

I don’t represent any other Respondent.

George S. Leonard:

But, it seems to me that the entire case being made here is a case of extraordinary, literally extraordinary exaggeration if the record is, in fact, the basis upon which this case is to be determined.

I have already said there is no Atlantic and Gulf contract.

In fact, there are no maritime workers in this case at all.

This is a District of Columbia adoption of the case, not necessarily something else which I don’t know.

Justice Stevens, I believe your question was directed right to it; namely, they put it in when it comes to a question of compensation and they take it out when it comes to a question of fact and thereby achieve a result.

What is the actual fact on the record?

This man gets 68 cents an hour in these three benefits.

That is a total of $27 a week.

William H. Rehnquist:

You say he gets them.

He doesn’t really get them, does he?

George S. Leonard:

That is, of course, this case.

I agree.

If this case were decided for the Plaintiff–

William H. Rehnquist:

His widow.

George S. Leonard:

–The widow and her two sons as the Court of Appeals put it, he would get a total addition of $27 a week, 68 cents and hour, constituting approximately 9 % increase, 9-1/2 % increase in his wages.

I simply don’t know on the basis of this record where the $22,000 a year, where the $24,000 a year, the tens of millions of cases, the tens of thousands of reopened cases, the nightmare of compensation run wild, I don’t know where these come from.

They are certainly not in this record.

Let me be perfectly frank about it because I have.

I myself now am going outside the record.

I want to be clear about this.

I don’t know that these facts are true.

But, according to the Department of Labor, the Bureau of Labor Statistics, in their Bulletin 2140 of 1981, they point out that two-fifths of all employers at the present time are funding such benefits as we are talking about.

They identified 11 employer-paid benefits, two-fifths of which are being paid for by the employers.

They identified 17 employee-paid benefits which I presume the employees are paying for.

That is stock sharing.

And, if this Court will recall, it had in the Ford case, the Ford decision, the interesting question of access to the company cafeteria which you held to be an actual benefit and part of a man’s wages.

Now, I have to rescind that.

You didn’t say it was part of his wages, but you said it was part of his recompense.

It was something he was entitled to get.

Warren E. Burger:

With these men, Mr. Leonard, when they calculate the social security, what is included for–

George S. Leonard:

Social security is offset by the benefits you receive from workmen’s compensation.

Warren E. Burger:

–When they send every month or every three months, at some period the employer must send something in and the employee has a deduction, does he not?

What is the base on which that is calculated?

George S. Leonard:

That I do not know.

I do know that in the Alessi decision of this Court you held that pension trust benefits could be offset from social security and the same under the National Labor Relations Act, the benefits were described as being terms and conditions of employment which had to be negotiated.

And, if you will… By the way, the citation on that case I referred to about the cafeteria prices is the Ford Motor Company against the National Labor Relations Board in which you pointed out that access to the company cafeteria was a very definite benefit and it is, of course.

Whether it is part of wages is an entirely different story.

John Paul Stevens:

Mr. Leonard, there really isn’t any dispute about the fact that the fringe benefits are benefits.

Everybody agrees with that.

Let me ask you this question if I may.

Is it not correct that if you are right in your reading of the word “wages”, that that would also apply to disability cases as well as death cases.

I am talking about the word in the statute.

George S. Leonard:

If these are recompense, and I believe they are, what we are talking about today is an entirely different labor picture than we had more than half a century ago when this case… when this was first passed.

John Paul Stevens:

I wonder if you heard my question.

George S. Leonard:

I heard your question and your question is does it apply to disability and I said, yes.

And, what is the thing here is very interesting.

You see, an employee now can deduct, defer is the right word, the income from these benefits until he retires, until he actually receives them.

In fact, he never pays any tax on the medical insurance at all.

He never pays any tax on the training if he doesn’t take it.

But, I found three cases which have rather odd benefits which are not part of the contract and, therefore, were taxable.

Number one, where the employee’s children are paid educational benefits out of the plan.

It was held to be income to the employee.

Where the employee received strike benefits from the union to keep them from going back to work.

That was held to be income on which he had to pay.

Now, the Title 26 is very clear about this.

Title 26 in effect says that everything a person receives directly or as a third-party beneficiary, which is this case, is income on which he must pay taxes.

Then Congress passed the Multi-Employer Pension Plan Amendments Act which added Sections 401 to 422 to the Title 26 and in 401 it is provided that these payments by the employer into pension plan trusts are not to be taxed to the employer until he receives them, then they are to be taxed to the employee.

Meanwhile, the employer, however, is totally entitled to deduct as payroll expense all of these payments.

William H. Rehnquist:

Mr. Leonard, is that true of the training fund too?

If an employee–

George S. Leonard:

No.

I have trouble with the training fund.

William H. Rehnquist:

–I would think if an employee gets restraining he doesn’t then realize income, does he?

George S. Leonard:

This happens to be one case in which I going to join with the Petitioners.

They take everything from Mrs. Hilyer’s point of view, whereas, in fact, the statute has everything from Mr. Hilyer’s point of view.

Nevertheless, from her point of view, she can’t go back to work without some kind of retraining.

So, in the sense that he had it to improve his job which brought money home to her, you see, the equivalent is her ability to go out and earn money to bring home.

So, I have to say with the Petitioners that in this case we should look to Mrs. Hilyer instead of Mr. Hilyer, because his possibility of getting that training is gone forever.

Her necessity is still in existence.

William H. Rehnquist:

So, you don’t think the training fund payment should be included in the wage?

George S. Leonard:

Yes, I think it definitely should be included in wages, because the question we have here on wages is really a very simply one.

As long as employees can defer taxability and employers can get it immediately, there is going to be a strong union push to put more and more benefits into a wage package, into a contract.

And, as a matter of fact, I have already told you that the Department of Labor has identified some 28 benefits of which 11 are employer paid.

I can go further than that.

I found a Conference Board Report which specializes in employee benefits and they say that dental benefits, prescription drugs, optical, hearing aid… and I will come to the last one in a moment… are all new types of benefits which most unions today are seeking to obtain.

Eight-four percent of employers today are paying for these benefits.

Now, I don’t think this is any indication that the employer wants to pay, that this is out of the goodness of his heart, that this is what has loosely been called a contribution.

It isn’t a contribution at all.

It isn’t a fringe benefit.

It isn’t anything but part of what the employer is paying in order to get this man on his payroll.

William H. Rehnquist:

You say these are more attractive to the employer than straight wage raises because the employer doesn’t have to pay tax?

Does he have to pay taxes on money that he puts into a pension fund or medical fund or training fund, the employer?

George S. Leonard:

I believe we… We come… Let me put that… Let me answer that this way if I may.

The new benefit which has currently only been adopted by 20 employers with 87 more now considering it is called the cafeteria benefit and it has nothing to do with the Ford case which was the access to the company cafeteria.

A cafeteria benefit is where the employer says I will pay $10 an hour for this man.

I will pay him $7 in salary and $3 and you can split that up into any kind of benefit you want.

Now, that is called a cafeteria benefit.

William H. Rehnquist:

Why is that more attractive to the employer than paying $10 in wages?

George S. Leonard:

Because the union asked them to.

And, he can… Since the employee can defer it and it doesn’t cost him any money one way or the other, it is exactly what he wants to do.

William H. Rehnquist:

It is a matter of no consequence–

George S. Leonard:

It is a matter of no consequence to the union.

It is a matter of no consequence to the employer.

William H. Rehnquist:

–Well, if it is of no consequence to the union, why do they ask for it?

Why do they prefer that?

George S. Leonard:

Well, I suppose that the answer is that they probably read the decisions of this Court to the effect that unions are supposed to represent their workers.

William H. Rehnquist:

You are suggesting that the workers want it?

George S. Leonard:

What?

William H. Rehnquist:

You are suggesting that really the workers prefer the 7-3 cafeteria–

George S. Leonard:

The workers get tax deferment for all of the benefits that apply to the wages.

Byron R. White:

–And the employer deducts it?

George S. Leonard:

What?

Byron R. White:

And the employer deducts it?

George S. Leonard:

The employer deducts it immediately as part of his payroll.

That is… This is the thing that we are going to see, more and more of these benefits.

The take-home pay with the various deductions is going to be down to a minimum and the tax deferral scheme, if we continue the way we are going, is obviously going to take over the labor market sooner or later.

These benefits are going to get larger and larger.

William H. Rehnquist:

Of course, Congress recognized that in the case of the Davis-Bacon Act and amended the statute accordingly.

George S. Leonard:

Davis-Bacon, Federal Employees, Miller Act, National Labor Relations Act, the Social Security Act, ERISA, the LMRA and the tax… Internal Revenue.

William H. Rehnquist:

Well, why do you recite all those seriatim?

George S. Leonard:

Because I can take each one as being tied in to workmen’s compensation directly.

Let’s take the Davis-Bacon Act.

It wasn’t cited to you.

It wasn’t quoted to you.

But, what is says that on public buildings labor’s wages are to include the employer payments to the unions and that is to be counted when adjusting the compensation of the worker.

That is what it says in the Davis-Bacon Act.

Warren E. Burger:

Does it say that in this Act?

George S. Leonard:

I don’t have quotations marks around it so I cannot say that is so.

John Paul Stevens:

But, isn’t it true that that is for a rather different purpose to be sure that the total compensation package meets the local area standard for–

George S. Leonard:

I know that… I am sorry, I–

John Paul Stevens:

–Isn’t the purpose of the Davis-Bacon Act quite different?

It is to be sure that the compensation paid by the government contractors is as high as the local prevailing wage standard and they include in that computation–

George S. Leonard:

–Are you suggesting that they would pay a higher compensation on the basis of… for a laborer on a public building than one on another building?

I don’t believe that was ever Congress’s intent.

John Paul Stevens:

–The statute requires that they pay at least as high, wages at least as high as the prevailing–

George S. Leonard:

Well, at least as high then would include the fringe benefits.

John Paul Stevens:

–Correct, for that purpose.

George S. Leonard:

Correct.

John Paul Stevens:

Yes.

George S. Leonard:

Now, I am clear that the employer payments to unions is part of the statutory language.

I am clear that these are to be counted in and I quote, “adjusting compensation for injuries” from the statute.

That is 40 USC 276(a).

Let’s take the Federal Employees Compensation Act because this is a rather remarkable parallel.

Assuming that Congress doesn’t particularly want to distinguish between the two, which it might well do, we take Section 8171 of the Federal Employees Compensation Act… that is Title 5, 81… starting at 8114… and that applies to non-appropriated fund activities.

Now, remember, these are civilian people and they are brought under this Act we are now talking about, the Longshoremen’s and Harbor Workers’ Act.

In other words, Congress is saying in the Federal Employees Compensation Act this covers non-appropriated fund activities and their personnel come under workers’ compensation.

Let’s take the Miller Act.

This I can’t go very far because of your statement before, Mr. Justice Stevens, because these are sums justly due the employees, because that is exactly what you said and there is no point in going into it.

John Paul Stevens:

Was that in a dissenting opinion if I remember correctly?

George S. Leonard:

What?

John Paul Stevens:

Are you talking about the Miller Act case?

George S. Leonard:

That was the Miller Act case.

John Paul Stevens:

And, wasn’t I in dissent in that case?

George S. Leonard:

It was what?

John Paul Stevens:

Wasn’t I… Was I not in dissent in that case?

George S. Leonard:

I am not sure.

John Paul Stevens:

I think I was.

George S. Leonard:

Let me go back for a moment to Davis-Bacon as a matter of fact.

As part of the general exaggeration of these facts, we have a very curious happening in Davis-Bacon.

Remember, you were told that the amendment to this Act went back to 1964 and that it had a parallel history to the Workmen’s Compensation Act?

George S. Leonard:

It was never amended.

It was supplemented but never amended.

You see, there never was a definition that kept out fringe benefits in the Davis-Bacon Act.

Congress was intent on seeing that they were, in fact, put in to the Act and, therefore, supplemented it in 1964, almost 20 years ago which shows that Congress is really not behind the times.

Let me take the National Labor Relations Act.

I have already mentioned the fact that the benefits are negotiable and that leads, of course, to the Labor Management Relations Act which created employee trusts.

Apparently Congress distrusted the unions on these funds to the extent that it created the trust form of handling, gave the right to the union and to the individual to make sure that the contributions were put into it.

And, in Section 17 of the Longshoremen’s and Harbor Workers’ Compensation Act it is provided that whatever you have received from one of the union benefit plans you may have to return if you get workmen’s compensation.

You may have to put it back into the trust.

Now, nothing, I think, could be clearer than to show that what is paid into these trusts, if paid out without compensation, must be put back if you get compensation.

The interrelationship of the two is fascinating.

By the way, there is a typo in the Hilyer brief.

It says it is Section 7 when in fact it is Section 17, but it has been identified two or three other places as 17.

That is on page 24.

Let’s come down to the Social Security Act.

As I have already mentioned, you have to offset both disability and compensation and pension trust benefits from what you receive under Medicare and under ERISA.

You have in tax… I have already talked about the fact.

I take it that this Court is fully familiar with Section 501(c) of the Title 26 which in Section 5 exempts all labor organizations from tax, which in Section 17 exempts benefit plan trusts such as these three from tax.

In Section 22 also exempts government retirement funds from tax.

And, Congress passed a law, as you probably know, in the Economic Recovery Tax Act that forbids the Internal Revenue Service from issuing any regulations on how to tax these benefits and this runs through the end of 1983 and probably… And, since this is the third extension, I am sure it will be extended again or it is reasonable.

Thank you very much.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.

We will resume arguments at 1:00.