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CABAIS v. EGGER

August 27, 1981

Lawrence CABAIS, et al., Plaintiffs,
v.
Roscoe EGGER, Commissioner of the Internal Revenue Service, et al., Defendants; INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE AND AGRICULTURE IMPLEMENT WORKERS OF AMERICA, UAW, et al., Plaintiffs, v. Roscoe EGGER, Commissioner of the Internal Revenue Service, et al., Defendants



The opinion of the court was delivered by: PARKER

MEMORANDUM OPINION

Plaintiffs in these consolidated cases challenge on constitutional and other grounds a recent amendment to the Federal Unemployment Tax Act (Act or FUTA), 26 U.S.C. ยงยง 3301 et seq., requiring a state to offset unemployment compensation payments by the amount of pension or other retirement benefits received by an unemployed claimant. They allege that this "pension offset provision", section 3304(a)(15) of the Act, violates their equal protection and due process rights, impairs their contractual rights, and violates the Bill of Attainder Clause of the Constitution. Plaintiffs also claim that various directives issued by the Secretary of Labor (Secretary), instructing state agencies how to conform with the requirements of section 3304(a)(15), are regulations promulgated without meeting the requirements of the Administrative Procedure Act (APA) *fn1" and the Freedom of Information Act (FOIA). *fn2" Because of non-compliance with those statutes they urge that the directives be set aside. Finally, plaintiffs allege that the Secretary's instruction that states seek retroactive application of state conforming legislation to the effective date of the federal provision violates the FUTA requirement that unemployment benefits must be paid when due. *fn3"

 The government argues that plaintiffs lack standing to sue and that the Court is without subject matter jurisdiction by virtue of the Tax Injunction Act. *fn4" As to the constitutional claims, the government asserts that the pension offset provision is rationally related to legitimate goals; that plaintiffs have no contractual right to unemployment compensation; and that the bill of attainder argument is without merit. The government also argues that the Secretary's directives are interpretative rules exempt from the APA and the FOIA requirements and that his urging that state legislation be given retroactive affect was no more than a suggestion that was not in violation of FUTA.

 The parties' memoranda and the oral argument of counsel have been considered. The Court concludes that there is merit in the plaintiffs' claim that the Labor Secretary's directives are regulations subject to APA notice and comment procedures. These should not be given effect until issued in conformity with that statute. Otherwise, the plaintiffs' constitutional claims are without merit. The reasons in support of the Court's determination are set out in this opinion.

 The Parties

 The plaintiffs in this consolidated proceeding are first, Lawrence Cabais and other individual recipients of social security and/or pension benefits from nine states and the District of Columbia. Following retirement, each plaintiff secured other work, subsequently became unemployed and received unemployment compensation benefits. But later their benefits were reduced or denied by virtue of the pension offset provision. Their complaint has been consolidated with a similar proceeding initiated by two national labor unions and two associations of retired persons whose memberships allegedly directly suffer from the same offset provision. The defendants are the Commissioner of the Internal Revenue Service and the Secretary of Labor.

 The Statutory Scheme

 Section 3304(a)(15) was originally enacted in 1976. A later modification provided that beginning after March 31, 1980, the amount of unemployment compensation received by a claimant for any week that he qualified for such payments must be reduced by the amount of any retirement benefits attributable to the claimant for that week. *fn5" The provision was adopted as one of the minimum standards for participation of state unemployment compensation programs in a cooperative federal/state unemployment tax scheme. This cooperative venture provides for certification of a state as a participant in the federal program if it levies an unspecified unemployment tax on employers based on their unemployment "experience ratings." The state provides unemployment compensation to claimants in accordance with state law, subject only to federal minimum standards. If the Secretary of Labor certifies that a state is complying with these standards, employers in that state are allowed a 90% credit against FUTA tax liability for unemployment taxes paid to the state. FUTA monies collected directly by the federal government are provided to the states to defray the administrative costs of maintaining the unemployment program. All fifty states and the District of Columbia are currently certified participants in the program.

 Beyond meeting federal minimum standards, each state is free to legislate its own requirement for claimant eligibility. When section 3304(a)(15) was enacted, some thirty-three states had disqualified recipients of private pensions from unemployment compensation, while a total of forty-six had enacted some form of disqualifying income provision to limit unemployment compensation paid to claimants with other resources. Congress specifically authorized this approach in 1970 with the enactment of section 3304(a)(10), which provided, in relevant part, that "compensation shall not be denied ... for any cause other than ... receipt of disqualifying income."

 In September 1980, Congress amended section 3304(a)(15) to narrow the class of pensioners whose retirement income would lead to an offset of unemployment compensation in two relevant respects. *fn6" First, under the new enactment, unemployment compensation payments are only offset by benefits received from a retirement fund maintained or contributed to by a "base period" or "chargeable" employer. Under the various state laws, a claimant must have been employed during the base period, usually four of the last five calendar quarters, to qualify for unemployment compensation. The base period employer is usually also the chargeable employer, i.e., the employer (or employers) whose state unemployment insurance account is charged for the compensation paid to the unemployed former employee. Second, retirement benefits paid from a fund contributed to by the base period or chargeable employer can only be applied to disqualify unemployment payments if employer contributions during the base period qualified the claimant for or enhanced the amount of retirement benefits the claimant receives. This second narrowing provision of the amendment does not apply to social security or railroad retirement benefits.

 The newly enacted section 3304(a)(15) applies only to recertifications by the Secretary of Labor starting October 1981. Section 414(b), Pub.L. 96-364, 94 Stat. 1310 (1980).

 ANALYSIS

 Standing and Jurisdiction

 At the outset, the government attempts to avoid the merits by asserting that plaintiffs are without standing to challenge the federal statute and the Court has no jurisdiction over their claims. Neither objection is meritorious.

 The standing argument hinges on the voluntary nature of state participation in the FUTA program. Because no state is required to take part in the cooperative scheme, state legislation conforming to the pension offset provision is not the result of federal compulsion and therefore the federal statute did not cause the plaintiffs' injuries. However, the government's insistence that plaintiffs can only obtain relief by challenging each state statute ignores what is indisputable-that at least some states enacted conforming legislation in direct response to the federal requirement. At least five such states have incorporated "self-destruct" clauses in their state offset laws, applying the pension reduction provision only if required by federal law. *fn7" Since an injunction on the operation of the federal statute will provide plaintiffs in at least these states with relief, they have standing to proceeding. See Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26, 45, 96 S. Ct. 1917, 1927, 48 L. Ed. 2d 450 (1976). In a recent challenge to section 3304(a) (15), Chief Judge Peckham of the Northern District of ...


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