Howard Delivery Serv., Inc. v. Zurich Am. Ins. Co., 547 U.S. 651 (2006)

United States v. Embassy Restaurant, Inc., 359 U. S. 29, 29–35, and Joint Industry Bd. of Elec. Industry v. United States, 391 U. S. 224, 228–229, held that an employer’s unpaid contributions to collectively bargained plans providing, respectively, life insurance and annuity benefits to employees did not qualify as “wages” entitled to priority status under the prior bankruptcy law. Congress thereafter enacted [p. 652] what is now § 507(a)(5) in order to provide a priority for the kind of fringe benefits at issue in those cases. Notably, Congress did not en large the “wages, salaries, [and] commissions” priority, § 507(a)(4)(A), to include fringe benefits, but instead created a new priority, § 507(a)(5), one step lower than the wage priority. The new provision allows a plan provider to recover unpaid premiums—albeit only after the employees’ claims for “wages, salaries, or commissions” have been paid. The cur rent Code’s juxtaposition of the wages and employee benefit plan priori ties manifests Congress’ comprehension that fringe benefits generally complement, or substitute for, hourly pay. Congress tightened the link age of § 507(a)(4) and (a)(5) by imposing a combined cap on the two prior ities, currently set at $10,000 per employee. See § 507(a)(5)(B). Be cause § 507(a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under § 507(a)(5) for benefit plan contributions can be recovered next up to the remainder of the $10,000 ceiling. No other § 507 subsections are so joined together.

This case turns instead on the essential character of workers’ compen sation regimes. Unlike pension plans or group life, health, and disabil ity insurance—negotiated or granted to supplement, or substitute for, [p. 653] wages—workers’ compensation prescriptions modify, or substitute for, the common-law tort liability to which employers were exposed for work-related accidents. Workers’ compensation regimes provide some thing for employees, ensuring limited fixed payments for on-the-job in juries, and something for employers, removing the risk of large judg ments and heavy costs in tort litigation. No such tradeoff is involved in employer-sponsored fringe benefit plans. Moreover, employer sponsored pension and health plans characteristically insure the em ployee (or his survivor) only. In contrast, workers’ compensation insur ance shields the insured enterprise. When an employer fails to secure workers’ compensation coverage, or loses coverage for nonpayment of premiums, an affected employee’s remedy would not lie in a suit for premiums that should have been paid to a compensation carrier. In stead, employees who sustain work-related injuries commonly have re course to a state-maintained fund or are authorized by state law to pur sue the larger recoveries successful tort litigation ordinarily yields. Further distancing workers’ compensation and fringe benefits, nearly all States require employers to participate in workers’ compensation, with substantial penalties, even criminal liability, for failure to do so. It is relevant, although not dispositive, that States overwhelmingly pre scribe and regulate insurance coverage for on-the-job accidents, while commonly leaving fringe benefits to private ordering.

The Bankruptcy Code accords a priority, among unsecured creditors’ claims, for unpaid “wages, salaries, or commis sions,” 11 U. S. C. § 507(a)(4)(A), and for unpaid contri butions to “an employee benefit plan,” § 507(a)(5).1 It is un contested here that § 507(a)(5) covers fringe benefits that complete a pay package—typically pension plans, and group health, life, and disability insurance—whether unilaterally provided by an employer or the result of collective bar gaining. This case presents the question whether the [p. 655] § 507(a)(5) priority also encompasses claims for unpaid premi ums on a policy purchased by an employer to cover its work ers’ compensation liability. We hold that premiums owed by an employer to a workers’ compensation carrier do not fit within § 507(a)(5).

The Court of Appeals for the Fourth Circuit reversed 2 to 1 in a per curiam opinion. 403 F. 3d 228 (2005). The judges in the majority, however, disagreed on the rationale. Judge King concluded that § 507(a)(5) unambiguously accorded pri ority status to claims for unpaid workers’ compensation pre [p. 657] miums. Id., at 237. Judge Shedd, concurring in the judg ment, found the § 507(a)(5) phrase “employee benefit plan” ambiguous. Looking to legislative history, he concluded that Congress likely intended to give past due workers’ com pensation premiums priority status. Id., at 238–239. In dissent, Judge Niemeyer, like Judge King, relied on the “plain meaning” of § 507(a)(5), but read the provision un equivocally to deny priority status to an insurer’s claim for unpaid workers’ compensation premiums. Id., at 241–244.

To provide a priority for fringe benefits of the kind at issue in Embassy Restaurant and Joint Industry Bd., Congress added what is now § 507(a)(5) when it amended the Bank ruptcy Act in 1978. See H. R. Rep. No. 95–595, p. 187 (1977) (hereinafter H. R. Rep.) (explaining that the amendment cov [p. 659] ers “health insurance programs, life insurance plans, pension funds, and all other forms of employee compensation that [are] not in the form of wages”); S. Rep. No. 95–989, p. 69 (1978). Notably, Congress did not enlarge the “wages, sala ries, [and] commissions” priority, § 507(a)(4), to include fringe benefits. Instead, Congress created a new priority for such benefits, one step lower than the wage priority. The new provision, currently contained in § 507(a)(5), allows the pro vider of an employee benefit plan to recover unpaid pre miums—albeit only after the employees’ claims for “wages, salaries, or commissions” have been paid. § 507(a)(4).

Congress tightened the linkage of subsections (a)(4) and (a)(5) by imposing a combined cap on the two priorities, cur rently set at $10,000 per employee. See § 507(a)(5)(B).4 Be [p. 660] cause (a)(4) has a higher priority status, all claims for wages are paid first, up to the $10,000 limit; claims under (a)(5) for contributions to employee benefit plans can be recovered next up to the remainder of the $10,000 ceiling. No other subsections of § 507 are joined together by a common cap in this way.

ERISA’s omnibus definition does show, at least, that the term “employee welfare benefit plan” is susceptible of a con struction that would include workers’ compensation plans. That Act’s signals are mixed, however, for 29 U. S. C. § 1003(b)(3) specifically exempts from ERISA’s coverage the [p. 662] genre of plan here at issue, i. e., one “maintained solely for the purpose of complying with applicable work[ers’] compen sation laws.”5 The § 1003(b)(3) exemption strengthens our resistance to Zurich’s argument. We follow the lead of an earlier decision, United States v. Reorganized CF&I Fabri cators of Utah, Inc., 518 U. S. 213, 219 (1996), in noting that “[h]ere and there in the Bankruptcy Code Congress has in cluded specific directions that establish the significance for bankruptcy law of a term used elsewhere in the federal stat utes.” Id., at 219–220. No such directions are contained in § 507(a)(5), and we have no warrant to write them into the text.

“The invention of workers compensation as it has ex isted in this country since about 1910 involves a clas sic social trade-off or, to use a Latin term, a quid pro [p. 663] quo.. . . What is given to the injured employee is the right to receive certain limited benefits regardless of fault, that is, even in cases in which the employee is partially or entirely at fault, or when there is no fault on anyone’s part. What is taken away is the employee’s right to recover full tort damages, including damages for pain and suffering, in cases in which there is fault on the employer’s part.” P. Lencsis, Workers Compensation: A Reference and Guide 9 (1998) (hereinafter Lencsis).

Further distancing workers’ compensation arrangements from bargained-for or voluntarily accorded fringe benefits, nearly all States, with limited exceptions, require employers to participate in their workers’ compensation systems. See, e. g., Ill. Comp. Stat., ch. 820, § 305/4 (West 2004); Minn. Stat. § 176.181, subd. 2 (2004); U. S. Dept. of Labor, Office of Work ers’ Compensation, State Workers’ Compensation Laws, Table 1: Type of Law and Insurance Requirements for Pri vate Employment (2005), online at http://www.dol.gov/esa/regs/statutes/owcp/stwclaw/tables-pdf/table1.pdf (as visited [p. 665] June 13, 2006, and available in Clerk of Court’s case file). An employer who fails to secure the mandatory coverage is subject to substantial penalties, even criminal liability. We do not suggest, as the dissent hypothesizes, see post, at 674, that a compensation carrier would gain § 507(a)(5) priority for unpaid premiums in States where workers’ compensation coverage is elective. Nor do we suggest that wage surro gates or supplements, e. g., pension and health benefits plans, would lose protection under § 507(a)(5) if a State were to mandate them. We simply count it a factor relevant to our assessment that States overwhelmingly prescribe and regu late insurance coverage for on-the-job accidents, while com monly leaving pension, health, and life insurance plans to pri vate ordering.7

We note that when the Fourth Circuit confronted a claim for workers’ compensation premiums owed not to a private insurer but to a state fund, that court ranked the premiums as “excise taxes” qualifying for bankruptcy priority under what is now § 507(a)(8)(E). See New Neighborhoods, Inc. v. West Virginia Workers’ Comp. Fund, 886 F. 2d 714, 718–720 (1989).8 See also In re Suburban Motor Freight, Inc., 998 [p. 666] F. 2d 338, 342 (CA6 1993) (“Where a State ‘compel[s] the pay ment’ of ‘involuntary exactions, regardless of name,’ and where such payment is universally applicable to similarly sit uated persons or firms, these payments are taxes for bank ruptcy purposes.” (quoting New Neighborhoods, 886 F. 2d, at 718–719; alteration in original)); LeRoy et al., Workers’ Compensation in Bankruptcy: How Do the Parties Fare? 24 Tort & Ins. L. J. 593, 623–624 (1989) (describing dis agreement among courts on whether payments to state-run workers’ compensation funds qualify as excise taxes under § 507(a)(8)). We express no view on the § 507(a)(8)(E) issue presented in New Neighborhoods. We venture only this ob servation: It is common for Congress to prefer Government creditors over private creditors, see Birmingham-Nashville Express, 224 F. 3d, at 517–518; it would be anomalous, how ever, to advance Zurich’s claim to level (a)(5) while leaving state-fund creditors at level (a)(8).

Zurich argues that according its claim an (a)(5) priority will give workers’ compensation carriers an incentive to con tinue coverage of a failing enterprise, thus promoting reha bilitation of the business. It may be doubted whether the projected incentive would outweigh competing financial pressure to pull the plug swiftly on an insolvent policyholder, and thereby contain potential losses. An insurer under takes to pay the scheduled benefits to workers injured on the job while the policy is in effect. In the case of serious injuries, however, benefits may remain payable years after termination of coverage. See 1 Larson & Larson §§ 10.02–10.03, at 10–3 to 10–7; Lencsis 51–52. While cancellation re lieves the insurer from responsibility for future injuries, the insurer cannot escape the obligation to continue paying bene fits for enduring maladies or disabilities, even though no pre miums are paid by the former policyholder. An insurer [p. 667] would likely weigh in the balance the risk of incurring fresh obligations of long duration were it to continue insuring em ployers unable to pay currently for coverage. That consid eration might well be controlling even with an assurance of priority status, for there is no guarantee that creditors ac corded preferred positions will in fact be paid. See Tr. of Oral Arg. 31–32 (“[A]s soon as they smell bankruptcy, they’re going to pull the plug anyway.” (Scalia, J.)); LeRoy, supra, at 596 (noting “general reluctance on the part of private in surers to provide debtors with the necessary Workers’ Com pensation coverage”).

Every claim granted priority status reduces the funds available to general unsecured creditors and may diminish the recovery of other claimants qualifying for equal or lesser priorities. See Joint Industry Bd., 391 U. S., at 228–229. “To give priority to a claimant not clearly entitled thereto is not only inconsistent with the policy of equality of dis tribution; it dilutes the value of the priority for those credi tors Congress intended to prefer.” In re Mammoth Mart, Inc., 536 F. 2d 950, 953 (CA1 1976). Cases like Zurich’s are illustrative. The Bankruptcy Code caps the amount recov [p. 668] erable for contributions to employee benefit plans. See supra, at 659–660. Opening the (a)(5) priority to workers’ compensation carriers could shrink the amount available to cover unpaid contributions to plans paradigmatically qualify ing as wage surrogates, prime among them, pension and health benefit plans.9

The Court of Appeals for the Fourth Circuit held that pay ments for workers’ compensation coverage are “contribu [p. 669] tions to an employee benefit plan . . . arising from services rendered.” 11 U. S. C. § 507(a)(5). In reversing that judg ment the Court’s opinion relies on the premise that “statuto rily prescribed workers’ compensation regimes do not run exclusively to the employees’ benefit.” Ante, at 655. This rationale, however, does not suffice to justify the Court’s holding. It does not accord, moreover, with the text or pur pose of the bankruptcy priority defined in § 507(a)(5). These are the main points of this respectful dissenting opinion.

In accord with these principles the Court does not seem to dispute that the payments at issue here are “contri butions” that “aris[e] from services rendered,” § 507(a)(5). [p. 670] There seems little doubt that both these statutory re quirements are met. Petitioner Howard Delivery Service, Inc. (Howard), argues that a contribution must be voluntary; and it says that because the workers’ compensation pay ments in this case are mandatory, they cannot be contribu tions. In some situations—for example, in discussing chari table contributions—it is possible to read “contributions” as Howard suggests. See Webster’s Third New International Dictionary 496 (1971) (defining “contribution” as “a sum or thing voluntarily contributed”). In the context of employer payments, however, the voluntariness requirement does not accord with the usual meaning of the word. See ibid. (de fining “contribution” alternatively as “a sum paid by an employer to an unemployment or group-insurance fund”). Many federal statutes and this Court’s own cases expressly refer to “mandatory contributions” when discussing pay ments by employers and employees. See, e. g., 26 U. S. C. § 411(a)(3)(D); 29 U. S. C. § 1053(a)(3)(D); § 1054(c)(2)(C); § 1344; Hughes Aircraft Co. v. Jacobson, 525 U. S. 432, 435 (1999); General Building Contractors Assn., Inc. v. Pennsyl vania, 458 U. S. 375, 394 (1982); United States v. Lee, 455 U. S. 252, 258 (1982). Even for pension and health benefit plans, which undeniably fall within the § 507(a)(5) priority, the payments are rarely if ever voluntary in the charitable sense that Howard invokes. The mandatory nature of most workers’ compensation coverage, then, fails to establish that the payments are not contributions.

Howard’s argument that the workers’ compensation pay ments here do not “aris[e] from services rendered, ” § 507(a)(5), is also unpersuasive. This phrase, according to Howard, does not cover payments to insurance companies because those payments are made in exchange for the serv ices of the insurance company, not the services of the employ ees. The Court seems to accept that insurance payments can receive the priority, see ante, at 659, 661–662, and this is part of the statute’s necessary operation. Even if the pay [p. 671] ments may go to the insurance company, they are predicated nonetheless on the employees’ performing services for the employer. They therefore “aris[e] from services rendered” in the same manner as do payments to a pension, health, or disability plan. From a practical standpoint, moreover, “[t]o allow the insurer to obtain its premiums through the priority would seem the surest way to provide the employees with the policy benefits to which they are entitled.” In re Saco Local Development Corp., 711 F. 2d 441, 449 (CA1 1983) (ma jority opinion by Breyer, J.).

Even assuming that the benefit the employer provides must be a net benefit, this condition is easily satisfied. It is true that, in return for receiving workers’ compensation, employees give up some of the common-law tort remedies they otherwise could have pursued. See ante, at 662–663. The common-law remedies, though, typically required the employer to be at fault; and they were further limited by the defenses of contributory negligence, assumption of risk, and the fellow-servant doctrine. See 1 A. Larson & L. Larson, Workers’ Compensation Law § 2.03 (2005). As a result, only a small percentage of injured workers received any recovery. Ibid. Workers’ compensation plans, even considering the tort claims relinquished, thus are generally a benefit to em ployees. See id., § 2.03, at 2–6 (noting the “helplessness which characterized the position of the injured worker of the precompensation era”). Even where an employee might have received greater damages in a tort suit, the greater [p. 672] speed and certainty of payment in workers’ compensation is often worth the tradeoff. In many States, moreover, the employee has a choice to opt out of the workers’ compensa tion system, leaving him or her with traditional tort reme dies. See, e. g., Ariz. Rev. Stat. Ann. § 23–906 (West 1995); Cal. Lab. Code Ann. § 4154 (West 2003); Ky. Rev. Stat. Ann. § 342.395 (West 2005); Mass. Gen. Laws, ch. 152, § 24 (West 2004); N. D. Cent. Code Ann. § 65–07.1–03 (Lexis 2003); Pa. Stat. Ann., Tit. 77, § 1402(b) (Purdon 2002); R. I. Gen. Laws § 28–29–17 (Supp. 2005). When the employee chooses work ers’ compensation, it plainly should be considered a benefit. For these reasons, workers’ compensation plans, on the whole, are a benefit to employees; and indeed, the Court does not suggest otherwise.

The Court’s three other bases for treating workers’ com pensation differently also find no support in the Bankruptcy Code. First, the Court maintains, based on the purpose and structure of the “employee benefit plan” priority in relation to the wage priority of § 507(a)(4), that only wage substitutes [p. 673] are covered. Ante, at 657–660. Even assuming this propo sition were correct, it would not lead to the Court’s conclu sion. That is because workers’ compensation plans, as a matter of economic realities, are wage substitutes. The Court made this precise point in one of the first cases ad dressing a workers’ compensation scheme: “[J]ust as the em ployee’s assumption of ordinary risks at common law pre sumably was taken into account in fixing the rate of wages, so the fixed responsibility of the employer, and the modified assumption of risk by the employee under the new system, presumably will be reflected in the wage scale.” New York Central R. Co. v. White, 243 U. S. 188, 201–202 (1917). Re cent empirical studies confirm that employers pass on the cost of workers’ compensation to employees in the form of lower wages. See Fishback & Kantor, Did Workers Pay for the Passage of Workers’ Compensation Laws? 110 Q. J. Econ. 713 (1995); Gruber & Krueger, The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers’ Com pensation Insurance, 5 Tax Policy and the Economy 111 (D. Bradford ed. 1991); Viscusi & Moore, Workers’ Compensa tion: Wage Effects, Benefit Inadequacies, and the Value of Health Losses, 69 Rev. Econ. & Statistics 249 (1987).

Second, the mandatory nature of most workers’ compensa tion plans does not change the applicability of the priority. The benefit to employees is real and significant regardless of whether the government has mandated the benefit. While States generally “prescribe and regulate” workers’ compen sation and leave other benefits “to private ordering,” ante, at 665, the presence of bargaining has no bearing on whether contributions should receive priority. See Saco, supra, at 448–449. Indeed, it is difficult to imagine that if States began to mandate other kinds of benefits, those benefits would promptly fall outside § 507(a)(5). This would amount to saying that whenever some form of protection for employ ees comes to be accepted as so necessary for their welfare [p. 674] that it is mandated as an employer responsibility it is no longer a benefit.

Third, the existence of state funds to compensate employ ees when their employers fail to provide workers’ compensa tion benefits has little relevance. Once again, it is unclear how much weight the Court places on this factor, and it seems doubtful that the Court would remove health plans from the priority simply because a State created a fallback public health system. In any event state fallback funds do not change the fact that the employer is providing a benefit; a fallback fund simply indicates the employee could have re ceived the benefit from somewhere else. Were it otherwise, pension plans would also fall outside the priority, since it appears they must provide benefits even if the employer has defaulted on its contributions. See Central States, South east & Southwest Areas Pension Fund v. Central Transport, Inc., 472 U. S. 559, 567, n. 7 (1985) (citing Department of [p. 675] Labor advisory opinion). As a practical matter, moreover, most large multiemployer plans effectively guarantee com pensation (unless all the employers happen to go bankrupt at the same time), and the Pension Benefit Guaranty Cor poration ensures payment of at least some of the promised benefits. The exclusion of these plans from the priority, however, would accord with neither the text of the provision nor the commonsense notion that protecting the insurer—whether it be a private company, a multiemployer plan, or a government fund—is the best way to protect the employees. See Saco, 711 F. 2d, at 449. Simply put, harm to the insurer will be passed along to the employees, either by rendering the insurer unable to pay or causing it to charge higher rates for the same coverage.