WILLIAM W. SCHWARZER, UNITED STATES DISTRICT JUDGE
Karl and Cathleen Czechowski bring this action to recover accrued vacation benefits on behalf of themselves and a class consisting of former employees of Radio Shack in California terminated since July 1, 1982. The complaint was filed in California Superior Court and removed by defendant Tandy Corporation, parent of Radio Shack, on the bases of federal question jurisdiction, 28 U.S.C. § 1331, and diversity jurisdiction, 28 U.S.C. § 1332. Before the Court are several motions, but only plaintiffs' motion to remand needs to be addressed.
Defendant suggests that the motion to remand is untimely, as it comes after substantial activity has taken place in this Court. A remand motion, however, may be made "at any time before final judgment [whenever] it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). Moreover, counsel have an obligation to bring to the court's attention any possible defect in subject matter jurisdiction whenever discovered in order to avoid further proceedings in the federal courts that may prove futile.
Plaintiffs' complaint alleges that Tandy denied them vested vacation benefits to which they were entitled under California Labor Code section 227.3, which requires that "all vested vacation shall be paid to [an employee] as wages at his final rate" upon termination of employment. Vacation time vests proportionately as labor is rendered and upon termination of employment an employee is entitled to a pro rata share of vested vacation pay. Suastez v. Plastic Dress-Up Co., 31 Cal.3d 774, 183 Cal.Rptr. 846, 647 P.2d 122 (1982). Plaintiffs contend that defendant sought to avoid these state law obligations by creating the Tandy Corporation Voluntary Employees' Beneficiary Trust (the "VEBA trust") and holding it out as being subject to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. §§ 1001 et seq., and hence exempt from state regulation.
Defendant removed on two alternative grounds for federal jurisdiction: (1) ERISA preemption, and (2) diversity of citizenship. On this motion to remand, the burden of establishing federal subject matter jurisdiction is on the party asserting it, i.e. defendant. Emrich v. Touche Ross & Co., 846 F.2d 1190, 1194-95 (9th Cir. 1988). Moreover, removal statutes must be construed strictly against removal. Libhart v. Santa Monica Dairy Co., 592 F.2d 1062, 1064 (9th Cir. 1979).
I. ERISA Preemption
Defendant contends that the VEBA trust is an ERISA "employee welfare benefit plan" under the definition in 29 U.S.C. § 1002(1), which includes any plan maintained for the purpose of providing "vacation benefits" for its participants. If it is such a plan, ERISA would preempt any state law relating to the VEBA trust, 29 U.S.C. § 1144(a), and the action was removable on the basis of federal question jurisdiction. Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 95 L. Ed. 2d 55, 107 S. Ct. 1542 (1987).
Defendant's VEBA trust provides vacation benefits to California Radio Shack employees in accordance with a Vacation Benefits Plan. These vacation benefits are administered on a "use it or lose it" basis, i.e., the vacation benefits to which an employee is entitled after a given length of employment must be used by the employee during the calendar year in which they accrue, or else they are forfeited at the end of that year. Any unused benefits are forfeited upon an employee's termination for any reason. (See Oct. 10, 1989 Levinson Decl. ex. 4.)
The VEBA trust has since its inception operated on an "advance and recapture" basis: Tandy disburses payments of vacation benefits directly to Radio Shack employees from its own general funds; the VEBA trust then reimburses Tandy on a quarterly basis for the moneys Tandy has disbursed to employees, and Tandy simultaneously gives a check to the VEBA trust for the same amount it has received from the VEBA trust. (See id. exs. 5-10.) Though the VEBA trust, since its inception, has disbursed over $ 1 million in vacation pay in this manner, it has never held more than $ 1,000. (See id. exs. 11, 12; Oct. 23, 1989 Hobbs Decl. P 5.)
In Massachusetts v. Morash, 490 U.S. 107, 109 S. Ct. 1668, 1672, 104 L. Ed. 2d 98 (1989), the Supreme Court held that a "policy . . . to pay employees for unused vacation time [does not] constitut[e] an employee welfare benefit plan." It reasoned that
In enacting ERISA, Congress' primary concern was with the mismanagement of funds accumulated to finance employee benefits and the failure to pay employees benefits from accumulated funds. California Hospital Ass'n v. Henning, [770 F.2d 856] at 859 (9th Cir. 1985). To that end, it established extensive reporting, disclosure, and fiduciary requirements to insure against the possibility that the employee's expectation of the benefit would be defeated through poor management by the plan administrator. Because ordinary vacation payments are typically fixed, due at known times, and do not depend on contingencies outside the employee's control, they present none of the risks that ERISA is intended to address. If there is a danger of defeated expectations, it is no different from the danger of defeated expectations of wages for services performed -- a danger Congress chose not to regulate in ERISA.