On September 30, 2008, in Golden Gate Restaurant Ass'n v. City of San Francisco, __ F.3d __, 2008 WL 4401387 (9th Cir. Sept. 30, 2008), the appeals court for the federal circuit that includes California, the Ninth Circuit, held that the San Francisco Health Care Security Ordinance ("Ordinance") was not preempted by the Employee Retirement Income Security Act of 1974 ("ERISA"). In reviewing the validity of the Ordinance, the Ninth Circuit concluded that because the law offers San Francisco employers a realistic alternative to creating or altering ERISA plans, it does not "effectively mandate[ ] that employers structure their employee healthcare plans to provide a certain level of benefits." As a result, employers subject to the Ordinance (as described below) must continue to meet their "pay or play" reporting and payment requirements.
As explained below, because of the potentially significant impact the decision will have on national employers, and the conflict it arguably creates with the decision in Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007), it would not be unusual for this case to have further review, either by the Ninth Circuit en banc, or by the Supreme Court.
The Ordinance
In broad terms, the Ordinance requires covered employers with at least 100 employees to pay $1.76 per hour for full-time employees, and employers with 20 to 99 employees to pay a $1.17 per hour for full-time employees, for health care expenditures, or make payments to the city for the benefit of their covered employees (the "City-payment option"). The Ordinance also imposes reporting requirements on covered employers, mandating that employers maintain "accurate records of health care expenditures" and "proof of such expenditures" and annually report required information. A failure to maintain such records results in a presumption that the employer did not make the mandatory healthcare expenditures. Additionally, the Ordinance imposes penalties of up to $1,000 per week per employee for noncompliance with the Ordinance's disclosure requirements. Covered employers are for-profit businesses with 20 or more employees and nonprofit businesses with 50 or more employees.
Procedural History
In November 2006, the Golden Gate Restaurant Association (the "Association"), a non-profit trade association of San Francisco Bay Area restaurants and related businesses, filed suit challenging the validity of the Ordinance in federal court. On December 26, 2007, the district court entered judgment for the Association, holding that the employer spending requirements were rendered invalid because they were preempted by ERISA. See Golden Gate Rest. Ass'n v. City & County of San Francisco, 535 F. Supp. 2d 968 (N.D. Cal. 2007). The City immediately requested the district court stay its judgment pending appeal. Although the district court denied the motion to stay, on January 9, 2008, the Ninth Circuit granted the City's motion for a stay pending resolution of the City's appeal. See Ass'n v. City & County of San Francisco, 512 F.3d 1112 (9th Cir. 2008). In so ruling, the Ninth Circuit determined that there was a strong likelihood of success on the merits as to whether the Ordinance was not preempted by ERISA, and that the balance of hardships tipped sharply in favor of the City. The Court also found that public interest supported granting a stay. The Circuit Justice, Justice Kennedy, denied the application to vacate the Ninth Circuit's stay of the district court's judgment.
The Ninth Circuit's Decision
The Ninth Circuit's analysis began by noting that there was a presumption against preemption when, as here (according to the Ninth Circuit), the Ordinance "clearly operate[d] in a field that has been traditionally occupied by the States." The Court defined the field in which the Ordinance operates as the provision of health care services to persons with low or moderate incomes.
The Ninth Circuit's decision rejected two principal arguments advanced by the Association and supported by the United States Secretary of Labor, which, while not a party to the lawsuit, had filed an amicus brief in support of the Association's position that the Ordinance is preempted by ERISA. The rejected arguments are: (i) the City-payment option under the Ordinance creates an ERISA plan, and thus is preempted because of its direct relationship to ERISA; and (ii) even if the City-payment option does not establish an ERISA plan, an employer's obligation to make payments at a certain level, whether or not the payments are made to the City, sufficiently "relates to" the ERISA plans of covered employers, and is thus preempted by ERISA.
Ninth Circuit Rules The Ordinance Did Not Create An ERISA Plan
The Ninth Circuit reviewed earlier Supreme Court decisions in an attempt to determine whether the City-payment option impermissibly required an employer to establish an ERISA plan. The Association argued that an employer's payment obligations to the City resulted in administrative obligations on behalf of employers, and reasonable expectations on behalf of their employees with respect to the arrangement, sufficient to constitute an ERISA plan. Reviewing prior cases, the Ninth Circuit observed that an employer's obligation to make monetary payments (even directly to employees) based on the amount of time worked by an employee, over and above ordinary wages, does not necessarily create an ERISA plan. Here, the Ordinance only imputed a "modicum" of discretion on employers: employers' payments were made directly to the City, employers made the payments on a regular periodic basis and calculated those payments based on the number of hours worked by the employee. An employer's sole responsibility under the Ordinance, according to the Ninth Circuit, is to make the required payments for covered employees, and to retain records of such payments. Employers had no responsibility for ensuring that the payments are actually used for that purpose. The Ninth Circuit appears to have concluded that the employer's administrative obligations under the Ordinance were insufficient to rise to the level of an administrative scheme sufficient to create an ERISA plan.
After finding against the Association as to whether the Ordinance required employers to create an ERISA plan, the Ninth Circuit noted that the Secretary of Labor had raised the argument that the Ordinance itself constituted an ERISA plan. Acknowledging that this issue may not have been properly before the court because it was not raised below by the Association, the Ninth Circuit summarily found that the Health Access Plan created by the City's Ordinance and funded, in part by employer contributions, was not an ERISA plan. In so holding the Ninth Circuit noted its belief that only a "small portion" of the funding for the plan came from employers, and that the plan existed, and would continue to exist, whether or not any covered employer makes a payment to the City under the Ordinance.
Ninth Circuit Rules The Ordinance Does Not Relate To An ERISA Plan
Under ERISA, the U.S. Supreme Court has held that a law "relates to" to a covered employee benefit plan for purposes of ERISA's preemption provisions if the law has a "connection with" or "reference to" an ERISA plan. In New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 115 S.Ct. 1671 (1995), and subsequent cases, the Supreme Court has held this "relate to" preemption is cabined by focusing on whether the state law at issue implicates core concerns under ERISA.
The Ninth Circuit concluded that the Ordinance does not have a connection with an ERISA plan because it does not require any employer to adopt an ERISA plan, and it does not require any employer to provide specific benefits through an existing ERISA plan. The Ninth Circuit reasoned that a covered employer may fully discharge its obligations under the Ordinance by making the required level of employee health care expenditures to either an ERISA plan, or to the City; that is, the court found that there was no direct mandate on an employer with respect to the establishment or maintenance of an ERISA plan. The Ninth Circuit reasoned that while a covered employer may choose to adopt or to change an ERISA plan in lieu of making the required health care expenditures to the City, such influence is permitted by existing Supreme Court precedent. Finally, the Ninth Circuit concluded that the Ordinance does not impose undue influence on plan administrators, reasoning the burden is on employers, not plans, to keep track of their obligations to make expenditures on behalf of covered employees and to maintain such records.
Finally, the Ninth Circuit sought to distinguish the contrary ruling of the Fourth Circuit in Retail Industry Leaders Association v. Fielder, 475 F.3d 180, 183 (4th Cir.2007). In Fielder, Maryland enacted the so-called Wal-Mart Law, which required employers with over 10,000 employees to spend at least 8% of their payrolls on healthcare expenditures, or pay the difference between what the employers spent on healthcare and 8% of their payrolls to the state (this law was referred to as the Wal-Mart Law because it is widely believed that Wal-Mart was the only employer in Maryland that would be subject to the law). The federal circuit in which Maryland is located, the Fourth Circuit, held that the Wal-Mart Law left the employer with no reasonable alternative because any reasonable employer would use the money to contribute to its ERISA plan on behalf of its employees, rather than paying the money to the state as a penalty. Therefore, according to the Fourth Circuit, the statute functioned as a mandatory increase to the employer's ERISA plan.
According to the Ninth Circuit, Fielder is distinguishable because, under the Ordinance, covered employers have a reasonable alternative: they could either amend their ERISA plans to meet the statutory minimum for healthcare expenditures, or they could pay the city, and the city would provide the minimum healthcare for its employees. The Ninth Circuit further noted that over 700 covered employers had elected the later option.
Impact & Implications For Plan Sponsors And Administrators
As states and municipalities increasingly look for creative solutions to the increasing cost of health care for the underand un-insured, "pay or play" mandates continue to grow in popularity. The resulting impact on employers is substantial. Employers that operate in multiple states find themselves subject to conflicting state and city statutes that require them to pay varying amounts for employee benefits and/or penalties to the state or city government. Similarly, plan administrators are subjected to different state reporting requirements, creating confusion within the plan's recordkeeping procedures. One of the fundamental principles of ERISA is, of course, to create one national administrative scheme for benefits administration and to avoid subjecting employers to multiple different requirements. For now, however, covered employers in San Francisco must comply with the Ordinance unless the Supreme Court (or the Ninth Circuit en banc) resolves the potential split in the federal circuits and concludes that such pay-or-play laws are preempted by ERISA.
Golden Gate is also unlikely to be the last word on this issue. In addition to administrative uniformity, "[t]he flexibility an employer enjoys to amend or eliminate its welfare plan is not an accident." Inter-Modal Rail Employees v. Atchison, Topeka & Santa Fe Railway Co., 520 U.S. 510, 515 (1997). Golden Gate's implicit assumption that states or cities can require employers to provide a certain minimum level of health benefits – either directly through an ERISA plan, or indirectly through compelled payments to the City – would thus seem to implicate this core ERISA concern, one that has consistently led to preemption in other contexts.
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