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Ninth Circuit Holds San Francisco Health Care Security Ordinance is Not Preempted by ERISA

On September 30, 2008, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled that the San Francisco Health Care Security Ordinance (“Ordinance”) is not preempted by ERISA, in Golden Gate Restaurant Association v. City and County of San Francisco. This decision reverses the District Court’s ruling, issued on December 26, 2007, that the employer spending requirements of the Ordinance are preempted by ERISA. While covered employers have had to comply with the Ordinance since January 9, 2008, when the same three-judge panel granted the City and County of San Francisco’s (“City”) motion to stay the District Court’s judgment pending resolution of the appeal, the Ninth Circuit’s decision means that the Ordinance will take full effect unless it is overturned by an en banc review by the Ninth Circuit or by the Supreme Court. For details of the employer spending requirements of the Ordinance see our January 2008 issue.

The Golden Gate Restaurant Association (“Association”) challenged the employer spending requirements of the Ordinance on ERISA preemption grounds based on two theories:

  • That the Ordinance creates an ERISA plan
  • That the Ordinance impermissibly “relates to” employers’ ERISA plans

The Ninth Circuit rejected each of these arguments as described in further detail below.

ERISA Preemption Analysis

Section 514(a) of ERISA provides that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” that is subject to ERISA. This provision is intended to provide for a uniform regulatory scheme for the operation of employee benefit plans.

Prior to setting forth its ERISA-preemption analysis, the Ninth Circuit took notice of the fact that the Ordinance operates in a field traditionally occupied by states and local governments (i.e., the provision of health care for low and moderate-income residents). The Ninth Circuit noted that the Ordinance permits employers to comply with the employer spending requirements by simply making payments to the City on behalf of their employees (“City-payment option”) and facilitating either their enrollment in the “Health Access Program” (“HAP”) or their reimbursement for medical care through the HAP. Because of the public policies promoted by the Ordinance, the Ninth Circuit noted that the Ordinance was subject to a presumption against preemption as it operates in a field traditionally occupied by the states.

The City-Payment Option Does Not Create an ERISA Plan

Both the Association and the Secretary of Labor, as amicus curiae, asserted that the Ordinance makes an impermissible “reference to” an ERISA plan. The Association and the Secretary of Labor argued that the Ordinance’s City-payment option creates an ERISA Plan. The Secretary of Labor also argued that the HAP itself was an ERISA plan. The Ninth Circuit rejected both of these arguments.

To be an ERISA employee welfare benefit plan, a plan, fund or program must exist and be established or maintained by an employer through the purchase of insurance or otherwise. Comparing the Ordinance to cases involving monetary payments for severance and vacation payouts, the Ninth Circuit noted that an employer’s obligation to make monetary payments does not necessarily create an ERISA plan. The Ninth Circuit determined that because the City-payment option requires employers to make payments to the City, and not to employees directly, the Ordinance does not create an ERISA plan. (The Ninth Circuit noted that even if the Ordinance required that payments be made to employees directly, such payments would not be enough to create an ERISA plan, because the payments must be made on a regular, periodic basis based on the number of hours worked by an employee, and because such payments are made from the employer’s general assets, with little to differentiate them from wages.)

The Association next argued that the administrative obligations placed on an employer by the City-payment option create an ERISA plan. Under applicable case law, an ERISA plan is created if an employer’s administrative duties under the federal, state or local law entail more than a “modicum of discretion.” Under the City-payment option, employers must maintain accurate records of health care expenditures paid to the City and proof that such expenditures were made each quarter each year. These recordkeeping provisions require employers to distinguish between “covered” and “non-covered” employees, and keep track of the number of hours covered employees work and the number of such hours performed in the City. The Ninth Circuit held that these requirements were insufficient to create an ERISA plan. The Ninth Circuit likened the administrative obligations under the Ordinance to payments that are required under existing federal, state and local laws for income tax withholding, social security payments and minimum wage laws, stating: “the employer’s administrative obligations [under the Ordinance] involve mechanical record-keeping” and that any judgments involved in the making of required expenditure calculations and the related records involve “no more than the exercise of a modicum of discretion.”

Finally, the Association argued that the combination of the administrative burden and the “reasonable ascertainability” of benefits to employees, creates an ERISA plan. The Ninth Circuit rejected this argument on the basis that the City-payment option does not necessarily r-esult in “reasonably ascertainable” benefits as there is nothing in the Ordinance that guarantees that a certain level or kind of “intended benefits” will be provided by the HAP or that a particular group of beneficiaries will be included in the HAP.

The Ninth Circuit also held that the HAP itself is not an ERISA plan. As referenced above, the HAP provides health care to low and moderate income San Francisco residents regardless of their employment status. As stated above, to be an ERISA employee welfare benefit plan, a plan, fund or program must exist and be established or maintained by an employer through the purchase of insurance or otherwise. The Ninth Circuit found that because the HAP is funded primarily by taxpayers and not employer contributions and is maintained by the City, not by any employer, the HAP is a government entitlement program and not an ERISA plan. The Ninth Circuit noted that neither employers nor covered employees have any control over the kind and level of benefits provided. Furthermore, employers do not negotiate or sign contracts with the City or have any control over coverage decisions.

The Ordinance Does Not Relate to ERISA Plans

Under the U.S. Supreme Court’s test for ERISA preemption, a law relates to an employee benefit plan and is, therefore, preempted, if it has a connection with or references an employee benefit plan.

Connection with ERISA Plans

The Ninth Circuit concluded that the Ordinance does not have an impermissible connection with ERISA plans because it does not require an employer to adopt an ERISA plan or provide any specific level of benefit. The Ninth Circuit emphasized that the Ordinance just requires covered employers to spend a minimum amount on their employees’ health care, and this obligation can be satisfied by simply making payments to the City. While the Ninth Circuit acknowledged that the Ordinance may influence an employer to adopt or change an ERISA plan in lieu of making the required health care expenditures to the City, the Ninth Circuit found that such influence is permissible under ERISA and New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995).

The Ninth Circuit further determined that, unlike laws that have been struck down based on ERISA preemption, the Ordinance does not hold “ERISA plan administrators to a particular choice of rules for determining eligibility or entitlement to particular benefits.” The Ninth Circuit also stated that “the Ordinance does not impose on plan administrators any administrative or financial burden of complying with conflicting directives relating to benefits law.” Furthermore, because the administrative burdens of the Ordinance apply whether or not the employer has an ERISA plan, the Ninth Circuit found that the burdens imposed by the Ordinance rest with the employer and not with any ERISA plan.

Reference to ERISA Plans

A law has an impermissible reference to ERISA plans if it acts immediately and exclusively on ERISA plans or if the existence of ERISA plans is essential to the law’s operation.

The Ninth Circuit found that the Ordinance does not act immediately and exclusively on ERISA plans, stating: “the Ordinance does not act on ERISA plans at all.” Finding that compliance with the Ordinance does not require an employer to adopt an ERISA plan or amend an existing ERISA plan, the Ninth Circuit concluded that the existence of ERISA plans is not essential to the Ordinance’s operation. The Ninth Circuit noted that the Ordinance is fully functional even if no covered employer has an ERISA plan. Furthermore, the Ninth Circuit determined that because required expenditures under the Ordinance are calculated based on hours worked and not on the value or nature of ERISA benefits provided, the Ordinance does not “reference” ERISA plans.

The Ninth Circuit found the Ordinance to be similar to a California prevailing wage law that was challenged in WSB Electric Inc. v. Curry, 88 F.3d 788 (9th Cir. 1996). In WSB, an employer was required to pay the prevailing wage which was determined by reference to cash and benefits, subject to a cap on the amount that could be paid as benefits. That statute was found not to be preempted by ERISA because it did not force an employer to provide an ERISA plan nor did it force an employer to alter any existing benefit plans.

The Ordinance Is Different Than The Maryland Law That Was Found By The Fourth Circuit To Be Preempted By ERISA

The final argument made by the Association was that the Ordinance is preempted based on the analysis in Retail Industry Leaders Association v. Fielder, 475 F.3d 180, (4th Cir. 2007). The Maryland law at issue in Fielder required employers who had more than 10,000 employees in the state to either spend at least 8% of total payroll on health insurance for their employees, or make a payment to the state in the amount of the shortfall. Unlike the Ordinance, the Maryland law did not require the state to use the money contributed by employers to provide health insurance to the employees for whom such contributions were made. The law only impacted Wal-Mart and Wal-Mart had stated that it would not pay the state. Finding that Wal-Mart, in practical fact, had no choice but to amend its ERISA plan to satisfy the minimum spending requirement to comply with the law, the Fourth Circuit concluded that the Maryland law affected ERISA plans and therefore was preempted by ERISA.

The Ninth Circuit stated that while it neither adopted nor rejected the Fourth Circuit’s analysis, the Ordinance, unlike the Maryland law, provides employers a meaningful alternative to establishing or altering ERISA plans. The Ninth Circuit further noted that it did not observe any inconsistency between its ruling and the Fourth Circuit’s ruling that would amount to a split among the circuits that could be resolved by the U.S. Supreme Court.

Impact On Covered Employers

As indicated above, covered employers have been required to comply with the Ordinance since January 9, 2008. We understand that the Association will request an en banc review by the Ninth Circuit, and if that is denied, or an en banc decision is unfavorable, possibly request certiorari by the U.S. Supreme Court based on a split among the Circuits due to the decision in Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007). However, it could be several months, or even years, before a final decision is reached. Thus, covered employers must be prepared to comply with the Ordinance for the foreseeable future.

We also note that the ruling may spark other state and local governments to enact similar laws which will, in turn, require employers in multiple jurisdictions to comply with laws that may vary from locality to locality — a notion that is contrary to one of the primary tenets of ERISA.

Please contact us if you have questions or need assistance to comply with the Ordinance’s requirements.