Federal Circuit Court Holds That ERISA Does Not Preempt San

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January 2009

Pg. 14 Vol. 63 No. 7 ISSN: 0013-6808; CODEN: EBPVAL

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Federal Circuit Court Holds That ERISA Does Not Preempt San Francisco Health Care Security Ordinance

Tolle, Norman L



In Golden Gate Restaurant Assn v. City and County of San Francisco, (2008), the Ninth Circuit pointed out that the San Francisco Health Care Security Ordinance does not require employers to establish their own ERISA plans or to make any changes to any existing ERISA plans, and it is not concerned with the nature of the health care benefits an employer provides its employees but is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. The Ninth Circuit concluded that the Ordinance's spending requirements do not establish an ERISA plan and do not have an impermissible connection with employers' ERISA plans, or make an impermissible reference to such plans. Accordingly, the appellate court reversed the district court's decision and ordered it to enter summary judgment in favor of the city. FULL TEXT:

In July 2006, the San Francisco Board of Supervisors unanimously passed the San Francisco Health Care Security Ordinance, which the mayor signed into law. The Ordinance has two primary components, a city administered health care program (the HAP) and employer spending requirements that mandate that covered employers make "required health care expenditures to or on behalf of" certain employees each quarter. "Covered employers" are employers engaging in business within the city that have an average of at least 20 employees performing work for compensation during a quarter, and nonprofit corporations with an average of at least 50 employees performing work for compensation during a quarter. "Covered employees" are individuals who work in the city, work at least 10 hours per week, work for the employer for at least 90 days, and are not excluded from coverage by other provisions of the Ordinance.

The Ordinance sets the required health care expenditure for employers based on the Ordinance's "health care expenditure rate." For-profit employers with between 20 and 99 employees and non-profit employers with 50 or more employees have to make health care expenditures at a rate of $1.17 per hour. For-profit employers with 100 or more employees have to make expenditures at a rate of $1.76 per hour. The Ordinance provides that "[t]he required health care expenditure for a covered employer shall be calculated by multiplying the total number of hours paid for each of its covered employees during the quarter . . . by the applicable health care expenditure rate." If an employer does not make required health care expenditures on behalf of employees in some other way, it may meet its spending requirement by making payments directly to the city. An employer is exempt from making payments to the city if it makes health care expenditures of at least $1.17 or $1.76 per hour (depending on the nonprofit or for-profit status of the employer, and on the number of employees), and it is partially exempt to the extent that it makes lesser expenditures.

The Ordinance created five categories of employers. First are employers that have no ERISA plans (No Coverage Employers). Second are employers that have ERISA plans for all employees, and that spend at least as much as the Ordinance's required health care expenditure per employee (Full High Coverage Employers). Third are employers that have ERISA plans for some, but not all, employees, and that spend at least as much as the Ordinance's required health care expenditure per employee for employees under the ERISA plan (Selective High Coverage Employers). Fourth are employers that have ERISA plans for all employees, but that spend less than the Ordinance's required health care expenditure per employee (Full Low Coverage Employers). Fifth are employers that have ERISA plans for some, but not all, employees, and that spend less than the Ordinance's required health care expenditure per employee for employees under the ERISA plan (Selective Low Coverage Employers).

Under the Ordinance, No Coverage Employers may choose to continue without any ERISA plans. In that event, they can make their required health care expenditures directly to the city. If these employers choose, instead, to establish an ERISA plan, the Ordinance requires only that they make the required level of health care expenditures. They can do so by paying the full amount to the plan, or by paying part to the plan and part to the city. The Ordinance does not dictate which employees must be eligible for the plan, or what benefits a plan must provide.

Full High Coverage Employers may choose to leave their ERISA plans unaltered. So long as they maintain records to show that they are making the required health care expenditures, they comply with the Ordinance.

Selective High Coverage Employers may choose to leave their ERISA plans unaltered. In that event, for employees not covered by their ERISA plans, they can comply with the Ordinance by making the required health care expenditures to the city.

Full Low Coverage Employers may choose to leave their ERISA plans unaltered. In that event, they can comply with the Ordinance by making payments to the city in an amount equal to the difference between their expenditures for the ERISA plans and the required health care expenditures under the Ordinance.

Selective Low Coverage Employers may choose to leave their ERISA plans unaltered. In that event, they can comply with the Ordinance for employees enrolled in their ERISA plans by paying to the city the difference between their expenditures for the plans and the required health care expenditures under the Ordinance, and for employees not enrolled in their ERISA plans by paying to the city the full amount of the required health care expenditures.

The Golden Gate Restaurant Association challenged the employer spending requirements of the Ordinance, arguing that ERISA preempted the employer spending requirements of the Ordinance either because those requirements created a plan within the meaning of ERISA or because they related to employers' ERISA plans. In December 2007, a federal district court granted the Association's motion for summary judgment and enjoined the implementation of the employer spending requirements. San Francisco appealed, and the U.S. Court of Appeals for the Ninth Circuit recently reversed, holding that ERISA does not preempt the Ordinance.

The Ninth Circuit pointed out that the Ordinance does not require employers to establish their own ERISA plans or to make any changes to any existing ERISA plans, and it is not concerned with the nature of the health care benefits an employer provides its employees but is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. The appellate court added that an employer can satisfy its spending requirements by paying the city; it can satisfy those requirements by funding exclusively preventive care; it can satisfy those requirements by setting up an on-site clinic and reimbursing employees for the purchase of over-the-counter medications; or it can satisfy those requirements in some other manner, such as funding a traditional ERISA plan. The Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars.

The Ninth Circuit concluded that the Ordinance's spending requirements do not establish an ERISA plan and do not have an "impermissible connection" with employers' ERISA plans, or make an impermissible reference to such plans. Accordingly, the appellate court reversed the district court's decision and ordered it to enter summary judgment in favor of the city. [Golden Gate Restaurant Ass'n v. City and County of San Francisco, 2008 U.S. App. LEXIS 20574 (9th Cir. Sept. 30, 2008).]

Comment: The decision by the Ninth Circuit, with its detailed description of the San Francisco Ordinance's provisions and legal analysis, may set a roadmap for other municipalities seeking to expand health insurance coverage for employees. Of course, given the important issues raised by the circuit court's analysis, the ruling may be reviewed by the U.S. Supreme Court.

January 26, 2009

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