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Ninth Circuit Rules San Francisco's "Pay Or Play" Ordinance Not Preempted By ERISA

March 13, 2009

By Thomas I. Kramer

BENEFITS NOTEBOOK 

On September 30, 2008, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit, which decides appeals from federal courts in the nine westernmost states, upheld a San Francisco ordinance that requires certain San Francisco employers either to “pay” for employee health care or “play” by paying into a City health care fund. On March 9, 2009, the active judges of the Ninth Circuit voted not to rehear the case en banc, leaving the plaintiffs to decide whether to petition the Supreme Court to review the opinion. See Golden Gate Restaurant Association v. San Francisco, 546 F3d 639 (9th Cir 2008). If the decision survives Supreme Court review, it is important not only for its effect on San Francisco employers but for what it could authorize if other jurisdictions adopt similar requirements. 

The San Francisco Ordinance 
The San Francisco Health Care Security Ordinance, passed in July 2006, imposed an Employer Spending Requirement (the ESR) and created the Health Access Plan (the HAP). The ESR required covered employers to spend a minimum amount of money on health care expenditures for their covered employees either by making contributions to or for the employee for health care services or making payments into the HAP. “Covered employers” are for-profit employers in San Francisco with at least 20 employees and nonprofit employers in San Francisco with at least 50 employees. “Covered employees” are employees who have completed 90 days of employment and work at least eight hours per week in San Francisco. The HAP provides health care services to San Francisco residents and medical reimbursement accounts to nonresidents who work in the City. If a covered employer makes payments to the HAP, rather than making the minimum contribution to its own plan, San Francisco-resident covered employees receive a 75% discount off the HAP premium the employee otherwise would pay for coverage and nonresident employees receive credits to their medical reimbursement accounts. 

Before the Ordinance took effect on July 1, 2007, the Golden Gate Restaurant Association (the GGRA) challenged the ESR in the U.S. District Court for the Northern District of California. In December 2007, the court held that the federal Employee Retirement Income Security Act (ERISA) preempts the ESR and ordered the City not to enforce it. On January 8, 2008, the Ninth Circuit held that the City could implement the ESR while the appeal was pending, and the City did then start enforcing the ESR. 

Ninth Circuit Holding 
ERISA generally preempts, or nullifies, state and federal laws that relate to employee benefit plans, with a major exception for state insurance laws and minor exceptions for certain other kinds of laws. Just a year before the Ninth Circuit decided this case, the Fourth Circuit Court of Appeals, based in Richmond, Virginia, had relied on ERISA preemption in striking down a Maryland “Wal-Mart Act,” which required large employers to make minimum health care expenditures for employees or pay a state tax. 

The Ninth Circuit held that the ESR was not preempted by ERISA. The court’s holding was based on two key observations about the Ordinance. First, the Ordinance does not require employers to create an ERISA plan or make changes to an existing ERISA plan. The “play” option allows employers to make payments directly to the City without establishing a plan or changing existing plans. Second, the Ordinance is not concerned with the nature of the health care benefits provided to employees, only the dollar amount of the payments the employer makes toward those benefits. 

In fairness to the Ninth Circuit, the Supreme Court’s ERISA preemption decisions are confusing, at best. And one could make a strong argument that Congress ought to amend ERISA to permit state and local governments some flexibility in regulating the provision of health coverage to their residents. Nonetheless, the bases for the Ninth Circuit’s decision are difficult to square with either the wording of ERISA or the Supreme Court’s decisions. That is, contrary to the Ninth Circuit’s insistence in both the original panel decision and the denial of rehearing en banc, the Ordinance does seem to require covered employers to establish or maintain a health plan, either in the form of the City’s HAP or an employer-provided benefit plan. And there is virtually no support in either the statute or the Supreme Court’s decisions for saying that ERISA permits states to impose requirements on plan contributions, as long as they don’t mandate benefits. 

The novelty of the Ninth Circuit’s approach, in addition to its apparent conflict with the Fourth Circuit’s decision regarding Maryland’s Wal-Mart Act, increases the normally slim possibility that the Supreme Court would, if asked, agree to hear the case. If the Court were to take the case, it seems likely that it would reverse the Golden Gate decision. All of that is speculative and, in any event, off in the future. 

What Does This Mean for Employers? 
As noted above, the Ordinance has been in effect for more than a year. So employers that are covered employers are required to comply, and employers considering doing business in San Francisco need to take the Ordinance into account in making business and employment decisions. 

The broader implications of the Ninth Circuit’s decision relate to what it might encourage other state and local governments to attempt. “Pay or play” requirements have been proposed in various jurisdictions even before the Ninth Circuit’s GGRA decision and are even more likely to be proposed now. If such a statute or ordinance were to be enacted by a state, or any of its municipalities, within the Ninth Circuit, and if it were designed like San Francisco’s Ordinance, it would not be preempted by ERISA, at least not at present. As a result, employers in the Ninth Circuit will need to keep track of such laws and ordinances, while watching for the Supreme Court to clarify the law, whether by agreeing to review the GGRA decision or in some other case. 

We will try to keep track of developments regarding “pay or play” requirements and provide updates through our e-Alerts and seminars. Please feel free to contact Bullard Law with any questions concerning the GGRA decision or any other benefits issues. 

- Jennifer N. Warberg & Thomas I. Kramer
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