Guest Article

(From the January 22, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

U.S. Appeals Court Permits Temporary Enforcement of San Francisco County's Employer Health Benefits Play or Pay Requirement

San Francisco can temporarily enforce its newly-adopted ordinance requiring employers of twenty or more employees to either provide employees with health care at various "health care expenditure rates" or pay a fee to the city, under a temporary stay issued by the U.S. Court of Appeals. ____________ v. City and County of San Francisco, No. 07-17370 (9th Cir., January 9, 2008). The fees would be based on the size and income source of the employer.

San Francisco Employer Health Benefits Ordinance

The plaintiff challenged the ordinance under ERISA's preemption provision. The federal district court agreed the ordinance had violated ERISA and ruled in favor of the Association. The 9th Circuit court of appeals stayed that ruling, thereby enabling San Francisco to apply -- at least temporarily -- its new ordinance requiring certain business employers to meet a "health care expenditure rate" for employees. Under that statute employers with at least 20 employees (but less than 100 employees) and non-profit employers with an average of 50 employees, must have a health care expenditure rate of at least $1.17 per hour per employee for some type of health benefits. For-profit employers with at least 100 employees must spend at least $1.76 per hour per employee for health expenditures.

San Francisco's Requirements for the Health Coverage Ordinance

The challenged law provides the employer with considerable discretion on how to meet the requirements for the health care expenditures. The regulation provides that a "covered employer has discretion as to the type of health care expenditure it chooses to make for its covered employees." The provision explicitly states the definition of health care expenditures may include, but is not limited to:

Under the challenged law, if an employer does not pay for the required employees' health care expenditures, the employer must fulfill the spending requirement by making payments directly to the city. The required health care expenditures begin at $1.17 or $1.76 per hour (depending on the number of employees). An employer may be partially exempt to the extent that it makes lesser expenditures.

Appeals Court's Focus on Standards for a Stay

The appeals court's decision focuses significantly on the standards for granting a stay of action of a lower court's ruling. The 9th Circuit Court of Appeals was careful to note that its decision on a stay of the law was based on the standards for granting a temporary stay action, not necessarily, on the merits of the case. The appeals court's decision, rendered after the lower court had denied a requested stay, carefully outlines the requirements for an appropriate "stay" of action, i.e. a preliminary injunction. The standard for the preliminary injunction which the restaurant association sought requires the association as the "moving party" seeking the injunction to show "a strong likelihood of success on the merits" of the case and the possibility of irreparable injury to the moving party, if the requested preliminary relief is not granted. The appeals court rejected the Association's argument that preservation of the "status quo" was always a factor that should be weighed in granting a stay. Even with this ruling, the plaintiff ultimately may prevail on the merits of its ERISA preemption claim.

The court's opinion took a broad view of the basic standards for "the likelihood of success" and for "irreparable injury" for the parties.

In addressing ERISA's preemption of state laws applying to employee benefits, the court noted a number of cases in which it had found state law attempts to regulate employer-provided benefits violated ERISA's preemption. But the court distinguished those cases on grounds the challenged laws attempted directly to require health benefits and dictated specific benefits the employer must provide. As such these statues "impeded ERISA's goal of ensuring that plans and plan sponsors would be subject to a uniform body of benefits law." (Citing Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)). In this case the court noted the challenged San Francisco ordinance neither requires an employer to establish a health plan nor does it require any employer-provided health benefits through either an ERISA or other health plan; the ordinance simply requires the employer to pay a required level of health care expenditures to the city. Further the court asserted that this type of "influence" is permissible under the U.S. Supreme Court ruling in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co.¸ 514 U.S. 645 (1995).

In the Travelers case the U.S. Supreme Court found the application of a New York hospital surcharge on patient treatments covered by commercial insurance companies, including those covered by ERISA plans, but exempting patients covered by Blue Cross/Blue Shield plans, was not subject to preemption. The Supreme Court's decision recognized such surcharge exemptions might influence economic pressure on how the plans were managed, but did not regulate those plans or the employer's choices. The appeals court concluded the San Francisco ordinance:

Outlook for the San Francisco Law

If this ruling is ultimately adopted by the court, it will be the first case to uphold a state or local law requiring employer contributions to employees' health benefits. Other courts have ruled ERISA preempts "play or pay" type laws applied by the jurisdiction of Suffolk County, N. Y. (Retail Industry Leaders Association v. Suffolk County, 497 F. Supp. 2d 403 (E.D.N.Y. 2007)) and the state of Maryland. In the Maryland case, Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007), the appeals court ruled that ERISA preempted a Maryland law mandating that large employers, such as Wal-Mart Stores Inc., provide certain levels of health benefits for their employees. Maryland declined to appeal the case to the U.S. Supreme Court. Massachusetts has implemented a similar "play or pay" law, but so far it has not been the subject of an ERISA preemption challenge.

Ultimately the U.S. Supreme Court may decide to review this ERISA preemption issue if a split in the U.S. judicial circuits develops.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2008, Deloitte.