Introduction

The Ninth Circuit has ruled that the Employee Retirement Income Security Act (ERISA) does not preempt a San Francisco ordinance that requires employers to pay a certain minimal amount toward employees’ health insurance. Golden Gate Restaurant Ass’n v. City & County of San Francisco, __ F.3d __, 2008 WL 4401387 (9th Cir. Sept. 30, 2008). This decision arguably conflicts with a Fourth Circuit ruling regarding

ERISA preemption of a similar Maryland law in Retail Industry Leaders Assoc. v. Fielder, 475 F.3d 180 (4th Cir. 2007), and the split may require resolution by the Supreme Court.

ERISA Preemption

One purpose of ERISA is to provide a uniform regulatory regime over certain types of employee benefit plans, including “employee welfare benefit plans.”1 This uniform regulatory scheme is designed to minimize the administrative and financial burden that would be placed on plan administrators if they were required to comply with conflicting state laws, or conflicting state and federal laws. In furtherance of this goal, ERISA contains an expansive preemption provision that has been described as the most sweeping federal preemption provision ever enacted by Congress.

Under this provision, ERISA preempts “any and all State laws insofar as they . . . relate to” ERISAgoverned plans. As explained by the Supreme Court (in a rather ambiguous manner), a law “relates to” an ERISA plan if it “has a connection with or reference to such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983). More specifically, state laws that mandate “employee benefit structures or their administration” are preempted by ERISA because those laws not only “relate to” an ERISA plan, they also conflict with ERISA’s goal of establishing a uniform regulatory scheme over employee benefit plans. N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 658 (1995).

Retail Industry Leaders Assoc. v. Fielder

In Fielder, the Retail Industry Leaders Association (RILA) argued that ERISA preempted Maryland’s Fair Share Health Care Fund Act (the “Act”). The Act required employers with 10,000 or more Maryland employees to spend at least eight percent of their total payroll on employees’ health insurance costs or pay the amount their spending falls short to the state. The Act admittedly was aimed at Wal-Mart, which the legislature believed provided a substandard level of healthcare benefits, forcing many Wal-Mart employees to depend on state-subsidized healthcare programs. The parties agreed that, at the time of the lawsuit, only Wal-Mart was subject to the Act’s minimum spending requirements.

The Fourth Circuit agreed with RILA and held that the statute was preempted by ERISA. During the lawsuit, Wal-Mart had stated that it would not pay Maryland a sum of money that it could instead spend on its employees’ healthcare, a stance the court found “would be the decision of any reasonable employer.” The court also found that “the only rational choice employers have under the Fair Share Act is to structure their ERISA healthcare benefit plans so as to meet the minimum spending threshold.” Thus, the statute fell “squarely under Shaw’s prohibition of state mandates on how employers structure their ERISA plans.” Because the Fair Share Act effectively mandated that employers structure their employee healthcare plans to provide a certain level of benefits, the Fourth Circuit held that it was preempted by ERISA.

Golden Gate Restaurant Assoc. v. City and County of San Francisco

Facts

In Golden Gate, the plaintiff argued that ERISA preempted San Francisco’s Health Care Security Ordinance (the “Ordinance”), which has two primary components: a Health Access Plan (HAP) and an employer-spending requirement. The HAP is a city-administered healthcare program that prioritizes services for low and moderate income persons. The spending requirement mandates that for-profit employers with between 20 and 99 employees make healthcare expenditures at a rate of $1.17 per hour and for-profit employers with 100 or more employees make expenditures at a rate of $1.76 per hour. If an employer does not meet these minimum spending requirements, it may still comply with the Ordinance by making payments directly to the city (the “city-payment option”). If an employer elects that option, its covered employees who satisfy certain criteria may then enroll in the HAP. The court noted that (1) the Ordinance does not require employers to establish their own ERISA plans or to make any changes to any existing ERISA plans and (2) the Ordinance is not concerned with the nature of the healthcare benefits an employer provides its employees. Instead, it is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. Thus, in the court’s view, “the Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars.”

The Ninth Circuit’s Decision

Plaintiff and the Secretary of Labor as amicus made two central preemption arguments. First, they argued that the city-payment option creates an ERISA plan. Second, they argued that even if the city-payment option does not establish an ERISA plan, an employer’s obligation to make payments at a certain level “relates to” the ERISA plans of covered employers and is thus preempted. The Ninth Circuit rejected both arguments.

In rejecting the argument that the city-payment option created an ERISA plan, the court noted that the first element of an “employee welfare benefit plan” is the existence of a “plan, fund or program.” The court found that the employer payments at issue are made to the city, not directly to the employees, which, in the court’s opinion, “confirms, if confirmation were needed, that the employer’s administrative obligations under the City-payment option do not create an ERISA plan.” This was because an employer “has no responsibility other than to make the required payments for covered employees, and to retain records to show that it has done so.” Moreover, the fact that the city-payment option did not grant any sort of discretion to the employer militated against a finding of a “plan.”2

The court also found that the Ordinance did not have a “relation to” an ERISA plan because it neither had a “connection with” nor “reference to” such plans. According to the court, in order to show that a state or local law has an impermissible “connection with” an ERISA plan, a plaintiff must show that the challenged law “binds ERISA plan administrators to a particular choice of rules for determining beneficiary status, . . . rather than allowing administrators to pay the benefits to those identified in the plan documents.” A “connection with” also exists where the law mandates that employers structure their plans in a particular manner or pay employees specific benefits.

The court noted that the Ordinance does not require any employer to adopt an ERISA plan. It also does not require any employer to provide specific benefits through an existing ERISA plan. Moreover, any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee healthcare expenditures in whole or in part to an ERISA plan, or in whole or in part to the City. The court conceded that the decision to adopt or to change an ERISA plan in lieu of making the required healthcare expenditures to the City may be influenced by the Ordinance. However, the court found this type of influence to be permissible. The court noted, for example, that the Ordinance does not regulate benefits or charges for benefits provided by ERISA plans; instead, the only influence is on the employer who, because of the Ordinance, may choose to make its required healthcare expenditures to an ERISA plan rather than to the City. Finally, the court also reasoned that the Ordinance does not impose a burden on plan administrators in relation to benefits law. Instead, any burden is imposed on the employer rather than on an ERISA plan.

In order for the Ordinance to have a “reference to” an ERISA plan, the court reasoned that it must (1) act “immediately and exclusively upon ERISA plans, or (2) the existence of ERISA plans is essential to the law’s operation.” As to the first requirement, the court found that “the Ordinance does not act on ERISA plans at all, let alone immediately and exclusively.” Similarly, “the Ordinance can have its full force and effect even if no employer in the City has an ERISA plan. Covered employers without ERISA plans can discharge their obligation under the Ordinance simply by making their required health care expenditures to the City.” Accordingly, the court held that the Ordinance did not have a “reference to” an ERISA plan.

The court also reasoned that the Ordinance was distinguishable from the Act at issue in Fielder. The court noted that the Maryland law required employers to spend a certain amount on health insurance or make up the shortfall to the state but gave “nothing in return — either to an employer or its employees — for the employer’s payment to the State.” According to the court, this stood in “stark contrast” to the San Francisco ordinance, which offers employers a “meaningful alternative that allows them to preserve the existing structure of their ERISA plans.” Thus, the court found that the Ordinance does not “mandate[ ] that employers structure their employee healthcare plans to provide a certain level of benefits.”

Conclusion

It is difficult to reconcile the Ninth Circuit’s ruling with that of the Fourth Circuit. Both the Maryland and San Francisco laws required employers to spend a certain minimum amount on employee health insurance in one form or another, with any shortfall being made up by payment to the state or city. While the Fourth Circuit found that this requirement impermissibly mandated a certain minimum level of insurance benefits and the Act thus was preempted, the Ninth Circuit found that it did not.

Laws similar to the Ordinance and Act are under consideration across the nation at both the city and state level. It is still an open question as to whether these laws are preempted by ERISA, with future court challenges certain to be filed. The only thing clear at this point is that, in the Ninth Circuit, ERISA does not preempt laws identical to the Ordinance while, in the Fourth Circuit, ERISA does preempt laws identical to the Act.