On Tuesday, September 30, 2008, the Ninth Circuit Court of Appeals handed down its decision in Golden Gate Restaurant Association v. City of San Francisco, 2008 WL 4401387 (9th Cir. 2008). In this case, the Golden Gate Restaurant Association (the “Association”) and the Department of Labor (DOL) challenged a portion of the San Francisco Health Care Security Ordinance (the “Ordinance”) requiring employers to make a certain level of health care expenditures on behalf of employees in San Francisco. The Ninth Circuit rejected arguments that the employer spending requirements were preempted by the Employee Retirement Income Security Act of 1974 (ERISA).

The Decision

In July 2006, the San Francisco Board of Supervisors unanimously passed the Ordinance, and the mayor signed it into law. As previously reported in our February 2008 Management Alert on Developments Affecting Health Plans, the Ordinance requires certain employers doing business in San Francisco to make minimum health care expenditures for their covered employees working in San Francisco.

The Ordinance has two primary components:

  1. The Health Access Plan or “HAP.” HAP, which became effective in the Summer of 2007, is a City-administered health care program for low-to-moderate income residents.
  2. The employer expenditure component. This component of the Ordinance requires covered employers to make a certain level of health care expenditures on behalf of their covered employees, either to the HAP, or to their own health care program.

On November 8, 2006, the Association filed a complaint against the City and County of San Francisco (collectively, the “City”), alleging that ERISA preempted the employer expenditure component of the Ordinance. On December 26, 2007, the district court agreed with the Association and entered judgment for it. The City appealed the district court’s ruling. On January 9, 2008, the Ninth Circuit temporarily stayed the district court’s ruling allowing the Ordinance to remain in effect as the merits were taken up on appeal.

On appeal, the Association and DOL (amicus) argued that ERISA preempted the expenditure component of the Ordinance because it either created an ERISA “plan,” or because it “related to” employers’ ERISA plans.

The court rejected the argument that the expenditure component created an ERISA plan because the Ordinance simply required employers to make payments for covered employees and to retain records showing it had done so. The required payments did not involve an “ongoing, particularized, administrative discretionary analysis making them part of an ongoing administrative scheme,” which would have impacted ERISA. Rather, the court held that an employer’s administrative obligations under the Ordinance involved mechanical recordkeeping, with only a “modicum of discretion” required. As such, no ERISA “plan” was created.

The court also rejected the Association’s argument that the expenditure was preempted because it “related to” ERISA plans. A law “relates to” an ERISA plan if it has (1) a connection with, or (2) reference to such a plan. The court found that the Ordinance did not have a connection with covered employers’ ERISA plans because it did not require any employer specifically to adopt an ERISA plan, nor did it require employers to provide benefits through an existing ERISA plan or other health plan. Rather, an employer could fully discharge its expenditure obligations by making the required level of expenditures in whole or in part to an ERISA plan, or in whole or in part to the City.

In determining whether a law has a forbidden “reference to” an ERISA plan, a court must examine whether (1) the law acts immediately and exclusively on an ERISA plan, or (2) the existence of an ERISA plan is essential to its operation. Again, the court held that the Ordinance did not act on ERISA plans at all, let alone immediately and exclusively. As to the second requirement, the court found that the Ordinance could have its full force and effect even if no employer in the City had an ERISA plan, because covered employers could fully discharge their obligation under the Ordinance simply by making the required expenditure to the City. Thus, the court held, “where a law is fully functional even in the absence of a single ERISA plan . . . as it is in this case, it does not make an impermissible ‘reference to’ any ERISA plan.”

The Ordinance

Under the Ordinance, a “covered employer” is any employer engaging in business within the City that employs an average of at least 20 employees during a calendar quarter (50 employees for a non-profit). Covered employers must make the required expenditure for “covered employees” who are defined as individuals who:

  • work in the City; 
  • work at least 10 hours per week; 
  • have worked for the employer for at least 90 days; and 
  • are not excluded by other provisions of the Ordinance (e.g., highly compensated managerial, supervisory and confidential employees and those eligible for Medicare or veterans’ health care benefits).

Required Expenditures

Under the terms of the Ordinance, covered employers with 50 or more employees must make health care expenditures at a rate of $1.17 per hour worked. For-profit employers with 100 or more employees must make expenditures at a rate of $1.76 per hour. The Ordinance’s implementing regulations provide that any amount paid by an employer to its covered employees, or to a third party on behalf of its covered employees for the purpose of providing health care services or reimbursing the cost of such coverage, will qualify as a health care expenditure.

The Ordinance provides that covered employers have discretion as to the type of health care expenditure they may make for their employees, including the following expenditures:

  • Contributions to a Health Savings Account (as defined in Internal Revenue Code Section 223) or similar account; 
  • Reimbursement by the employer for expenses incurred in the purchase of health care services; 
  • Payments to a third party for providing health care services for covered employees; 
  • Costs incurred by an employer in the direct delivery of covered services; and 
  • Payments to the City to be used on behalf of covered employees.

Employers with self-funded ERISA plans will comply with the spending requirement if the preceding year’s average expenditure rate meets or exceeds the applicable expenditure rate for the employer.

Penalties for Non-compliance

Penalties for non-compliance with the Ordinance include administrative penalties of up to 1½ times the total required expenditures, plus simple annual interest up to 10% (not to exceed $1,000 per employee per week) and civil penalties in like amounts, plus attorneys’ fees and cost of enforcement.

The Possibility of Further Litigation

The last chapter of the litigation efforts to invalidate the Ordinance may not yet be written. The Association has filed a petition asking the Ninth Circuit to review the case en banc. If the Ninth Circuit does not alter the current decision, the Association could file a petition for a writ of certiorari with the Unites States Supreme Court. Importantly, the Fourth Circuit has issued a decision that, at least arguably, conflicts with the current decision of the Ninth Circuit. That case is Retail Indus. Leaders Ass’n v. Fielder, 475 F.3d 180 (4th Cir. 2007). If the current Ninth Circuit decision stands, the Supreme Court may choose to hear the case because the cost implications of state and local regulation on the administration of ERISA health plans could be significant.