Appeals Court Says San Francisco’s Pay or Play Law Can Go into Effect
On December 26, 2007, the U.S. District Court for the Northern District of California ruled that a San Francisco ordinance requiring employers to pay for health care for their employees or to pay the city to provide care was preempted by ERISA. That is, the court said that San Francisco was not allowed to create such a rule because the federal government, not cities or states, has jurisdiction over benefit plans offered by employers. The city attorney of San Francisco, Dennis Herrera, appealed the decision to the Ninth Circuit Court of Appeals and asked for an emergency stay. On January 9, 2008, that stay was granted: a three-judge panel concluded that the City will probably succeed in showing that San Francisco’s ordinance is legal and not preempted by ERISA. The court allowed the ordinance to go into effect pending the outcome of the full appeal, ruling that the ordinance will help to prevent human suffering and that the stay will serve the public interest. This case will be important to other states that are drafting pay or play laws.
What does the San Francisco ordinance require?
The San Francisco ordinance requires employers to make health care expenditures based on their size and for-profit/nonprofit status:
- A private employer with between 20 and 99 employees and a nonprofit with 50 or more employees would, for any employee who has been employed for 90 days and works more than 10 hours per week, make health care expenditures of $1.17 per hour on behalf of that employee.
- A private employer with 100 or more employees would make health care expenditures of $1.76 per hour on behalf of each covered employee.
Employers can satisfy this requirement in a number of ways, including by directly paying for health services, paying a third party (such as a health insurer) to provide services, funding health savings accounts, or by paying into a new city-funded program (the “Health Access Program”) that would provide care.
The Health Access Program is to be funded partly by employer contributions, and partly with general revenues and individual contributions. It will be open to all uninsured residents, whether or not their employers contribute, and it will provide care through a network of public hospitals and clinics and other participating providers.
What did the lower court say was wrong with the ordinance?
The lower court said that through the ordinance, San Francisco was trying to impose requirements on employers that, under ERISA, can be imposed only by the federal government and not by states and localities. More specifically, the court said, the ordinance violated federal law because:
- It required that employers provide a certain level of health care coverage;
- It made unlawful reference to employee benefit plans and based calculations as to whether and how much an employer needed to pay the city primarily on employers’ expenditures for employee health benefit plans.
- It would require employers to structure and administer their employee benefit plans differently in San Francisco than in other places where they did business. For instance, they would need to keep specific records about their health care expenditures, provide officials with access to those records, and provide ongoing reports to San Francisco. This, the court said, would require employers to establish accounting systems regarding their health benefits that were different in San Francisco than in other places; however, ERISA is supposed to enable employers to administer their employee benefits plans uniformly across states.
To learn more, see the full decision.
Why did the Appeals Court disagree with the lower court and allow San Francisco to implement the ordinance?
In its ruling, the Ninth Circuit said that states are allowed to pass laws related to the amount employers spend on employees but not laws related to the benefit plans they provide. The court noted that:
- The ordinance requires employers to pay a certain amount for health care, but they have many choices about how to do this. Employers are not required to alter their ERISA plans nor are they required to provide an employee benefit plan at all. If they already have an ERISA benefit plan but they are not meeting the level of health expenditures required by the ordinance, they can choose either to pay more in health benefits or to pay the difference between their actual expenditures and the required expenditures to the city. Likewise, if they do not have an ERISA plan and do not want to establish one, they can make required health care expenditures directly to the city.
- Employers will not have to alter the structure of their employee benefit plans or administer them any differently in San Francisco than they do in other places – the accounting that they will do is about the amount of payments they provide, not about the structure of their health plan benefits. Employers will need to maintain records of their health payments whether or not they have ERISA plans.
The Ninth Circuit therefore found that that the case is likely to “succeed on the merits,” one criteria for granting a stay. To grant a stay, the court also had to determine who would be injured if the ordinance did or did not go into effect and where the public interest lies. The court found:
- About 20,000 uninsured workers will get health benefits when the ordinance is fully implemented. Without coverage, many individuals with serious conditions go without treatment and face suffering, illness, and possibly death.
- Though some employers may need to pay more and face administrative burdens, on balance, the hardships they face are not as great as the hardships others will face if the ordinance is not implemented.
- The general public also has an interest in workers’ health, and public officials have found that the ordinance is in the public interest.
You can read the order of the US District Court of Appeals for the Ninth Circuit here.
What happens next in the case?
The stay permits the City of San Francisco to implement the ordinance pending the final outcome of the appeal. The court will likely hear the appeal in April or May, with a final decision following thereafter.
What states require employers to contribute to health care?
Massachusetts, Vermont, and Hawaii each require employers to contribute to health care. Hawaii’s law, which requires employers to offer health insurance to all employees who work more than 20 hours a week, passed in 1974 at about the same time as the federal ERISA law. After the courts found that Hawaii’s law was preempted by ERISA, Hawaii was therefore able to obtain a special federal exemption to ERISA, which other states are unlikely to obtain. Massachusetts and Vermont each enacted laws that tax employers a small amount annually to help fund a health coverage expansion but that waive that tax if they contribute to health coverage. To date, these two laws have not faced legal challenges under ERISA and we thus do not know whether courts would find them to comply with ERISA.
For further information about ERISA and state health reforms, see:
