April 24, 2008

Immediate Action May Be Required By Employers Doing Business In San Francisco

Multi state employers are facing a growing challenge to their ability to provide a uniform and national health program for their employees. That challenge is more imminent today because of recent legislative enactments in San Francisco. In fact, the first payments under San Francisco’s Health Care Security Ordinance, applicable to most employers doing business in San Francisco (as explained more fully below), are due on April 30, 2008.

Generally speaking, the Employee Retirement Income Security Act was enacted in part to provide a uniform set of rules that govern employee benefit plans, thereby providing a level playing field for multi state employers. Nevertheless, San Francisco is only one of a growing list of state and local governments that have decided to shift some of the cost of providing its citizens with health care by enacting legislation targeted at employers and designed to survive ERISA pre-emption scrutiny. Multi state employers must now consider how they will approach this issue.

First San Francisco Expenditures Due in One Month

San Francisco’s Health Care Security Ordinance requires covered employers to make statutorily established minimum health care expenditures on behalf of their San Francisco employees. A covered employer conducts business in San Francisco (i.e., is required to be licensed with the San Francisco Office of the Treasurer and Tax Collector, regardless of whether it maintains offices in the city) and has 20 or more employees in the aggregate (i.e., within and without San Francisco). A covered employer’s health care expenditures can take the form of one or more benefits, such as health insurance, contributions to a flexible spending account or contributions to a health care reimbursement account (among other options), so long as the expenditures satisfy the statutorily established minimum amount.

The expenditure requirement became effective on January 9, 2008, for covered employers with 50 or more employees (again, in the aggregate), with the first quarterly payment due on April 30, 2008; and the expenditure requirement became effective on April 1, 2008, for covered employers with 20-49 employees, with the first quarterly payment due on July 30, 2008. For-profit employers with fewer than 20 employees and nonprofit employers with fewer than 50 employees are exempt.

The required expenditure amount is calculated by multiplying the number of hours worked by a San Francisco employee by the statutory rate. While at least one legal challenge is pending in the federal courts (asserting ERISA pre-emption), the 9th Circuit Court of Appeals has ruled that, until such time as the appeal overturns the law, it is effective and enforceable. Notably, the U.S. Department of Labor filed an amicus brief last month for the appeal, arguing in favor of ERISA pre-emption.

What About ERISA Pre-Emption?

In the past, when states began legislating their own mandatory coverage requirements (generally through insurance laws), Congress acknowledged and remedied the situation by passing federal legislation (e.g., the Newborns’ and Mothers’ Health Protection Act that mandated certain minimum maternity hospital stays). These state laws generally addressed what is and is not covered by a health benefit plan, which is in the realm of federal regulation (e.g., ERISA and the Public Health Service Act). In contrast, the new local laws do not turn on the existence of a health benefit plan. Rather, they operate as an additional tax or cost of doing business in the state or local jurisdiction.

Arguably the most publicized, Massachusetts’s Health Care Reform Act, requires employers to adopt a cafeteria plan for their employees to purchase health benefits on a pretax basis, and make either a fair and reasonable contribution to their employees’ health insurance costs (satisfied if 25 percent of their full-time employees enroll in their group health plan or if they pay at least 33 percent of their full-time employees’ premiums for their group health plan) or a fair share contribution to the Commonwealth Care Trust Fund (a published dollar amount).

Other states and localities have opted for mandatory contributions determined using a flat rate formula per person (for example, Maryland’s Fair Share Act, based on wages, and Suffolk County’s Fair Share for Health Care Act and Vermont’s Employer Health Care Contribution Fund, based on hours worked).

The Vermont and Massachusetts acts have yet to be challenged, and other local laws have had mixed success in the courts. The 4th Circuit Court of Appeals and the Eastern District of New York overturned Maryland’s and Suffolk County’s laws, respectively, as pre-empted by ERISA. A California district court overturned San Francisco’s Health Care Security Ordinance as pre-empted by ERISA, but, as noted above, the 9th Circuit Court of Appeals granted a motion to stay the district court’s ruling pending its decision on appeal. In the order granting the stay, the 9th Circuit reasoned that San Francisco had shown a strong likelihood of success with its argument against ERISA pre-emption.

If San Francisco ultimately prevails on appeal, it will create a split among the circuits as to these types of health benefit mandates. A circuit split, combined with the Department of Labor’s interest, could render this issue finally ripe for Supreme Court review.

Bottom Line

As the number of local mandates continues to grow, we hope to see resolution of the ERISA pre-emption issue in the courts or by Congress. In the meantime, San Francisco’s Health Care Security Ordinance, like that of other states and localities that have instituted health care mandates, has the potential to affect many U.S. employers.

If you have employees in various locations around the country, you now need to consider what state or local health care mandates may apply and their impact, if any, on your benefit programs. Subject to the much anticipated ruling by the 9th Circuit Court of Appeals, employers conducting business in San Francisco have until the end of April 2008 to evaluate the impact of the San Francisco ordinance and act accordingly.

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If you have any questions or comments, please feel free to contact Richard G. Schwartz in the firm’s New York office at 212-351-4713 or [email protected]. Kelly Pointer and Abigail R. Levy assisted in the preparation of this alert.