The scope and breadth of the Employee Retirement Income Security Act’s statutory preemption of state laws that relate to employee benefit plans[1] has confounded the courts since ERISA was enacted in 1974. In recent years, a battle front has emerged over the power of local governments to ensure universal health care for workers.

The U.S. District Court for the Western District of Washington’s recent ruling on that issue in ERISA Industry Committee v. City of Seattle[2] is illustrative. In September 2019, the Seattle City Council passed an ordinance[3] requiring large hotels and ancillary hotel businesses to make health care expenditures on behalf of covered employees.

The stated purpose of the ordinance was to “improve low-wage hotel employees’ access, through additional compensation, to high-quality, affordable health coverage for the employees and their spouses or domestic partners, children, and other dependents.”[4]

To achieve that end, the ordinance required covered employers[5] to spend $420 for each employee, $714 for each employee with only dependents, $840 for each employee with only a spouse or domestic partner, and $1,260 for each employee with a spouse or domestic partner and dependents.[6] The ordinance permits the spending obligation to be met either by making direct payments to employees, to third parties such as insurers, or to a self-funded health care plan.

An employer would be exempt from making the required payments, though, if the employee explicitly declines the payment, establishes existing coverage from another source, or if the employee is a member of a collective bargaining unit that expressly waives the requirements of the ordinance.

The ordinance was challenged by the ERISA Industry Committee, a nonprofit trade association that advocates for employers with respect to employee benefits through lobbying and litigation. The committee asserted the ordinance was preempted by ERISA in several respects. The court disagreed and dismissed the committee’s lawsuit.

The court was guided by the U.S. Court of Appeals for the Ninth Circuit‘s ruling in Golden Gate Restaurant Association v. City & County of San Francisco,[7] which involved a similar ordinance. In that case, the city and county of San Francisco gave employers the choice of making health care contributions on behalf of employees to a city-established health benefit program or providing the employees with insurance coverage. The ordinance was upheld because the court found it did not establish an ERISA plan or require any employer to make changes to an existing plan.

The Ninth Circuit also found the record-keeping requirements imposed by the ordinance were comparable to tax withholding, social security and other governmental obligations that are not considered ERISA-governed plans. What also saved the San Francisco ordinance was that employers were given the choice of making contributions to an ERISA plan, but were not obligated to do so.

In this instance, the court began its ruling by citing guidance from the U.S. Supreme Court that explains: “[N]othing in the language of [ERISA] or the context of its passage indicates that Congress chose to displace general health care regulation, which historically has been a matter of local concern.”[8] Thus, the court began its analysis with a presumption against finding preemption of the Seattle ordinance.

The committee argued, though, that the Seattle ordinance

requires that employers establish and maintain at a minimum, an on-going, discretion-laden program and administrative process for the purpose of defraying, through the purchase o[f] insurance or ‘otherwise,’ its employees’ costs for healthcare, thereby satisfying the definition for the existence of an ERISA plan.[9]

The committee focused its challenge on the direct payment option set forth in Seattle Municipal Code 14.28. Under the direct payment option, employers pay workers a dollar amount directly. The committee contended that by

its terms, [this direct payment] option for compliance constitutes an employer-based regimen of repeated payments to employees to defray the employees’ medical costs which — on its face — satisfies ERISA’s welfare plan definition of a program established or maintained by the employer for the purpose of providing benefits in the event of sickness or medical need.[10]

The court disagreed, finding the ordinance, like the one at issue in Golden Gate, did not establish a plan. Although the court questioned whether direct payments to employees that did not necessarily have to be used for health care expenditures fulfilled the purpose behind the Seattle ordinance, the court explained, “ERISA regulates benefit plans because plans — not dollar payments to employees — implicate ERISA’s concern regarding an employer’s potential mismanagement and abuse of funds.”[11]

Nor did the court accept the committee’s argument that the ordinance involved “complicated webs of administrative processes,” finding instead that the ordinance merely imposed no additional responsibilities “other than to retain records that it would maintain in its normal course of business.” Likewise, the court determined the ordinance lacked a connection with an ERISA plan.

Citing Golden Gate, the court explained: “A state or local law has a ‘connection with’ an ERISA plan if it binds, regulates, or dictates the administration of the plan.”[12] The court observed that the Seattle ordinance gives employers multiple options, only one of which is to make the required payments to an existing ERISA plan or establish a new plan.

Finally, the court determined that the Seattle ordinance lacks a reference to an ERISA plan: “To determine whether a law has a forbidden ‘reference to’ an ERISA plan, the Court asks whether (1) the law ‘acts immediately and exclusively upon ERISA plans,’ or (2) ‘the existence of ERISA plans is essential to the law’s operation.'”[13]

Since the Seattle ordinance did not require the existence of an ERISA plan and was fully functional irrespective of the existence of any ERISA plan, it passed muster under the Golden Gate test. Further, since the ordinance was not premised on the cost of specific existing coverage, the lack of a reference to any particular existing plan saved the ordinance from preemption. Hence, the court concluded:

The dollar amount spending requirements in SMC 14.28 do not establish an ERISA plan and do not create impermissible connections with or reference to ERISA plans. Moreover, this Court is bound by the Ninth Circuit precedent set more than a decade ago in Golden Gate determining that a nearly identical local ordinance was not preempted by ERISA.

The court’s ruling illustrates the complexity of ERISA preemption since it is difficult, if not impossible, to draw a firm line in deciding whether a state law relates to an employee benefit plan since nearly anything can be found related, however attenuated.

The U.S. Supreme Court has not made the task any easier in its rulings on the subject, but the court has laid out three important guideposts: First, begin with a presumption against preemption. Second, look to see whether the law has a direct effect on ERISA plans. If so, the law will likely be preempted. Third, examine whether the law presents a forced choice.

Since no provision in ERISA compels an employer to establish any type of employee benefit plan, if a state law is passed mandating that all employers provide health insurance to their employees,[14] it will easily be found preempted by ERISA. However, if the law offers a range of choices, none of which compel employers to establish benefit plans, there is no basis for preemption.

As the COVID-19 crisis continues, health care remains a critical issue for nearly all Americans. For better or worse, the system established in the U.S. is employer-centric, meaning that most workers rely on obtaining their health insurance from their employers.

With the Patient Protection and Affordable Care Act facing a Constitutional challenge before the Supreme Court,[15] more ordinances such as the ones passed in San Francisco and Seattle may be needed to make health care universally available, particularly for low-wage, nonunion employees. Consequently, the ruling issued in ERISA Industry Committee v. City of Seattle is a critical step along that path.

Mark DeBofsky is a shareholder at DeBofsky Law.

This article was originally published in Law360 on May 27, 2020

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] ERISA § 514(a); 29 U.S.C. § 1144(a).

[2] 2020, U.S. Dist. LEXIS 81750, 2020 WL 2307581 (W.D. Wash. May 8, 2020).

[3] SMC 14.28.

[4] SMC 14.28.025.

[5] Covered employers are those who own, control, or operate a hotel or motel with more than 100 guest rooms in Seattle, or who own, control, or operate an ancillary hotel business in Seattle with 50 or more employees. SMC 14.28.020; SMC 14.28.040.

[6] SMC 14.28.060.A.

[7] 546 F.3d 639 (9th Cir. 2008).

[8] N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. , 514 U.S. 645, 661 (1995).

[9] See, 29 U.S.C. § 1002(1) – defining what constitutes a “plan” under ERISA.

[10] Id. at 17-18.

[11] Fort Halifax Packing Co. v. Coyne , 482 U.S. 1, 11 (1987).

[12] Golden Gate, 546 F.3d at 655-56.

[13] California Div. of Labor Standards Enf’t v. Dillingham Const., N.A., Inc. , 519 U.S. 316, 325 (1997).

[14] There is a specific exemption in ERISA for the Hawaii Prepaid Health Care Act (Haw. Rev. Stat. §§ 393–1 through 393–51), though, which does impose a health insurance obligation upon Hawaii employers. 29 U.S.C. §§ 1144(b)(5)(A) and (b)(5)(B)(ii).

[15] California v. Texas, No. 19-840.

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