Golden Gate Restaurant Association v. City and County of San Francisco: 546 F.3d 639 (9th Cir. 2008)


Full Summary

San Francisco’s Health Care Security Ordinance.  In July of 2006, the City and County of San Francisco’s Health Care Security Ordinance (“HCSO”) was passed and signed into law.  Codified at Chapter 14 of the Administrative Code, the HCSO has two central components: the Health Access Plan (“HAP”) and the mandatory employer health care expenditure requirements.  The HAP (now called “Healthy San Francisco”) is a city-administered health care program that provides direct access to health care services for specified low- to moderate-income San Francisco residents.  Non-residents and individuals who already have health insurance are ineligible for the HAP.  The Golden Gate Restaurant Association did not challenge the existence of the HAP itself; only the employer health care expenditure requirement was challenged in this case.  

The employer health care expenditure provision requires that covered employers make quarterly health care expenditures on behalf of covered employees.  “Covered employers” are those employers doing business within the city that have an average of twenty paid employees during a quarter, and non-profit corporations with an average of fifty paid employees during a quarter.  “Covered employees” are those employees who work within the city, who work at least 10 hours per week, who have worked for the employer for at least ninety days, and who are not otherwise excluded from the provisions of the HCSO.

The required health care expenditure is calculated by multiplying the total number of hours paid for each covered employee during a quarter by the applicable health care expenditure rate.  The applicable rate ($1.23 to $1.89 per hour in 2009) is determined by the size of the employer.  Employers can meet the spending requirement in a variety of ways, including through direct delivery of health care services, contributions to Health Savings Accounts, or reimbursement to employees for the purchase of health care services.  However, if an employer does not make expenditures on behalf of covered employees in some other way, the employer must make payments directly to the city.  The employer must also maintain records of its health care expenditures.  

If an employer selects the city-payment option, employees who meet the HAP’s eligibility requirements may be enrolled in the HAP free of charge or at reduced rates.  Employees who are ineligible for the HAP (including non-residents, individuals who already have health care coverage, and those who do not satisfy the HAP’s age or income requirements) are eligible to maintain reimbursement accounts from funds provided by employers, which they may use to obtain reimbursement for health care expenditures.

Summary of Decision.  The Ninth Circuit held that federal Employee Retirement Income Security Act (ERISA) did not preempt the mandatory employer spending requirement of the San Francisco Health Care Security Ordinance.  The court’s holding is grounded in two key observations: first, that the HCSO does not require employers to establish their own ERISA plans or modify any existing ERISA plans, and second, that the HCSO is concerned only with the dollar amounts of employer payments, rather than the nature of health care benefits provided to employees. 

The court rejected the Golden Gate Restaurant Association and the U.S. Secretary of Labor’s arguments that either the obligations imposed by the city-payment option or the HAP itself created an ERISA plan.  The court found that the minimal record-keeping obligations imposed by the requirement and the employer’s lack of discretion in administering the funds were insufficient for the creation of an ERISA plan.  Moreover, the court observed that the HAP is a government entitlement program available to residents of San Francisco regardless of employment status and employer contributions.  By contrast, an ERISA plan must be maintained or established by an employer through the purchase of insurance or otherwise.

The court also rejected the Golden Gate Restaurant Association and U.S. Secretary of Labor’s argument that the HCSO was preempted by ERISA because it “relates to” an ERISA plan.  The court held that the Ordinance did not have an impermissible connection with an ERISA plan, because it did not require an employer to adopt or modify an ERISA plan or any other plan, and did not require employers to provide specific benefits to covered employees.  Moreover, the court held that the HCSO did not make an impermissible reference to an ERISA plan, because it did not act upon ERISA plans, did not single out ERISA plans for different treatment under state law, and did not require the existence of an ERISA plan as essential to its operation. 

Importantly, the court distinguished the HCSO from a Maryland statute that was struck down by the Fourth Circuit in Retail Industry Leaders Association v. Fielder, 475 F.3d 180 (4th Cir. 2007).  The court observed that the Maryland statute (which affected only one employer in the state) did not offer the employer or employees anything in exchange for the employer’s payment to the state under a state-payment option, thus providing the employer with no reasonable choice but to restructure its ERISA plan to meet the minimum spending threshold.  In contrast, by providing employees with the option to enroll in the HAP or participate in medical reimbursement accounts with the city, San Francisco’s city-payment option offered a “meaningful alternative” that allowed for the preservation of existing ERISA plans with tangible benefits for employees whose employers chose to exercise the city-payment option.

The Golden Gate Restaurant Association is expected to petition the U.S. Supreme Court to hear its challenge to the ordinance.  The Association’s petition to the U.S. Supreme Court is due in June 2009.  If the Supreme Court accepts the Restaurant Association’s petition, the case likely will not be decided until spring 2010.

On March 17, 2009, the Golden Gate Restaurant Association filed an application for a stay pending the filing and disposition of a petition for a writ of certiorari to the U.S. Supreme Court.  If granted, the stay would have prohibited San Francisco from carrying out the employer spending provision and administrative requirements of the ordinance until the Supreme Court made a final decision on the Association’s appeal.  Supreme Court Justice Anthony Kennedy denied the Association’s application for a stay on March 30, 2009.

Lessons Learned
• A city- or state-payment option that provides employees with tangible benefits in exchange for employer contributions creates a meaningful alternative to the modification of an existing ERISA plan.
• A law that is concerned only with the dollar amount of employer health care expenditures, rather than the nature of health care benefits provided, likely does not establish an ERISA plan.
• A law that imposes only minimal record-keeping requirements is less likely to establish an ERISA plan.
• A law may limit employer discretion in administering funds paid for health care without establishing an ERISA plan.
• Even if they are partially funded by employer contributions, government entitlement programs that provide health benefits are not ERISA plans.
• Contributions to employee Health Savings Accounts, direct reimbursement of employee health expenditures, and direct delivery of employee health services are permissible options for meeting employers’ health care spending requirements, so long as the employer is provided with at least one meaningful alternative for meeting the requirements that is not preempted by ERISA.  

Related Links

Full Ninth Circuit Court Opinion$file/0717370.pdf).

Briefs and News Releases from the San Francisco City Attorney’s Office 

San Francisco’s Office of Labor Standards Enforcement Health Care Security Ordinance Website

Health Care Security Ordinance, Administrative Code Chapter 14

Healthy San Francisco Website