Initiative 124 draws another legal challenge

Last week, the ERISA Industry Committee (aka ERIC) filed a new legal challenge to a section of Initiative 124, which provides protections to hotel workers.

Initiative 124, the Seattle Hotel Employees Health and Safety Initiative, was passed by voters in November 2016. The ordinance has several parts; the one challenged by this new lawsuit is Part 3, which requires hotel employers either to provide health coverage to most of their employees at a “gold level” standard at a cost to their employees of no more than 5% of gross taxable earnings, or supplement their pay with the difference between the cost of the health benefits actually provided and the cost of a gold-level plan on the state’s health exchange (up to the full cost of a gold-level plan for employers who don’t provide health benefits).

Here’s the catch though: the Employee Retirement Income Security Act, a federal law passed in 1974, preempts state and local jurisdictions from regulating employee benefit programs. ERISA was passed by Congress to acknowledge that employee benefit plans were increasingly crossing jurisdictional borders (especially for retirement plans), and because at the time companies were increasingly required to navigate 50 separate state regulatory schemes in designing and administering their benefit plans. ERISA doesn’t actually require employers to offer employee benefit plans, but if they do they need to follow the rules in ERISA. In this context the state and local preemption makes a lot of sense.

The Supreme Court has upheld that preemption as recently as 2016 — but not without some hand-wringing. ERISA’s pre-emption clause reads as follows:

Except as provided in subsection (b) of this section, the provisions of this subchapter and subchapter III shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.

The challenge in applying this interpreting what it means to “relate to” an employee benefit plan — a very vague, and potentially extremely broad, phrase (the Supreme Court ruling called it “terse but comprehensive”). The court has settled on two categories of laws that are preempted: laws that make “reference to” an employee benefit plan, and those that have a “connection with” such a plan. “Reference to” is explained as:

“[w]here a State’s law acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law’s operation . . . , that ‘reference’ will result in pre-emption.”

And “connection to” is explained as:

… a state law that “governs . . . a central matter of plan administration” or “interferes with nationally uniform plan administration.” Egelhoff v. Egelhoff, 532 U. S. 141, 148 (2001). A state law also might have an impermissible connection with ERISA plans if “acute, albeit indirect, economic effects” of the state law “force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers.”

ERIC argues that Initiative 124 satisfies both of these tests. It has a “reference to” an ERISA plan because it imposes a new requirement whose exact details depend on what health benefits the employer chooses to offer. It also has an exception for a particular kind of ERISA plan known as a “Taft-Hartley Act plan.” ERIC also argues that Initiative 124 has a “connection with” ERISA plans because the alternative to offering a gold-level health plan is more costly to employers — essentially compelling employers to offer the health plan to minimize their costs. It also imposes reporting requirements on employers; the 2016 Supreme court case referenced above explicitly ruled that the substantial reporting requirements in ERISA mean any additional reporting requirements are an obvious connection.

That’s a pretty strong argument that Initiative 124 is preempted by ERISA. The opposite side of the argument however, is motivated by a separate Supreme Court ruling:

Nothing in ERISA requires employers to establish employee benefits plans. Nor does ERISA mandate what kind of benefits employers must provide if they choose to have such a plan.

Initiative 124 part 3, at its core, is a requirement for employers to provide health benefits to their employees — something that is outside the scope of ERISA.  It doesn’t specify the details of a gold-level plan; it just says that employers need to offer one (though it does specify what an employer may charge employees for it). And that brings us back to the question of the breadth of ERISA’s preemption language, which has long been a cause of consternation for Supreme Court justices. In the 2016 case, Justice Thomas wrote a concurring opinion expressing his view that Congress’s ability to preempt state laws must be derived from a power granted in the Constitution, such as the Commerce Clause’s grant to Congress of the power to regulate interstate commerce. Thomas was concerned that ERISA’s preemption has been interpreted to be broader than its constitutional mandate:

Read according to its plain terms, §1144 raises constitutional concerns. “[T]he Supremacy Clause gives ‘supreme’ status only to those [federal laws] that are ‘made in Pursuance’” of the Constitution. … But I question whether any provision of Article I authorizes Congress to prohibit States from applying a host of generally applicable civil laws to ERISA plans. “The Constitution requires a distinction between what is truly national and what is truly local.” United States v. Morrison, 529 U. S. 598, 617–618 (2000). If the Federal Government were “to take over the regulation of entire areas of traditional state concern,” including “areas having nothing to do with the regulation of commercial activities,” then “the boundaries between the spheres of federal and state authority would blur and political responsibility would become illusory.” United States v. Lopez, 514 U. S. 549, 577 (1995) (KENNEDY, J., concurring). Just because Congress can regulate some aspects of ERISA plans pursuant to the Commerce Clause does not mean that Congress can exempt ERISA plans from state regulations that have nothing to do with interstate commerce.

Justice Ginsburg also wrote a dissent in that case, referring to a key earlier case where the Supreme Court also wrestled with the vagueness of the “relates to” phrase. There Justice Stevens wrote:

In order to evaluate whether the normal presumption against pre-emption has been overcome in a particular case, we concluded that we “must go beyond the unhelpful text and the frustrating difficulty of defining its key term, and look instead to the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive.”

In the end though, that case points to one of the key issues in ERIC’s case, without providing a clear answer:

Any state tax, or other law, that increases the cost of providing benefits to covered employees will have some effect on the administration of ERISA plans, but that simply cannot mean that every state law with such an effect is pre-empted by the federal statute.

What does all this mean? The case law around ERISA preemption of state and local laws is a big mess, and while ERIC’s case looks strong, the City of Seattle will no doubt be able to find competing case law that supports its side as well. Don’t expect a quick resolution to this case.

It also points to the problem with legislating by voter initiative: there is no amendment process and thus no way to improve a proposed law between its introduction and when voters pass it into law. Initiative 124’s “guest blacklist” provision is equally problematic, and is an issue in the other legal challenge it is facing.

ERIC’s case was filed now because the Office of Labor Standards published its administrative rules just last month, putting the law into full effect. Those extra details also make it easier to write legal briefs arguing the finer points of the law’s impact, and particularly how it relates to ERISA-covered benefit plans.

One last note: don’t blame the City Council for this mess. They did their best to stay out of it.