On Monday, a panel of 9th Circuit Court of Appeals judges heard oral arguments in an appeal of the City of Seattle’s ordinance mandating that hotel companies provide healthcare benefits to their workers.
Let’s begin by reminding ourselves of the unusual path this case has taken to arrive at this point. After Initiative 124 passed, two lawsuits were filed against it: one challenging the entire initiative as violating the state “single subject” constitutional rule, and another by the ERISA Industry Committee (ERIC) challenging the specific provision that requires hotels to make minimum monthly payments for healthcare for their employees. The latter case was placed on hold while the former one ran its course.
The City Council mooted the broad legal challenge by rescinding I-124 and replacing it with four separate bills, in the process rewriting some of the provisions to avoid the most legally questionable aspects. In response ERIC re-filed its complaint, targeting the one bill that deals with the healthcare mandate.
The bill in question requires hotels with at least 100 rooms and ancillary businesses with at least 50 employees worldwide to make minimum monthly payments for healthcare expenses for all employees working at least 80 hours per month. It provides the companies three options for how to make those payments:
- “Additional compensation paid directly to the covered employee.”
- Payments to a third-party health insurance company or into a health savings account on behalf of the employee.
- Payments into a company’s self-funded insurance program.
Along with this requirement are provisions for employees to sign a waiver if they receive health insurance through their partner’s employer, and notice and record-keeping requirements the employer must satisfy.
ERIC argues that this ordinance runs afoul of the 1975 federal ERISA act, which preempts state and local laws that “relate to” employee benefit plans. ERISA’s preemption was to ensure that companies would not need to tailor their employee benefit plans to the specific requirements of every local and state jurisdiction, but could have a uniform system of employee benefits nationwide. Since ERISA passed, there have been countless lawsuits litigating the boundaries of what “relates to” an employee benefit plan, since that language is both very broad and incredibly vague — in fact, courts have pointed out that it could be boundless if allowed to be so. In recent years, the U.S. Supreme Court has settled on a two-part test: a law relates to an employee benefit plan if it “makes reference to” or “has a connection to” such a plan. Of course, that is still far from precise guidance, so the cases continue on, hacking away at the boundaries of ERISA’s preemption.
There are other legal questions that get bound up in determining whether a state or local law is pre-empted by ERISA. One is whether those laws have a general “presumption against preemption.” Partly in recognition of states’ sovereign status, the federal courts have found that a state law could be preempted by a federal one under the Constitution’s Supremacy Clause if there is a direct conflict, an implied conflict, or an express preemption, but have tread lightly on states’ regulatory powers. As a theoretical example: a federal law setting a 55 MPH maximum speed would preempt a state law setting the speed limit at 65 MPH because the two cannot be harmonized, but it would not preempt a state law setting it to 50 MPH because they can co-exist. However, in recent years the Supreme Court has more firmly recognized that there is no presumption against preemption when the federal law explicitly includes a preemption clause — as ERISA does.
Another legal question is how to reconcile federal preemption with states’ broadly-recognized inherent “police powers” to regulate, in areas such as public health and safety. In this case, the City of Seattle argues that its ordinance is ensuring the health and safety of hotel workers by ensuring that they have healthcare coverage.
Specific to this ordinance, there is no debate that Options 2 and 3 relate to employee benefit plans. But the city argues that Option 1 does not, and therefore there is a potential implementation of the ordinance, where all employers select option 1, that does not relate to ERISA-covered plans and is therefore legal. ERIC, on the other hand, argues that even Option 1 is an ERISA-covered plan, an argument we’ll return to in a moment.
U.S. District Court Judge Thomas Zilly ruled in favor of the City of Seattle on all of these issues, finding that:
- there is a presumption against preemption;
- the city is using its inherent police power to regulate;
- the ordinance is nearly identical to a bill passed in San Francisco that the 9th Circuit found not to be preempted by ERISA.
That ruling is the basis of ERIC’s appeal that was heard this week by the 9th Circuit.
As the case has proceeded, ERIC has sharpened its legal arguments, and it points out several flaws in the city’s defense (and Zilly’s ruling):
- In December 2020, the U.S. Supreme Court issued a ruling on a separate ERISA pre-emption case that re-emphasized its more recent belief that when a federal law contains an explicit preemption clause it undermines any presumption against preemption of state and local laws. The Supreme Court’s 2015 ruling in Gobeille vs Liberty Mutual made it clear that ERISA’s pre-emption clause trumps the presumption against preemption; the city tried to argue that more recent Supreme Court rulings leaned the other way, but this most recent ruling directly cites Gobeille on the question, making it clear where the Court stands (and undermining the city’s argument).
- Since Option 1 in Seattle’s ordinance does not actually require the payments to the employee to be used to obtain healthcare, the notion that it is a legitimate exercise of police power to regulate health and safety does not stand up to scrutiny.
- Seattle’s ordinance substantively differs from San Francisco’s, and thus the 9th Circuit’s previous ruling is inapplicable.
Let’s dive into that third point. Whereas Seattle’s ordinance requires direct payments to employees as one of the three options, San Francisco’s instead requires employers to pay into a city-run fund that provides healthcare coverage to low and moderate income city residents. In fact, the bill is structured in reverse: it is a funding bill for the city healthcare provision program, essentially imposing a head-tax on employers to fund the program but providing exceptions for those employers who provide healthcare to their own employees. The payments don’t go to their employees, and in fact may not ever benefit those employees who choose not to participate in the city’s healthcare provision program.
ERIC goes on to argue that Option 1 in the Seattle ordinance is, in fact, an ERISA-covered plan, and not “wage-like” payments as the city argues:
- The ordinance itself says that the Option 1 payments are not wages.
- The amount of the payments varies depending upon whether the employee has a spouse or domestic partner, and the number of dependents the employee has. Wages don’t do that, and in fact under Washington state law it is illegal for an employer to determine wages based upon marital status. In contrast, San Francisco’s bill determines employer payments based upon the number of hours an employee works, not family size.
- It is a “plan” because there is an administrative regime that the employer must establish in order to meet the requirements of the ordinance that includes tracking and verifying the marital status and dependents of each employee, managing a waiver program, providing notices to employees of their rights under the ordinance, and relevant record-keeping.
In the city’s written briefs and their oral arguments, it did not address these points, other than to argue that the administrative requirements were minimal and did not rise to the level of a “benefit plan.”
Both sides cherry-pick their ERISA-preemption case law to bolster their arguments, and there are certainly plenty of precedents to substantiate nearly any position. This presents an opportunity for the Ninth Circuit to clarify which of the various cases is the controlling precedent, especially in light of the Supreme Court’s recent ruling. Of note, in that ruling, Justice Thomas attached a concurring opinion casting doubt on the Court’s recent direction on ERISA preemption in general:
I write separately because I continue to doubt our ERISA pre-emption jurisprudence. Gobeille v. Liberty Mut. Ins. Co., 577 U. S. 312, 327 (2016) (THOMAS, J., concurring). The plain text of ERISA suggests a two-part pre-emption test: (1) do any ERISA provisions govern the same matter as the state law at issue, and (2) does that state law have a meaningful relationship to ERISA plans? Only if the an-swers to both are in the affirmative does ERISA displace state law. But our precedents have veered from the text, transforming §1144 into a “vague and ‘potentially bound-less’. . . ‘purposes and objectives’ pre-emption” clause that relies on “generalized notions of congressional purposes.” Wyeth v. Levine, 555 U. S. 555, 587 (2009) (THOMAS, J., concurring in judgment). Although that approach may allow courts to arrive at the correct result in individual cases, it offers little guidance or predictability. We should instead apply the law as written…
… But it is not enough for this Court to reach the right conclusions. We should do so in the way Congress instructed. Indeed, although we have generally arrived at the conclusions we would arrive at under a text-based approach, our capacious, nontextual test encourages departure from the text. The decision below is testament to that problem. We unanimously reverse that decision today, but we can hardly fault judges when they apply the amorphous test that we gave them. We can and should do better.
There is no timeline for the appeals court to rule in this case. In the meantime, you can watch Monday’s oral arguments here.
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