District Court: Seattle's Fair Share Ordinance Is Not ERISA-Preempted | Practical Law

District Court: Seattle's Fair Share Ordinance Is Not ERISA-Preempted | Practical Law

In a preemption dispute under the Employee Retirement Income Security Act of 1974 (ERISA), the US District Court for the Western District of Washington held that a Seattle ordinance requiring certain hotel industry employers to make employee health care expenditures was not preempted by ERISA. In the district court's view, the challenged ordinance was similar to the ordinance previously upheld by the Ninth Circuit in Golden Gate Restaurant Ass'n v. City & County of San Francisco.

District Court: Seattle's Fair Share Ordinance Is Not ERISA-Preempted

Practical Law Legal Update w-025-4601 (Approx. 4 pages)

District Court: Seattle's Fair Share Ordinance Is Not ERISA-Preempted

by Practical Law Employee Benefits & Executive Compensation
Published on 13 May 2020 • USA (National/Federal)
In a preemption dispute under the Employee Retirement Income Security Act of 1974 (ERISA), the US District Court for the Western District of Washington held that a Seattle ordinance requiring certain hotel industry employers to make employee health care expenditures was not preempted by ERISA. In the district court's view, the challenged ordinance was similar to the ordinance previously upheld by the Ninth Circuit in Golden Gate Restaurant Ass'n v. City & County of San Francisco.
In an ERISA preemption dispute, a Washington State district court held that a Seattle ordinance (SMC 14.28) requiring certain employers to make employee health care expenditures was not preempted by ERISA (The ERISA Indus. Comm. v. City of Seattle, (W.D. Wash. May 8, 2020)). In the court's view, the challenged ordinance was "nearly identical" to a San Francisco fair-share ordinance that the Ninth Circuit upheld in Golden Gate Restaurant Ass'n v. City & County of San Francisco (546 F.3d 639 (9th Cir. 2008)).

Ordinance Requires Health Expenditures in One of Several Forms

Effective July 1, 2020, the Seattle ordinance at issue in this case requires large hotel employers (and related businesses) to make employee health care expenditures on behalf of covered employees. Employers may satisfy the requirement by making monthly expenditures in specified dollar amounts that vary depending on whether a covered employee has a spouse/domestic partner and dependents. Employers may comply with the ordinance by:
  • Paying additional compensation directly to employees.
  • Making payments to an insurer or into a tax-favored health program that provides health care services to employees, their spouses or domestic partners, and dependents.
  • Making average per-capita monthly health care expenditures on behalf of employees, their spouses or domestic partners, and dependents to an employer's self-funded health plan.
Employers must satisfy recordkeeping requirements demonstrating their compliance with the ordinance. Employers also are subject to enforcement penalties for noncompliance with the ordinance, which is effective July 1, 2020, or the earliest annual open enrollment period thereafter (see New Employee Checklist for ERISA Health and Welfare Plans).
A nonprofit trade association sued the city, seeking to enjoin enforcement of the ordinance on ERISA preemption grounds (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Fair Share Laws and ERISA Litigation Toolkit). The city moved to dismiss.

Outcome

Applying the presumption against ERISA preemption, the district court held that the ordinance was not ERISA-preempted. According to the court, the ordinance did not:
  • Require creation of an ERISA plan.
  • Have an impermissible connection with or reference to an ERISA plan.

Ordinance Did Not Require Creation of ERISA Plan

Focusing on the Seattle ordinance's direct payment option, the trade association argued that the ordinance required employers to create and maintain "an on-going, discretion-laden program and administrative process" for providing health care benefits to employees, which met the definition of an ERISA plan. The association characterized the direct payment option as an employer-based arrangement that:
  • Included regular payments for funding employees' medical costs.
  • Satisfied ERISA's definition of a welfare benefit plan.
Rejecting this argument, the district court observed that the Ninth Circuit expressly rejected the same argument in Golden Gate (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): ERISA Did Not Preempt San Francisco's Fair Share Ordinance). Finding that the ordinance did not require creation of an ERISA plan, the district court reasoned that the direct payment option:
  • Was similar to paying employees' regular wages.
  • Did not implicate ERISA's concerns regarding mismanagement of plan funds.
  • Imposed minimal recordkeeping obligations that employers would maintain in their normal course of business.
  • Did not give employers discretion to limit or deny benefits.

Ordinance Did Not Have Connection with or Reference to ERISA Plan

The district court also rejected the association's arguments that ERISA preempted the ordinance because it had an impermissible connection with or reference to an ERISA plan (29 U.S.C. § 1144(a)). The association contended that the ordinance forced ERISA plans to:
  • Adopt certain substantive coverage or restrict their choice of health insurers.
  • Effectively extend their existing insured or self-funded coverage options to include employees covered by the Seattle ordinance (because the direct payment option was too expensive to be a viable option).
In determining that the ordinance lacked a connection with an ERISA plan, the court reasoned that employers had multiple options for complying with the ordinance. The district court found that the direct-to-employee payments were not, in themselves, ERISA plans.
Regarding the association's argument that the ordinance had an impermissible reference to an ERISA plan, the court concluded that the ordinance was fully functional without the existence of an ERISA plan. The court also found that payments required under the ordinance were determined based on an employee's status, rather than benefits available under an ERISA plan. The court contrasted the ordinance with a preempted District of Columbia law that required benefits provided under the law to be the same as benefits provided under an ERISA plan (see D.C. v. Greater Wash. Bd. of Trade, 506 U.S. 125 (1992)).

Practical Impact

Employer fair share laws became the subject of litigation more than a decade ago (and before enactment of the Affordable Care Act's (ACA's) employer mandate) when the Fourth and Ninth Circuits reached different outcomes regarding whether ERISA preempted such laws in Maryland and California, respectively (see Employer Mandate Toolkit). It remains to be seen whether the trade association plaintiff in this litigation will appeal the district court's ruling to the Ninth Circuit, which in 2008 issued the Golden Gate ruling referenced above concerning San Francisco's fair share ordinance. But the spread to other municipalities of requirements such as those under the San Francisco and Seattle ordinances (or more expansive requirements) could eventually bolster the argument that these ordinances interfere with ERISA's goal of uniform plan administration nationwide.