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Friday, December 26, 2008

Local Democracy's struggle with ERISA Preemption

San Francisco is now locked in a struggle with business over whether subnational governments can mandate that employers provide their employees with health care benefits. The employers are claiming that ERISA preempts the mandate, and their argument illustrates the insidiously anti-democratic nature of preemption arguments. As a matter of policy, I tend to agree that funding public benefits like health care through mandates on employers is foolish. Such a finance mechanism interferes with the mobility of labor and discourages job creation. Far better, it seems to me, to provide health benefits through general taxes not incident on employment.

But here is where I am a die-hard lover of federalism: As dumb as employer mandates are, centralizing debate over health care through a broad construction of ERISA preemption is even dumber. Such centralization is an outrage against the democratic process both locally (by suppressing the efforts of those zany San Franciscans) and nationally (by letting Congress off the hook of confronting the relationship between health care and employment). San Francisco hurts no one but itself and its own residents by burdening business and driving away capital to the 'burbs. The claim that national businesses will suffer some external cost outside San Francisco from disuniform regulation is patently baloney: Any business that operates in any city already must uncontroversially incur the costs of researching and complying with local zoning codes, local taxes and fees, local building codes, local safety regulations, etc. The marginal cost of insuring that one's local branch complies with the local complying health care law is close to zero.

Therefore, you can imagine my delight when I read Judge William Fletcher's opinion in Golden Gate Restaurant Association v. San Francisco, 546 F.3d 639 (9th Cir. Sept 30th 2008), upholding San Francisco's mandate on employers employing between 20-99 persons to provide health benefits to their employees. The Golden Gate Restaurant Association argued that ERISA preempted the ordinance because the ordinance "related to" or "made reference to" ERISA benefit plans. Fletcher rejected this argument, which had been adopted by the Fourth and Second Circuits, reasoning that San Francisco's ordinance did not regulate the terms of any employers' ERISA plans but rather required employers to provide a dollar amount of benefits (roughly $1.17-1.76 per employee hour) regardless of the terms of any employment contract.

Judge Fletcher is right on the legal merits, in my view, for reasons too tedious to detain anyone except aficionados of federalism and/or ERISA. (I include a few of those reasons after the jump for the one or two readers who might conceivably care about such matters). But, as far as "decentralization policy" is concerned, Fletcher's opinion is a precarious victory for sane federalism -- precarious, because it is vulnerable to en banc and SCOTUS review. One can only hope that SCOTUS's recent endorsement of the presumption against preemption in Altria v. Good will slow down the madness that is ERISA preemption.

For those who care about ERISA, why do I claim that preempting San Francisco's ordinance is madness? The Restaurant Association is essentially making an effects-based preemption argument, asserting that SF's ordinance effectively requires employers to change their ERISA benefits plans to comply with San Francisco law. The folly of this argument, however, is that it proves too much: Lots of local laws might have effects on employers' incentives to provide contractual benefits. Medical malpractice lawsuits under state tort law might drive up the cost of insurance, leading the marginal employer to reduce employees' health care benefits. Local zoning law could -- indeed, does -- increase housing costs, which increases the relative attractiveness of housing benefits to employers. But no lawyer in their right mind would argue that these state and local laws "relate to" ERISA benefits plan, because these laws' obligations are not triggered by the existence of ERISA-covered employment benefits.

It is conceded that SF could not impose mandates on employers because they provide ERISA-covered benefits to their employees. But SF has not done so: The duties under the SF ordinance apply to every employer, regardless of whether those employers provide ERISA benefits -- or any benefits - -pursuant to contract. True, employers who provide health care benefits thereby comply with the ordinance. But employers who do not do so do not thereby escape the ordinance -- and it is this latter fact that makes the ordinance a simple mandate on businesses rather than a regulation of the terms of ERISA-covered plans.

Any other theory will draw the courts into a theory of preemption that could suck every state and local regulation of business into the maw of ERISA preemption -- an outcome utterly unintended by anyone in Congress in the 1970s, when ERISA was enacted. For courts to create such centralization without Congress' assent is, as I noted above, an outrage against common sense and subnational democracy. As I have argued elsewhere (Against Preemption: How Federalism Can Improve the Federal Legislative
Process
, 82 N.Y.U. L. Rev. 1 (2007)), ERISA preemption has also absolved Congress of the duty to confront the problem of how health care benefits relate to employment. Preemption, in short, destroys both subnational and national democracy. So here's hoping that Judge Fletcher can sustain his blow for federalism.

Posted by Rick Hills on December 26, 2008 at 10:29 AM in Rick Hills | Permalink

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"The marginal cost of insuring that one's local branch complies with the local complying health care law is close to zero."

Have you ever drafted an employee benefit plan? Trying to harmonize a patchwork of local regulations to the Internal Revenue Code's various requirements could be extraordinarily complex (if not impossible).

This is not to say that the SF plan poses such obstacles, but I think it's overly facile to simply announce that compliance costs for various local health care laws would be zero; from the tax side alone, I would expect that compliance costs are massive (just looking at e.g. IRC sec. 125 and related regulations makes my head spin; perhaps an EB lawyer can make better sense of the issues). I'd also be interested in hearing form ERISA or L&E lawyers regarding the effects that varying local health care laws may have on compliance with other regulatory regimes; I have a hard time believing that, just because a large company deals with (for example) recording its security interests in a different way in Colorado than in Nebraska, that that means that compliance costs for myriads of local health care plan requirements are "zero."

Perhaps health care should be a local issue, perhaps not. But there undoubtedly are significant costs associated with complying with numerous regulatory regimes, and one should address those costs in touting any of the purported benefits of local government.

Posted by: andy | Dec 27, 2008 4:20:21 AM

"andy" writes: "Have you ever drafted an employee benefit plan? Trying to harmonize a patchwork of local regulations to the Internal Revenue Code's various requirements could be extraordinarily complex (if not impossible)."

But SF's ordinance does not require any employer to harmonize their benefits plan with local law. Any employer is absolutely free to ignore SF's ordinance and choose whatever benefits plan they please - -including no plan at all. In such a case, they'll have to pay a fee to the city health benefits fund to cover the costs of providing health care to un- or under-insured city residents. But so what? No employer is statutorily entitled to be free from such fees: So far as ERISA is concerned, cities are entitled to levy whatever taxes they please, so long as they do not try to regulate the contents of employers' ERISA plans.

In effect, SF has told employers, "(1) pay a fee to the city to cover health care -- but (2) we'll give you a credit if you provide benefits yourself directly to employees." Everyone agrees, I hope, that ERISA does not preempt taxes and fees, so (1) by itself is fine. But (2) simply tries to give employers credit for accomplishing the same goal as the fee required by (1). It surely cannot be more disruptive to national commerce, etc, to give the employers an extra option, right? You don't like the paperwork required by (2)? Then don't apply for a credit: Just pay the money to the city -- a $1.17 or so per employee hour.

If the Ninth Circuit is so foolish as to reverse Judge Fletcher, then I'd advise the city just to impose a uniform fee on all employers regardless of their health plan and deposit the proceeds into a city fund to cover health care costs of city residents. This new law would impose an extra burden on employers who already provide benefits to their employees -- making reversal of Judge Fletcher's opinion a pyrrhic victory for business.

Posted by: Rick Hills | Dec 28, 2008 11:24:59 AM

"But SF's ordinance does not require any employer to harmonize their benefits plan with local law."

as i noted, I did not mean to imply that SF's plan in particular would raise hell, only that allowing various localities to impose requirements regarding employee benefit plans likely would.

Posted by: andy | Dec 28, 2008 11:46:34 AM

Ladies and Gentlemen, you're missing the point. It is nice that Massachusetts and San Francisco have increased healthcare coverage.

But at the same time, they have increased its per capita cost materially with reduced utility (i.e., how do we Americans feel in terms of physical and mental health). Piecemeal approaches can only drive up the cost to the point where the perceived economies of scale associated with universal coverage will not be there.

Posted by: Juan N. Kelly | Dec 30, 2008 12:11:23 PM

Great post, Rick.
Here's another consideration: Part of the goals of fair share legislation is to get large corporations to internalize their costs. Thus, e.g., the Fair Share Act in Maryland (the Fourth Circuit case, RILA v. Fielder) was designed in part to get large employers to pay for its employees' health care. In Maryland, Wal-Mart was able to provide such low prices for its customers in part because it didn't provide a reasonable employee health insurance plan. Instead, Wal-Mart employees would go on a spouse's insurance plan or the state Medicaid rolls. Wal-Mart (and its shoppers) thus received a substantial subsidy: It distributed the costs of its employees' health insurance to other employers and to the state itself. (As a result, all Maryland residents paid for Wal-Mart employees' health plans, whether they shopped at Wal-Mart or not.)
(Wal-Mart was not the only affected employer in Maryland, but it was the only employer who consistently failed to provide adequate health insurance for its employees.)
The Maryland Fair Share Act was designed in part to get Wal-Mart to internalize those costs (and, presumably, pass them along to Wal-Mart customers, not the entire state). And, as you note, the burden of compliance was negligible: The program operated simply as a tax credit for employers who provided health insurance to their employees; otherwise, it was merely a state tax.
So here's another good reason to let state and local governments deal with the problem: They're the ones who are incurring the costs, and they're best situated to reallocate costs from their entire population to employers who fail to provide adequate insurance.

Posted by: Steven D. Schwinn | Dec 30, 2008 1:54:39 PM

"Instead, Wal-Mart employees would go on a spouse's insurance plan or the state Medicaid rolls. Wal-Mart (and its shoppers) thus received a substantial subsidy: It distributed the costs of its employees' health insurance to other employers and to the state itself. (As a result, all Maryland residents paid for Wal-Mart employees' health plans, whether they shopped at Wal-Mart or not.)"

Steven,

What is the causal relationship between Wal-Mart's busineses and, say, a Wal-Mart employee who has congenital heart disease? I

f Wal-Mart decides to employ people with one leg, and persons with one leg need more support from society (parking spots/ramps/etc.), you would seem to say that the fact that this person has one leg is a cost that Wal-Mart has imposed on society and that Wal-Mart should bear. I don't understand that reasoning; is there a different basis to find that the costs of Wal-Mart employees' illnesses somehow belong to or are created by Wal-Mart?

If Wal-Mart employees are suffering ill effects as a result of their work (falling off of ladders, etc.), and society were forced to pay those costs, I could see how Wal-Mart is receiving a subsidy from society. But the argument that the cost associated with e.g. someone suffering from lung cancer from smoking too much is really created by Wal-Mart -- simply because Wal-Mart employs that person -- is difficult to accept.

In short, I don't see why Wal-Mart must "internalize" these costs if the health of its workers are not internal to it. Universal health care requires universal cooperation (across the board taxes, etc.), not the singling out of a big evil corporation.

Posted by: andy | Dec 30, 2008 9:47:50 PM

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