Supreme Court Asked to Assess Whether City of Seattle’s Hotel Workers Insurance Ordinance Is Preempted.

Seyfarth Shaw LLP

Seyfarth Synopsis: A City of Seattle ordinance requires large hotels and related businesses to give workers either health insurance coverage or additional compensation. Earlier this month, the ERISA Industry Committee (ERIC) petitioned the U.S. Supreme Court, seeking a determination of whether this ordinance is preempted by the federal Employee Retirement Income Security Act of 1974, as amended (ERISA). This update summarizes the ordinance and key arguments in ERIC’s petition for a writ of certiorari.

The City’s Improving Access to Medical Care for Hotel Employees Ordinance, SMC 14.28 (“Ordinance”) requires large hotels and related businesses that are “covered employers” to make minimum monthly expenditures for their “covered employees” in Seattle. The Ordinance purports to require these expenditures so that covered employees will have access to healthcare services. Because the Ordinance relates to covered employers’ health insurance plans, it has been subject to ongoing ERISA preemption challenges.

Who is a covered employer?

“Covered employers” are those who own, control, or operate a hotel in Seattle with more than 100 guest rooms, or who own, control, or operate an “ancillary hotel business” in Seattle and have 50 or more employees worldwide. An “ancillary hotel business” is one that “(1) routinely contracts with the hotel for services in conjunction with the hotel’s purpose; (2) leases or sublets space at the site of the hotel for services in conjunction with the hotel’s purpose; or (3) provides food and beverages, to hotel guests and to the public, with an entrance within the hotel premises."

Who is a covered employee?

“Covered employees” include those who work for a covered employer “for an average of 80 hours or more per month” and who are not managers, supervisors, or employees who help to create or effect management policies about labor relations (“confidential employees”). Employees who have other healthcare coverage may waive benefits under the Ordinance.

What is the required expenditure amount?

The mandated minimum monthly expenditure varies depending on each covered employee’s family composition. Subject to adjustments for inflation, the mandated monthly amounts for 2022 range from $459 for employees with no spouse and no dependents to $1,375 for employees with a spouse and one or more dependents. Employers must make reasonable efforts to obtain accurate information about their employees’ family composition to determine the amount.

How can covered employers comply?

Under the Ordinance, employers can satisfy the healthcare expenditure requirements for a covered employee by:

  • Making average per-capita monthly expenditures in the employer’s self-insured healthcare program;
  • Making payments to a third party, such as to an insurance carrier or trust, or into a tax favored health program (including health savings accounts, medical savings accounts, health flexible spending arrangements, and health reimbursement arrangements); or
  • Paying additional compensation directly to the employee.

Employers must retain records documenting their compliance, including proof of each required healthcare expenditure made to or on behalf of each current and former employee for three years. The Ordinance also contains notice posting requirements, anti-retaliation provisions, and enforcement mechanisms.

Was the Ordinance challenged as being preempted by ERISA? 

Yes, in both the United States District Court for the Western District of Washington and on appeal in the Ninth Circuit. Both courts held the Ordinance is not preempted by ERISA. The courts reasoned that the Ordinance does not require an employer to establish or amend an ERISA-covered plan. Instead, the courts found that a covered employer need only make expenditures for healthcare services, which can include paying cash to employees. ERISA Indus. Comm. v. City of Seattle, No. C18-1188 TSZ, 2020 WL 2307481, at *4 (W.D. Wash. May 8, 2020); ERISA Indus. Comm. v. City of Seattle, 840 F. App'x 248, 249 (9th Cir. 2021).

Both courts relied heavily on Golden Gate Rest. Ass’n v. City & Cty. of San Francisco, 546 F.3d 639, 647 (9th Cir. 2008), in which the Ninth Circuit held that a similar San Francisco ordinance requiring businesses to make certain minimum health care expenditures on behalf of covered employees was not preempted by ERISA. The Golden Gate court likewise found that the ordinance had no impermissible “reference to” or “connection with” an ERISA plan because it was “functional even in the absence of a single ERISA plan.”

In light of the Ninth Circuit’s holding, ERIC petitioned for certiorari. See The ERISA Industry Committee v. City of Seattle, No. 21-1019 (Jan. 14, 2022).

What are the arguments on certiorari?

ERIC made several arguments in its petition for writ of certiorari for why the Supreme Court should hear the case and find the Ordinance preempted, including the following key arguments:

  • The case “presents an excellent vehicle to resolve an entrenched and increasingly relevant split of authority over whether ERISA preempts state and local efforts to regulate employee-benefit plans through play-or-pay laws.”
  • The Ninth Circuit’s decision conflicts with the Supreme Court’s precedents regarding the presumption against preemption, “which have made clear that no such presumption applies in cases, like this one, involving an express preemption provision.”
  • The Ordinance has an impermissible “connection with” ERISA plans because it interferes with uniform plan administration across the country. The core objective of ERISA’s preemption provision is to ensure “plans and plan sponsors [are] subject to a uniform body of benefits laws,” minimizing “the administrative and financial burden of complying with conflicting directives and ensuring that plans do not have to tailor substantive benefits to the particularities of multiple jurisdictions.”
  • The Ordinance makes forbidden “reference to” ERISA plans because the expenditures required to comply with the play-or-pay option are measured by reference to the contributions the employer makes to its existing ERISA plan. “The Ordinance,” ERIC argues, “cannot ignore that virtually all of the national hotel chains and related national employers targeted by the law have existing ERISA plans.”

The Ordinance, along with similar ordinances in other cities, threatens to upend employers’ ability to maintain uniform health and welfare plans on a nationwide basis. We’ll be watching the petition carefully and will provide updates. If you have questions regarding this Ordinance or the petition, including its practical implications, contact the authors or your Seyfarth attorney for more information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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