Supreme Court: Some Corporations Can Opt Out of Obamacare’s Contraception Coverage Mandate

by LeClairRyan

On June 30, 2014, the United States Supreme Court held 5-4 in Burwell v. Hobby Lobby Stores, Inc. that closely held for-profit corporations cannot be forced to comply with the Patient Protection & Affordable Care Act’s contraception mandate if the owners have religious objections to providing the coverage. It is a landmark decision in many respects, but most employers won’t feel an immediate impact from the case. The real significance of the case for employers will be revealed in the months and years ahead, as companies test the limits of Hobby Lobby by challenging a variety of other governmental restrictions on the freedom of employers to run their businesses as they choose.

Hobby Lobby is a family-owned, for-profit corporation that provides health insurance coverage to employees through a self-insured plan. The owners are evangelical Christians who believe that life begins at conception. This belief was in conflict with the Patient Protection & Affordable Care Act (ACA) mandate that employers provide no-cost prescription contraception coverage in health insurance plans offered to employees, or else face steep penalties.

The Department of Health and Human Services (HHS), which issues regulations related to the ACA, allowed certain religious entities -- including houses of worship and some non-profit organizations -- to claim exemptions from compliance with the mandate, but did not provide similar exemptions for for-profit entities. Facing the prospect of huge penalties if it failed to comply with the law, Hobby Lobby filed suit to challenge the lawfulness of the contraceptive mandate. Several other employers did the same, and the cases eventually worked their way to the Supreme Court. Two of those cases were combined and addressed together in the Hobby Lobby opinion.

The central legal question in Hobby Lobby was whether the ACA’s contraception mandate violated the Religious Freedom Restoration Act of 1993 (RFRA). Under RFRA, the government may not "substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability," unless it can demonstrate that "application of the burden to the person is (1) in furtherance of a compelling governmental interest; and (2) the least restrictive means of furthering that compelling governmental interest." Translated into plain English, this means that the government can’t mess with peoples’ ability to practice their religion unless it has a really, really good reason to do so. (And even then, it must meddle as minimally as possible.)

On one side of the case, HHS argued that RFRA’s protections did not apply to Hobby Lobby because RFRA was designed to protect individuals’ religious rights -- not the religious rights of corporations. Thus, when Hobby Lobby chose to operate as a corporation instead of as a sole proprietorship or general partnership, it forfeited protection under RFRA. On the other side of the case, Hobby Lobby argued that its owners were individuals whose right to exercise their religious beliefs was protected under RFRA. Because those individuals’ religious beliefs were significantly burdened by the ACA’s contraceptive mandate, the mandate violated RFRA.

The Court ultimately agreed with Hobby Lobby, holding that the mandate violated RFRA as applied to closely held corporations. Writing for the majority, Justice Alito said that Congress did not intend for RFRA to discriminate against "men and women who wish to run their businesses as for-profit corporations in the manner required by their religious beliefs.... [P]rotecting the free-exercise rights of closely held corporations protects the religious liberty of the humans who own and control them."

HHS also did not show that it "lacked other means of achieving its desired goal without imposing a substantial burden on the exercise of religion," the Court noted. Alito suggested that a less restrictive method of achieving HHS’ goal would be for the government to assume the cost of providing contraceptives to women who are unable to obtain them under their health insurance plans due to an employer’s religious objections.

What the Hobby Lobby Decision Means for Employers
"For employers that have not historically and openly operated their businesses in accordance with their religious beliefs, the Hobby Lobby decision is not likely to have any direct impact in the short term," says Carmon Harvey, a LeClairRyan shareholder whose practice focuses on employment litigation and counseling. "But for institutions that have to some degree conducted their businesses in a manner guided by religious principles, the decision could have more immediate implications."

Companies in the latter category that want to opt out of the ACA’s contraception mandate should keep two things in mind. First, the Hobby Lobby decision only applies to closely held corporations, which the IRS defines as those where more than 50 percent of the value of the entity’s outstanding stock is owned by five or fewer individuals, and that are not personal service corporations. Second, in order to be exempt, a company’s owners must hold sincere religious beliefs that would be burdened by compliance with the law. Toward that end, company policies, incorporation documents, and actions should openly evidence the religious beliefs and characteristics of the corporation.

For other employers, Hobby Lobby presents a classic wait-and-see scenario. That said, one thing employers can surely expect is a lot more litigation. Take, for example, state laws mandating contraception coverage. At present, more than 25 states have laws requiring all health insurance plans that cover prescription drugs to also provide coverage for contraceptives. Many, but not all, of those laws have exemptions for employers with religious objections. Hobby Lobby opens the door for companies to challenge the validity of these laws as applied to corporations.

We can also expect a variety of legal challenges to government control over corporate behavior in the context of employment discrimination and other employment regulations. "We might see religious exercise challenges to compulsory vaccination programs, for example," says Harvey, "or to laws protecting employees from discrimination on the basis of sexual orientation or gender identity." Many states have already passed laws that protect employees from sexual orientation and gender identity discrimination, and Congress has been working to pass this kind of anti-discrimination legislation for several years. Although the most recent proposed legislation includes an exemption for religious organizations, "Hobby Lobby would seem to expand the number of institutions that might fall within that exemption, unless the government can show that the legislation is the least restrictive means to achieve its compelling interest in preventing employment discrimination," says Harvey.

Another interesting twist could emerge if female employees of Hobby Lobby (or other companies that stop offering contraceptive coverage) sue their employers for gender discrimination under Title VII of the Civil Rights Act of 1964. The groundwork for this type of claim was laid in a ruling by the Equal Employment Opportunity Commission (EEOC) in 2000, in which the agency held that an employer’s failure to provide contraception coverage in health insurance plans constituted unlawful discrimination against women in violation of Title VII.


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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