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 August 10, 2007
COURT RULES SUFFOLK COUNTY, NY'S "FAIR SHARE" LAW IS PREEMPTED BY ERISA The U.S. District Court for the Eastern District of New York recently ruled in Retail Industry Leaders Assoc. v. Suffolk County that the New York county's 2005 "fair share" law, requiring certain large employers to provide a specific level of health coverage for their workers or pay a penalty to the county, is preempted by the Employee Retirement Income Security Act (ERISA).1 This is the second federal case to evaluate a "fair share" law and conclude that it is preempted.2 Background The 2005 Suffolk County Fair Share for Health Care Act required certain large retail stores selling groceries, such as Wal-Mart, to make health care expenditures equivalent to not less than $3 per hour worked for their employees working in Suffolk County. Failure to comply would trigger civil penalties to the county and require the employer to pay to the county the shortfall needed to reach the required level of health expenditure.3 In April 2006, after the Retail Industry Leaders Association (RILA) filed a lawsuit on the grounds that the law was preempted by ERISA, the county amended the law, replacing the hourly expenditure requirement with a "public health cost rate" to be determined annually by the county. Employers covered by the law would be required to (1) make a minimum health care expenditure at least equal to the public health cost rate multiplied by the total number of hours worked by their employees in the county, or (2) pay a civil penalty to the county. The Decision In its decision that the county's law was preempted by ERISA, the court relied heavily on the reasoning in two federal court decisions in RILA's lawsuit concerning Maryland's "fair share" law. The court stated that the county law was substantially similar to the Maryland fair share law. As in the Maryland case, the court found that although the county's law did not mandate that employers increase contributions to ERISA plans, other options for meeting the minimum health care expenditure outside of an ERISA plan were not "meaningful alternatives." For example, the court pointed out that one such option, establishing health savings accounts (HSAs), requires individual employees to voluntarily establish the account on their own. There is no guarantee that the account would be created, the court said. The court concluded that the only rational choice for employers covered by this law was to restructure their ERISA plan and their recordkeeping to comply with the minimum spending threshold. This, the court stated, is effectively a mandate on these employers to increase their spending under their ERISA plan. This mandate would disrupt the employers' uniform administration of employee benefits because the employers would have to vary benefits just for certain New York employees. The court indicated that this is the type of result that ERISA preemption is designed to avoid. Outlook Whether ERISA preempts state and local fair share (also called pay-or-play) requirements will continue to be an issue as more states enact these types of laws. At least two other states, Massachusetts and Vermont, have passed variations of these fair share laws. Other states, such as California and Pennsylvania, are considering them.
Health plan sponsors should rely on their legal counsel for authoritative advice on the interpretation or application of laws and related litigation. Sibson Consulting can be retained to work with plan sponsors and their attorneys to revise health plans based on changes in federal, state or local law.
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