San Francisco "Play or Pay" Law Upheld

Yesterday, the U.S. Court of Appeals for the Ninth Circuit upheld a San Francisco ordinance requiring for-profit employers with 20 or more employees to contribute a specified portion of employees' wages for health insurance or pay a fee to the City's "Healthy San Francisco" program. The ordinance, which took effect on January 9, 2008, was challenged by the Golden Gate Restaurant Association on the basis of ERISA preemption.

The trial court granted the restauranteurs' requested injunction, concluding that the law has a "connection with" or "reference to" employee benefits plans, thus meeting the broad "relate[s] to" preemption language in the ERISA statute. The Ninth Circuit had previously stayed the trial court's injunction and yesterday held similarly on the merits. Some restaurants have imposed menu surcharges, reflecting the added cost.

The decision creates a circuit split with the Fourth Circuit's 2007 decision in the "Wal-Mart case," Retail Industry Leaders Ass'n v. Fielder, holding that Maryland's pay or play law, applicable to employers with 10,000 or more Maryland employees spend at least 8% of payroll on employee health benefits or remit the spending shortfall to the State, was preempted because it directly regulated how employers (or at least one major employer) structured their employee health plans.