Fourth
Circuit Rules that Maryland’s Fair Share Health Care
Fund Act
(“The Wal-Mart Bill”) is Preempted by ERISA
By
Bruce S. Harrison and Teresa D. Teare
Appeared in Bender's Labor & Employment Bulletin, June
2007
Introduction
In the midst of a campaign to force Wal-Mart Stores, Inc.
(“Wal-Mart”) to increase health insurance benefits,
the Maryland General Assembly ostensibly out of concern
for its 16,000 citizens employed by Wal-Mart, enacted the
Fair Share Health Care Fund Act (the “Fair Share Act”
or “Act”). The Act would have required Wal-Mart
to spend a fixed minimum amount on employee health care.
(MD. CODE ANN., LAB. & EMPL. §§ 8.5-101-.107;
see also Retail Indus. Leaders Ass’n v. Fielder,
No. 06-1901, 2007 WL 102157, at *1 (4th Cir. Jan. 17, 2007).)
Although the Act did not by name single out Wal-Mart, the
obvious intent of the General Assembly was that the Act
encompass only the huge national retailer. (Retail Indus.
Leaders, No. 06-1901, 2007 WL 102157, at *1.) By it
language, the Act required employers with 10,000 or more
Maryland employees (MD. CODE ANN., LAB. & EMPL. §
8.5-102) to spend at least 8% of their total payrolls on
employees’ health insurance costs. (§ 8.5-104.
As an alternative, the employer could elect to pay the amount
that the spending fell short to the State of Maryland.)
Of all employers in Maryland, only Wal-Mart fell subject
to the Act. (Retail Indus. Leaders, No. 06-1901,
2007 WL 102157, at *1.)
Wal-Mart, and the retail industry in general, were concerned
about the implications of the Act. Thus, the Retail Industry
Leaders Association (“RILA”) (RILA is a retail
trade association whose members include Wal-Mart, Best Buy
Company, Target Corporation, Lowe’s Companies, and
IKEA), of which Wal-Mart is a member, brought a declaratory
judgment action against James D. Fielder, Jr., the Maryland
Secretary of Labor, Licensing, and Regulation. (The case
was brought in the United States District Court for the
District of Maryland in 2006. See Retail Industry Leaders
Ass’n v. Fielder, 435 F. Supp. 2d 481 (D. Md.
2006).) RILA successfully sought a declaration that, inter
alia, the Act was preempted by the Employee Retirement
Income Security Act of 1974 (“ERISA”). (RILA
also argued that the Act violated the Equal Protection Clause
of the U.S. Constitution. See Retail Industry Leaders,
435 F. Supp. 2d at 484. The Court of Appeals, however, did
not reach the merits of the equal protection argument on
appeal.)
The U.S. Court of Appeals for the Fourth Circuit, in Retail
Industry Leaders Ass’n v. Fielder, No. 06-1901,
2007 WL 102157, at *1, upheld the decision of the U.S. District
Court for the District of Maryland and found that because
Maryland’s Fair Share Act effectively would require
employers to restructure their employee health care plans,
it conflicted ERISA’s goal of permitting uniform nationwide
administration of health care plans. Thus, the Act was an
invalid exercise of state power.
Promulgation of the Maryland
Fair Share Health Care Fund Act
Before it enacted the Fair Share Act, the Maryland General
Assembly heard testimony about the rising cost of the Maryland
Medical Assistance Program, Id., specifically that
between fiscal years 2003 and 2006, annual expenditures
on the program increased from $3.46 billion to $4.7 billion.
Id. The General Assembly also heard testimony that
Wal-Mart, in particular, provided its employees with a substandard
level of healthcare benefits, forcing many Wal-Mart employees
to depend on state-subsidized healthcare programs. Id.
Further, the Assembly considered allegation that in
other states Wal-Mart employees routinely ended up on public
health programs such as Medicaid; that more than 10,000
children of Georgia Wal-Mart employees were enrolled in
the state’s children’s health insurance program
at a cost of nearly $10 million annually; that a North Carolina
hospital found that 31% of 1,900 patients who said they
were Wal-Mart employees were enrolled in Medicaid; and,
that while Wal-Mart’s competitor, Costo Wholesale,
provides health insurance to 96% of eligible employees,
Wal-Mart provides health care to 45% of its total workforce.
Id.
In response to what the General Assembly characterized
as a lack of social responsibility on the part of Wal-Mart,
the Fair Share Act was enacted in January 2006 and was to
become effective on January 1, 2007. As noted above, the
Act would have applied to employers that have at least 10,000
employees in Maryland, and would have imposed spending and
reporting requirements on such employers. Specifically,
the Act read:
An employer that is not organized as a nonprofit organization
and does not spend up to 8% of the total wages paid
to employees in the State on health insurance costs
shall pay to the Secretary an amount equal to the difference
between what the employer spends for health insurance
costs and an amount equal to 8% of the total wages paid
to employees in the State.
MD. CODE ANN., LAB. & EMPL. § 8.5-104(b). Moreover,
if an employer covered under the Act failed to make the
required payment, it would have been subject to a civil
penalty of $250,000. § 8.5-105(b).
The Act also contained reporting requirements. Covered
employers were required to submit an annual report on January
1 of each year to the Secretary of Labor, Licensing, and
Regulation. § 8.5-103(a)(1). It also required that
the employer disclose how many employees it had for the
prior year, its health insurance costs, and the percentage
of compensation it spent on health insurance costs for the
year immediately preceding the previous calendar year. §
8.5- 103(a)(1).
Wal-Mart was the only employer in Maryland covered by
the Act. Three other employers -- Johns Hopkins University,
Giant Food, and Northrop Grumman -- employed more than the
minimum 10,000 employees; however, the manner in which the
legislation was drafted excluded them from the Act’s
provisions. (Retail Indus. Leaders, No. 06-1901,
2007 WL 102157, at *2.) Specifically, Johns Hopkins, as
a nonprofit organization, was subject to a lower 6% spending
threshold, which it satisfied. Id. Giant Food,
which employs unionized workers, spends over the 8% threshold
on health insurance. Id. Finally, Northrop Grumman,
a defense contractor, was subject to the minimum spending
requirement in an earlier version of the Act, but the General
Assembly included an amendment that effectively excluded
Northrop Grumman based on the amount of high-salaried employees
it employed. Id.
Court of Appeals for the Fourth
Circuit’s Opinion in light of ERISA
ERISA provides for comprehensive regulation of the benefits
by employers to their employees. Id. While ERISA
does not mandate that employers provide specific employee
benefits (Id. at *8 (quoting Curtiss-Wright
Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995)), it
does regulate the employee benefit plans that an employer
chooses to establish by setting uniform standards and rules
concerning reporting. Id. at *8 (quoting Curtiss-Wright
Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995)). Furthermore,
the majority of healthcare benefits that an employer extends
to its employees qualify as an “employee welfare benefit
plan,” and therefore come within the purview of ERISA.
See also 29 U.S.C.A. § 1002(a) defining “employee
welfare benefit plan” as:
“any plan, fund, or program… established
or maintained by an employer or by an employee organization,
or by both, to the extent that such plan, fund, or program
was established or is maintained for the purpose of
providing for its participants or their beneficiaries,
through the purchase of insurance or otherwise, (A)
medical, surgical, or hospital care or benefits, or
benefits in the event of sickness, accident, disability,
death or unemployment, or vacation benefits, apprenticeship
or other training programs, or day care centers, scholarship
funds, or prepaid legal services….”
The Court of Appeals observed that Congress enacted ERISA
so that there would be a uniform regulatory regime covering
employee benefit plans (Retail Industry Leaders,
No. 06-1901, 2007 WL 102157, at *8 (citations omitted)),
and thus ERISA was intended to preempt “any and all
State laws insofar as they may now or hereafter relate to
any employee benefit plan” covered by ERISA. 29 U.S.C.
§ 1144(a). The fundamental reason for the preemption
provision, as the Court noted, was to minimize the administrative
and financial burden of complying with conflicting statutes
and regulations. (Retail Industry Leaders, No.
06-1901, 2007 WL 102157, at *8 (quoting Ingersoll-Rand
Co. v. McClendon, 498 U.S. 133, 142 (1990)). That is,
if ERISA did not contain a preemption clause, employers
would be heavily burdened in tailoring their plans to comply
with each specific state or local requirement pertaining
to health care.
The preemption provision of ERISA specifically states
that the provisions of ERISA “shall supersede any
and all State laws insofar as they may now or hereafter
relate to any employee benefit plan described in section
1003(a) of this title….” 29 U.S.C.A. §
1144(a). Accordingly, it covers all laws that “relate
to” an ERISA plan. 29 U.S.C.A. § 1144(a). The
Supreme Court has found that the provision is “clearly
expansive” (Retail Industry Leaders, No.
06-1901, 2007 WL 102157, at *9 (citation omitted)) in that
a law “relates to” an ERISA plan if it has a
“connection with” or “reference to”
such a plan. Id. (citing Shaw v. Delta Air
Lines, Inc., 463 U.S. 85, 97 (1983)).The Court of Appeals
in Retail Industry Leaders emphasized that a state
law will have an impermissible “connection with”
an ERISA plan if it directly regulates or effectively mandates
some element of the structure or administration of employers’
ERISA plans.
The State argued that the nature and effect of the Act
was part of the comprehensive scheme for planning, providing,
and financing health care for the citizens of Maryland,
and therefore was not “related to” ERISA. Id.
at *7. Rather, it contended that the Act simply imposed
a payroll tax credit on employers. Id. at *6. The
Court of Appeals found this argument unpersuasive and in
conflict with the provisions of the Act. The Court noted
that given the legislative history, the Fair Share Act was
aimed at requiring covered employers to provide medical
benefits to employees (Id. at *12), and not generating
revenue for the Maryland Medical Assistance Program.
Although technically employers would have an option to
pay the State or provide more health care, the Court of
Appeals pointed out that this was not a genuine option.
Rather, the Court noted that any reasonable employer would
spend the money on the employees’ healthcare. Id.
at *11. An employer “only stands to gain from increasing
the compensation it offers employees through improved retention
and performance of present employees and the ability to
attract more and better new employees.” Id. On
the other hand, the employer would gain nothing by paying
the State and, as the Court noted, would likely suffer from
such things as lower employee morale and increased public
condemnation.” Id. Therefore, given the
true intent of the Act and the options presented to covered
employers, the Act unmistakably required employers to structure
their ERISA healthcare plans so as to meet the minimum spending
threshold.
The Court of Appeals, therefore, found that the Act would
disrupt employers’ uniform administration of employee
benefit plans on a nationwide basis, in conflict with ERISA.
Further, the Court noted that because Wal-Mart does not
presently allocate its contributions to ERISA plans or other
healthcare spending by State, the Fair Share Act would require
it to segregate a separate pool of expenditures for Maryland
employees. Id. at 12.
The Court further predicted that other States and local
governments would seek to promulgate healthcare spending
mandates that would clash with the Fair Share Act. Id.
In effect, Wal-Mart and any other employers affected
would have to tailor its healthcare benefit plans to each
specific State, and even to specific municipalities and
counties. The court stated that this was “precisely
the regulatory balkanization that Congress sought to avoid
by enacting ERISA’s preemption provision.” Id.
(citing Shaw v. Delta Air Lines, Inc., 463 U.S.
85, 98-100 (1983)).
Impact of the Court’s
Decision
Maryland is not the only State seeking to reform healthcare
and targeting large companies like Wal-Mart. Sixteen other
States have introduced or are considering healthcare reform
bills similar to Maryland’s Act. These include California,
Florida, Georgia, Kansas, Kentucky, Michigan, Minnesota,
Missouri, New Jersey, Ohio, Oklahoma, Rhode Island, Tennessee,
Virginia and West Virginia. Other models of healthcare reform
have been introduced and enacted into law, including in
Massachusetts and in two New York counties. States and local
governments are reacting to an employer-based healthcare
system that is not cohesive and leaves many citizens uninsured.
For that reason, there is a belief among legislators that
businesses have a social responsibility to provide adequate
healthcare benefits, and further that large companies that
receive millions of dollars in tax benefits from the government
should step up to the plate and establish a precedent.
As demonstrated in Retail Industry Leaders Ass’n
v. Fielder, State and local legislation that broadly
relate to ERISA-governed benefits will likely conflict with
ERISA’s preemption clause. Maryland’s Fair Share
Health Care Fund Act did just that: it gave employers falling
under its purview no reasonable choice but to comply with
its spending and reporting requirements. The illusory choice
under the Maryland plan of paying the difference to the
State was not enough to circumvent ERISA’s preemption.
If employers like Wal-Mart are to be required to reform
and streamline their benefits then the impetus will have
to come from federal legislation.
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