Legal Analysis of Maryland Health Benefits Ruling
Analysis
QUESTION PRESENTED
This memorandum examines the implications of the recent ruling in the Maryland health benefits
law case, Retail Industry Leaders Assn v. Fielder, Civ. No. JFM-06-316, 2006 WL 2007654 (D.
Md. July 19, 2006), for the proposed Chicago retail living wage ordinance. Specifically, it
addresses whether ERISA (the federal Employee Retirement Income Security Act), which was
found to preempt the Maryland law, would pose any obstacles for the proposed living wage
ordinance.
MEMORANDUM
TO: Chicago City Council
FROM: Brennan Center for Justice at New York University School of Law
SUBJECT: Legal Analysis of Implications of Maryland Health Benefits Ruling for Proposed
Chicago Retail Living Wage Ordinance
DATE: July 22, 2006
For more information, please contact Paul Sonn, (917) 566-0680,
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SHORT ANSWER
Contrary to the assertion made by the Chicago Tribune in its editorial on July 22 (Chicago, take
a look at Maryland), Chicagos proposed large retail living wage ordinance is not preempted by
ERISA. The Maryland law was a straight health benefits mandate. The trial court found that the
Maryland law was preempted by ERISA because it effectively forced covered employers to
modify their health benefits offerings in order to comply with the law.
By contrast, it is well-established that combined wage and benefits laws that require employers
to provide a minimum level of compensation, and give them the option of providing some of that
compensation in the form of health, vacation, disability or other benefits, are not preempted by
ERISA. To date, four federal appeals courts have ruled on whether ERISA preempts such laws,
and all four have ruled that they are not so preempted.
The proposed Chicago ordinance follows exactly the structure of the wage laws that have been
upheld by the courts: it establishes a base minimum wage for large retailers set at $9.25 per
hour in the first year and asks employers to provide an additional $1.50 per hour, which can be
provided in the form of supplemental wages, benefits, or any combination thereof. Whether to
provide any benefits at all, and what kind of benefits to provide paid vacation days, health or
other benefits, or just supplemental wages is left to the employers discretion.
This feature was key to the rulings upholding combined wage and benefits laws and
distinguishes the Chicago ordinance from the Maryland law. The fact that the Chicago
ordinance follows this approach means it will similarly survive ERISA preemption.
LEGAL ANALYSIS
1. The Federal Courts Have Repeatedly Held That Combined Wage and Benefits Laws
Are Not Preempted by ERISA
ERISA is a federal statute that regulates certain categories of employee benefits plans (known as
ERISA plans) most significantly, health benefits plans. ERISA bars states and localities
from adopting laws that require employers to establish or modify ERISA plans. Significantly,
however, ERISA does not regulate all employee benefits. Paid vacation, paid sick leave,
severance pay, and health savings accounts are common examples of employee benefits that are
generally not considered ERISA plans. See Massachusetts v. Morash, 490 U.S. 107 (1989); see
also Cal. Div. of Labor Standards Enft v. Dillingham Constr., 519 U.S. 316, 326-27 (1997)
(distinguishing between ERISA and non-ERISA benefits). Just as importantly, wages do not
constitute ERISA plans either.
The fact that wages and many types of benefits do not constitute ERISA plans explains why the
federal courts have repeatedly upheld laws that establish combined wage and benefits standards.
In all four recent cases where the U.S. Courts of Appeals have addressed such laws, the courts
have upheld the laws under ERISA. See Burgio v. N.Y.S. Dept of Labor, 107 F.3d 1000 (2d Cir.
1997); WSB Electric v. Curry, 88 F.3d 788 (9th Cir. 1996); Minnesota Chapter of Associated
Builders and Contractors, Inc. v. Minnesota Department of Labor and Industry, 47 F.3d 975 (8th
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Cir. 1995); Keystone Chapter, Assd Builders & Contractors Inc. v. Foley, 37 F.3d 945 (3rd Cir.
1994), cert. denied, 115 S. Ct. 1393 (1995). The U.S. Seventh Circuit Court of Appeals, which
covers Chicago, has yet to address the issue. But there is no reason to believe that it would reach
a different conclusion from the other federal appellate courts.1
These cases all involved prevailing wage laws that established combined wage and benefits
standards for construction contractors performing public works projects. Employers challenged
the laws as preempted by ERISA. Each of the four laws set a minimum standard for employers
hourly compensation packages. Under each of the four laws, employers could provide the whole
package in wages, or could provide a portion in benefits of any sort if the employer so chose.
See, e.g., Minnesota Chapter, 47 F.3d at 977 ([a]n employer can divide the amount between
wages and benefits as it chooses, so long as the combined total meets or exceeds the prevailing
wage rate); id. at 980 (benefits and wages can be used interchangeably); Burgio, 107 F.3d at
1009 (an employer may provide supplemental benefits in any form or combination so long as
the sum total is not less than locally prevailing benefits).
An employers total liability would thus be the same whether the [employer] had bargained to
provide benefits exclusively through ERISA plans, exclusively through non-ERISA plans,
through additional cash wages, or through some combination of the three. Burgio, 107 F.3d at
1009. Because of this, The [combined wage and benefits laws] do[] not force employers to
provide any particular employee benefits or plans, to alter their existing plans, or to even provide
ERISA plans or employee benefits at all. WSB Electric, 88 F.3d at 793.
This feature the fact that employers can mix and match wages, non-ERISA benefits, and
ERISA benefits was crucial to the courts in finding that these laws comply with ERISA. As
the Eighth Circuit explained, [A state or local government] can set a minimum cash wage, and
allow an employer the option of paying part of that in benefits, without triggering ERISA
preemption. Minnesota Chapter, 47 F.3d at 980 (quoting Keystone, 37 F.3d at 961). Where a
legal requirement may be easily satisfied through means unconnected to ERISA plans, and only
relates to ERISA plans at the election of the employer, it affects employee welfare benefit plans
in too tenuous, remote, or peripheral a manner to warrant a finding that the law relates to the
plan and so is not preempted. Keystone, 37 F.3d at 960. Accord Burgio, 107 F.3d at 1009;
WSB Electric, 88 F.3d at 794.
2. The Chicago Retail Living Wage Ordinance Follows Exactly the Structure of the
Combined Wage and Benefits Laws That Have Been Upheld by the Courts
The proposed Chicago retail living wage ordinance is structurally identical to the combined
wage and benefits laws that have been upheld by the Second, Third, Eighth and Ninth Circuit
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One federal court of appeals, the Second Circuit, had held in 1989 that ERISA preempted combined wage and
benefits laws. See General Electric Co. v. N.Y. State Dept of Labor, 891 F.2d 25 (2d Cir. 1989). However, after
that ruling, the U.S. Supreme Court issued a series of new opinions clarifying the ERISA preemption standard and
New York modified its law to provide employers greater flexibility in mixing and matching wages and benefits. In
light of those developments, the Second Circuit subsequently reversed itself and ruled in Burgio v. N.Y.S. Dept of
Labor, 107 F.3d 1000 (2d Cir. 1997), that combined wage and benefits laws are not preempted by ERISA.
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Courts of Appeals. It establishes a base minimum wage for large retailers set at $9.25 per hour
in the first year and then asks employers to provide an additional $1.50 per hour, which can be
provided in the form of supplemental wages, benefits, or any combination thereof. Employers
are allowed to mix and match wages, non-ERISA benefits, and ERISA benefits. Whether to
provide any benefits at all, and what kind of benefits to provide paid vacation days, health or
other benefits, or just supplemental wages are left to the employers discretion. Because the
proposed ordinance mirrors the combined wage and benefits laws that have been approved under
ERISA by the federal courts, one can expect that it would similarly be upheld.
The fact that the combined wage and benefits laws reviewed by the federal courts of appeals
have to date been prevailing wage laws that applied to businesses performing public contracts
rather than direct regulation of private sector employers who do not receive public contracts as
under the Chicago ordinance does not matter for ERISA purposes. None of the analysis in the
reported cases depended in any way on the fact that the laws regulated public contractors. See,
e.g., Council of the City of N.Y. v. Bloomberg, 6 N.Y.3d 380, 846 N.E.2d 433 (2006) (holding
that ERISA imposes the same limits on regulations that apply to government contractors as on
those that regulate private employers).
3. Unlike the Combined Wage and Benefits Laws That Have Been Approved Under
ERISA, the Maryland Law Was a Straight Health Benefits Mandate
Unlike the combined wage and benefits laws upheld by the federal courts of appeals, the
Maryland health benefits law addressed only health benefits. It established a requirement that
covered for-profit employers had to spend at least 8% of their payroll on providing health
benefits (which are generally an ERISA benefit), or pay the balance in the form of a tax to the
state. Fielder, 2006 WL 2007654, at *1. The Maryland law did not allow employers the option
of meeting the requiring by providing wages or non-ERISA plan benefits such as paid vacation,
paid sick leave, severance pay, etc.
The court interpreted the Maryland law as impos[ing] [an] employee health or welfare
mandate[], and on that ground ruled that it was preempted by ERISA. Id. at *9-*10. In this
regard, it was similar to an old federal court of appeals case that had struck down a combined
wage and benefits law that had required employers to provide a specific amount of health
benefits, and had not allowed employers the flexibility to mix and match wages, non-ERISA
benefits and ERISA benefits. See General Electric Co. v. N.Y. State Dept of Labor, 891 F.2d 25
(2d Cir. 1989).
The defenders of the Maryland law had argued that it was not actually a mandate, since
employers had the option of paying a tax to the state rather than providing the mandated benefits.
However, the court held that such an option did alter the basic fact that the law was a health
benefits mandate. Fielder, 2006 WL 2007654, at *12.
Regardless of whether the Fielder courts ruling is correct and there are good reasons to
questions aspects of it it does not change in any way the established law regarding combined
wage and benefits laws: that [A state or local government] can set a minimum cash wage, and
allow an employer the option of paying part of that in benefits, without triggering ERISA
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preemption. Minnesota Chapter, 47 F.3d at 980 (quoting Keystone, 37 F.3d at 961). Because
the proposed Chicago ordinance mirrors the wage and benefits laws that have consistently been
upheld by the federal appeals courts, there is little reason to fear that it would be preempted by
ERISA.