Federal Court Finds Maryland's "Wal-Mart Law" Preempted by ERISA

June 5, 2008 — 1,119 views  

On July 19, 2006, Judge J. Frederick Motz of the U.S. District Court for the District of Maryland ruled that Maryland’s so-called “Wal-Mart law,” requiring expenditure of 8% of payroll on health care, is preempted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001, et seq. (“ERISA”). Retail Industry Leaders Association v. Fielder, et al. Civ. No. JFM-06-316.

The Fair Share Health-Care Fund Act, Md. Code Ann., Lab. & Empl. § 8.5-101, et seq. (“Fair Share Act”), was enacted in January of this year and was to become effective January 1, 2007. By its terms, the Fair Share Act applies to non-governmental employers of 10,000 or more people in Maryland, but effectively covers only Wal-Mart Stores, Inc. The Fair Share Act requires that a for-profit employer that “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.” The Fair Share Act also requires certain reporting and disclosure requirements separate from those required under ERISA.

Only four non-governmental entities employ 10,000 or more in Maryland: Johns Hopkins University, Northrop Grumman Corp., Giant Food, Inc. and Wal-Mart. Johns Hopkins, as a non-profit, meets a lower 6% standard for such institutions set by the Act. Northrop Grumman successfully lobbied for an exclusion for compensation paid above the Maryland median income, thus permitting Northrop Grumman to meet the 8% standard. Giant Food, which actively lobbied for passage of the law, spends well over 8% of wages to Maryland employees on healthcare. Wal-Mart was thus the clear target of this legislation.

The Retail Industry Leaders Association (“RILA”), of which Wal-Mart is a member, sued Maryland’s Secretary of Labor for a declaratory judgment that the Fair Share Act is preempted by ERISA and also violates the Equal Protection Clause of the U.S. Constitution.

Judge Motz rejected several procedural challenges to RILA’s declaratory judgment action, including whether RILA had standing to challenge the Fair Share Act, whether the case was ripe for judicial review, and whether the Fair Share Act imposed a “tax” protected by the federal Tax Injunction Act, which prohibits federal courts from interfering with the collection of State taxes.

The Court ruled that ERISA preempted the Fair Share Act under Shaw v. Delta Airlines, Inc., 463 U.S. 85, 96-97 (1983). The Act had a “connection with” ERISA plans because the law’s intent and effect were to coerce Wal-Mart to increase its expenditures to its ERISA health plan. The Court rejected arguments that Wal-Mart could comply with the law outside of its ERISA plan, reasoning that other options for compliance (contributions to voluntary health savings accounts, on-site first aid facilities and payments to the state fund) were not practical options for Wal-Mart.

Judge Motz found that, without preemption, the Fair Share Act could contribute to a multiplicity of healthcare plan regulation, such as “fair share" laws already adopted by New York City and Suffolk County, New York. The Court noted, however, that recent Massachusetts legislation “addresses health care issues comprehensively and in a manner that arguably has only incidental effects on ERISA plans,” and suggested that it would be “strongly in the public interest” to permit states to “experiment” in this area.

The Court distinguished the Fair Share Act from statutes held not preempted by ERISA in earlier Supreme Court decisions. See New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co, 514 U.S. 645 (1995); Cal. Div. of Labor Standards Enforcement v. Dillingham Construction, NA, 519 U.S. 360 (1997); and DeBuono v. NYSA-ILA Medical and Clerical Services Fund, 520 U.S. 806 (1997). Judge Motz noted:

The [Fair Share Act] is not merely tangentially related to ERISA plans, but is focused upon them. Indeed, as the legislative history makes clear, the Fair Share Act is targeted directly at the ERISA plan of a particular employer. Moreover, the economic effect of the Fair Share Act upon Wal-Mart's ERISA plan could not be more direct: it would require Wal-Mart to increase its health care benefits for Maryland employees and to administer its plan in such a fashion as to ensure that the statutory spending required by the Act is met.

Although RILA prevailed on ERISA preemption, the Court found that the law did not violate the Equal Protection Clause of the U.S. Constitution. Noting that the Equal Protection Clause does not permit courts to second-guess the wisdom, fairness or logic of a legislative decision, the Court found that the distinctions drawn by the Maryland General Assembly were not necessarily irrational, and that the fact that Wal-Mart was the only entity subject to the law was not sufficient for an equal protection claim.

The Court's ERISA analysis, if upheld on appeal, will help employers challenge similar existing and proposed legislation, including the Chicago “big-box” retail store ordinance expected to be voted upon July 26. If adopted, this ordinance would initially raise the local minimum wage to $9.25 per hour, and would also give workers $1.50 per hour in benefits, at stores of at least 90,000 square feet that are owned by retailers having $1 billion in sales.

Organized labor will continue to promote and defend these laws, and Maryland officials have already announced their intent to appeal Judge Motz’s decision to the Court of Appeals for the Fourth Circuit.