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Equal Benefits Law Loses A Round

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New York appeals court says state, federal law bar domestic partnership measure

The unanimous ruling by a five-judge panel of the New York Appellate Division striking down the city's Equal Benefits Law on March 15 is premised on two completely distinct legal theories—that the municipal ordinance is preempted by a state law on public contracting, and also preempted by the federal Employee Retirement Income Security Act, commonly known as ERISA.

The Equal Benefits Law, passed by the City Council over Mayor Michael Bloomberg's veto last year, provides that any business with more than $100,000 in city contracts has to provide employees with domestic partners identical benefits to those offered married employees. The ordinance is patterned on a similar law enacted by San Francisco during the 1990s.

After the Council overrode his veto, Bloomberg said he would not put the ordinance in effect while he litigated to get it struck down. Trying to preempt the mayor, the Council sought an injunction mandating enforcement of the ordinance unless it was declared invalid by a court. The Corporation Counsel argued in opposition for the city that the ordinance was invalid, but Justice Faviola A. Soto held that point irrelevant to the Council's demand that it be enforced until it was declared unconstitutional in a proper proceeding. Soto granted the injunction sought by the Council on December 1, but the order was stayed to give the city the chance to appeal.

The March 15 opinion was not attributed to any single judge. The appellate panel acknowledged that this sort of proceeding was not the usual venue for deciding on a statute’s validity, but said that Soto should have considered the city's arguments.

The court found the ordinance defective on two grounds. The first was that it could disqualify contractors who had not violated any state law. According to the court, the state's General Municipal Law, section 103(1), requires that local governments use a competitive bidding process to award contracts, in order to "protect the public fisc by obtaining the best work at the lowest possible price.” The court found that enforcement of the Equal Benefits Law would defeat this purpose by disqualifying "a class of potential bidders for a reason unrelated to the quality or price of the goods or services they offer."

New York State law preempts a local law if the local ordinance prohibits conduct permissible under state law or imposes "prerequisite 'additional restrictions' on rights under state law, so as to inhibit the operation of the state's general laws." Since the ordinance would interfere with the bidding process for reasons not having to do with price or quality, the court concluded that it must be struck down as preempted by state law.

The alternative ground cited by the court was more questionable.

ERISA, the federal employee benefits statute, strives for national uniformity in employee benefit plan administration by preempting any state or local law "affecting" employee benefits. The Council argued, as had the city of San Francisco in defense of its ordinance, that the ERISA provisions should only bar an attempt by the city to require businesses to adopt domestic partnership benefits. The Council argued that it merely adopted a policy that it would not contract with businesses who did substantial business with the city unless they provided such benefits, thereby giving businesses an incentive to adopt such plans if they want city contracts, but not requiring them as a general matter.

The court rejected this argument.

"Since Local Law 27 'mandate[s] employee benefit structures or their administration,' even if only conditionally, i.e., only if the vendor chooses to contract with the City," said the court, "it is connected with a core concern of ERISA, impermissibly interferes with its goal of uniform plan administration, and is thus preempted."

The court cited three cases for this proposition, two of which involved challenges to similar equal benefits ordinances adopted in Portland, Maine, and in San Francisco. In both of those cases, the federal courts ruled that employee benefits plans subject to ERISA regulation could not be covered by local equal benefit ordinances.

A federal district judge in San Francisco found that the equal benefits ordinance there would be preempted, at least with respect to ERISA-regulated benefits provided by the airlines. The analysis was complicated and turned in part on the city's extraordinary coercive power over the airlines through the city's operation of the municipal airport. Unlike some other vendors, the airlines could not provide any passenger service in the San Francisco market unless they contracted with the municipal airport. Thus, the court found that the San Francisco benefits ordinance, at least with respect to the airlines, was an attempt to regulate employee benefits and not merely an incentive to a contractor who had an option to do business elsewhere.

But the court did not declare the San Francisco ordinance totally preempted, holding that even the airlines would be subject to its terms with respect to non-ERISA benefits. ERISA applies only to employee benefit plans, like pension and funded medical insurance plans, but generally does not apply to things like medical leave, employee discounts and other "non-economic" benefits.

Thus, the New York court may have erred in finding that the city ordinance would be totally preempted by ERISA. The federal court in the San Francisco case left open the issue of whether city contracts for other goods and services where the city was not a monopoly were preempted. In the case of those contracts, it was more plausible to argue that the city was not regulating ERISA-regulated employee benefit plans, but merely acting as one customer among many providing incentives for employers to adopt partner benefits.

Several thousand private employers have adopted such benefits plans in order to contract with San Francisco—and Seattle and Los Angeles, which followed San Francisco's lead in adopting equal benefits ordinances.

Even if the New York court’s ERISA holding is flawed, however, the opinion is alternatively grounded on state law preemption, which is more difficult to contest.

In criticizing the holding, Empire State Pride Agenda argued, "If the court's thinking were accurate, no state and certainly not the city could ever question a vendor's decision to discriminate." This criticism is not strictly accurate, for both federal and state law directly outlaws various other forms of discrimination. State law preemption only applies to situations where the city law would forbid conduct that state law permits, and at present state law permits discrimination in benefits against domestic partners but does not permit discrimination on grounds of race, for example. And a city or state prohibition of race discrimination in employee benefits would not be preempted by federal ERISA because federal law also prohibits such discrimination.

The arguments are quite complicated. Council Speaker Gifford Miller announced that the Council will appeal to the Court of Appeals. The state preemption holding depends upon interpretive reasoning that can be contested, and the ERISA preemption holding is more clearly open to challenge, so it is not yet time to write an obituary for the Equal Benefits Law.

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Updated 5:17 pm, July 20, 2018
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