San Francisco’s Health Care Security Ordinance: A Step-By-Step Approach to Compliance

On Jan. 9, 2008, the Ninth Circuit Court of Appeals issued its decision in Golden Gate Restaurant Association v. City of San Francisco, permitting implementation of San Francisco's Health Care Security Ordinance (the“HCSO”). While aspects of the ordinance will continue to be challenged, it is now in effect and all companies with employees in San Francisco must comply.

Summary of the Health Care Security Ordinance (HCSO)

The HCSO requires that “covered employers” make specified “health care expenditures” on behalf of “covered employees.” Covered employers include for-profit companies with 20 or more employees and non-profit companies with 50 or more employees. Covered employees include any employee working in San Francisco who has been employed for 90 days and who works 10 or more hours per week (dropping to eight hours in 2009).

The health care expenditure requirements for 2008 and 2009 for each covered employee are:

To meet these requirements, covered employers may make payments to insurers or health care providers, may reimburse employees for their actual health care costs, or may make payments to the Healthy San Francisco program of the San Francisco Department of Public Health (DPH).

In addition to requiring that health care expenditures be made, the HCSO mandates that covered employers maintain certain records, provide certain notice to employees, and report compliance to the city.

Because the requirements of this ordinance can seem daunting, we recommend that employers approach compliance using the following step-by-step approach.

Step 1: Determine whether your company is a “covered employer”

Covered employers include all for-profit companies with 20 or more employees, and all non-profit companies with 50 or more employees, within the calendar quarter (beginning Jan. 1).

Specific considerations

• Your company does not have to be located within San Francisco to be a covered employer. You will be considered a covered employer if you are a for-profit company with 20 or more employees or a non-profit company with 50 or more employees regardless of where those employees work. If your company meets that standard, and any of your employees performs 10 or more hours of work per week within the geographic boundaries of San Francisco, you will be required to make health care expenditures on behalf of the covered employee(s).

All employees are counted in determining whether you are a covered employer. All employees are counted for coverage purposes regardless of their status (i.e. regular, part-time, seasonal, temporary, etc.)

• Fluctuating workforces may result in coverage. For businesses employing a fluctuating number of employees, coverage is determined based on the average number of employees performing work for compensation per week during the applicable quarter.

Step 2: Identify "covered employees"

A covered employee is any employee who has worked for the covered employer for more than 90 calendar days, and has performed 10 or more hours of work in a particular week within the geographic boundaries of San Francisco. Beginning Jan. 1, 2009, the number of hours worked within San Francisco will drop to eight.

Specific considerations

• The 90-day eligibility period does not have to be continuous. The regulations provide: (1) “For an employee who is separated from employment prior to completing the eligibility period, the prior days of employment shall count towards the eligibility period if the employee returns to work within one year of the most recent separation date; and (2) An employee who is separated from employment after completing the eligibility period shall not be required to complete a new eligibility period, if the employee is rehired within one year of the most recent separation date.”  

  In other words, if you have a seasonal employee who works from June 1 to July 30 every year, by July 1, 2009 you will be required to make health care expenditures on his or her behalf.
  

• The 90-day period includes leaves of absences to which the employee is legally entitled.
  
  
• Even seasonal, temporary, part-time, and agency employees are included. The regulations specify that “An employee's status or classification as seasonal, permanent or temporary, full-time or part-time, exempt or non-exempt, salaried or hourly, or contracted (whether employed directly by the employer or through a temporary staffing agency, leasing company, professional employer organization, or other entity) or commissioned shall not be considered in determining whether that employee is a covered employee.”
  
  Furthermore, “Employees made available to work through the services of a temporary staffing agency, leasing agency, professional employer organization, or other entity serving the same or similar function may or may not be considered employees of such entity. Both the client and the temporary staffing, leasing, professional employer, or similar entity may be considered an employer under this Ordinance, and each party shall have an obligation to ensure that the Employer Spending Requirement is met. [. . .] Whether an employee is simultaneously employed by more than one employer shall not impact a covered employer's responsibilities under this law.”
  
  In other words, unless they meet an exemption, anyone getting a W-2 is covered. If you contract with a staffing or leasing agency to provide workers, you are advised to communicate with that agency to confirm compliance.
  
  
• Work performed “within” San Francisco includes employees whose work requires “stops” in San Francisco. This does not include employees who simply travel through San Francisco, but does include employees who only work in San Francisco during part of their workday. An employee whose work requires stops in the City, such as to make pick-ups or deliveries, does work “within” San Francisco, and that employee's travel time within the City counts as time worked in San Francisco.
  
  
• There are exemptions for certain employees. Health care expenditures are not required for the following categories of otherwise covered employees:
  
  • Employees who waive coverage because they receive health care through another employer, or a spouse, domestic partner or parent's health insurance plan.
    
    
  • Managers, supervisors, and confidential employees earning more than $76,851 annually (or $36.95 hourly) in 2008.
    
    
  • A “managerial employee" is an employee who has authority to formulate, determine or effectuate employer policies by expressing and making operative the decisions of the employer and who has discretion in the performance of his/her job independent of the employer's established policies.
    
    
  • A “supervisory employee” is an employee who has authority, in the interest of the employer, to hire, transfer, suspend, lay off, recall, promote, discharge, assign, reward or discipline other employees, or the responsibility to direct them, or to adjust their grievances, or effectively to recommend any such action, if the exercise of this authority or responsibility is not of a merely routine or clerical nature, but requires the use of independent judgment.
    
    
  • A “confidential employee” is an employee who acts in a confidential capacity to formulate, determine and effectuate management policies with regard to labor relations, or who regularly substitutes for employees having such duties.
    
    
  • Employees who are covered by Medicare or TRICARE/CHAMPUS.
    
    
  • Employees who are employed by a non-profit corporation for up to one year as trainees in a bona fide training program consistent with federal law.
    
    
  • Employees who receive health care coverage because their employers comply with the City's public contracting laws.
    
    
  • Bona fide independent contractors are not covered employees. The legal test for determining whether an individual is truly an “independent contractor” is intensely fact-specific. Employers should obtain advice from a legal professional if they believe certain individuals qualify for the “independent contractor” exemption.

Step 3: Distribute waiver forms to all covered employees

Employees may lawfully waive coverage under the HCSO if they receive health care services through another employer, either as an employee of that other employer or through a spouse, domestic partner or parent employed by that other employer. To support a waiver, the employee must complete a voluntary waiver request form.

Specific considerations

• San Francisco's Office of Labor Standards Enforcement (OLSE) has provided a form: http://sfgsa.org/index.aspx?page=418. Although employers are not required to use this form, failure to comply with the “knowing waiver” requirements contained in the form will void the waiver. We recommend using the form.
  
  
• A new waiver must be signed each year.
  
  
• Employees have the right to revoke a waiver at any time.

Step 4: Examine your existing health insurance benefit plans and options

The HCSO permits employers to meet their health care expenditure obligations through a variety of means. Therefore, you should examine each component of your benefit offerings to see what you are already providing. If you are meeting or exceeding your health care expenditure obligation for covered employees, skip Step 5 and go to Step 6.

Step 5: Determine the most efficient and cost-effective method of compliance for your organization 

Some employers may find it easiest to modify the coverage components of their existing health plan and benefit options to comply with the HCSO. Others may find a combination of health care expenditures is best. Still others may determine the best option is to make payments to the City's Healthy San Francisco plan.

Specific considerations

• Employers can meet their health care expenditure” obligations in a number of ways:
  
  • Payments to a health insurer to provide coverage for covered employees;
    
    
  • Contributions on behalf covered employees to a health spending account, such as a health reimbursement arrangement, a flexible spending account, or a medical/health savings account;
    
    
  • Cash reimbursements to covered employees for expenses incurred in the purchase of health care services, such as doctor and pharmacy bills; and
    
    
  • Paying a health care provider directly for services rendered to covered employees.
• Employers who do not wish to meet their obligations through private payments may make contributions to the Healthy San Francisco program. Payments to the DPH are due within 30 days of the end of each quarter. The DPH has created a web site for employers who want to use this option: http://www.healthysanfrancisco.org/employers/.
  
  


• Some payments cannot be counted. The regulations prohibit employers from counting payments related to workers' compensation claims or “in lieu” of benefits.
  
  
• Merely providing employees access to a health plan that would satisfy the requirements of the HCSO is not enough. If employees “opt out” of coverage under an employer's health plan (for example, because the employee's portion of the premium is more than the employee wants to pay), the required health care expenditures on behalf of that employee still must be made.

Step 6: Develop a tracking system

Expenditures are due for every hour a covered employee is paid, and employers are required to keep records demonstrating compliance. Therefore, a tracking system is essential.

Specific considerations

• “Hours paid” includes paid vacation hours, paid time off, and paid sick leave hours—any form of payment to an employee.
  
  
• “Hours paid” for which expenditures are due are subject to caps. The maximum number of hours for which expenditures are required is 172 per month and 516 per quarter. For salaried employees, “hours paid” are to be calculated based on a 40-hour workweek
  
  
• The tracking system should incorporate the 90-day concept for employees with breaks in service. See Step 2 above.
  
  
• Even terminated employees must be tracked. Expenditures are due each quarter for any employee who, after being employed for 90 days, worked at least 10 hours in a particular week during the quarter, even if that employee was terminated during the quarter.
  
  Note: PTO and vacation pay are counted in determining “hours paid.” Therefore, a reasonable reading of the regulations would require contributions on behalf of an employee who worked no hours during the quarter, but was paid more than 10 hours of PTO or vacation pay as a result of the employee's termination from employment.

Step 7: Establish record-keeping and notice procedures

The HCSO contains specific recordkeeping and notice obligations. Failure to maintain records as required results in a presumption that the required expenditures were not made.

Specific considerations

• Every covered employer with a covered employee is required to keep and maintain the following records for a period of at least four years:
  
  • Itemized pay statements, as mandated by California Labor Code Section 226;
    
    
  • The employee's address, telephone number, date of first day of work;
    
    
  • Records sufficient to establish compliance with the expenditure requirements of the HCSO;
    
    
  • Signed waiver forms for every employee for whom the employer seeks to claim an exemption; and
    
    
  • A copy of all “Employee City Option Deposit Confirmation” forms, for employers who elect this option.
• Employers who make payments to the Healthy San Francisco program are required to provide a quarterly notice to each employee on whose behalf payments were made. The notice must be made on this form: http://sfgsa.org/index.aspx?page=418.
  
  
• Every covered employer is required to provide information to the City regarding its health care expenditures on an annual basis. The information must be reported on the OLSE's “HCSO Mandatory Annual Reporting Form,” which will be mailed to all businesses registered to do business in San Francisco.

As a final note, employers should be aware that the HCSO prohibits employers from discriminating against an employee based on whether the employee possesses health insurance coverage. In addition, the HCSO prohibits employers from retaliating against any employee for exercise of rights under the HCSO, or for participating in an investigation related to enforcement of the HCSO.

This step-by-step guide is intended to provide useful information to employers that have employees in San Francisco and therefore potentially must comply with the HCSO. If you have questions, or for specific advice about a particular situation, you can consult the web site of San Francisco's Office of Labor Standards and Enforcement http://sfgsa.org/index.aspx?page=418 or call one of us.