• Health and Welfare: San Francisco Health Care Security Ordinance Enforcement Initiative
  • April 1, 2013 | Authors: Eva P. McComas; Gary G. Quintiere
  • Law Firm: Miller & Chevalier Chartered - Washington Office
  • San Francisco has recently signaled that employers failing to observe both the letter and spirit of its Health Care Security Ordinance (SF HCSO) will be dealt with sternly. On January 25, 2013, the San Francisco City Attorney announced an enforcement initiative against San Francisco restaurants and other businesses that imposed a customer surcharge in order to cover their costs for complying with the requirements of the SF HCSO. Although these employers followed a practice that met the requirements of the SF HCSO, the City Attorney has threatened to charge them with consumer fraud unless they agree to a settlement offer described below.

    The SF HCSO, which became effective in 2008, requires certain San Francisco businesses to incur health care expenditures of a specified amount for employees who work a minimum number of hours per week. In response to the SF HCSO, some San Francisco restaurants imposed a health care surcharge on each customer's bill, such as four percent of each customer bill. According to the San Francisco Office of Labor Standards Enforcement (OLSE) Analysis of the Health Care Security Ordinance, 2011 Annual Reporting Forms, issued August 23, 2012, 172 businesses imposed a surcharge on customers' bills in 2011. These 172 businesses are five percent of the 3,652 businesses and nonprofit organizations that filed 2011 Annual Reporting Forms (ARFs). Of these 172 businesses, 101 reported that the amount of health care surcharges collected were higher than the amount they irrevocably spent on health care for their employees.

    OLSE's analysis of the 2011 ARFs states that the collection of a consumer surcharge in excess of the amount of irrevocable health care expenditures is not a violation of the SF HCSO in 2011. That situation changed in 2012 when San Francisco amended the SF HCSO to provide that if an employer collects a health care surcharge greater than the amount spent on employee health care, then the employer must irrevocably pay or designate such difference for health care expenditures for its covered employees.

    The City Attorney's enforcement initiative is focused on surcharges occurring during the 2009 to 2011 period. As noted above, prior to 2012, it was a permissible practice under the SF HCSO for an employer to impose a health care surcharge in excess of the amount spent on employee health care. The City Attorney's enforcement initiative is not based on the SF HCSO; rather it is based on the allegation that this surcharge practice constituted consumer fraud under California consumer protection laws. This allegation was the basis, in part, for the Patxi's Chicago Pizza settlement agreement, which the City Attorney released shortly before announcing the enforcement initiative.

    The City Attorney has sent letters to the businesses that it has identified as the "worst offenders." Although these businesses were not identified in the initiative, they were subsequently disclosed to a news company pursuant to a public documents request. These letters provide that the businesses will not be sued by San Francisco for consumer fraud if they voluntarily take the following action:

    • The business discloses all health care surcharges and health care expenditures for the years from 2009 to 2011.
    • The business distributes 50 percent of the amount of the health care surcharges in excess of actual health care expenditures to employees who worked for the business during the time that the surcharge was imposed.
    • Any amounts distributed to employees but not redeemed by the employees will revert to San Francisco. The City Attorney has indicated that these amounts will be used for future enforcement of the SF HCSO and consumer protection laws.
    • The business must comply in good faith with the SF HCSO going forward.

    The business must provide certain information to the City Attorney no later than April 10, 2013. The City Attorney will advise the business of the next steps.

    The City Attorney has indicated that a business that does not participate in this settlement program risks being sued for "full restitution of the amount of surcharges collected during that period, plus up to $2,500 in penalties for each customer who was defrauded" during the years 2009 to 2011. The City Attorney also asserts that the businesses risk liability for all costs and attorneys' fees incurred by San Francisco in the consumer fraud lawsuit.

    The City Attorney's enforcement initiative is supported by the Golden Gate Restaurant Association (GGRA), which is the trade association for the San Francisco Bay Area restaurant industry. The GGRA's prior challenge to the legality of the SF HCSO was not successful.

    The City Attorney's enforcement initiative is a reminder of the importance of compliance with both the complex SF HCSO and California consumer protection laws. It is a strong signal to employers that San Francisco will challenge any practice that it believes falls short of delivering the required health benefits to covered employees under the SF HCSO.