of the calculations and adjustments must be made retrospectively.
If an administrative scheme were required merely to pay wages, but not other benefits, ERISA preemption would not be implicated. However, the definition of per diem wages necessitates reference to, and calculation of, employer contributions to employee benefit plans. Complex calculations are required to determine the prevailing base wage that must be paid. The calculations can only be made after referencing the dollar value of benefits paid. Thus, the wage requirement incorporates employee benefits into the prevailing wage statute. This incorporation can only be accomplished by requiring per diem wages that "refer to" and "regulate" employee benefit plans.
The Supreme Court decision in Fort Halifax does not support defendants' argument to the contrary. In that case, the Supreme Court rejected the argument that "ERISA preempts state laws relating to certain employee benefits, rather than to employee benefit plans," and held that a state statute requiring a lump sum severance pay was not preempted. 482 U.S. 1, 19, 23, 96 L. Ed. 2d 1, 107 S. Ct. 2211. The Court noted that the lump-sum payment "requires no administrative scheme whatsoever to meet the employer's obligation. The employer assumes no responsibility to pay benefits on a regular basis, and thus faces no periodic demands on its assets that create a need for financial coordination and control." Id. The Court's recent discussion of Fort Halifax noted that although the "state law required payment of severance benefits, which would normally fall within the purview of ERISA, it was not preempted because the statute did not require the establishment or maintenance of an ongoing plan." Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478, 483, 112 L. Ed. 2d 474 (1990) (citation omitted).
The present cases differ, because the employers will be forced to implement an administrative scheme to calculate on a regular basis the wages and benefits paid to individual workers on projects covered by the resolutions and the ordinance. Those contractors will be required to determine the cash equivalent of the benefits provided. At a minimum, employers will be forced to calculate wages and benefits on covered projects separately from other projects, creating an ongoing administrative system. At least with respect to some of plaintiffs' members, the resolutions and the ordinance impose on-going administrative burdens that fall within the parameters of an ERISA plan. See Fort Halifax, 482 U.S. at 14 n. 9 ("the ongoing, predictable nature of this obligation therefore creates the need for an administrative scheme to process claims and pay out benefits, whether those benefits are received by beneficiaries in a lump sum or on a periodic basis.")
The resolutions and the ordinance are therefore preempted by ERISA.
The resolutions and the ordinance are also preempted by ERISA because they have a disproportionate impact on the benefits of various employees. The Second Circuit recently held that a statute which required prevailing fringe benefits, or a cash payment equal to the cost of compliance, was preempted by ERISA. General Electric Co. v. New York State Dept. of Labor, 891 F.2d 25, 28-31 (2d Cir. 1989). The court noted that the payment of the equivalent cost of fringe benefits to the employee may be of lesser value to the employee than the benefits themselves. The court determined that the statute "related to" ERISA plans of certain employers and was therefore preempted.
Similarly, the resolutions and the ordinance relate to and regulate ERISA plans because they provide for employer compliance through the payment of benefits or the cash equivalent. Because these alternate provisions for compliance have disproportionate effects on employees, they regulate ERISA benefits by altering the calculation or payment of benefits under ERISA-covered pension plans. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 524, 68 L. Ed. 2d 402, 101 S. Ct. 1895 (1981).
By limiting the amount of benefits that can be "subtracted" from the per diem wage calculations, the resolutions and the ordinance also relate to and regulate ERISA plans by discouraging payment of benefits at higher than prevailing levels. They place a limit on employers' abilities to meet the total compensation package, because the amount of wages paid directly to the workers may not be less than the base wage rate. If the total compensation package is equal to wages plus benefits, then the requirement that wages must be paid in cash discourages higher-than-standard contributions towards benefits. An employer could provide higher-than-standard benefits, but that employer would not be able to compensate for that added cost by paying wages below the base wage level.
Thus, although the ordinance and the resolutions do not mandate the creation of an ERISA benefit plan, or a minimum level of plan benefits, it does discourage employer contributions in excess of the prevailing amounts.
In determining the scope of ERISA preemption, Congress expressed concern that to require plan providers to design their programs in an environment of differing State regulations would complicate the administration of the nationwide plans, producing inefficiencies that employers might offset with decreased benefits. See Fort Halifax, 482 U.S. at 10. Thus, where a "patchwork scheme of regulation would introduce considerable inefficiencies in benefit program operation," the Court has applied preemption to ensure that benefit plans will be governed by a single set of regulations. Id. at 11.
The effect of the resolutions and the ordinance is to discourage employers from paying benefits at a level other than that established as "prevailing." Not only does this directly implicate Congress' desire to avoid a patchwork of state regulation, it also imposes differing requirements on employers within a single state or even a single locality. Employers will be faced with the choice of: (1) setting up separate benefit plans for employees on covered projects; (2) adjusting participation in existing plans to compliance levels; or (3) abandoning ERISA benefit plan benefits altogether.
Each of these alternatives represents regulation of ERISA plans in a manner that may harm employees and create inefficiencies in the implementation of ERISA plans on a national, state and even a local level. They illustrate the extent to which the resolutions and ordinance "relate to" and "purport to regulate" ERISA benefit plans. The inconsistencies and burdens created by this local legislation is within the preemptive intent of Congress to assure that ERISA plans are governed by a single set of federal regulations. The resolutions and ordinance undermine this goal and are therefore preempted.
The Chamber asserts a claim under the U.S. and California Constitutions that the legislation impairs the obligations of contracts. U.S. Const. art. I, § 10; Cal. Const. art. I, § 9. Plaintiffs did not raise this issue in their challenge to the resolutions. However, for the reasons to be discussed, the court believes that the resolutions are subject to the same challenges and they will be discussed together. The contracts allegedly impaired are the collective bargaining agreements between the plaintiffs' members and their respective labor unions. Plaintiffs contend that the legislation would require those members who operate under collective bargaining agreements to alter their contracts in order to comply, resulting in substantial and unexpected liability.
Chamber has submitted declarations from members who have collective bargaining agreements, including Shell, Unocal and Timec.
Declarations were also submitted in support of the contention that the collective bargaining agreements would be affected by the ordinance. The record demonstrates that Chamber has established that contracts with its members' employees will be affected by the ordinance.
"The threshold inquiry is whether the state law has, in fact, operated as a substantial impairment of a contractual relationship." Energy Reserves Group, Inc. v. Kansas Power & Light Co., 459 U.S. 400, 411, 74 L. Ed. 2d 569, 103 S. Ct. 697 (1983) (citation omitted). The severity of the impairment increases the level of scrutiny to which the legislation will be subjected. Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245, 57 L. Ed. 2d 727, 98 S. Ct. 2716 (1978). Total destruction of contractual expectations is not necessary for a finding of substantial impairment. United States Trust Co. v. New Jersey, 431 U.S. 1, 31, 52 L. Ed. 2d 92, 97 S. Ct. 1505 (1977).
If the legislation constitutes a substantial impairment, the government must demonstrate a significant and legitimate public purpose behind the regulations, United States Trust, 431 U.S. at 22, such as remedying a broad and general social or economic problem. Allied Structural Steel, 438 U.S. at 247, 249. The requirement of demonstrating a legitimate public purpose assures that a government is exercising its police power, rather than providing a benefit to special interests.
If a legitimate public purpose is demonstrated, the next inquiry is whether the changes in the rights and responsibilities of the contracting parties compelled by the legislation are reasonable and are appropriate to the public purposes of the legislation. United States Trust, 431 U.S. at 22.
Existing collective bargaining contracts will be substantially impaired by this legislation. When wages and benefits are set by law at not less than a particular level, there is little remaining to bargain about except upward departure. According to the record, wages now being paid would rise under the ordinance, in some cases nearly one hundred percent. The Supreme Court found a change to a pension fund provision to be a substantial impairment in Allied Structural Steel, 438 U.S. at 246, calling it a "basic term" of the employment contract.
Is there a significant and legitimate public purpose for the legislation such as the remedying of a broad and general social or economic problem? To answer this question the court must examine the legitimacy of the "ends," and then examine the appropriateness and necessity of the means chosen to achieve those ends.
It has been long established that:
the interdiction of statutes impairing the obligation of contracts does not prevent the state from exercising such powers as are vested in it for the promotion of the common weal, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected. This . . . police power is an exercise of the sovereign right of the Government to protect the lives, health, morals, comfort and general welfare of the people, and is paramount to any rights under contracts between individuals. Allied Structural Steel, 438 U.S. at 241 (citing Manigault v. Springs, 199 U.S. 473, 480, 50 L. Ed. 274, 26 S. Ct. 127 (1905)).