Can an employer who is subject to Oakland’s Measure Z pay employees more and drop their health coverage?

Measure Z is an Oakland, California ballot measure which passed in November 2018 will take effect on July 1, 2019. It states that a hotel business with 50 or more rooms must pay employees $15 per hour and offer healthcare benefits or $20 per hour if it does not offer healthcare benefits. Healthcare benefits are not defined. For the purposes of this Q&A, we assume that healthcare benefits mean a standard group health plan.

An employer can always drop their health plan and pay employees more, however, there will be consequences depending on the employer’s status under the ACA. For example, Measure Z has no bearing on an employer’s obligations under the ACA. If an employer is required under the ACA to offer coverage, they must offer coverage. Paying employees more, unfortunately, is not an alternative under the ACA to offering coverage.

Here are the two most likely scenarios – both assume the employer is subject to Measure Z:

a) If the employer is a small employer under the ACA (fewer than 50 full-time, plus full-time equivalent employees), then the employer is under no obligation to offer health coverage under the ACA. For ACA small employers who are subject to Measure Z however, this could be a marketing opportunity for brokers. Small employers who are subject to Measure Z and don’t currently offer coverage will have to:

1. Pay $15/hour and offer health coverage, or
2. Pay $20/hour and not offer coverage
3. Comparing 1 and 2:
   • For a 40-hour per week employee, the difference between $15/hour and $20/hour is $800/month.
   • Certainly, an employer could put in place a cost-effective health plan for less than $800/month/employee.

This represents a sales opportunity for brokers.

b) If the employer is an Applicable Large Employer (ALE) under the ACA (50 or more full-time, plus full-time equivalent employees), they must offer qualified coverage to all full-time employees or risk costly penalties. There is no exception allowing ALEs to “pay employees more” in place of offering qualified health plans to full-time employees.

Of course, an ALE always has a choice to offer or not offer, but not offering comes with the potential to incur harsh ACA penalties. And If an ALE that is also subject to Measure Z doesn’t offer coverage and also doesn’t pay $20 per hour or more, then it looks like they would be subject to penalties under both the ACA and Measure Z.

Bottom line answer to the original question: assuming the employer is an ALE, it would not be wise to drop coverage and pay employees more because of the ACA penalty risk.