A three-judge panel of the 9th U.S. Circuit Court of Appeals granted a stay that will allow San Francisco to enforce a law that went into effect January 1 but had been challenged by employers. The city law requires employers with more than 20 workers to pay between $1.17 and $1.76 per employee per hour into a city health care fund or to purchase health insurance.

National employers will be affected by this law too. Any employer with more than 20 employees must comply with the law for any employees who are permanent residents of San Francisco and who have been employed for 90 days and work at least an average of 10 hours a week.

In December, U.S. District Judge Jeffrey White ruled that the city law violated the Employee Retirement Income Security Act. Like a similar law struck down in Maryland in 2006, the San Francisco law would inhibit employers from managing health benefits nationally, a key provision of ERISA, White said. The city quickly appealed that decision, asking for a temporary stay of the lower court’s ruling so the law could be fully implemented while the court considers the appeal.

While the court has not issued a final ruling on the city ordinance—the first of its kind in the nation—the stay gives legal momentum to a similar law requiring employer funding that has been approved by the state Assembly and is supported by Gov. Arnold Schwarzenegger.

The San Francisco law helps establish and fund a number of clinics around the city to serve the uninsured. Employer contributions are estimated to total about 20 percent of the $200 million needed to run the program annually.

“There is a minimum expenditure that has to be made but how it's spent is up to the employer,” says Joannie Chang, contract compliance officer in the office of labor standards enforcement for the city.

In unanimously granting the stay, the judges wrote that they were moved both by legal and humanitarian arguments, or what the court called “a probability of success on the merits and the possibility of irreparable injury.”

Judge William Fletcher wrote in the 3-0 ruling that the public interest would be best served if the law were fully implemented during the appeal process. “Otherwise avoidable human suffering, illness and possibly death will result if a stay is denied.”

Employers have long said the requirement is administratively and financially burdensome, especially for small businesses. It was first challenged in a lawsuit brought against the city by the Golden Gate Restaurant Association. Dan Scherotter, the group’s incoming president, says the hourly payments are much higher than the actual cost of the insurance. The group proposed a quarter-cent sales tax to help pay for the program.

“We went to every hearing and every meeting and our concerns were ignored at every step and we’re the largest employer in the city,” Scherotter says. “The reason we are suing is because it’s unaffordable and unsustainable. Health insurance is far cheaper than what the city is requiring.”

Scherotter says his members will comply with the court’s stay.

The program, Healthy San Francisco, is intended to cover more than 70,000 city residents—20,000 of whom are employed but do not receive health care benefits. Scherotter expects most employers will offer health insurance rather than pay into the city fund, which will be used in part to offer health care at 12 clinics in the city.

Final written arguments are due in April. A ruling on the appeal may not be handed down until the summer or fall.

Hinting at how the appeal might turn out, Fletcher wrote: “We conclude that the city and intervenors have a probability, even a strong likelihood, of success in their argument that the ordinance is not pre-empted by ERISA.”