05/07/2012 05:46 pm ET Updated Dec 06, 2017

San Francisco Health Care Security Ordinance: City Orders Company To Pay $1.3 Million After 'Cheating' Employees

SAN FRANCISCO -- A commercial janitorial services company has been ordered to pay more than $1.3 million to 275 current and former employees to cover unpaid medical expenses –- expenses the company was required to cover under San Francisco's innovative and controversial Health Care Security Ordinance.

San Francisco's Health Care Security Ordinance requires that all companies with more than 20 employees provide either health insurance, enrollment in Healthy San Francisco (the city's health care program) or a health reimbursement account that reimburses employees for medical expenses while leaving them technically uninsured.

According to City Attorney Dennis Herrera, GMG Janitorial's employees testified that not only did they not know the company's health reimbursement account existed, but that they were told there was no such program when they inquired.

"This is a significant legal victory –- not just for the employees who were systematically denied benefits to which they were entitled, but for all the competing businesses that play by the rules," said Herrera in a statement. "This decision sends a strong message that San Francisco's Health Care Security Ordinance has teeth, and the city leaders are committed to enforcing it."

The case highlights a shortcoming in the ordinance that some have called a loophole. While the health insurance and Healthy San Francisco options require employers to pay a set amount each year, the reimbursement option allows employers to recollect any unused funds at the end of each two-year cycle. Last year, Supervisor David Chiu argued that the temptation could encourage employers to choose the reimbursement option, leaving employees technically uninsured. In cases like GMG's, the fund recollection feature of the option could also encourage employers to downplay the account.

“When low-wage workers are denied their rightful health care benefits, the human consequences are incalculable,” said Office of Labor Standards Enforcement Manager Donna Levitt in the same statement as Herrera's. “The vast majority of San Francisco employers comply with both the letter and the spirit of this law, which is why it’s so important that violators are brought to justice.”

Though the ordinance is considered a landmark for universal health care, it is not without its critics, specifically when it comes to who picks up the tab.

In 2008, the Golden Gate Restaurant Association (GGRA) filed a lawsuit questioning the legality of a mandate within the ordinance that requires employers to pay for the program. The Ninth U.S. Circuit of Appeals rejected the argument in 2008, and the U.S. Supreme Court rejected a challenge in 2010.

"The position of the association has never been whether or not people should have access," GGRA Executive Director Rob Black told The Huffington Post. "It's who should have to pay for it." Black explained that while the ordinance is certainly admirable, it's not without significant consequences.

"The city estimates that the cost is about $40-50 million annually, and that cost is split up between a few thousand businesses. It's significant," said Black.

Black explained how the ordinance and legislation like it makes running a business in San Francisco especially challenging.

"The state minimum wage is $8.00 per hour," he said. "In San Francisco it's $10.24 -- the highest in the country. Now lets say you have 50 employees: you have to pay $1.46 per employee per hour on top of that for Healthy San Francisco. Then add a payroll tax of 1.5 percent and San Francisco's mandatory paid sick leave, which breaks down to about $.25. So now we're up to over $12 per hour versus $8 per hour per employee in Oakland," he said. "As a business, how can you financially justify that?"

Black pointed out that many retail and restaurant businesses have abolished part-time employees altogether, opting instead to hire fewer full-time employees to escape the mandate.

"In San Francisco, we're seeing a significant reduction in the number of jobs, and I think that has a lot to do with how costly it is to create jobs," said Black. "The economy has come back, but the jobs have not."

Still, Black said that the GGRA's main priority regarding the ordinance is making sure that businesses adhere. "Even if we disagree with parts of it, this is the law and everyone needs to be complying," he said. "Otherwise it's putting some businesses at a competitive advantage. We work as hard as we can to make sure that our businesses are clear on the rules and follow them completely."

CORRECTION: An earlier version of this article stated that Rob Black had said the minimum wage in San Francisco is $10.40. Mr. Black actually referenced San Francisco's correct minimum wage, $10.24 per hour. The wage stated originally was a typo.

Watch ABC's video about the Supreme Court's 2010 decision in the video below: