Markets & Finance

Rollback Ruling Favors Wal-Mart


In a clear victory for Wal-Mart Stores (WMT), a federal judge on July 19 struck down a Maryland law that required the world's largest retailer to provide more health-care coverage for its employees in the state. The decision marks a significant setback for government officials and others who have been pressing Wal-Mart to boost the benefits and wages that it pays to its 1.3 million U.S. employees.

The Maryland state law was passed in January and was scheduled to become effective on Jan. 1, 2007. It required nongovernment employers with more than 10,000 workers to spend at least 8% of their payroll on health benefits. While other large employers in the state, such as Giant Foods, met that threshold, Wal-Mart did not.

Wal-Mart battled against the legislation for months, first through lobbyists and then via a lawsuit against the state filed in February. The suit was filed by the Retail Industry Leaders Assn., a trade group representing Wal-Mart and other big retailers. In his decision on July 19, Judge J. Frederick Motz of U.S. District Court in Baltimore found that the law violated federal law regulating employee benefits, specifically the Federal Employment Retirement Income Security Act (ERISA). "The act violates ERISA's fundamental purpose of permitting multi-state employers to maintain nationwide health and welfare plans, providing uniform nationwide benefits and permitting uniform national administration," he wrote in the decision.

LEGISLATIVE EFFORTS IN DANGER. The retail group was thrilled with the ruling. "The decision sends a clear signal that employer health plans are governed by federal law, not a patchwork of state and local laws. It also is a clear message that similar bills under consideration in other states and municipalities violate federal law, as well," said Sandy Kennedy, president of the association. Investors cheered too, sending the stock up $1.03, or 2.39%, to end the day at $44.20.

Motz's decision, however, is a huge blow to retail employees, many of whom would have been automatically eligible for health benefits. It also undercuts similar moves around the country. Just this year, at least 30 state and local governments have considered rules similar to the Maryland law, but the retail association has worked hard at creating enough dissenting voices in legislatures and has even challenged the proposed laws in court.

Unions that represent employees were deeply disappointed. "The District Court's decision, unfortunately, ignores the strong public support for requiring large, profitable corporations to pay their fair share for health care," said Chris Kofinis, communications director at WakeupWalmart.com, a movement started by the United Food and Commercial Workers, the largest union in the U.S.

HEALTH-CARE HOT BUTTON. While the Maryland ruling is a clear legal victory, it may be a setback in the court of public opinion. Wal-Mart has been working hard to improve its image, after withering public criticism over the way it treats its employees. On April 17, the company publicly touted changes to its benefits plan, which would allow employees to be eligible for health-care benefits a year after being employed, compared with two years previously, and part-timers will be able to add their children to their coverage. "We think this is a really big deal," Susan Chambers, Wal-Mart Stores executive vice-president of human resources, said at the time (see BusinessWeek.com, 4/19/06, "Wal-Mart Puts on a Happy Face").

Health care has been a particularly sensitive issue for the company. A memo leaked to the public earlier this year showed that Wal-Mart's employees—who make an average of $20,000 a year—spend 8% of their income on health care, nearly twice the national average. Some 46% of employees' children are either uninsured or on Medicaid, the memo said. Many workers and their dependents end up costing state governments, via their Medicaid programs.

Yet Wal-Mart has fought hard to stop local and state governments from dictating changes to its benefits. It has hired several public relations firms, while at the same time boosting the number of lobbyists in Washington who work with policymakers on laws that protect Wal-Mart, the corporation, not necessarily its employees. In February, CEO Lee Scott met with state governors at a meeting of the National Governors Assn. and urged them not to pass legislation that would burden the retailer, and pledged to work with the governors to move workers off state Medicaid rolls.


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