San Francisco Commuter Ordinance - Sounds Like a Good Idea? Maybe?

UPDATE: Please see Littler's Employment Taxes ASAP, San Francisco Commuter Ordinance — Update on Enforcement and Enhanced Federal Commuter Benefits

San Francisco recently passed an ordinance (Ordinance) requiring San Francisco non-governmental employers to offer employees "subsidized" commuting benefits.1 The Ordinance, scheduled for full implementation on January 19, 2009, requires employers to provide employees at least one of the following three options: (1) allow employees to elect to deduct commuting costs from pre-tax wages to purchase transit passes or vanpool rides (but not parking); (2) the employer may pay (no less than $45 per month) for transit passes or reimburse employees for a portion of carpool or vanpool expenses; and/or (3) the employer may operate a vanpool, bus, or similar multi-passenger shuttle-type service at no cost to employees. The Ordinance's stated purpose is to reduce air pollution and carbon dioxide emissions in San Francisco to 20 percent below the city's 1990 levels by the year 2012, by encouraging the use of public transportation or vanpooling. Whether or not the environmental goals can be met, the Ordinance complicates doing business in San Francisco. The Ordinance adds yet another (and sometimes conflicting) layer to subsidized employee commuting benefits that are already provided for under federal tax law as Qualified Transportation Fringe Benefits (QTFB).2 This article discusses the new Ordinance as well as its interplay with QTFBs and California laws allowing employees to cash out employers' subsidized parking for additional wages under the California Air Resources Board's "Parking Cash-Out Program."3

Since the San Francisco Ordinance was passed, a federal law has been enacted, effective January 2009 that provides for a potential subsidy for bike riders. This article also includes some preliminary observations as to how the introduction of this new federal benefit overlaps with the Ordinance.

How the San Francisco Ordinance Works

Covered Employers

The Ordinance covers San Francisco employers ("Covered Employers") other than governmental entities (i.e., excludes state and federal employers in San Francisco) that have 20 or more employees in a given week, counting not only employees working in the city but also employees who work outside of San Francisco. For the purposes of determining Ordinance coverage only, the Ordinance counts full-time, part-time and temporary employees as well as workers provided by temporary services, staffing companies or similar entities to a San Francisco company. Consequently, a San Francisco employer may be covered by the Ordinance even if it has a workforce almost totally populated by temporary workers or paid by agencies, or has only one employee located in San Francisco.4

The Ordinance defines the term employer to include corporate officers and executives who directly or indirectly control wages, hours, or working conditions of employees.5 This provision potentially creates personal liability for such individuals for the penalties imposed under the Ordinance (as discussed further below).6 It is unclear from the Ordinance's legislative history why such individuals were included in the definition.

At least as written, the Ordinance does not appear to cover related companies (i.e. parent companies or other subsidiaries) either for purposes of determining whether an entity is a Covered Employer or as to liability for enforcement purposes. So a company that may have multiple subsidiaries each with separate operations in San Francisco should not be collectively counted for Ordinance purposes, nor obliged, if covered, to provide the same options, although there may be efficiencies in providing a single program.

In contrast to the Ordinance, the QTFBs under Internal Revenue Code (IRC) section 132(f) are wholly voluntary programs that may provide either pre-tax or employer-subsidized commuting expenses, as well as allow employers to provide parking benefits, up to certain limits. Likewise, a QTFB has no minimum employer size for participation, and the employer can selectively make such QTFBs available.

Employers that currently maintain QTFB programs should review such programs to determine whether existing programs extend to San Francisco-based employees and, if not, consider amending programs to provide one or more of the benefits provided for under the Ordinance.

Employees Covered By Ordinance

For Ordinance purposes, a Covered Employee7 is someone who performs on average at least ten hours of work per week in the previous month for compensation in San Francisco, is entitled to payment of at least minimum wages under California Labor Code or a Wage Order, or participates in a Welfare-To-Work Program. It is unclear from the Ordinance if a Covered Employee must have worked at least ten hours in every week of the previous month to participate. Measuring participation by hours worked in the previous month potentially allows Covered Employers to drop employees in any month following insufficient qualifying hours. As a practical matter, a Covered Employer will probably not want to monitor hours for this purpose and take advantage of this provision, at least with respect to employee-paid benefits, such as an employee's pre-tax election to pay for commuting expenses.

It appears that if an employee is not directly paid by an otherwise Covered Employer, then that employee would still be covered, for purposes of the Ordinance, only as an employee of the employer actually paying the wages. For instance, if the Jones Company has one employee paid directly and 20 temps who are paid by the Smith Temporary Agency, then the Ordinance's benefits for such temps, if any, would be provided by the Smith Temporary Agency, not the Jones Company, even though their work is counted towards determining whether or not the Jones Company is a Covered Employer. The Jones company would have to provide the Ordinance's benefits for the one employee it pays directly.

Benefits Provided By the Ordinance

The Ordinance requires that a Covered Employer provide at least one of the following three options to a Covered Employee:

  1. Pre-tax Election: Employer creates a program under IRC section 132(f) (i.e., a QTFB) that allows employees to make a "pretax purchase" of transit passes or vanpool charges up to the federal level (in 2009, $120 per month);
  2. Employer-Paid Benefit: Employer supplies or reimburses for transit passes or cost of vanpool charges up to the monthly cost of an adult San Francisco Muni Fast Pass (currently $45 a month); or
  3. Employer-Provided Transit: Employer provides transportation for free to employees in a vanpool, bus or similar multi-passenger vehicle operated by or for employer.8

An employer with an existing QTFB program that enables employees to pay commuting expenses through a Compensation Reduction Arrangement (pre-tax basis) for transit passes should be able to comply with the Ordinance's first option without further action or adjustments to its existing program, as long as all Covered Employees can participate in that QTFB. While employer-provided parking is not an option under the Ordinance, nothing in the Ordinance precludes a Covered Employer from continuing to subsidize employee parking.

The second option provides for a Covered Employer to subsidize a transit pass on a tax-free basis up to $45 a month, subject to the provisions of IRC section 132(f)(5)(A) for transit passes. Note that the $45 per month option is subject to future cost of living adjustments (COLA). Also note that under federal law, an employer can provide a subsidy of up to $120 per month towards such transit passes. The subsidy option creates a direct expense for an employer, in addition to possible administrative costs. In sum, this option is more costly to the Covered Employer than the first option.

The third option involves employer-provided transportation between home and work on a "no cost" basis in a vanpool, bus, or similar multi-passenger vehicles operated by or for the employer. To the extent "at no cost" is reasonably interpreted as "free" or "tax-free," providing this option may be problematic under the Internal Revenue Code. Under the Internal Revenue Code, an employer can subsidize, in 2009, up to $120 a month for a vanpool that qualifies as a "Commuter Highway Vehicle" under the QTFB rules. It is unclear whether San Francisco intends that such vanpools be free even if the cost of providing the services exceeds the tax-free limits imposed for QTFBs. It is also unclear whether the Ordinance would require an employer to gross up an employee's wages so that the net "effect" would be no cost over the employee's "normal" wages if the monthly cost exceeds the tax-free cap. The vanpool option presents additional difficulties. For example, how does an employer calculate fair market value (FMV) for vanpool purposes? The most common method used under federal law to calculate FMV is using the Commuting Valuation Rule.9 Under that rule, vanpool transportation is valued either one way at $1.50 or $3.00 for round trip per commute. So, if an employee commutes no more than 20 days per month, the fair market value under the round trip method would be a mere $60.00 (20 x $3.00) and well within the $120 cap set for 2009. However, under IRS regulations, this method for valuing cannot be used to value the cost to an employee who is considered to be a "control employee."10 Absent a gross-up of a control employee's wages, such employer-provided transportation does not appear to be doable at "no cost" to such employees. It is unclear whether such technical considerations were contemplated by the San Francisco Board of Supervisors.

Finally, while the cost to an employee for vanpool transportation may be nil, the actual cost of providing this type of benefit is often well beyond the imputed FMV. The cost can be significant to the employer—whether provided by company vehicles or through outsourcing. The relative costs should be carefully considered before offering this option.

Federal Bicycle Commuting Expense Reimbursement Program

Since the enactment of the San Francisco Ordinance, and as part of the federal Emergency Economic Stabilization Act of 2008, IRC section 132(f) has been further amended to allow employers, as of January 2009, to reimburse employees up to $20 per month towards bicycle commuting expenses for employees who "regularly use" a bike to commute, provided these employees do not receive any other type of transportation reimbursement. The specifics of this benefit will be addressed by IRS regulations sometime in 2009. While the San Francisco Ordinance makes reference to encouraging biking and walking, the Ordinance does not presently compel making such bike subsidies available. Given the federal change, it is likely that San Francisco will ultimately amend its ordinance to add bike subsidies. While the bike benefit is tax-free at the federal level, at present, such bike benefits are not tax-free under California law. Given the state's budget crisis, it may be some time before California considers conforming legislation.

Administering These Options

With the introduction of QTFB programs, numerous companies have become purveyors of administrative and support services for commuter benefit programs. These range from payroll services companies to organizations that specialize in administering pre-tax, ERISA, or non-ERISA benefits. If an employer has an existing program, its vendor is likely prepared to assist with the implementation and administration of the Ordinance options. If a company does not have such a program, it will need to create one, and this will both take time and impose costs on the employer.

How Does this Ordinance Work with Parking Subsidies?

IRC section 132(f) allows an employer to provide subsidized parking for employees. In 2009, such "qualified" parking benefits are available for up to $230 per month on a tax-free basis. Under QTFB programs, an employee can receive a combination of vanpool and transit passes of $120 a month in 2009, as well as receive "qualified parking," for a total tax-free monthly "commuting benefit" of $350 paid either on a pre-tax basis and/or by a subsidy from the employer. While the San Francisco Ordinance's objective is to reduce driving, it does not force a Covered Employer to either eliminate a parking fringe benefit or prohibit an employee from driving.

While employer-provided parking is typically associated with parking in close proximity to the workplace, for QTFB purposes, it can also be used to subsidize parking at or near a location from which the employee commutes to work, such as a vanpool or carpool pick-up location or a mass transit facility.11

How Does this Ordinance Work with California's Parking Cash-Out Program?

For many years, California has had a "Parking and Cash-Out Program," which allows employees to waive otherwise employer-paid parking in favor of receiving an equivalent adjustment to wages.12 Under a QTFB program, such an employee may also be able to elect subsidized transit passes, pretax transit passes, and/or participate in a "vanpool." Nothing in the San Francisco Ordinance directly affects this "cash-out," but forcing a Covered Employer to offer one of the options under the Ordinance potentially increases an employer's expense for employees who cash out their parking benefits, i.e., increased wages plus Ordinance benefits. This state program perhaps provides the financial basis for a Covered Employer to limit employees to the first option under the Ordinance.

What Penalties Are Provided By the Ordinance?

The Ordinance designates the Department of the Environment as the department responsible for enforcement purposes. The director can issue administrative citations and civil penalties to any Covered Employer that fails to provide at least one of the required transportation benefits to Covered Employees. The current penalty scheme provides for a fine not to exceed $100 for the first violation of any infraction under the Ordinance, a fine not to exceed $200 for a second violation and a fine not to exceed $500 for each additional violation within the same year. In addition to the penalties, the city can recover the cost of enforcement from a Covered Employer. While the definition of "Covered Employer" extends to certain executives or officers, whether the Ordinance will be used against such individuals appears to be left to the regulators.

The Department of Environment, in consultation with the Office of Labor Standards Enforcement for the City and County of San Francisco, is to promulgate rules and regulations to assist in the implementation and enforcement of the Ordinance. As of early December 2008, no regulations have been proposed.

What Are the Implementation Issues?

Neither the Ordinance nor the IRC rules allowing for a QTFB program require that such benefits be provided under a written plan. QTFBs also are not subject to regulation under ERISA. That said, it is likely that the regulations will require a Covered Employer to provide employees with notice of the Ordinance and the option(s) available. Some written communications are implicit under the Ordinance, as well as any QTFB program. Information should be provided to Covered Employees prior to the January 19, 2009, effective date. Information should include the option(s) selected by the employer to be made available to employees and how an employee can elect to participate. While nothing in the Ordinance compels that employees participate, some waiver or acknowledgement should be obtained from non-participating employees as confirmation of their choices.

Any existing commuting subsidy QTFB program should be reviewed and updated to be sure to include all Covered Employees under at least one of the Ordinance's options. To simplify compliance, an employer that has an existing QTFB program with fewer options than the Ordinance provides should limit the program only to options now available. Likewise, for an employer presently subsidizing transit passes, it is recommended that the subsidy level for Covered Employees be the same for San Francisco Ordinance purposes. For example, if the employer already provides the COLA limit of $120 for pretax transit pass subsidies, the employer should not reduce the subsidy to $45.

Covered Employers that do not presently have a QTFB program should target implementation to be effective no later than January 19, 2009. In fact, an employer should consider implementing its program by January 1 to ensure sufficient time, if option one is elected, to process any pre-tax employee payment before January 19. Likewise, if an employer intends to subsidize (up to $45 or more per month) transit passes, it should consider whether to pro-rate January or not. As there are only nine working days in January following the required implementation date of January 19 (January 19 is a state holiday in California), an employer should consider offering the benefit on a pro-rata basis for that month.

Vanpools, subsidized or not, will typically take even further lead-in time to establish, especially as outsourced, competitive bidding may be recommended. It is strongly recommended that an employer delay adopting the vanpool option beyond 2009 if it does not already have such an arrangement in place.

One last issue to consider is whether to provide similar benefits to employees outside of San Francisco in order to ease the burden of administration. The Ordinance singles out employees working in San Francisco not only to receive a commuting subsidiary not required under the IRC, but also to receive benefits that an employer may not be providing outside of San Francisco. Will parity considerations force employers to provide San Francisco-like options to workers outside of San Francisco?

Next Steps for Implementation — A Checklist

The following checklist is offered to assist in complying with the new Ordinance:

  1. Determine if the employer is covered by the San Francisco Ordinance;
  2. Determine which employees are Covered Employees under the San Francisco Ordinance;
  3. Review existing QTFB programs, if any, with respect to their scope and coverage;
  4. Review San Francisco Ordinance options;
  5. Determine which San Francisco option(s) will be initially provided, including their financial and administrative costs;
  6. Arrange for administration of benefits and training for at least one employee who will assist in administration of the program;
  7. Advise Covered Employees, in writing, as soon as possible as to the option(s) being offered under the Ordinance;
  8. Adjust any existing written program to reflect option(s) to be provided;
  9. If there is no existing QTFB program in place for San Francisco employees, adopt a written program to detail the Covered Employer's implementation of the Ordinance prior to January 19, 2009;
  10. Determine Ordinance implementation date—January 1 or January 19, for company's administrative purposes;
  11. For the pre-tax option, obtain elections from employees prior to the processing date for payroll on or after the chosen implementation date;
  12. Review and monitor for compliance with San Francisco rules and regulations;
  13. Upon implementation, monitor the program for effectiveness, efficiency, costs, as needed;
  14. Consider whether to offer bike subsidy under new federal law; if so, determine implementation date.
  15. At least monthly, monitor for eligibility changes for new or departing Covered Employees.
  16. Develop process for notifying new or departing employees of eligibility or ineligibility information.
  17. Develop and collect acknowledgements/waivers from otherwise Covered Employees not electing to participate under the Ordinance.

1 San Francisco Ord. 199-08.

2 Int. Rev. Code § 132(F).

3 A.B. 2109.

4 San Francisco Ord. 199-08 § 421(a)(4).

5 San Francisco Ord. 199-08 § 421(a)(5).

6 San Francisco Ord. 199-08 § 421(c)(3)-(4).

7 San Francisco Ord. 199-08 § 421(a)(3).

8 Transportation in a "Commuter Highway Vehicle," which is a vehicle that seats at least six adults (excluding driver) for which 80% of mileage use is reasonably expected to be used for the purpose of transporting employees between home and work at least half capacity for such trips. IRC § 132(f)(5)(B) Treas. Reg. 1.132-9, Q&A-2. Ordinance § 421(a)(8).

9 Treas. Reg. 1.61-21(f).

10 A control employee is an officer earning at least $95,000 a year in 2009, a director earning $185,000 or more per year, or a 1% owner.

11 I.R.C. § 132(f)(5)(C) and Treas. Reg. 1.132-9, Q/A4.

12 A.B. 2109, Cal. Health & Safety Code § 43845, Cal Rev. Tax Code §§ 17202, 17090, 24343.5.

GJ Stillson MacDonnell is a shareholder and chair of Littler Mendelson's Employment Taxes Practice Group in Littler's San Francisco office. If you would like further information, please contact your Littler attorney at 1.888.Littler,, or Ms. MacDonnell at

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.