Sunday, August 24, 2014

The Hobby Lobby Case and Your Small Business

On June 30, 2014, the U.S. Supreme Court announced its decision in a case brought by a company contesting the government’s rule under the Affordable Care Act (“Obamacare”) that it provide 20 types of contraceptives to employees despite the religious objections of its owners to 4 of these types.

The company’s owners were victorious. The court said that regulations issued by the Department of Health and Human Services violate the Religious Freedom Restoration Act of 1993 (RFRA), which generally prohibits the government from substantially burdening a person’s exercise of religion.
Bottom line: The Court said that a closely-held corporation (the legal entity of the litigants Hobby Lobby Stores, Inc. and Conestoga Wood Specialties Corp.), is a person for purposes of the RFRA, thus protecting, at least on this contraception issue, the religious liberty of the humans who own and control it.

Immediate impact

The decision allows owners of businesses that are not public companies to follow their conscience (there must be a “sincere” religious belief) when it comes to the contraception coverage mandate of the Affordable Care Act . The way in which a business is organized — as a sole proprietorship, partnership, limited liability company, or corporation — does not matter.

When it comes to corporations, the government may seek to limit the application of the decision to those defined in the Internal Revenue Code as a closely-held business, which are corporations that:
  • Have more than 50% of the value of its outstanding stock owned directly or indirectly by 5 or fewer individuals at any time during the last half of the tax year, and
  • Are not personal service corporations.

Of course, the requirement to provide health coverage (“employer mandate”), and all that this entails, does not apply to most small businesses. The mandate only applies to large companies — those with 50 or more full-time and/or full-time equivalent employees. The mandate takes effect in 2015 for companies with 100 or more employees, or 2016 for companies with 50 to 99 employees. Only 2% of all small businesses have more than 50 employees.

Long-term impact
No one can say for sure what this decision will mean in the future. The decision should not be taken as a free pass for small businesses to object to all government actions or positions on a religious basis; they may not prevail as did Hobby Lobby. For example, small businesses likely won’t be able to refrain from serving gay customers on religious grounds (this issue has not come before the U.S. Supreme Court but lower courts around the country have ruled against businesses taking this stance).
On the other hand, there could be some backlash from the decision. One possible argument that can now be made by creditors is that the so-called corporate veil, which protects the personal assets of owners, is less than inviolate. The claim may seem far fetched, but the argument would be that if that veil is pierced for purposes of the Patient Protection Act, could it not also be breached for purposes of company debts?


While the First Amendment of the U.S. Constitution and RFRA protect the free exercise of religion by small business owners, this protection won’t give blanket protection in all situations. Consult with an attorney when taking any position on religious grounds that runs counter to government rules.
Note: On July 17, 2014, the Department of Labor issued a ruling that any business dropping coverage for certain contraception methods must give notice to employees.

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