California Public Agency Labor & Employment Blog

California Public Agency Labor & Employment Blog

Useful information for navigating legal challenges

Tips from the Table: Must-Have Items in Your MOUs

Posted in Labor Relations, Negotiations

We are excited to continue our video series – Tips from the Table. In these monthly videos, members of LCW’s Labor Relations and Negotiations Services practice group will provide various tips that can be implemented at your bargaining tables. We hope that you will find these clips informative and helpful in your negotiations.

Appellate Law – The Final Judgment Rule and its Exceptions

Posted in Litigation

Gavel-and-Books.JPGMany times, parties to a lawsuit receive trial court rulings in the midst of the litigation that are unfavorable, oppressive, and seem to them to be demonstrably wrong.  The parties want to appeal immediately, but their counsel will say that cannot happen, citing the “Final Judgment Rule.”  The rule certainly sounds dark and fateful.  Perhaps courts intend it to be, because the rule serves to deter disgruntled litigants from appealing while the trial court case is ongoing, and typically requires those litigants to wait months, or even years, to appeal.  So what is this rule?  And perhaps more importantly, what are ways to gain access to an appellate court early without offending it?

The Final Judgment Rule (sometimes called the “One Final Judgment Rule”) is the legal principle that appellate courts will only hear appeals from the “final” judgment in a case.  A plaintiff or defendant cannot appeal rulings of the trial court while the case is still ongoing.  For example, a party that loses its motion to compel discovery, motion for summary judgment, or demurrer cannot appeal these decisions, at least not until a final judgment has been entered in the case, concluding the lawsuit in the trial court.  The Final Judgment Rule has existed for hundreds of years, and serves the purpose of promoting judicial efficiency – cases would practically never end if the party who lost a motion while the case was pending could appeal it, wait for a decision from the court of appeal, and then continue with the trial court case.

Moreover, the Final Judgment Rule greatly reduces appellate court workloads by tending to make it so that only very important issues are ultimately presented to those courts.  If a party loses a motion early in the trial court case, they may certainly feel wronged.  But in the weeks or months afterward, the case may settle, the issue may fade in importance, or the trial court might actually decide to change the ruling, making appellate review unnecessary.  Postponing review conserves appellate court resources, and those of the parties as well.  In addition, postponing appellate review allows the appellate court to rule on all the challenges to the trial court’s decisions at the same time, thereby further promoting efficiency.  The appellate court will not have to consider “piecemeal” appeals.

The Final Judgment Rule may make sound policy sense.  But it is not much comfort to a litigant who has lost an important motion in court many months before the actual trial will start and cannot immediately appeal the bad ruling.

There are, however, some ways around the Final Judgment Rule.  Here are examples of four significant ways, and the circumstance under which each is available.

  1. Petition for Writ of Mandamus:

This is the classic method for obtaining relief while a litigation matter is still ongoing.  This type of petition to an appellate court seeks a “writ of mandamus” (sometimes also called a “writ of mandate”), essentially an order from the appellate court to the trial court directing it the trial court to change its decision or take some other action.  This type of writ is available in both federal and state courts.

The advantage of a petition for writ of mandamus is that it is available to overturn essentially any ruling or order made by a trial court, even though the lawsuit is still ongoing.  The disadvantage of this type of petition, however, is that it is entirely discretionary in the court of appeal.  The court of appeal is free to turn down any writ petition, even one that clearly has merit, and the court of appeal denies the overwhelming majority of petitions for writ of mandamus seeking review of trial court orders.  The state court percentage of accepted petitions is low and the number is even lower in federal court.  The reason these writs are so often denied on this summary basis (i.e., without even considering whether they raise a valid legal point) is that courts of appeal rarely see any reason to depart from the underlying principles of the Final Judgment Rule.

There are particular types of scenarios in which appellate courts are more likely to decide a writ on the merits.  One is when issues of privilege or confidentiality are concerned.  For example, when a trial court orders a litigant to disclose sensitive personnel records of individuals or information in which the litigant claims attorney-client privilege, the need for appellate review is immediate.  If the litigant obeys the trial court’s order, then the disclosure will be made, and the alleged harm done, before any appellate court can determine whether the trial court’s ruling in fact was correct.  It is widely understood that in these scenarios, appellate courts will more likely choose to intervene in the midst of litigation.

Another example is when the issue raised by the writ petition is one of great public importance, and when the party who files the petition can persuade the court that the public would be well served by the appellate court immediately reviewing and providing guidance on that particular issue without waiting for the case to conclude.

  1. A Preliminary Injunction Ruling:

The parties can also immediately appeal a trial court’s ruling granting or denying injunctive relief.  Trial courts have the power to issue preliminary injunctions at the beginning of a case that can operate to preserve the status quo.  For example, a trial court can order that a public college must stop enforcing a rule that supposedly stifles student First Amendment free speech rights.  Trial courts can make these orders based on an initial showing by the plaintiff, at the beginning of the case, that they are likely to succeed on the merits of their claim, that they are likely to suffer irreparable harm if the preliminary injunction is not granted, and that general equities and the public interest support issuance of the injunction.

Not only are these types of orders for injunctive relief by trial courts (either granting or denying) immediately appealable, but in the federal appellate courts, appeals of injunctions are given priority over other types of cases.

  1. Rulings on Anti-SLAPP Motions:

An immediate appeal is also available from a state trial court’s ruling on what is known as an “anti-SLAPP motion.”  This type of motion can be used by a defendant, including a public entity, in response to a lawsuit that challenges conduct by the defendant in furtherance of the defendant’s right of petition or free speech as defined by the anti-SLAPP statute.  (SLAPP stands for “Strategic Lawsuit Against Public Participation,” and is meant to refer essentially to meritless lawsuits brought against persons or organizations to punish them for and/or deter them from speaking out on important issues or petitioning the government for redress.)  The statute defines protected activities very broadly.  Indeed, courts have interpreted the definition to include government statements in various types of proceedings, including internal investigations conducted by public entities as to their employees.  (Hansen v. California Dept. of Corrections and Rehabilitation.)

If the anti-SLAPP statute applies in a given context, then the defendant can make a motion at the outset of the case to have a trial court determine if there is any “probability” of success on the claim.  If the plaintiff cannot present evidence making this showing of a “probability,” then the trial court rules in favor of the defendant.  If the defendant wins the motion, the trial court will require the plaintiff to pay the defendant’s attorneys’ fees and costs.  Thus, another very important way to have an appeal heard early in state court is to bring an anti-SLAPP motion.

  1. Qualified Immunity Decisions:

Another judicial determination that is often immediately appealable, in the midst of litigation, is a federal trial court’s decision on the defense of qualified immunity.  This is a defense available to individuals who are officials or employees of government agencies and are named personally in federal civil rights lawsuits.  In general, the defense of qualified immunity applies when the individual defendant is challenged for actions he or she took relating to an area of law that is unclear or unsettled.  If it is sufficiently difficult for the individual to tell what is constitutionally prohibited in the situation in question, then this defense will apply.  Qualified immunity will not provide a defense to claims for declaratory or injunctive relief against the individual, but it will serve as a defense to a monetary damages claim.

If the trial court either grants or denies a motion based on qualified immunity in the middle of the case, then either side respectively can appeal the determination, if the appeal involves essentially legal questions such as whether the plaintiff’s alleged rights at issue were sufficiently unclear to merit applying the defense.  The defense applies in a wide variety of cases brought against government officials and employees.  Significantly, individual defendants can claim the qualified immunity defense in wrongful termination cases in which the former employee claims violation of his or her constitutional free speech or due process rights.

Each of these four ways to obtain appellate review on an interlocutory basis — i.e., in the middle of the case — are available to public entity defendants.  This gives public entities a unique ability in many cases to structure the defense to obtain immediate access to an appellate court, and thus have important matters resolved before the case concludes.

For other litigation posts on related issues, see prior LCW posts: “Anti-Slapp Motions As A Litigation Resource For Public Employers,” “Extending Qualified Immunity To Private Individuals,” and “Appellate Law — What Are Amicus Curiae Briefs?”

PERB Expands Right to Union Representation to Interactive Process Meetings

Posted in Personnel Issues

Sonoma DecisionThe Public Employment Relations Board (PERB) recently held in Sonoma County Superior Court (Sonoma) that employees are entitled to union representation at interactive process meetings.  With this ruling, PERB expressly overturned prior precedent on this issue.

Before the Sonoma ruling, PERB recognized a right to union representation in individual meetings with the employer primarily only in the context of investigatory or disciplinary meetings, i.e. Weingarten rights.  Under the ADA and FEHA, interactive process meetings are held between employees and employers in order to explore potential reasonable accommodations to assist an employee with a disability to perform essential job functions.  They are not disciplinary or investigatory meetings.  As a result, PERB has previously held that the right to representation does not apply to interactive process meetings.  Notably, in an analogous situation where the employee was represented by a workers’ compensation attorney, the California Court of Appeal has found that an employer may be required to allow the employee’s attorney to participate in the interactive process.

However, in Sonoma, PERB explains that the right to representation is not limited to Weingarten rights.  Many years ago, the California Court of Appeal affirmed PERB’s decision in Redwoods Community College District recognizing that the right to representation is broader than Weingarten rights. In fact, the collective bargaining statutes administered by PERB support the right to representation in the additional context of grievance processing and arbitration.   This is because grievance-type meetings are a product of collective bargaining, and the grievance procedure is the mechanism by which collective bargaining agreements (CBAs) are enforced.

PERB stated in Sonoma that interactive process meetings are not traditional Weingarten meetings because they are not disciplinary or investigatory meetings.  Further, they are not grievance meetings because they do not arise out of a negotiated grievance procedure or other claim that the employer has violated the CBA.  PERB reasoned that interactive process meetings most closely resemble grievance meetings.  Like a grievance meeting, an interactive process meeting may involve the terms and conditions of employment in which all parties have an interest.

Importantly, for the employee, the interactive process meeting could result in the loss of his or her job.  In addition, there are many potential reasonable accommodations that could intersect with the terms of a CBA (e.g. seniority rights).  PERB noted that a union representative can serve a useful function in explaining, defending and asserting the employee’s rights and the possible consequences of refusing offered accommodations.  The representative, who can bring to the meeting a familiarity with the CBA, could also assist the employer in identifying conflicts between a proposed accommodation and the CBA.

PERB’s decision in Sonoma does not hold that employees are entitled to representation at all meetings affecting wages, hours and other terms and conditions of employment.  But it is reasonable to view PERB’s reasoning in the case as signaling PERB may soon further clarify or possibly expand the right to representation at individual meetings between employer and employee.

IRS Releases Final Affordable Care Act Information Reporting Forms

Posted in Healthcare

Affordable Care Act

This blog was authored by Shardé C. Thomas

The Internal Revenue Service (“IRS”) recently released the final versions of the information reporting forms that Applicable Large Employers (i.e. large employers subject to the employer mandate) and employers sponsoring self-insured plans are required to file annually under the Affordable Care Act (“ACA”).  The final forms do not contain significant revisions to the previous version of draft forms.

The first reporting deadline is February 28, 2016, as to the data employers collect during the 2015 calendar year.  The first deadline is March 31, 2016, for employers filing electronically.  If an employer is filing 250 or more returns, the employer is required to file electronically.  The reporting provides the IRS with information it needs to enforce the Individual Mandate (i.e. individuals are penalized for not having health coverage) and the Employer Mandate (i.e. large employers are penalized for not offering affordable minimum value health coverage to full-time employees).  The IRS will also require employers who offer self-insured plans to report on covered individuals.

Employers must provide annual written statements identifying reported information to all employees on whom the employer is reporting by January 31st, beginning in 2016.

Forms 1094-C, 1095-C, 1094-B, and 1095-B can be found on the IRS website.  Instructions for forms 1094-C and 1095-C can be found here.  Instructions for forms 1094-B and 1095-B can be found here.  The IRS has also published a brochure summarizing the new reporting requirements, which can be found here.

Which Forms Do I File? 

Employer Description                                                 Applicable Forms
Applicable Large Employer Offering Fully-Insured Coverage 1094-C and 1095-C (except Part III)
Applicable Large Employer Sponsoring Self-Insured Coverage 1094-C and 1095-C (incl. Part III)
Applicable Large Employer Offering Self-Insured Coverage to Non-Employees (e.g. retirees/COBRA qualified beneficiaries) 1094-C and 1095-C1094-B and 1095-C
Small Employer (non-ALE) Sponsoring Self-Insured Coverage 1094-B and 1095-B
Small Employer Offering Fully Insured Health Plans Not Applicable

More Information

You may find additional information on the ACA at http://www.lcwlegal.com/ACA.  The reporting forms will also be discussed during the LCW Annual Conference at the seminar entitled, “The Affordable Care Act – An Administrative Nightmare?”

Your Employee Is On-Call, But Is Your Employee “Working”?

Posted in Employment, Wage and Hour

hourglass-small-copy.jpg

This blog post was authored by Jennifer Palagi.

The term “on call pay” is subject to various interpretations.  There is on-call pay where an employer pays an employee a flat rate or small hourly amount to be available to the employer, such as $100 per week or $2 per hour.  But wage and hour law may require all of the on-call time to be paid, at least at minimum wage, if the time is considered “controlled.”  As with many wage and hour areas, the issue as to whether the on-call time must be paid depends on the factual circumstances surrounding situation.  This area is often complicated by an agency’s on-call policy/agreement.  In the event of a later claim, a clear on-call policy can be essential in determining whether the parties characterized the time spent waiting on-call as actual work.

Employers must generally pay employees for actual work performed for the employer, whether the work is performed on the employer’s premises or off-site.  The key factor is whether the employee is actually engaging in work.  For example, an on-call employee who is not required to remain on the employer’s premises, but merely required to notify the employer where he or she may be reached, is not working compensable hours under the FLSA so long as the employee is not prevented from effectively using the time to engage in personal pursuits.

The Ninth Circuit has held that the two predominant factors in determining whether an employee’s on-call waiting time is compensable overtime are:

(1) the degree to which the employee is free to engage in personal activities; and

(2) the agreements between the parties.

Engaged to Wait or Waiting to Be Engaged?

The proper inquiry into the first factor is whether an employee is so restricted during on-call hours as to be “effectively engaged to wait.”  The Ninth Circuit has provided an illustrative, non-exhaustive list of factors to be analyzed in determining the degree to which an employee is free to engage in personal activities while on-call:

(1) whether there was an on-premises living requirement;

(2) whether there were excessive geographical restrictions on employee’s movements;

(3) whether the frequency of calls was unduly restrictive;

(4) whether a fixed time limit for response was unduly restrictive;

(5) whether the on-call employee could easily trade on-call responsibilities;

(6) whether use of a pager could ease restrictions; and

(7) whether the employee had actually engaged in personal activities during call-in time.

What Did You Say?

The second factor involves evaluating the agreements between the parties.  An agreement between the parties which provides at least some type of compensation for on-call waiting time may suggest the parties characterize waiting time as work.  Conversely, an agreement pursuant to which the employees are to be paid only for time spent actually working, and not merely waiting to work, may suggest the parties do not consider waiting time to be work.  Although it is important to note that the parties’ agreement is a predominant factor, but not a controlling factor.

Ultimately, whether employees are entitled to be paid for every hour they are on-call requires a fact-intensive analysis and must be determined on a case-by-case basis.  Therefore, it is essential to understand the appropriate circumstances under which non-exempt employees can be designated as “on-call”, how to properly structure on-call assignments and how to effectively draft on-call policies/agreements in order to avoid triggering hourly compensation requirements.  Employers should also periodically evaluate the on-call assignments and how often employees are called out so they can make sure the organization is operating efficiently and employees are paid properly.

Let’s Talk About Sex (in the Workplace)

Posted in Employment, Workplace Policies

829px-Symbols-Venus-Mars-joined-togetherWe are closing in on the thirtieth anniversary of the seminal decision that defined sexual harassment in the workplace.  In 1986, the United States Supreme Court opined in Meritor Savings Bank v. Vinson that when a boss coerces a subordinate into having sex, it’s against the law—in particular, a violation of Title VII of the Civil Rights Act of 1964.  By 2006, twenty years later, AB 1825 established mandatory sexual harassment training for California employees.  But, this post is not about unlawful sex or sexual harassment in the workplace, as that topic has been well covered over the past three decades.  So, let’s talk about sex in the workplace that is lawful (or at least starts that way) but nonetheless ends up in litigation, and whether a fraternization policy is the employer’s metaphorical shield against a lawsuit.

In a 2013 survey conducted by the Society for Human Resources Management, the number of employers with fraternization policies increased from twenty to forty-two percent since 2005.  Ninety-nine percent of those surveyed prohibit romantic relationships between supervisor and subordinate.  Even though the supervisor/subordinate relationship could start as consensual, the risk for employers associated with these types of relationships is significant.  When one person is in a power position, whether male or female, the subordinate will generally be in a position of vulnerability.  Additionally, a supervisor engaging in a consensual relationship with a subordinate risks his or her employment when the subordinate claims the relationship was not consensual.  This type of claim happens—frequently.

In the California case Barbee v. Household Automotive Finance Corporation, a national sales manager was terminated from his employment because he was involved in a consensual relationship with a subordinate.  The employer’s policy required supervisors to notify management of such relationships so the employer could evaluate whether there was a conflict of interest.  The sales manager did not follow the company’s policy.  When management learned of the relationship, the sales manager was allowed to end the relationship or resign.  He did neither and was terminated.  In reaching its conclusion that the sales manager’s claims against the employer failed, the court aptly noted that employers are “legitimately concerned with . . . possible claims of sexual harassment . . . created by romantic relationships between management and non-management.”  The court also noted that widely accepted community norms support a finding that supervisors do not have “a privacy right to engage in intimate relationships with their subordinates.”

The fraternization policy in Barbee did not stop the employer from being subject to a lawsuit.  In fact, the terminated sales manager sued the company for various causes of action, including invasion of privacy.  The policy did, however, ultimately serve as a metaphorical shield, by putting an end to the lawsuit — as Perseus’ shield put an end to Medusa.

As in Barbee, California courts since have consistently found that employers have an interest in prohibiting supervisor/subordinate romantic relationships.  However, it is less clear whether employers may restrict relationships in other circumstances, such as those involving relationships between co-workers or between company employees and clients or customers.  A policy that strictly prohibits co-workers from dating possibly could violate the employees’ Constitutional right to privacy.  Barbee established that there is no reasonable expectation of privacy for supervisor/subordinate romantic relationships; however, the same is not necessarily true for some other types of workplace relationships.

Several California court decisions affirm that individuals, including in the employment context, have a recognized right to privacy in their sexual relationships or habits.  Employers, nevertheless, still have options.  For example, if co-worker romantic relationships interfere with the employer’s business, the employer may be able to take reasonable action to correct the situation—employers should use caution though in disciplining employees under these circumstances.

When an employer drafts or reviews its fraternization policy, there are some key elements to consider:

  • Clearly define what types of subordinate/supervisor relationships are prohibited;
  • State what behavior is acceptable in the workplace regarding romantic relationships;
  • Describe consequences for violating the policy; and
  • Offer employees the opportunity to understand the implications of the policy and how to comply.

Although fraternization policies may be a daunting task to develop, and unpalatable to employees, even a diminutive shield is better than none.

Tips from the Table: Effect of Retirement Costs on Negotiations

Posted in Labor Relations, Negotiations

We are proud to continue our video series – Tips from the Table. In these monthly videos, members of LCW’s Labor Relations and Negotiations Services practice group will provide various tips that can be implemented at your bargaining tables. We hope that you will find these clips informative and helpful in your negotiations.

Affordable Care Act Limitations When Hiring a Retired Annuitant – A Potential Catch 22

Posted in Healthcare, Retirement

Healthcare.jpgThis post was authored by Heather DeBlanc

Under the Affordable Care Act’s (ACA) large employer shared responsibility provisions, employers are required to offer minimum essential coverage that is both affordable and provides minimum value to substantially all full-time employees and their dependents, or face potential penalties.  However, the California laws governing retired annuitants prohibit employers from offering retired annuitants health or other benefits without incurring serious consequences.  The result is a potential Catch 22 – employers are prohibited from offering retired annuitant health benefits, but the ACA will penalize employers that fail to offer health benefits to full-time employees.

In light of the above, what happens if a retired annuitant is employed on average at least 30 hours of service per week (i.e. full-time under the ACA)?  The retired annuitant could trigger potential penalties to the employer.

Therefore, employers should ensure that a retired annuitant does not become a full-time employee under the ACA.  CalPERS has recommended that certain public employers develop policies prohibiting retired annuitants from working full-time to ensure that the employer will not be in jeopardy of federal penalties and will not inadvertently offer health benefits in violation of provisions in the California Government Code.  In order for an employer to determine what kind of policy to adopt, the employer must know how it will identify full-time employees under the ACA.

The ACA has two potential methods an employer may use to determine full-time employees:  (1) the monthly measurement method and (2) the look back measurement method safe harbor.

An employer using the monthly measurement method will need to limit hours of retired annuitants to less than 30 hours of service per week.  The monthly measurement period does not allow an employer to plan ahead.  If an employee’s hours of service hit 130 hours in a month (i.e. the ACA-defined equivalent to 30 hours of service per week), then the employee will be considered full time.

An employer using the look back measurement method safe harbor has a bit more flexibility.  An employer using the look back measurement method safe harbor will need to limit a new retired annuitant who is reasonably expected to be full-time to no more than three consecutive months of service.  A new retired annuitant is one who is rehired after a break in service of at least 13 consecutive weeks (26 consecutive weeks for an educational organization) or a break of at least 4 consecutive weeks but the break is longer than the preceding period of service.  For a new retired annuitant, the employer must determine whether the retired annuitant is “reasonably expected” to be employed at least 30 hours of service per week.  Under the ACA, the employer must look at the following factors to determine whether a retired annuitant is “reasonably expected” to be employed full-time (retired annuitants usually may not fill a vacant position, but must perform “extra help” assignments.  The first four factors will be less useful here than in the ACA Analysis related to the non-retiree employees.   However, where the appointment is by the governing body to fill a high level vacancy during active recruitment under Government Code section 21221(h) these factors will be more relevant):

  • Is the retired annuitant replacing someone who was full-time?
  • The extent to which employees in the same or comparable positions are full-time?
  • Is the job advertised as full-time?
  • Does the job description indicate the position is full-time?
  • How is the job communicated to the retired annuitant?

If the retired annuitant will be performing work reasonably expected to be full-time, the employer must offer affordable coverage by the first day of the fourth month from their date of hire, or risk exposure to potential penalties.  The regulations state that an employer must not take into account the fact that the employee may terminate shortly when making the “reasonable expectation” determination.

If the retired annuitant does not have the requisite break in service described above, then the prior hours of service will factor in to the full-time status of the retired annuitant.

In sum, we recommend the following for agencies who wish to hire retired annuitants:

  • Agencies using the monthly measurement method:
    • Limit a retired annuitant’s hours of service to less than 30 hours of service per week.
  • Agencies using the look back measurement method safe harbor:
    • Do not hire a retired annuitant until they have had a break in service of at least 13 consecutive weeks (26 consecutive weeks for an educational organization) or at least 4 consecutive weeks but the break is longer than the preceding period of service;
    • If hiring a retired annuitant who is “reasonably expected” to be full-time, limit the term of employment to three months.

U.S. Supreme Court Holds: There is No Presumption That Retiree Medical Benefits Are Vested

Posted in Pension, Retirement

US-Supreme-Court_2.jpgOn Monday, a unanimous United States Supreme Court, in a harshly critical opinion, overruled a decision of the Sixth Circuit Court of Appeals that had in essence created a presumption that retiree medical benefits provided for in a collective bargaining agreement are per se vested, unless it can be proven by extrinsic evidence otherwise.  In M&G Polymers USA v. Tackett, the Supreme Court rejected this presumption and in a line of cases upon which the Sixth Circuit erroneously relied.

The story begins with Hobert Tackett who worked at the Point Pleasant Polyester Plant in West Virginia for many years until he retired in 1996.  During the term of his employment he, and other employees, were represented by various labor unions and subject to collective bargaining agreements.

In 2000, the plant was purchased by M&G Polymers USA.  M&G entered into a master collective bargaining agreement with the labor unions and a Pension, Insurance and Service Award Agreement (“P&I Agreement”), similar to previous agreements entered into by the predecessor employer and the unions during the term of Tackett’s employment.  The 2000 P&I Agreement provided that for employees who retired on or after January 1, 1996, and who were eligible for and receiving a monthly pension under the company’s pension plan, whose age and years of service equaled 95 or more points would receive a full company contribution towards the cost of the company’s health care benefits.  The agreement had a term of three years after which it was renegotiated and a similar agreement was adopted in 2003.

In 2006, once the term of the current P&I Agreement was at an end, M&G announced that it would require retirees to contribute toward the cost of their health insurance.  Tackett, with other retirees, sued M&G claiming the language in the 2000 P&I agreement providing that employees with a certain level of seniority “will receive a full Company contribution towards the cost of [healthcare] benefits” created a vested right to such benefits that continued beyond the expiration of the agreement.  They alleged the company had breached the prior collective bargaining and P&I agreements, both in violation of federal labor law and the Employee Retirement Security Income Act (“ERISA”).

The federal district court ruled in favor of M&G, but the Sixth Circuit Court of Appeals reversed. The Court of Appeals erroneously relied upon its earlier decision in the case of International Union, United Auto, Aerospace, & Agricultural Implement Workers of Am. v. Yard-Man, Inc., 716 F. 2d 1476, 1479 (1983) (“Yard-Man”) and its progeny to hold that in the absence of extrinsic evidence to the contrary, the provisions of the contract indicated an intent to vest retirees with lifetime benefits.

On January 26, 2015, a unanimous United States Supreme Court reversed the Sixth Circuit Court of Appeals and, in no uncertain terms, disapproved the rationale behind the decision in Yard-Man and its progeny.

The Court explained, that “[a]s an initial matter, Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law.”  The Supreme Court went on to dissect the fallacies encountered by the Court of Appeals both in the instant matter and in Yard-Man as follows:

  1. The Court of Appeals presumed that when parties agree to benefits which accrue upon achievement of retiree status, there is an inference that the parties likely intended those benefits to continue as long as the beneficiary remains a retiree.  The Supreme Court rejected such a wholesale presumption to be read into every collective bargaining agreement.   “Although a court may look to known customs or usages in a particular industry to determine the meaning of a contract, the parties must prove those customs or usages using affirmative evidentiary support in a given case.”
  2. The Court of Appeals reasoned that benefits for retirees are not mandatory subjects of collective bargaining and therefore, the presumption is that they are not subject to renegotiation.   The Supreme Court disagreed finding that parties can and do make retiree medical benefits subject to collective bargaining, as did M&G Polymers and the labor unions did in this case.
  3. The Yard-Man decision likened retiree medical benefits to “deferred compensation” and therefore treated the benefits the same as vested pensions. The Supreme Court disagreed pointing out that under ERISA, plans that result in a deferral of income by employees are pension plans, whereas medical benefits are “welfare plans.” Thus, as far as ERISA is concerned, retiree medical benefits are not deferred compensation.
  4. The Yard-Man decision discounted the presence of durational clauses in collective bargaining agreements providing for the expiration of the agreement at the end of its term. It inferred that parties would not leave retiree benefits to the contingencies of future negotiations and that it is presumed retiree medical benefits continue so long as the beneficiary remains retired.  Yard-Man concluded this inference “outweigh[ed] any contrary implications derived from a routine duration clause terminating the agreement generally.”  A subsequent Court of Appeals decision went a step further requiring a contract to include a specific durational clause for retiree health care benefits to prevent vesting.  The Supreme Court wholly rejected such reasoning stating these decisions “distort[ed] the text of the agreement and conflict with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties.”
  5. The Court of Appeals reasoned that because some employees would not attain the prerequisites to attaining the retiree medical benefits during the three-year term of the agreement (e.g. age and years of service), the company’s promise of paid retiree medical benefits was “illusory.”  Generally, the “illusory contract doctrine” instructs courts to avoid constructions of contracts that would render promises a sham because such promises cannot serve as consideration for a contract.  However, the Supreme Court found that if the agreement benefits some class of retirees, then it may serve as consideration for all of the union’s promises. “And the [Court of Appeals’] interpretation is particularly inappropriate in the context of collective-bargaining agreements, which are negotiated on behalf of a broad category of individuals and consequently will often include provisions inapplicable to some category of employees.”
  6. The Court of Appeals reasoned that because the receipt of paid retiree medical insurance was tied to the retiree’s receipt of pension benefits, the intent was to vest the retiree health care benefits.  The Supreme Court rejected this inference as inconsistent with ordinary principles of contract law.
  7. The Supreme Court also noted that the Court of Appeals “failed to even consider the traditional principle that courts should never construe ambiguous writings to create lifetime promises” and “failed to consider the traditional principal that ‘contractual obligations will cease, in the ordinary course, upon termination of the bargaining agreement,’” quoting its earlier decision in Litton Financial Printing Div. v. NLRB.

Most importantly, the Supreme Court reaffirmed that employers can and do create vested rights to retiree medical benefits where the collective bargaining agreement provides “‘in explicit terms that certain benefits continue after the agreement’s expiration.’”  However,

“when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”

The Supreme Court remanded the case back to the Sixth Circuit Court of Appeal to interpret the P&I Agreement according to ordinary contract principles.

In a concurring opinion, Justice Ginsburg further pointed out that no rule requires “clear and express” language in order to show that parties intended health-care benefits to vest.  Those promises may also arise from implied terms of the agreement. Justice Ginsburg instructed the Court of Appeals to examine the agreement as a whole to ascertain the intent of the parties. If the agreement is ambiguous, the court may look to extrinsic evidence, such as the parties’ bargaining history.

While this decision arises out of the private sector, it has application and force to public employers. The California Supreme Court in Retired Employees’ Association of Orange County v. County of Orange has similarly held that retiree medical benefits contained in a collective bargaining agreement are to be interpreted according to ordinary contract principles. While public employers are guided by other legal strictures not otherwise found in the private sector (e.g. the Contracts Clause of the United States and California Constitutions), and overriding public policy considerations (e.g. legislation is not presumed to create private contractual rights), at the end of the day, we are guided by ordinary contract principles in deciphering the intent of employers and labor unions in creating employment, and post-employment, benefits.

With Labor Negotiations Approaching, is Your Agency Ready for a CalPERS Audit?

Posted in Retirement

Retirement-Sign.jpgThis blog post was authored by Michael Youril

The California Public Employees’ Retirement System (“CalPERS”) substantially increased the number of public agency audits it conducted last year.  As discussed in our previous post, the audit process can be long, complex, and time-consuming.  An audit can also result in significant liability or administrative headache for an agency when its reporting practices and labor agreements are not in compliance with the Public Employees’ Retirement Law (“PERL”) and applicable regulations.  It can also cause conflict between the agency and employee organizations regarding how to correct past mistakes and implement compliant policies and language.

As agencies gear up for negotiations on successor labor agreements, agencies can use this time to conduct an “internal audit” of their labor agreements and existing policies to ensure that they are in compliance with the PERL and other provisions of law.  A proactive internal audit allows agencies to identify and correct any errors so that they can be addressed at the bargaining table, before the agency is locked into a labor agreement and confronted with an unlawful provision that needs to be corrected after-the-fact on a piecemeal basis.  It can also correct errors before compliance agencies come knocking.

CalPERS recently issued Circular Letter No. 200-064-14, which discusses items of special compensation that are commonly misreported.  In order to qualify as special compensation and be included in calculating pension benefits, payment must meet the definitions set forth in the PERL and applicable California Code of Regulations provisions.  The Circular Letter identifies, among others, the following common reporting errors CalPERS discovered during its audits:

  • Longevity Pay – Longevity pay should not have additional requirements other than length of service, or service in a particular class, for a minimum period exceeding five years.  For example, where a longevity incentive is combined with educational or performance requirements, the additional requirements remove the payment from the definition of “longevity pay” and the item may be excluded by CalPERS.
  • Uniform Allowances – Agencies must report the value of uniforms provided to employees, even if no specific payment is made directly to the employees. The value of the uniform should also be set forth in the labor agreement.  Items solely for personal health or safety are not reportable.  Moreover, uniform allowances are not reportable for “new members” subject to the Public Employees’ Pension Reform Act (“PEPRA”).
  • Bonus – In order to qualify as a “bonus,” the bonus must be made to a group or class, awarded for superior performance or merit, and in accordance with a “program or system…to plan and identify performance goals and objectives.”  Bonus pay is also not reportable for new members subject to PEPRA.

Agencies should conduct internal audits to determine whether any of their policies, labor agreements, or reporting practices contain the errors identified by CalPERS.  For example, agencies should ensure that they are differentiating among “classic members” and “new members” in reporting certain items of special compensation.  Agencies should also review whether their labor agreements are at odds with any other legal requirement, such as the Fair Labor Standards Act or the Affordable Care Act.  Correcting these issues early on can save the agency time and money in the event of an external audit by a compliance agency.

On February 3, 2015 at 10:00 am, Liebert Cassidy Whitmore will be conducting a webinar regarding internal reviews and audits of labor agreements.  Peter Brown and Steve Berliner will walk agencies through common mistakes in labor agreements and negotiations.  For details, or to register, click here.