This guest post was authored by Judith Islas

Pandora's box

The California Supreme Court recently opened the door to a new way employees and retirees can sue local public agencies.  The Court held that employees and retirees may have implied contractual rights.  Retired county employees may even have an implied contractual right to vested health benefits, although there is no ordinance, resolution or MOU expressly providing that right.

For years, Orange County combined active and retired employees into a single pool to calculate health insurance premiums.  Retirees benefitted from paying less than if they were pooled separately; however, active employees subsidized retirees by paying more. In 2007, the County split the pool, resulting in increased retiree premiums.

The retirees sued to stop the County from splitting the pool. There was no MOU, resolution or ordinance requiring combined pooling, so in the absence of an express requirement, the retirees claimed there was an implied contract requiring shared pooling.

The County argued the retirees could not sue based on an implied contract theory because public employment rights are created by state laws, local ordinances and resolutions, and not by contract. The Supreme Court disagreed, ruling that public employment can be governed both by laws and contracts, as long as any contracts are not inconsistent with the applicable laws or local legislative enactments.  The Court noted various laws authorizing local agencies to enter into employment based contracts, thereby allowing employee rights to be based on both statutory and contractual obligations.

The Court ruled a contract creating employment rights can be express– based on words– or implied– based on conduct, including conduct reflecting the parties’ intent.  This means a county and its employees may form implied in fact contracts, including one creating vested retiree health benefit rights.  Thankfully, the standard for proving an implied contract is high and can only be established by showing that a right is clearly implied by a County ordinance or resolution or there is other convincing evidence of an implied contract.   Further litigation will determine whether the retirees in this case can prove existence of an implied contract to provide a vested right to a unified pool for health premiums.

CAUTION: The Court’s reasoning in Retired Employees Association of Orange Co. v. County of Orange can be used by county and other local agency retirees and employees to claim they have various implied contractual rights. In a time of economic turmoil, local agencies will want to act cautiously to avoid creating unanticipated and unwanted implied contractual obligations that may create unfunded and unanticipated liabilities.

Some TIPS to protect against implied contract claims are:

  • Clear language in MOUs, ordinances and resolutions, as implied contracts cannot be established if they contradict express language
  • Language in MOUs, ordinances and resolutions that expressly denies the creation of or intent to create any benefits or rights not expressly stated in writing
  • Be sure to comply with all applicable MOUs, ordinances, and resolutions
  • Do not provide benefits and rights not set forth in MOUs, ordinances or resolutions
  • Carefully review newsletters, pamphlets and other written communications to monitor for unintended statements, representations or promises that could be used to support an implied contract claim 


Photo Courtesy of Creative Commons by Christiaan Botha