Employment Law Daily Implied contract claims concerning retiree heath care benefit revived, but state law age bias claim fails
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Friday, September 7, 2018

Implied contract claims concerning retiree heath care benefit revived, but state law age bias claim fails

By Ronald Miller, J.D.

Contract claims asserted by retirees with regard to a county’s reduction in the Grant Benefit paid to retirees to defray the cost of health care premiums were revived by the Ninth Circuit. The appeals court held that the retirees’ second amended complaint set forth sufficient allegations regarding continuation of the Grant Benefit during retirees’ lifetimes to survive a motion to dismiss. On the other hand, because employers are not required to provide post-retirement benefits at all, the county did not violate the California Fair Employment and Housing Act (FEHA) by treating retirees as a separate force and making cost calculations accordingly, taking into account the age distribution of the retiree group as a whole. Thus, the retirees’ claim of unlawful age discrimination under FEHA fails as a matter of law (Harris v. County of Orange, September 5, 2018, Berzon, M.).

This case arises out of the restructuring of two benefits the county provided to its retirees: the Retiree Premium Subsidy and the Grant Benefit. In 1966, the county began offering group medical insurance to its retired employees. Initially, premiums were calculated separately for active and retired employees. The county paid a large portion of the premium for active employees, but retirees paid most of their own premiums.

In 1985, the county combined active and retired employees into a single unified pool for purposes of calculating premiums. By allowing retirees to participate in a single unified pool, the county effectively established a health insurance subsidy for retirees, lowering their premiums while raising active employee premiums. This benefit is called the Retiree Premium Subsidy.

From 1993 through 2007, the retired employees also received a monthly grant (the Grant Benefit) to defray the cost of health care premiums. The terms of the Grant Benefit were set forth in a Memorandum of Understanding (MOU) between the county and its union-represented employees. The monthly grant for retirees was calculated by multiplying an employee’s years of service at retirement by a fixed-dollar amount (the Grant Multiplier).

In return for the Grant Benefit, the unions and the Orange County Employee Retirement System (OCERS) agreed to allow the county to access $150 million in surplus investment earnings. The county intended the Grant Benefit to induce employees to retire early, allowing the county to reduce its workforce.

Beginning in 2004, the county negotiated with its labor unions to restructure the retiree medical program, which was underfunded. Two years later, county supervisors approved an agreement with the union that made reductions in benefits for retirees: (1) the county would split retired and active employees into separate pools to set premiums; the maximum increase for the Grant Multiplier would be reduced from 5 percent to 3 percent; and (3) once a retiree became eligible for Medicare, the Grant Benefit would be reduced by 50 percent.

In November 2007, a retiree association (REAOC) filed suit challenging the county’s decision to eliminate the Retiree Premium Subsidy. The district court granted summary judgment in favor of the county. On appeal, the Ninth Circuit certified to the California Supreme Court the question whether a county and its employees can form an implied contract that confers vested rights to health benefits for retirees. In light of the state court’s affirmative response, the matter was remanded to the district court. On remand, the district court held that REAOC failed to show the existence of an implied contract right.

Class action. While the REAOC case was pending, this class action was filed on behalf of thousands of retirees, alleging that the county breached its contractual obligations to retirees by eliminating the Retiree Premium Subsidy and reducing the Grant Benefit, and that elimination of the Retiree Premium Subsidy also constituted age discrimination under FEHA. In 2011, the district court granted the county’s motion for judgment on the pleadings. Subsequently, the Ninth Circuit reversed the district court’s dismissal in Harris v County of Orange (Harris I).

On remand, the district court granted the county’s motion to dismiss contract claims related to the Grant Benefits because there was no explicit legislative or statutory authority requiring the county to provide the retirement benefits associated with the grant. The FEHA claim was dismissed as well on the ground that the retirees provided no legal authority that prohibited the county from splitting the premium pool. Ultimately, the retirees appealed the judgment of the district court.

Implied contract. The retirees alleged that they had an implied contractual right to receive the Grant Benefit throughout their retirement. It was undisputed that the county and its retirees had annual contracts providing for health benefits. Those contracts were the product of negotiations resulting in binding MOUs between the county and its employees. The entitlement to the Grant Benefit was set forth expressly in the MOUs. Therefore, the retirees alleged an express contractual right to the Grant Benefit for some period. The question on appeal was whether those annual contracts, also contained, as an implied term, a promise that the Grant Benefit would continue during their retirement.

Here, the Ninth Circuit observed that the district court misread its decision in Harris I because that decision did not directly address the retirees’ implied contract claim. It was only on remand that the retirees clarified their allegations as encompassing both express terms and an implied term that required the county to continue providing that benefit during retirement. Harris I “did not purport to rule on a theory premised on implied terms or to interpret or apply” the California Supreme Court’s decision in REAOC II.

Consequently, the appeals court concluded that the retirees’ second amended complaint set forth sufficient allegations regarding continuation of the Grant Benefit during retirees’ lifetimes to survive a motion to dismiss. In this case, the retirees have set forth the existence of annual MOUs establishing a right to Grant Benefits. The retirees’ allegations plausibly supported the conclusion that the county impliedly promised a lifetime benefit, which could not be unilaterally eliminated or reduced. Accordingly, the district court’s order was reversed insofar as it dismissed the retirees’ contract claims regarding the Grant Benefit.

Age discrimination. The retirees’ FEHA age discrimination claim challenged the elimination of the Retiree Premium Subsidy. As a general matter, California law “does not require equal health care benefits for active employees and retirees.” Here, the retirees asserted that the county’s decision to “split the pool” and thereby eliminate the Retiree Premium Subsidy violated FEHA by targeting retirees based on express stereotyped assumptions that (1) a retiree is likely to be older; and (2) an older person is likely to have higher health costs than a younger one.

The Ninth Circuit observed that the sole question here was whether the county, under FEHA’s age discrimination provisions, may treat retirees as a group differently, with regard to medical benefits, than employees as a group, taking into account that the cost of providing medical benefits to the retiree group is higher because retirees are on average older. The appeals court concluded that it may.

Thus, the appeals court ruled that where employers are not required to provide post-retirement benefits at all, and particularly where retirees as a force are covered by separate benefits terms, the county did not violate the FEHA by treating retirees as a separate force and making cost calculations accordingly, taking into account the age distribution of the retiree group as a whole. Thus, the retirees’ claim of unlawful age discrimination under FEHA failed as a matter of law.

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