Affirming summary judgment for a tenured teacher whose job was eliminated following the 2012 enactment of Senate Bill 1, which established a mandatory teacher-evaluation regime and removed the protection for tenured teachers in layoffs, the Seventh Circuit held that the law violated the Contract Clause when it was applied retroactively to the teacher, who had earned tenure 14 years before the new statute took effect. The teacher had just been elected president of his local teacher’s union and had been evaluated as satisfactory or higher in all skills when his principal recommended his annual contract be renewed, but the district determined to close two schools and lay off six teachers, retaining six non-tenured teachers instead under the new law. The appeals court agreed that this qualified as a substantial impairment of a contractual relationship under Indiana law, which unlike many state tenure statutes, has been treated as forming “an employment by contract between the teacher and the school corporation” (Elliott v. Board of School Trustees of Madison Consolidated Schools, December 4, 2017, Hamilton, D.).
Tenure statute. In 2012, Indiana’s Senate Bill 1 law took effect amending the teacher tenure law, enacted in 1927, reduced the rights of tenured teachers in layoffs. The U.S. Supreme Court had ruled in 1938 that the Indiana teacher tenure statute created contractual rights protected by the Contract Clause. So, said the Seventh Circuit, from 1927 to 2012, those contractual tenure rights included job security when school districts needed to reduce their teaching staffs: as long as they were qualified for an available position, tenured teachers had a right to be retained over non-tenured teachers. Senate Bill 1 eliminated that right and ordered school districts to base layoff choices on performance reviews without regard for tenure status. Did that law violate the Contract Clause rights of the teacher here, who had tenure 14 years before the law took effect, but who was laid off while non-tenured teachers were retained in positions for which he was qualified? Both the district court and the Seventh Circuit said yes.
Senate Bill 1 amendment. After discussing Indiana’s tenure statute and its history, under which tenured teachers have an “indefinite contract” that entitles them to employment contracts each year unless the employer has good cause (incompetence, in-subordination, neglect of duty, immorality, a justifiable decrease in the number of teaching positions so long as it retains qualified tenured teachers over non-tenured) to fire them, the appeals court examined Senate Bill 1. Among other things, it required schools to assess their teachers based on performance evaluations, student achievement, and effectiveness; rate them; and not consider tenure status when reducing its teaching staff.
Tenured teacher’s contract not renewed. After the teacher in this case had taught at the same elementary school for 19 years, 14 of them as a tenured teacher, he was elected president of the local teachers union. He had received teacher evaluations for 10 years, in all but one of which he was rated one of the two highest ratings in all 14 skills evaluated. The exception was in 2002, ten years earlier, when he received “needs improvement” in three skills related to “interpersonal relationships.” Near the end of the 2011-12 school year, his principal reviewed his yearly evaluation and recommended the teacher for contract renewal. Due to declining enrollment and funding, however, the district closed schools and reduced teaching staff; the teacher and five others were laid off. He sought a full hearing with the school board, during which the board’s findings of fact pointed to the ten-year-old evaluation that had rated the teacher low in interpersonal relationships. Concluding that the district could cancel his contract during a justifiable reduction in force under Senate Bill 1, it did just that, retaining six non-tenured teachers in positions that the teacher was licensed to teach.
Contract clause analysis. The constitution’s Contract Clause prohibits changes in law only if they operate “as a substantial impairment of a contractual relationship,” the Seventh Circuit instructed, describing the applicable two-step analysis that asks, first, whether a change in state law has substantially impaired a contractual relationship, and second, whether the impairment is reasonable and necessary for a legitimate public purpose.
Scope of contract. Although the school district did not generally dispute the U.S. Supreme Court’s 1938 holding in Anderson v. Brand that Indiana’s teacher tenure law had created an enforceable contract, it did dispute the scope of that contractual relationship. It argued that the tenure law’s job-security provisions were not part of the tenure contract but were variable terms that annual teaching contracts can change and also that the law has protected teachers only against dismissal without cause. However, that is not what the 1938 Supreme Court ultimately determined, emphasized the appeals court. Instead, the tenure law—not annual contracts—granted the teacher his contractual tenure rights, which became enforceable the year he earned tenure. Also, Indiana law made it clear that the tenure law protects against more than at-will termination: Before Senate Bill 1, the law granted a qualified tenured teacher an enforceable contractual right to be retained over non-tenured teachers during a reduction in force. Senate Bill 1, when applied retroactively to a teacher who earned tenure before 2012, “impairs those job security rights and the tenure contract,” concluded the Seventh Circuit.
Substantial impairment of job security. Laws impairing contracts violate the Contract Clause only if the impairment is substantial, which involves determining whether the impaired term was so central to the bargain such that it “substantially induced” teachers to enter their contracts, and whether the change in law was foreseeable (e.g., whether this change substantially disrupted teachers’ important and reasonable reliance interests). “The promise of job security, especially during layoffs, lies close to the core of teacher tenure,” reasoned the appeals court, pointing out that teachers trade higher salaries afforded to similarly educated professionals in exchange for protections against job loss that tenure offers. But Senate Bill 1 “substantially disrupted tenured teachers’ expectations about job security,” the court noted.
Unforeseeable. The second requirement for finding a substantial impairment is that the parties must not have anticipated the change in law. If a new law was foreseeable, then reliance on the impaired contract terms may have been unreasonable. To the Seventh Circuit, however, while any state law could change, “retroactive application to impair existing contract rights and reliance interests is another question” and was unforeseeable when teachers like the one here became tenured. Indiana has regulated teacher tenure since 1927; the Supreme Court held in 1938 that those regulations were contractual; and the state had not materially amended those terms for more than 80 years. Retroactive application of the layoff provisions of Senate Bill 1 to already-tenured teachers was not a foreseeable change, the appeals court concluded.
Reasonable and necessary. But if the impairment to contract is both reasonable and necessary for an important public purpose, the law still does not violate the Contract Clause. Though enacted for a legitimate and important public purpose, Senate Bill 1, the Seventh Circuit agreed, was unconstitutional as applied to an already-tenured teacher because it was neither necessary nor reasonable. Although improving teacher quality and public-education outcomes were both significant public interests, the Seventh Circuit held they did not justify this substantial impairment of the tenure contract for already-tenured teachers.
Senate Bill 1 did not change the state’s power to fire ineffective teachers, which it enjoyed from before 1927 to the present; instead, that amendment required schools “to consider small differences in performance among teachers who are not ineffective.” Here, when the school district chose the teacher for layoff, he had never been found ineffective (if he had, the school district could have fired him without relying on Senate Bill 1). Instead, the district offered as a rationale that he once, ten years earlier, had been found to need improvement in one skillset (which he apparently improved). Distinguishing between qualified and effective teachers on such a “meager basis” was not necessary to achieve Indiana’s goals as applied to teachers who earned tenure before Senate Bill 1 took effect. This retroactive impairment of their job security rights also was not reasonable; there were no significantly changed circumstances that imposed unforeseen advantages or burdens on either party, noted the court. And, after it had restricted tenure for new teachers, the state and its school districts were free to buy out the tenure rights of already-tenured ones, the court pointed out.
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