The Supreme Court of California addresses whether a California county and its employees can form an implied contract that grants vested rights to health benefits for retired employees. The court concludes that a county can be bound by an implied contract under California law if there is no legislative prohibition against such arrangements. Although Government Code section 25300 requires that compensation for county employees be addressed in an ordinance or resolution, it does not prevent the formation of contracts with implied terms if legislative intent to create private rights is evident.
The context stems from a lawsuit filed in 2007 by the Retired Employees Association of Orange County, Inc. (REAOC) against the County of Orange, challenging changes to health benefits for retired employees. Since 1966, the county offered group medical insurance to retirees, initially calculating premiums separately for active and retired employees. In 1985, the county combined both groups into a single pool for premium calculations, subsidizing retiree premiums by lowering them below actual costs while raising premiums for active employees.
In 2007, due to budget concerns, the county resolved to split the pool of active and retired employees effective January 1, 2008, after negotiating with labor unions for active employees but not with retirees. REAOC filed suit on November 5, 2007, representing approximately 4,600 retired employees and seeking an injunction against the split. Although REAOC acknowledged the silence of the express provisions regarding the duration of the unified pool, it argued that the county's longstanding practice of pooling and its representations created an implied contractual right to maintain the single unified pool for retirees prior to the split. Notably, REAOC referenced promotional materials that indicated retirees would continue to be eligible for the health insurance plans upon retirement.
County referenced annual Board motions and resolutions that specified health insurance rates for each plan year. The district court granted summary judgment in favor of County, ruling that County could not be liable for obligations not explicitly undertaken through Board resolutions. The Retired Employees Association of Orange County (REAOC) appealed to the Ninth Circuit, which required a demonstration that an enforceable contract existed for the continuation of health benefits for retirees. The Ninth Circuit sought clarification on whether implied contracts could confer vested rights to health benefits under California law.
California law recognizes both express and implied contracts, with the latter arising from conduct rather than explicit words. While implied terms can have equal legal effect as express terms, they cannot alter express terms. All contracts, public or private, are interpreted under the same legal standards unless specified otherwise. California courts do not apply special rules for governmental contracts and acknowledge that collective bargaining agreements may contain both express and implied terms.
The Ninth Circuit's certified question asks if California law prohibits implied contracts between a county and its employees from conferring vested rights to health benefits for retired employees. County argues three main points: (1) that implied contracts are not permissible between a county and its employees; (2) that even if allowed, such contracts cannot create vested rights; and (3) that any vested rights implied do not extend to health benefits. Each argument is set for examination.
Plaintiff employees of the Nevada Irrigation District in Youngman claimed entitlement to merit salary increases based on an implied contract requiring annual salary reviews and advancements on employment anniversary dates. The district contended that it lacked authority to enter into implied contracts, as it could only act within powers expressly granted by statute. The court unanimously ruled that the district's general powers included the ability to enter into implied contracts, concluding that governmental subdivisions can be bound by such contracts in the absence of statutory prohibition.
In contrast, the County cited Markman v. County of Los Angeles, where a deputy sheriff was denied compensation for overtime worked due to a local ordinance's requirements regarding prior approval and time off. The court recognized the unfairness of penalizing Markman but ultimately denied recovery based on the ordinance. This case established that employment terms for public agency employees are governed strictly by statutes or ordinances, limiting their compensation to what is expressly provided, thus precluding the formation of implied contracts for compensation, including postretirement benefits. The County argues this principle directly addresses the certified question, asserting that public employees cannot form implied contracts for compensation.
Markman established that a public employee who fails to take required time off or obtain authorization for overtime pay as specified by an ordinance cannot recover under that ordinance, regardless of the hardship it may cause. Subsequent cases, including Association for Los Angeles Deputy Sheriffs v. County of Los Angeles, reiterated this principle, emphasizing the conflict between employee claims and governing statutes. In that case, the court ruled that department policies conflicting with the county ordinance were invalid, limiting employee compensation to what the ordinance provided. Similar rulings in Seymour v. Christiansen and California School Employees Assn. v. New Haven Unified School Dist. reinforced that implied contract terms cannot contradict expressly agreed terms or statutory provisions. The court highlighted that statutory provisions governing civil service employment cannot be overridden by conflicting contracts. However, since the County does not argue that any statute prohibits providing health benefits to retirees, previous cases do not apply here. The document also cautions that while public employment is generally not contractual, parties can enter binding contracts regarding employment terms, as permitted by the Meyers-Milias-Brown Act, which allows local governments to negotiate with employee representatives. The County engaged in negotiations and approved memoranda of understanding (MOUs) with employee bargaining units during the relevant period, indicating flexibility in the employment relationship.
Agreements of employment between the state and public employees, once adopted by governing bodies, are binding and constitutionally protected. Public employers cannot deny employees the ability to enforce written contracts that do not contravene public policy. When a contract governs the employment relationship, breach of contract claims by public employees are valid regardless of their public employee status. All California court decisions recognize labor-management agreements, both public and private, as enforceable contracts, interpreted to reflect the mutual intent of the parties. This principle is particularly significant in public employment due to the limited bargaining power of public employees.
The contractual rights in question do not necessarily hinge on explicit statutory language but rather on the existence of valid bilateral contracts regarding compensation. The possibility of an implied right for a unified health insurance pool for active and retired employees cannot be determined solely by the procedures outlined in case law. Counties may be bound by implied contracts unless a statutory prohibition exists.
The county identified Article XI, Section 1(b) of the California Constitution, which mandates that governing bodies prescribe employee compensation but does not specify a required formal method for doing so. This provision's intent is to grant local autonomy over setting salaries rather than to impose strict limitations on the methods used. Previous court rulings support the notion that counties can approve Memoranda of Understanding (MOUs) through resolutions without constitutional constraints.
Government Code section 25300 limits a county's discretion regarding employee compensation, stipulating that the board of supervisors must prescribe compensation and employment conditions for county officers and employees. The statute permits these actions to be taken by resolution or ordinance, although the use of "may" suggests permissiveness. Legislative history indicates the provision's second sentence was intended to give counties an alternative to addressing employment matters exclusively through ordinances, thereby expanding their authority. This change was enacted in 1974 to allow the board of supervisors to regulate terms, conditions, and compensation of employees via resolution. Specifically, Orange County mandates that such matters be addressed by resolution. REAOC argues that its members' claims regarding health premiums constitute deferred compensation, tying future retirement benefits to overall compensation. Consequently, a court must reference board resolutions, including those related to Memorandums of Understanding, to ascertain the contractual rights and obligations of the parties involved. The court does not determine if an implied contract on compensation exists but notes that REAOC seeks acknowledgment of an implied term within an existing contract rather than the establishment of a new implied contract.
Compensation issues can be implied through resolutions, but this does not equate to establishing contractual rights. Under California law, contractual rights may only be implied from legislation under specific circumstances. A resolution by a county board primarily serves as an exercise of policy authority, not solely to create contract rights. Courts determine whether a resolution intends to create private rights or merely establish policy, emphasizing that legislatures primarily make laws, not contracts. Policies are inherently adjustable, and interpreting laws as contracts without clear expression would restrict legislative power. The presumption exists that statutes do not create private rights, and the burden lies on individuals claiming a contract with the state to counter this presumption.
California courts consistently uphold this presumption, with various verbal formulations. For example, in Taylor v. Board of Education, the court ruled that permanent tenure was statutory and thus modifiable, reinforcing that legislatures make laws, not contracts. However, legislative enactments can create contractual obligations if there is a clear intention to do so, which must be unmistakable. California Teachers Assn. v. Cory noted that intent does not require explicit statutory language but can be implied from the statute's context and consideration exchange. Cases have recognized implied contractual obligations from statute texts. In Claypool v. Wilson, while it did not acknowledge an implied promise regarding investment earnings, it recognized that such obligations could exist if legislative control suspension is unmistakable. The case upheld the idea of implied vested rights within the context of public retirement systems.
Legislation in California can establish contractual rights when the statutory language or surrounding circumstances indicate a clear legislative intent to create enforceable private rights against a governmental body. While express intent is not strictly necessary, case law allows for implied contractual rights under certain conditions. For instance, if legislation ratifies or approves a contract, this intent becomes evident. However, some amici curiae argue that implied contractual rights are not applicable when a specific contracting method is legally mandated. They reference the case of Reams v. Cooley, which stated that contracts made outside the prescribed statutory method are not binding and that implied liability cannot arise in such circumstances. The case at hand involves a claim of an implied-in-fact contract, distinct from implied-in-law or quasi-contract claims. Unlike the plaintiff in Reams, who sought recovery under an improperly awarded contract, the claimant (REAOC) asserts that its contractual rights arise from resolutions formally approved by the County. Additionally, Government Code section 3505.1, which discusses the non-binding nature of memoranda of understanding until presented to a governing body, does not preclude REAOC’s claim; it argues that such a contract was presented and approved by the Board, albeit with terms that were not explicitly stated. Furthermore, Government Code sections 25207 and 54953 do not negate the potential validity of REAOC’s claim concerning the open meeting law and the duties of county government.
REAOC is not pursuing enforcement of a contract approved in violation of the Ralph M. Brown Act but is instead seeking to uphold the implied terms of a contract allegedly approved in an open meeting. Concerns raised by amici curiae, including the League of California Cities and the California State Association of Counties, highlight that retiree health benefits are not pre-funded like pensions and are often provided on a pay-as-you-go basis, with costs rising significantly in recent years. The legal issue at hand pertains to whether a contractual right to maintain a unified pool for setting health insurance premiums for retired Orange County employees can be implied from Board resolutions, including those that approved memoranda of understanding. The court notes that it will not decide this implication here.
A cautious approach is advised when identifying contracts within statutory language and defining contractual obligations. A 'clear showing' is required to demonstrate that legislation intended to create such obligations, preventing unexpected burdens on governing bodies and the public. The County argues that even if contractual rights could be implied, vested rights cannot be inferred without legal authority supporting this distinction. The cases cited indicate that benefits were not vested, but do not categorically bar the concept of vesting. A benefit is considered vested when the employee has an irrevocable interest in it, which is separate from when benefits mature. REAOC asserts that retiree rights to a unified pool vested at retirement, not during service.
In a relevant case, San Bernardino Public Employees Assn. v. City of Fontana, the Court of Appeal ruled that certain benefits could not be vested due to their annual accrual under expired MOUs, emphasizing that no statutory source provided additional employee protections. However, the court acknowledged that vested rights could be established through statute or valid regulations when legislative intent is clear.
The County's position is weakened by California League of City Employee Associations v. Palos Verdes Library District, which recognized that certain pay, vacation, and sabbatical benefits could be implied as vested rights based on employee longevity. The Court of Appeal supported this view, noting these benefits incentivized continued employment and constituted earned compensation. Although some courts have criticized the California League analysis for not sufficiently addressing legislative intent regarding vested rights, they have not disputed the concept that public employee benefits can become vested by implication under the right circumstances.
In Sappington v. Orange Unified School District, the Court of Appeal ruled that retirees did not hold a vested right to free health insurance under a preferred provider organization (PPO) plan, despite the district having offered it previously without charge. The court determined that the board's statement regarding underwriting health insurance costs did not create such a right, as it relied on common definitions of 'underwrite,' the parties' conduct, and the lack of evidence showing retirees had a reasonable expectation of free PPO coverage. The decision did not rule out the possibility of implied vested benefits in the public employee context.
REAOC claims that a unified pool for health insurance premiums represents deferred compensation that becomes vested upon retirement. However, the validity of this claim, including whether REAOC members had a contractual right to participate in this pool for premium purposes, is not addressed in the certified question. It is emphasized that any implied rights to vested benefits should be based on clear contractual language or strong extrinsic evidence. The County contends that even if vested rights could be implied from legislation, such rights should not extend to health benefits.
County's argument relies on the California Employees Retirement Law of 1937, particularly Government Code section 31692, which stipulates that the adoption of ordinances or resolutions under section 31691 does not create vested rights for members or retired members. Section 31692 allows the board of supervisors or governing body to amend or repeal such ordinances at any time, with specific provisions for notifying retired members.
Section 31691 permits counties or specified districts to contribute to premiums for life or disability insurance or medical service, requiring at least one plan to offer free choice of physician. However, the relationship between the contracts for medical services under section 31691 and 'health benefits' referenced by the Ninth Circuit is ambiguous.
REAOC argues that section 53201, which allows local agencies to provide health and welfare benefits, supersedes the anti-vesting language of section 31692 concerning health insurance benefits. This section gives local legislative bodies discretion over the scope of such benefits, which can include various forms of insurance. REAOC further cites case law indicating that health insurance benefits authorized under section 53201 have been recognized as vested benefits despite the anti-vesting provisions in section 31692, referencing Thorning v. Hollister School District as supporting evidence.
The County argues that the anti-vesting language in Government Code section 31692 applies to the benefits in question, despite not addressing the differences between Government Code sections 31691 and 53200. The relationship between a 'hospital service or medical service corporation contract' and a 'health care service plan' is also not clarified. However, the court finds that the County's reliance on the anti-vesting language fails because the vested benefit sought by REAOC pertains to the method of calculating health benefit premiums, not a direct contribution from the County towards those premiums. The pooling of active and retired employees affecting premium costs does not constitute a County contribution under section 31691.
While the County subsidized a portion of the retiree premiums through agreements with active employees, REAOC has not claimed a vested right to this subsidy. Instead, REAOC argues for equal health premiums for active and retired employees. The court concludes that California law may imply a vested right to health benefits for retired county employees from a county ordinance or resolution under certain circumstances, but determining if such circumstances exist is outside the scope of the current inquiry from the Ninth Circuit. The case is titled Retired Employees Association of Orange County Inc. v. County of Orange, with the opinion filed on November 21, 2011.
Ernest Galvan, Emblidge Moscone, G. Scott Sater, Rachel J. Sater, and Michael P. Brown represent the Plaintiff and Appellant. The California Public Employees' Retirement System is represented as Amicus Curiae by Peter H. Mixon, Gina M. Ratto, Patricia K. McBeath, Howard L. Schwartz, and Jennifer G. Krengel. The California Federation of Teachers, the California Community College Independents Organization, and the Fresno United Retirees Association are also Amici Curiae, represented by Robert J. Bezemek and Patricia Lim. Additionally, the California Retired County Employees Association, Sonoma County Association of Retired Employees, and Retiree Support Group of Contra Costa County are represented as Amici Curiae by Lewis, Feinberg, Lee, Renaker, Jackson, Jeffrey Lewis, Bill Lann Lee, Andrew Lah, and Sacha Crittenden Steinberger. The Defendant and Respondent is represented by Nicholas S. Chrisos, Teri L. Maksoudian, and the law firm Meyers, Nave, Riback, Silver, Wilson, including Arthur A. Hartinger, Jennifer L. Nock, and J. Scott Smith. The League of California Cities and California State Association of Counties are represented as Amici Curiae for the Defendant by Renne Sloan Holtzman Sakai, including Jonathan V. Holtzman, K. Scott Dickey, and Steve Cikes. The County of Sonoma and the County of Contra Costa are also represented as Amici Curiae by Hanson Bridgett, including Raymond F. Lynch, Sarah D. Mott, and Caroline B. Burnett. Counsel details are provided, including contact information for the primary attorneys involved, with a note that this information is not intended for publication with the opinion.
