City’s Promise To Pay Portion Of Future Retirees’ Medical Insurance Premiums Is Enforceable

A court of appeal recently concluded that a trial court erred when it dismissed a lawsuit by city employees who alleged in their petition that the memorandum of understanding (“MOU”) ratified by the city council promised active employees that the city would pay 50 percent of their medical insurance premiums after they retire.  (International Brotherhood v. City of Redding (--- Cal.Rptr.3d ----, Cal.App. 3 Dist., November 2, 2012).

Note

For a discussion of the referenced Retired Employees case, please see our Legal Alert entitled, “County May be Bound by Implied Contract for Retired Employees' Health Benefits”, December 5, 2011.

Facts

Local 1245 of the International Brotherhood of Electrical Workers (“IBEW”) claimed that from 1979 until March 2010, its MOU with the City of Redding (“City”) provided that City would pay 50 percent of the group medical insurance premiums for retirees and their dependents.  The MOUs since 1979 have contained the following or substantially similar language:  “The City will pay fifty percent (50%) of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future who goes directly from active status to retirement and continues the group medical insurance without a break in coverage.”  The MOUs provided that they would remain in full force and effect unless the MOUs were modified by mutual agreement.  The promises made in the MOUs were approved by City’s city council. 

IBEW asserts City also made promises to employees outside the MOUs that it would pay 50 percent of future retirees’ medical insurance premiums.  These promises were found in job postings and internal documents and communications.  IBEW claims “City used these promises to recruit employees and induce current employees to remain employed by the City and to accept lower wages.

In 2008, IBEW and City started negotiating a new collective bargaining agreement pursuant to which they agreed that City’s payment of 50 percent of future retirees’ medical insurance premiums was a vested benefit.  However, IBEW claims that in March 2010, City unilaterally changed its position and proposed to pay only a subsidy of 2 percent per service year, up to a maximum of 50 percent.  IBEW contends that because the parties could not reach an agreement on the issue, City unilaterally imposed the 2 percent per-service-year plan.

IBEW filed a petition for writ of mandate claiming that City unilaterally retracted it promise to pay 50 percent of employees’ medical insurance premiums after retirement.  City sought dismissal of IBEW’s petition because it alleged IBEW failed to state a claim against it.  The trial court dismissed IBEW’s petition finding that the right of an active employee “to receive future medical insurance benefits cannot be vested because it is subject to the collective bargaining process” and the MOU the parties entered into “cannot be deemed to provide vested rights because the MOU remains in force only until its expiration.”

Decision

After IBEW appealed the trial court’s decision, the Supreme Court filed its opinion in Retired Employees Association of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171 (“Retired Employees”), in which it held that pursuant to “California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”  After analyzing the facts in this case pursuant to the holding in Retired Employees, the court of appeal concluded that the trial court erred in dismissing IBEW’s petition “because the petition alleged that the MOUs ratified by the city council promised active employees that the City would pay 50 percent of their future retiree medical insurance premiums.”

The question before the Supreme Court in Retired Employees was whether “a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”  The Supreme Court held that a county may be bound by an implied contract “if there is no legislative prohibition against such arrangements, such as a statute or ordinance.”  Also, “[a] contractual right can be implied from legislation” and if “the legislation is itself the ratification or approval of a contract, the intent to make a contract is clearly shown.”  An agreement’s implied terms may also create vested rights and vesting is a matter of the parties’ intent. 

Based upon the holding in Retired Employees, the court of appeal held the trial court’s reasons for dismissing IBEW’s action were not valid.  IBEW adequately pleaded that there was a valid agreement for City to provide future retirement benefits to active employees.  It also pleaded that the agreement to provide future benefits was ratified by the city council.  The court concluded that the fact that active employees’ future right “to receive retiree medical insurance benefits remained subject to the collective bargaining process does not necessarily mean that prior MOUs, ratified by the city council, did not already create a contractual obligation that survived the expiration of the MOUs.”  A MOU may provide vested rights beyond the expiration of the MOU if the parties intend for it to do so. 

The court rejected City’s argument that city council did not expressly authorize a vested right to future medical insurance premiums for then-active employees.  The MOU clearly promised to pay 50 percent “of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future.”  This provision clearly includes future retirees as “presently enrolled” could only refer to retirees who are enrolled during the term of the MOU.  The court concluded that the most reasonable interpretation of the phrase “for each retiree in the future” is that City promised the benefit “to active employees when they retired, even beyond the term of the MOU.”  The city council ratified the MOUs with this language.  Therefore, “then-active employees’ vested right to future retiree medical insurance premium benefits was legislatively authorized, expressly.” 

The court rejected City’s argument that the provision of the MOU on the subject of future retirement of active employees expires upon the expiration of the MOU.  The court concluded that use of language in the MOU whereby City’s promised to pay 50 percent of medical insurance premiums for “each retiree in the future” reasonably leads the court to conclude that City and IBEW “intended to provide a future benefit to active employees, not just during the term of the MOU.”

City also asserted that the right to have City pay for a retiree’s medical insurance premiums did not vest unless an employee retires before the expiration of the MOU.  The court found City’s argument is defeated by the language of the MOU that provides the benefit not only for retirees but for each retiree in the future.  The court of appeal reversed the decision of the trial court and ordered it to allow IBEW to proceed on its claims against City.

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Bruce A. Scheidt, Laura Izon Powell or Jeffrey L. Massey | 916.321.4500