PUBLIC SECTOR BENEFITS UPDATE

These are difficult economic times for public sector entities, and having the ability to modify or eliminate employees’ fringe benefits may be crucial to a public sector entity’s financial viability. In a significant recent ruling, the Oregon Court of Appeals held that Josephine County (which was represented by Bullard Law) could prospectively modify or eliminate its employees’ fringe benefits and salaries because the County had retained the right to make those modifications. Watkins v. Josephine County (May 25, 2011).

The Underlying Facts
In 2005, in response to budget cuts, the Josephine County Commissioners prospectively modified the terms and conditions of its non-union managers’ employment. Specifically, the Commissioners prospectively: (1) eliminated the County’s matching contribution to the employees’ deferred compensation account; (2) stopped any further accrual of unused leave days in a leave bank; (3) modified salary step increases; and (4) revised the standard of discipline from “just cause” to “insufficient cause.”

Forty three current and former County managers sued the County claiming the changes breached their employment contracts, violated the Oregon Constitution, and violated the wage and hour statutes. The managers’ primary argument was that the County’s 2005 modifications to the terms and conditions of their employment violated non-union personnel rules the County had adopted in 2004. The trial court granted summary judgment to the County on the managers’ claims, and the managers appealed.

Court of Appeals Holding
On appeal, the managers claimed the purpose of the County’s non-union personnel rules was to make public sector employment more attractive, and that allowing the County to change those rules would undermine that purpose. In rejecting this argument, the Court of Appeals noted that any such purpose could not constitute a legally enforceable promise that the County would never change those rules.

The Court also noted the following:
 

1. The County’s rules expressly provided that the County Commissioners could take action “as they deem appropriate” on any proposed rule amendment;
    
2. The County’s Charter expressly provided that the “compensation and job related expenses of personnel in the service of the county shall be fixed annually by the budget committee”; and
    
3. The County’s deferred compensation plan expressly provided that the County could terminate it.

In short, the County reserved to itself the discretion to modify the terms and conditions of the managers’ employment, and thus the managers claims had to be rejected.

Practical Thoughts for Employers
There are several key points to take away from this case.

First, be careful how you word descriptions of benefits, terms and conditions in employee handbooks and personnel policies. It is a good idea to include language that expressly reserves the employer’s right to make prospective changes. You may also want to include a “this is not a contract” disclaimer to help show that permanent promises were not intended.

Second, remember that the rules governing prospective changes apply only to non-vested benefits. Whether or not a benefit is vested depends on: (1) the nature of the benefit in question; and (2) the terms of the promise. As the Court of Appeals cautioned, certain benefits can become instantly accrued such that they cannot be subsequently taken away or modified by the employer. Instant accrual benefits generally involve pension or other retirement benefits. Thus, the distinction between the types of benefits that can or cannot be prospectively modified requires careful analysis.

Bullard Law will continue to follow public sector benefit issues and to report on new developments. Please also feel free to contact us with any questions or concerns about any other employment, labor relations, and employee benefits issues.