California Supreme Court Holds Counties May be Bound by Implied Contracts to Provide Health Benefits to Retired Employees

In Retired Employees Association of Orange County, Inc. v. County of Orange (“REAOC”), the California Supreme Court addressed a question posed to it by the Ninth Circuit: “Whether, as a matter of California law, a California county and its employees can form an implied contract that confers vested rights to health benefits on retired county employees.”  REAOC, No. S184059, at *1 (Cal., filed Nov. 21, 2011). 

In Orange County, retirees and active employees of the County had traditionally been pooled together for the purposes of calculating a single set of health insurance premiums—generally resulting in lower premiums for retirees (which are paid largely by the retirees themselves) and higher premiums for actives (which are paid largely by the County).  In REAOC, retired employees challenged the County’s 2007 decision to split active employees and retirees into separate pools. 

REAOC argued that the County’s decision constituted an impairment of contract, and that the long-standing practice of pooling had created an implied contractual right to a continuation of a single unified pool for retirees and actives.  The California Supreme Court held “that a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance.”  REAOC, at *1.  While acknowledging that Government Code section 25300 “does require that compensation of county employees be addressed in an ordinance or resolution,” the Court noted “the statute does not prohibit a county from forming a contract with implied terms, inasmuch as contractual rights may be implied from an ordinance or resolution when the language or circumstances accompanying its passage clearly evince a legislative intent to create private rights of a contractual nature enforceable against the county.”  Id. 

The Supreme Court went on to state that whether an implied contract in fact exists “remains a matter of the parties’ intent.”  Id. at *19.  When determining whether public employee benefits become vested by implication, courts should “focus explicitly on the legislative body’s intent to create vested rights.”  Id. at *20 (quotations omitted).  And the plaintiff has a “heavy burden” to demonstrate a legislative body’s intent to create a vested right:  “as with any contractual obligation that would bind one party for a period extending far beyond the term of the contract of employment, implied rights to vested benefits should not be inferred without a clear basis in the contract or convincing extrinsic evidence.”  Id. at *22.  Further, “[a] court charged with deciding whether private contractual rights should be implied from legislation . . . should proceed cautiously both in identifying a contract within the language of a . . . statute and in defining the contours of any contractual obligation.”  Id. at *19 (quotations omitted). 

In light of this decision, under California law, “a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”  Id. at *26.  The Court did not address the question of whether those circumstances exist in REAOC or whether an implied vested right existed for Orange County retirees.  Accordingly, the case now returns to the Ninth Circuit for that determination.

To read the Court’s full decision in REAOC v. County of Orange, click here.  We will follow up shortly with practical advice in light of the decision.