Member Advisory Concerning Stand-by Pay

September 2, 2020

On July 30, 2020, the California Supreme Court issued its decision in Alameda County Deputy Sheriffs’ Assoc. v. Alameda County Employees’ Retirement Association (the Alameda Decision). The following is a brief history underlying the case, a short summary of the decision and information about how the decision may impact some SBCERS members.

Background

The Alameda Decision is the culmination of seven years of litigation pertaining to 2012 amendments to the County Employees’ Retirement Law (CERL) made as part of the Public Employees’ Pension Reform Act of 2013 (“PEPRA”).  PEPRA established new benefit plans for new employees and modified the definition of “compensation earnable” for members who were active employees at the time of PEPRA’s passage and thereafter.

Compensation earnable is a statutory term that defines the items of compensation that SBCERS uses to calculate contributions and pension benefits for members of pre-PEPRA benefit plans.  Prior to PEPRA, the statutory definition of compensation earnable, as interpreted by the courts, included special items of compensation such as stand-by, leave cash-outs, and special duty pay types.

Effective January 1, 2013, PEPRA made several changes to the definition of compensation earnable for then-current members of CERL retirement systems. Immediately following the enactment of PEPRA, some CERL retirement systems, including the three defendants in the Alameda case, adopted policies excluding certain items of compensation they found to be subject to exclusion under PEPRA definitions. Employee groups sued to reverse these changes, specifically focusing on the exclusion of leave cash-outs encompassing more than the final average salary period and the exclusion of stand-by pay as an item of pay for “additional services rendered outside of normal working hours.”

The primary basis for the employee challenges to the implementation of changes to compensation earnable was a clause of the California Constitution, and interpretive case law, precluding government action to impair the enforcement of contracts. As applied to pensions, this doctrine, known as the California Rule, had been held by a long line of case law to prevent impairment of vested pension rights by subsequent legislative action absent the provision to the members of “comparable new advantages.”

The Alameda Decision

After extensive discussion of the history of the California Rule and the evaluation of the language and history of compensation earnable statutes, the Supreme Court reached the conclusion (among others) that PEPRA’s amendments to compensation earnable were intended to and did change the law in material respects.  The Court found that these changes require evaluation under the California Rule.

However, the Court also found that although changes in the law that impair pension benefits are generally subject to the requirement that they be accompanied by comparable new advantages to the affected employees, such advantages are not always required where the modifications are reasonable and necessary to preserve the integrity or successful operation of the pension plan.  In the Alameda Decision, the court determined that because the statutory changes imposed by PEPRA were specifically focused on closing “loopholes” in the CERL and preventing pension spiking, the modifications were reasonable and did not require “comparable new advantages” to the affected employees, which would have defeated the purposes of the amendments.

What Did the Supreme Court Say About Specific Items of Compensation?

The primary cases at issue were sent back to the trial courts for further proceedings and new information may become available in the future as part of that further consideration.  The following points describe major elements of the decision as it relates to compensation earnable.

  • Leave cash-outs as compensation earnable are limited to the strict terms of the statute, and are those that are “accrued” and paid during the final average salary period. Leave cash-outs, for the most part, had been eliminated by SBCERS employers prior to the enactment of PEPRA.  Where leave cash-outs have still been allowed by plan sponsors, SBCERS current operating procedure conforms to the statutory requirements established by PEPRA. SBCERS anticipates no change to our operating procedures on leave cash-outs.
  • Items of compensation paid in order to “enhance a member’s retirement benefit” must be excluded, and are not limited to the examples provided in the statute. SBCERS current operating policy conforms to this statute. SBCERS’ Pension Enhancement Review Policy is available for review on our website.
  • Some items of compensation related to stand-by pay should be excluded from compensation earnable. The decision contains extensive discussion of the exclusion from compensation earnable of pay for “additional services outside of normal working hours” and reasons that such language “prevents employees from volunteering, during their final compensation period, to perform additional services outside of normal working hours to artificially inflate their daily rate of pay.”  The court did not categorically state that all items of stand-by pay are excluded, and noted in its opinion the similarity of stand-by pay to overtime pay, citing another  compensation earnable statute that excludes overtime pay except where the overtime is worked within the employees “normally scheduled or regular working hours.”   SBCERS currently includes all stand-by pay codes as compensation earnable.  Accordingly, over the next few months SBCERS will be reviewing plan sponsor management practices to determine whether or not stand-by pay should continue to be included in compensation earnable in whole or in part.

How the Alameda Decision May Impact SBCERS Members

The ruling has no impact on members who retired prior to January 1, 2013. The ruling also has no impact at all on members of “PEPRA” Plans, Safety Plan 8 and General Plan 8.

SBCERS had already excluded most of the pay items discussed by the Alameda Decision, such as termination pay, leave cash-outs for periods in excess of the final salary period, and lump sum payments to individual members.  The Alameda Decision may have potential impact on a small portion of our members who received stand-by pay after January 1, 2013 and are members of SBCERS Plans 2, 4, 5, 6 and 7.  SBCERS staff is conducting a careful study of how stand-by pay reported as compensation earnable has been administered by our plan sponsors.  Those practices will be evaluated in accordance with the legal standards enunciated by the Supreme Court.  Based on the outcome of that study, recommendations may be made to the Board of Retirement for further action.

If SBCERS identifies you as having received stand-by pay from one of our plan sponsors subsequent to January 1, 2013, we will send you an individual notification regarding the ongoing review of compensation earnable as it relates to stand-by pay.  This notice will include instructions on how you can reach a member services specialist for more information.  We anticipate sending these individual notices to members by September 30, 2020.

Once SBCERS staff completes its review of plan sponsor operating practices, affected members will again be directly notified of any future Board of Retirement consideration of the matter.  All meetings of the Board of Retirement are publicly noticed, the agenda materials are available for review on our website, www.sbcers.org, and contain information on how members and the public can participate in the Board of Retirement meeting through public comment.

How to Get More Information

If you have any questions about this notice, please do not hesitate to contact SBCERS member services at 1-877-568-2940 or [email protected].