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Public Entities and Implied Employment Contracts

The California Supreme Court recently provided an answer to the Ninth Circuit that may affect litigation between local governments and their employees. On the appeal from dismissal of a claim against Orange County for changing retired employee health benefits, the Ninth Circuit wanted to know whether a county could form an implied contract. In Retired Employees Association of Orange County, Inc. v. County of Orange, No. S184059 (Nov. 21, 2011), the Supreme Court concluded that it could so long as there was no legislative prohibition against such an arrangement.

From 1985 until 2007, the County of Orange combined active and retired employees into a single unified pool for purposes of calculating health insurance premiums. If there had been separate pools, the premiums for active employees would have been lower than those for retired. The County paid a large portion of the premiums for active employees, but retired employees paid the majority of their own premiums. To save money, the county passed an ordinance in 2007 that split the groups into separate pools. That resulted in the retired employees’ having to pay higher premiums. The retired employees’ retirement association sued, claiming that the long-standing practice of combining retired and active employees into a single pool had created an implied contractual right to continuation of the single unified pool.

A long line of cases have established that public employment is not held by contract, but by statute. See Miller v. State of California, 18 Cal.3d 808, 557 P.2d 970, 135 Cal.Rptr. 386 (1977); Jenkins v. County of Riverside, 138 Cal.App.4th 593, 41 Cal.Rptr.3d 686 (2006). That principle has been invoked in a wide variety of circumstances to bar claims by public employees who sought to enforce rights that were not found in the express language of a statute. See, e.g., Shoemaker v. Myers, 52 Cal.3d 1, 801 P.2d 1054, 276 Cal. Rptr. 303 (1990) (public employee has no claim for breach of an implied covenant of good faith and fair dealing).

Here, the Supreme Court pointed to another line of cases, which hold that, where a public entity has authority to enter into a contract, normal contract rules apply, unless a statute provides otherwise. M.F. Kemper Const. Co. v. City of Los Angeles, 37 Cal.2d 696 (1951). In the public employment context, the Supreme Court had previously acknowledged that public entities may be bound by implied contracts in the absence of a statutory prohibition.Youngman v. Nevada Irrigation Dist., 70 Cal.2d 240 (1969). In addition, the Meyers-Milias-Brown Act (Cal. Gov. Code sections 3500-3511) authorizes agreements with public employee bargaining representatives through the memorandum of understanding process.

The Retired Employees Association based its claim on the history of provisions in the memorandums of understanding between the county and the employees’ organizations. Because there is no statute that would prohibit implied contractual obligations, the association had a legal basis on which to pursue the claim. The Supreme Court did not opine on whether the facts made out a claim, but just answered the question of law posed by the Ninth Circuit.

If the application of the case is restricted to memorandums of understanding, it will not have a significant effect on public employee lawsuits. But, the court said that implied obligations may be created out of an ordinance or resolution in appropriate circumstances, and did not limit its statement to the adoption of a memorandum of understanding.

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