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What constitutes "Compensation Earnable?"


In 1987 the California Supreme Court undertook to define what it termed "compensation earnable" as defined by the County Employees Retirement Law of 1937. The court, in Ventura County Deputy Sheriffs Assn. v. Board of Retirement of Ventura County Employees Retirement Assn. (1997) 16 Cal.4th 483, rejected an earlier characterization from a 1983 appellate decision, (Guelfi v. Marin County Employees Retirement Assn. (1983) 145 Cal.App.3d 297). Since that time the 20 counties operating under the 1937 enactment have relied on the Guelfi case to calculate retirement compensation. The 1997 decision held that, with the limited exception of overtime compensation, all items of compensation paid in cash, even if not earned by all employees in the same grade or class, must be considered "compensation earnable" upon which an employee’s retirement is calculated.

The decision has the potential for a wide-ranging impact on California retirement law. A key question is whether the decision should be given retroactive application. Such an application has the potential to mandate the recalculation of previous retirement benefits and could have a significant economic impact on employers. Other related issues include how to treat payouts for accrued vacation or sick leave, and employer "pickups" for employee obligations.

Key to understanding this opinion is the meaning of "compensation earnable," which is defined as the final compensation on which an employee’s retirement is based. The issue before the court in Ventura was the county’s failure to include in its calculation of retirement benefits payment made to members of the Ventura County Deputy Sheriffs Association for several non-salary compensation items including: bilingual premium pay, uniform maintenance allowance, educational incentive pay, additional compensation for scheduled meal periods for certain employees, pay in lieu of annual leave accrual, holiday pay, motorcycle bonuses, and field training officer bonuses. The argument was made that retirement computation should include cash payments for such things as uniform maintenance allowances, longevity incentives, pay in lieu of annual leave accrual, and matching deferred compensation payments.

In settling the initial issue, the court determined that the county’s contributions to employees’ deferred compensation plans were not compensation within the meaning of the legal computation of retirement benefits. In considering the remaining items, the court first focused on the statutory distinction between "in-kind" benefits, such as employer-provided travel and lodging, which are not intended to be included for purposes of setting pension benefits; and cash payments, which are considered remuneration and compensation. The Guelfi decision had previously found that items of compensation must be received be all employees in the applicable grade or class to be part of a retiring employee’s "compensation earnable."

The Ventura court rejected the previous statutory interpretation of Guelfi and concluded that "compensation earnable" is "the average pay of the individual retiring employee computed on the basis of the number of hours worked by other employees in the same class and pay rate — that is the average monthly pay, excluding overtime, received by the retiring employee for the average number of days worked in a month by the other employees in the same job classification at the same base pay level." The court also rejected the argument that such a ruling would be unfair to those counties that have relied on Guelfi, and, at the same time, ducked the issue of retroactivity. The court stated "No other county is before us in this matter, "and "we need not decide whether this decision applies retroactively to any other county." In short, the court left it up to each individual county to determine exactly what it must be done to comply with the decision.

In looking at the issue of retroactivity in general, California law dictates that court decisions are given retroactive effect unless they establish a new principle of law by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression that was not clearly foreshadowed by earlier opinions. In the view of the plaintiffs, Ventura must be given retroactive effect because it does not overrule Guelfi. Additionally, the court expressly rejected the county’s argument that it was bound by Guelfi. The court stated, "Guelfi is not prior precedent of this court. The issue is one of first impression in this court."

Another major issue to be determined is the treatment of lump sum cash payouts received by the retiring employee for accrued vacation or sick leave. There appears to be agreement that Ventura does not mandate the recalculation of pension benefits to reflect the cash payout of accrued paid leave which was earned outside the final compensation period. This is in line with California Public Employees Retirement System law, which also excludes lump-sum payments for unused leave accrued outside the final compensation period from "final compensation" calculations. However, retirement benefits received during the final compensation period for relinquishing annual leave and other paid leave benefits during the final compensation period may have to be recalculated to reflect any cash payment.

Also to be decided is whether Ventura mandates that county retirement boards treat as "compensation earnable" the employer’s payments made to third parties to satisfy the employee’s obligation, such as an employer’s "pick up" of an employee’s health insurance premiums or of an employee’s obligation to make required retirement contributions. This issue was not expressly addressed by the court but the plaintiffs argue that the case defines compensation broadly as "remuneration paid in cash out of county funds," and does not require that the cash payment be paid directly to the employee in order for it to qualify. They go on to argue, "These cash payments out of county finds are as much remuneration as if the county first paid the money to the member and he then immediately forwarded it to the retirement system."

Finally, there is some debate over the application of Ventura with regard to certain specific items of compensation. Given the broad range of issues addressed by the court, however, it seems clear that all cash payments provided as remuneration for services rendered, such as pay for field training instruction, for special achievements, such as educational incentive pay; or for special skills, such as bilingual pay, are to be considered compensation under the act.

The real impact of Ventura is yet to be determined but, as stated at the outset, there is a great potential for a significant retroactive and current economic impact to employers. At this time, the decision only affects 1937 Retirement Act counties and does not affect PERS. However, it can be argued that it is only a matter of time before a case is brought to the Supreme Court under PERS dealing with the same compensation issues.

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