County May be Bound by Implied Contract for Retired Employees’ Health Benefits

At the request of the United States Court of Appeals for the Ninth Circuit, the California Supreme Court recently addressed whether California laws allow a California county and its employees to form an implied contract that confers vested rights to health benefits on retired employees. The Supreme Court concluded a county may be bound by an implied contract if there is no statute or ordinance that prohibits such an arrangement. (Retired Employees Association of Orange County, Inc. v. County of Orange (— P.3d —-, Cal., November 21, 2011)).


The County of Orange ("County") began offering its employees group medical insurance in 1966. Initially, the County calculated the premiums separately for its retired and active employees. However, in 1985, the County combined retired and active employees in a single unified pool to calculate premiums for health insurance. Because retired employees are typically more expensive to insure, the single unified pool had the effect of subsidizing the retirees' health insurance. Retired employees paid the majority of their own premiums while the County paid a large portion of the active employees' premiums.

In 2007, the County passed a resolution that would split the pool of active and retired employees beginning January 1, 2008. The County negotiated with labor unions representing active employees about changes to health benefits before passing the resolution, but the County did not negotiate with retired employees.

The Retired Employees Association of Orange County, Inc. ("REAOC") filed a lawsuit in federal court and sought an injunction to prohibit the County from splitting the pool of retired and active employees. The federal district court granted summary judgment in favor of the County. REAOC appealed to the United States Court of Appeals for the Ninth Circuit. The federal appellate court asked the California Supreme Court to resolve the question of whether a county can be bound by an implied contract.


The Supreme Court concluded “that, 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.” However, the Supreme Court declined to decide whether those circumstances existed in this case because the resolution of that issue would go beyond the scope of the question posed to the Supreme Court by the Ninth Circuit Court of Appeals.

REAOC conceded that the express provisions of the resolutions passed by the County Board of Supervisors (“Board”) and the applicable Memoranda of Understanding (“MOU”) were silent as to the duration of the unified pool. REAOC, however, asserted the County’s long-standing practice of pooling active and retired employees for the purpose of calculating health insurance premiums created an implied contractual right to the continuation of the practice of pooling for those employees who retired before January 1, 2008.

Here, the parties entered into a contract governing compensation. The Court noted that prior case law established that if the relationship between a county and its employees is governed by contract, the county may be bound by either an implied contract or implied terms to a written contract if there is no statutory prohibition against an implied agreement.

REAOC contended that its members’ entitlement to a single unified pool for determining health insurance premiums represents deferred compensation. Government Code section 25300 requires that compensation of county employees be set by ordinance or resolution of the board of supervisors. However, the Court held that section 25300 “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.”

The Court, however, concluded that it could not determine whether the right for continuation of a single pool can be implied from the resolutions of the Board, including the resolutions that approved the MOU, because the determination of this issue is beyond the scope of the certified question presented to it by the Ninth Circuit Court of Appeals.

The County argued that even if it is permissible to imply contractual rights from legislation, it is impermissible to infer vested contractual rights from legislation. The Supreme Court opined that “[w]hether an implied term creates vested rights, in the absence of a legislative bar, is a matter of the parties’ intent.” The Court concluded that it could not determine the parties’ intent as to the vested benefits because that issue is beyond the scope of the certified question. However, the Court cautioned that implied rights to vested benefits should not be inferred by a court unless there is a clear basis in the contract or convincing extrinsic evidence to support the inference.

The Court rejected the County’s argument that a vested contractual right that arises from an implied contract cannot include the right to the pooling of health benefits.


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