Standby Pay Not Pensionable In California

James Linhart was a division chief with the Livermore-Pleasanton, California Fire Department. The Department’s compensation plan provided that “Division Chiefs assigned to a standby schedule shall be compensated in an amount equal to seven and one-half percent (7.5%) of the Division Chief control point listed in Appendix A. Standby pay shall be paid biweekly.”

Linhart retired in 2006, after 22 years of service, and began receiving a retirement allowance from California’s Public Employees Retirement System (PERS). Under PERS, a member’s benefits are determined according to a statutory formula that takes into account the member’s base salary and certain items of special compensation received during the year in which the member’s compensation is highest. Not all items of compensation paid in addition to the member’s base salary count as pensionable special compensation. To qualify as special compensation, the payment must be received (1) “for special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions”; (2) “pursuant to a labor policy or agreement” applicable to a group or class of similarly situated employees; (3) “for services rendered during normal working hours.” Pensionable special compensation includes only payments the PERS board has “affirmatively determined to be special compensation.”

The Department made PERS contributions on behalf of Linhart, including in its calculations standby pay as special compensation. The Department and its employees believed the employees’ retirement benefits would, in part, be based on standby pay. PERS itself never made any representation to that effect to them. Although PERS has a procedure for alerting contracting public agencies when there are discrepancies in member earnings and retirement contributions reported to PERS, no such report was generated to the Department.

When PERS took the position that Linhart’s standby pay was not pensionable, both he and Pleasanton sued. The California Court of Appeals sided with Pleasanton, and dismissed the lawsuit.

Linhart argued first that the standby pay was meant to compensate him for his “normal working hours.” The Court disagreed, finding that Linhart’s argument did “not reflect a reasonable interpretation of the statute or of the standby pay provision of his labor agreement. It would mean Linhart’s ‘normal’ workweek was not 40 hours, but over 60 hours – a difference of more than 50 percent. Yet for the additional 20-plus hours added to his normal workweek he was only being compensated at a small fraction of his base salary. Consistent with the testimony of the witnesses, and the unambiguous language of Linhart’s compensation plan, we think it is more reasonable to view the 7.5 percent pay increment as compensation to Linhart for being available to work on a standby basis outside of his normal working hours.”

Linhart then had to confront the fact that PERS regulations do not include standby pay as a form of “extra pay” on which retirement is based. Linhart contended that the 7.5% compensation he received was not in substance standby pay even though it was labeled that way in his compensation plan, and that it was more akin to one of the five distinct “extra pay” categories authorized by PERS regulations – holiday pay, shift differential pay, training premium pay, management incentive pay, and off-salary-schedule pay.

Again, the Court was unwilling to accept Linhart’s argument. The Court observed that “holiday pay is described in the regulations as additional compensation for employees who are normally required to work on an approved holiday because they work in positions that require scheduled staffing without regard to holidays. Linhart’s pay did not meet this definition. Although Linhart might occasionally have to work on a holiday if he was on backup and was called in to relieve the shift commander, he was not normally required to work on holidays.

“Shift Differential is defined as compensation to employees who are routinely and consistently scheduled to work other than a standard ‘daytime’ shift. The evidence established Linhart was routinely and consistently scheduled to work a standard daytime shift of 8:00 a.m. to 5:00 p.m., Monday through Friday. Training premium pay is defined as compensation to employees who are routinely and consistently assigned to train employees. We find no evidence in the record the 7.5 percent pay increment he received was because he performed one of the central duties of his position.”

City of Pleasanton v. Board of Administration of the California Public Employees’ Retirement System, 149 Cal. Rptr. 3d 729 (Cal. App. 1 Dist. 2012).