Required Retirement Contributions After Contract Expiration Do Not Violate ‘Contracts Clause’

In 2010, at the suggestion of newly-elected Governor Chris Christie, the New Jersey Legislature enacted a number of reductions to the retirement benefits provided firefighters and law enforcement officers. One of the changes altered the definition of “final compensation” used in calculating retirement benefits for persons who became members of the Police and Fireman’s Retirement System after the law’s effective date. Instead of defining “final compensation” for such new members as compensation received in the last 12 months of creditable service, the law called for “final compensation” for new hires to be measured over any three fiscal years of membership providing the largest possible benefit to the member or the member’s beneficiary.

A second change required all firefighters and officers to contribute 1.5% of base salary towards the cost of providing post-retirement health care benefits. A third change limited to one year the amount of vacation leave that certain local government employees would be permitted to carry forward, under most circumstances.

A group of labor organizations challenged the changes contending, among other things, that the mandatory 1.5% contribution violated the “contracts clauses” of the New Jersey and United States Constitutions. A New Jersey appeals court recently rejected the challenge.

The Court started with the proposition that the “federal and state constitutions prohibit the passage of any law impairing the obligation of contracts. In addressing a claim for violation of the Contract Clause, the threshold inquiry is whether the law operated as a substantial impairment of a contractual relationship. In making that determination courts inquire whether: (1) There is a contractual relationship; (2) the change in law impairs that contractual relationship; and (3) the impairment is substantial. If the state law constitutes a substantial impairment, it may nonetheless be constitutional if it is reasonable and necessary to serve an important public purpose.

“The unions base their arguments primarily on the premise that their contracts do not expire on their expiration dates, but rather continue, either under a theory of implied contract or by statute. The statute the unions rely on states in part that during the pendency of proceedings before an interest arbitrator, existing wages, hours and other conditions of employment shall not be changed by action of either party without the consent of the other. This statutory rule, known as the prescription against unilateral change of the status quo, prohibits an employer from unilaterally altering the status quo concerning mandatory bargaining topics, whether established by expired contract or by past practice, without first bargaining to impasse.

“However, the new law does not require public employees to make the 1.5% contribution until after existing contracts expire. Contrary to the unions’ arguments, the status quo doctrine creates statutory, not contractual, prohibitions against a party changing the terms and conditions of employment during the pendency of interest arbitration proceedings or during the negotiation of a new contract. And because the Legislature created the prohibitions against such changes, the Legislature can modify them by statute. Further, even if the terms of an expired contract are deemed to be implied in fact until new terms are negotiated, public employees have neither a contractual right nor a reasonable expectation that terms implied in fact under such circumstances will survive superseding terms imposed by preemptory legislation.”

Teamsters Local 97 v. State of New Jersey, 84 A.3d 989 (N.J. Super. 2014).