Longevity/Performance Pay Need Not Be Included In California Retirement Calculations

The Memorandum of Understanding between the County of Monterey, California and the Monterey County Deputy Sheriffs Association includes a longevity performance stipend that employees who achieved 20 years of service and a satisfactory or outstanding performance evaluation could receive an additional stipend of up to eight percent.

CalPERS provides pension fund retirement services for employees of the County and the Sheriff’s Department. The County has never reported the longevity performance stipend to CalPERS and therefore CalPERS has not included the longevity performance stipend as compensation in calculating the retirement benefits of the members of the Association.

A group of deputies receiving longevity pay sued, contending that longevity pay should be included in their retirement calculations. The California Court of Appeals rejected the lawsuit, finding that CalPERS had acted correctly.

The Court’s decision turned on the definition of “compensation” under the retirement statute. The Court observed that “an employee’s compensation is not simply the cash remuneration received, but is exactingly defined to include or exclude various employment benefits and items of pay. The scope of compensation is also critical to setting the amount of retirement contributions, because PERS is funded by employer and employee contributions calculated as a percentage of employee compensation.”

The CalPERS statutes also provide a definition for the term “special compensation,” which must be included in pension calculations. Under the definition, “special compensation” includes payments “received for special skills, knowledge, abilities, work assignment, workdays or hours, or other work conditions. Special compensation shall be for services rendered during normal working hours. Special compensation does not include any of the following: (A) Final settlement pay. (B) Payments made for additional services rendered outside of normal working hours, whether paid in lump sum or otherwise. (C) Other payments the CalPERS Board of Administration has not affirmatively determined to be special compensation.”

The key section of the CalPERS statutes, known as Section 571, describes bonus as “compensation to employees for superior performance such as ‘annual performance bonus’ and ‘merit pay.’ If provided only during a member’s final compensation period, it shall be excluded from final compensation as ‘final settlement’ pay. However, additional compensation to employees who have been with an employer, or in a specified job classification, for a certain minimum period of time exceeding five years,” must be included in retirement calculations.

Putting all this together, the Court concluded that the statutes and regulations provided “clearly and unambiguously, that only those items of compensation expressly identified in Section 571, constitute special compensation that must be reported to CalPERS and included in CalPERS’s calculation of retirement benefits. As we have noted, the law expressly states that special compensation does not include payments that CalPERS has not affirmatively determined to be special compensation.

“It is undisputed that a longevity performance stipend or bonus was not included in Section 571’s list of qualifying items of special compensation. Moreover, there is nothing in the language of Section 571 or the statutes that indicates that the Board of Administration affirmatively determined that a form of incentive pay combining longevity pay and bonus pay constitutes special compensation. Therefore, the longevity performance stipend does not constitute special compensation under Section 571 that must be reported to CalPERS and included in CalPERS’s calculation of retirement benefits.”

DiCarlo v. County of Monterey, 2017 WL 2265098 (Cal. App. 2017).