Employer Can Change Post-Retirement Health Insurance Benefits Without Violating Constitution

For many years, the collective bargaining agreement between the State of Rhode Island and Council 94 of the American Federation of State, County and Municipal Employees (AFSCME) contained a clause requiring the State to pay a portion of the costs of post-retirement health insurance. The most recent agreement between the State and AFSCME expired on June 30, 2008, and the State gave timely notice to AFSCME that it was terminating the contract.

In the midst of its most recent fiscal crisis, the State of Rhode Island sought to tighten its belt by enacting legislation effective October 1, 2008, that reduced the amount the State would spend on retiree health benefits. The legislation essentially froze the current rate of State contributions for retirees currently receiving health benefits, and included a new set of age and service criteria for State employees who retired on or after October 1, 2008.

AFSCME brought a lawsuit, contending that the reduction in benefits was barred by the so-called “contracts clauses” of the United States and Rhode Island constitutions. Both constitutional clauses forbid governmental bodies from “impairing” obligations owed under contracts that have been previously reached.

A federal court rejected AFSCME’s lawsuit. The Court began its decision by setting forth the test for determining whether a law unconstitutionally impairs a contract: (1) Whether a contract exists; (2) whether the law impairs an obligation under the contract; (3) whether that impairment is substantial; and (4) whether that impairment, albeit substantial, is nevertheless reasonable and necessary to fulfill an important public purpose.
AFSCME argued that its collective bargaining agreement was the underlying contract that was constitutionally protected. The Court demurred, however, reasoning that “there can be no question that the CBA was a valid contract for its duration; however, the State and the Union negotiated a CBA that included a provision for either party to terminate the agreement upon ten days’ notice. There is no dispute that proper notice was given by the State regarding the termination of the CBA.”

The effect of the termination simply is that after June 30, 2008, the parties no longer had a contractual relationship with each other. Nonetheless, the State was legally (but not contractually) obligated to maintain the terms and conditions of employment for union members. It has long been a pillar of labor/management relations law that an employer may not unilaterally change terms and conditions of employment, even post-contract expiration, unless and until the employer has bargained in good faith to impasse with the union. The post-expiration obligations to maintain the status quo are rooted in statute and common law and not in contract. As a result, AFSCME cannot establish the first element of a contract clause violation on the back of the terminated CBA alone.

AFSCME also argued that the post-retirement health care benefits had “vested” because employees had performed their jobs under the assumption that the benefits would continue. The Court disagreed, finding that “nothing in the statutory language can be fairly read to suggest that once an employee is either hired, or reaches the age and service requirement, he or she locks in to a benefit level that acts as a floor, below which he or she can never go as a result of contract negotiations, and/or changes in the law. As a practical matter, it is more probable that the legislative change will precede the negotiated CBA change. And this is precisely the point with the statutory language found here: As long as the employee is in the bargaining unit and subject to the give and take of the negotiated benefit changes through collective bargaining, benefits – even those mirrored in corresponding statutes – may go up or down; they do not forever lock in at any particular point before retirement.”

Rhode Island Council 94 v. Rhode Island, 2010 WL 1499282 (D. R.I. 2010).

This article appears in the June 2010 issue