Labor & Employment – Public Employees – ent AgreRetirement System – 5 Years’ Service – Accrued & Unpaid Leave – Settlemement

McCaskill v. Department of State Treasurer. (Lawyers Weekly No. 10-07-0548, 57 pp.) (Sam Ervin IV, J.) (Robert C. Hunter, J., dissenting) Appealed from Durham County Superior Court. (Orlando F. Hudson Jr., J.) N.C. App.

Holding: Plaintiff agreed to abandon his grievance against the N.C. Department of Health and Human Services in exchange for DHHS’s reinstatement of plaintiff’s employment, allowing him to use his accrued vacation and leave time, interspersed with unpaid leave, so that plaintiff could reach the five-year mark needed to qualify for disability benefits from the N.C. Teachers’ and State Employees’ Retirement System. Since neither plaintiff nor DHHS had the settlement agreement approved by the retirement system, and since the agreement does not follow the applicable law, the retirement system correctly refused to honor the agreement.

Judgment for defendant affirmed.

G.S. Sect. 135-106(a) provides in part, “Any participant or beneficiary who does not have five years of membership service within the 96 calendar months prior to conclusion of the short-term disability period or cessation of salary continuation payments, whichever is later, shall not be eligible for long-term disability benefits.”

Although the parties agree that plaintiff was a “member” of the retirement system and that his sick and vacation leave time counts toward the calculation of his “membership service,” they disagree about the extent to which he is entitled to credit toward the five-year “membership service” requirement for the time he was on leave without pay between Dec. 6, 2001, and Sept. 9, 2002. As a result, the issue which we must decide is the extent to which the term “membership service” used in Sect. 135-106(a) includes periods of leave without pay.

Plaintiff argues that, since “periods of leave without pay do not constitute a break in service,” 25 N.C.A.C. 1D.0114, he was a full-time DHHS employee for 60 continuous months, thus meeting the five-year “membership service” requirement.

In plaintiff’s opinion, the retirement system’s insistence that he exhaust his sick and vacation leave on a continuous basis lacked any specific statutory support and was, therefore, “arbitrary, capricious, unauthorized, unconstitutional, and contrary to the intent of the General Assembly.”

Furthermore, plaintiff argues that neither G.S. Sect. 135-4(b), (h), and (v), 25 N.C.A.C. 1E.1112, nor 25 N.C.A.C. 1B.0436 rendered the provisions of the settlement agreement ineffective because G.S. Sect. 135-4(b) addresses sharing leave among two employees occupying the same position; G.S. Sect. 135-4(h) appears to address leaves of absence lasting longer than one month; G.S. Sect. 135-4(v) says nothing about the need for continuous leave exhaustion; 25 N.C.A.C. 1E.1112 “does not say that the use of short term leave without pay is expressly limited to only those times where an employee has no leave credits;” and 25 N.C.A.C. 1B.0436 did not require prior approval of the present settlement agreement because it involved the substitution of a resignation for a termination notice.

As a result, plaintiff argues that, given the absence of any statutory provision or regulation that directly prohibits implementation of the arrangement embodied in the settlement agreement, he is eligible for long-term disability benefits.

After carefully studying the record, the relevant statutory provisions and the pertinent regulations, we conclude that the General Assembly did not contemplate awarding long-term disability benefits in situations like this one.

Plaintiff has essentially assumed that, in the absence of some specific statutory provision or regulation prohibiting the arrangement adopted in the settlement agreement, the approach adopted in that document is lawful. Plaintiff has not correctly identified the pertinent question: whether, using traditional standards of statutory construction, “membership service” as that term is used in G.S. Sect. 135-106(a) includes periods during which a “member” has leave-without-pay status.

A number of factors tend to support the superior court’s determination that “Petitioner did not have five years of membership service as a result of the July 2002 settlement agreement with the DHHS.”

First, the overriding theme of both the relevant statutes and Wiebenson v. Bd. of Trustees, State Employees’ Ret. Sys., 345 N.C. 734, 483 S.E.2d 153 (1997), is that, generally speaking, an employee gets a day’s credit for a day’s work

Second, the day-for-day credit approach is also consistent with considerations of sound policy, in that it discourages attempts to manipulate the rules governing eligibility for long-term disability benefits and other benefits administered by the retirement system in favor of a simple approach to the determination of the amount of “membership service” that a particular state employee has accumulated.

The effect of construing “membership service” to include leaves without pay will be to encourage more settlements of the type at issue here, an outcome which the court should not facilitate given the uncertain effect of large numbers of such arrangements upon the economic status of the retirement system.

Thirdly, we do not believe that the provisions of the settlement agreement are consistent with the relevant personnel rules governing the availability of short leave without pay. Although “leave without pay may be granted to a full-time or part-time permanent, trainee, or probationary employee for illness, educational purposes, vacation, or for any other reasons deemed justified by the agency head,” 25 N.C.A.C. 1E.1101, uncategorized unpaid leave appears to be divided into extended leave without pay, which is defined as “leave in excess of one-half the workdays in the pay period,” 25 N.C.A.C. 1E.1111, and short leave without pay, which is defined as “leave for less than one-half the workdays [in the] pay period.”

Plaintiff exhausted sick and vacation leave for slightly more than half of the work days in each month from Jan. 1, 2002, through Sept. 6, 2002. As a result, under the applicable regulation, and as the superior court found, plaintiff was on short leave without pay on those days that he was not exhausting sick or vacation leave.

However, 25 N.C.A.C. 1E.1112 expressly provides that short leave without pay “is used to account for time that an employee is absent and has no accumulated or advanced leave credits.” Since plaintiff had unexhausted sick and vacation leave throughout the period from Jan. 1, 2002, through Sept. 6, 2002, he was not eligible under 25 N.C.A.C. 1E.1112 to receive short leave without pay.

This inconsistency between the applicable state personnel regulations and the provisions of the settlement agreement provides further confirmation that “membership service” for purposes of determining eligibility for long-term disability benefits does not include periods when an employee is on unpaid leave.

We disagree with the superior court’s conclusion that this statutory provision “necessarily require[s]” that a reinstated employee who is exhausting leave do so “on a continuous basis.” On the other hand, given the numerous other bases for construing “membership service” to exclude unpaid leave, we do not believe that our disagreement with the superior court’s conclusion that G.S. Sect. 135-4(v) requires continuous exhaustion of paid leave necessitates an award of appellate relief.

Finally, we agree with the superior court’s conclusion that 25 N.C.A.C. 1B.0436 required the submission of the settlement agreement to the Office of State Personnel for approval, given that the “settlement agreement went considerably beyond merely allowing plaintiff to substitute his resignation for his dismissal and the withdrawal of the agreement.”

DHHS was not entitled to provide plaintiff with binding assurances that the retirement system would accept the approach adopted in the settlement agreement; the fact that the relevant DHHS officials were unaware of this requirement does not render the contract any less binding. Had plaintiff and DHHS taken the time to consult with the Office of State Personnel and the retirement system prior to executing the settlement agreement, the present controversy could have been avoided.

The superior court correctly determined that only sick and vacation leave days could be counted toward the calculation of plaintiff’s “membership service” and that the periods during which plaintiff was on leave without pay should be excluded from the calculation of his “membership service.” As a result, we affirm the superior court’s conclusion that, under the applicable statutory provisions, plaintiff did not have sufficient membership service to be entitled to long-term disability benefits.

Plaintiff also contends that the settlement agreement represents a valid contract entered into between a state agency and an individual that is binding upon all agencies of state government, including the retirement system. As a result, plaintiff contends that he is entitled to enforce the settlement agreement against the retirement system regardless of his eligibility for such benefits under a strict application of G.S. Sect. 135-106(a).

The state is liable only upon contracts authorized by law. Plaintiff has not cited any authority in support of his implicit contention that the Secretary of DHHS is entitled to award membership service in the retirement system, and we know of none. For that reason, the mere fact that plaintiff and DHHS entered into a contract that both parties hoped would render plaintiff eligible to receive long-term disability benefits does not automatically entitle him to receive such benefits. As a result, plaintiff is only eligible for long-term disability benefits to the extent that he qualifies for them under otherwise applicable law.

Finally, neither estoppel nor quasi-estoppel applies in this case.

The failure of the parties to the settlement agreement to submit the settlement agreement for approval by the Office of State Personnel as required by 25 N.C.A.C. 1B.0436 or consult with the retirement system precluded anyone from justifiably relying on the beliefs of the relevant DHHS officials that the approach adopted in that agreement would pass muster with the retirement system.

Although the retirement system accepted payments made by DHHS on plaintiff’s behalf, the superior court found that the retirement system “had no knowledge of the real facts until well after the settlement agreement had been made.” The retirement system rejected plaintiff’s application for disability benefits during the course of evaluating his initial application. The record is totally devoid of any indication that the retirement system made any misrepresentation to plaintiff or did anything whatsoever that would have suggested to plaintiff that the retirement system would honor the arrangement embodied in the settlement agreement.

Finally, there is no indication that plaintiff relied on anything that the retirement system did or said in deciding to enter into the settlement agreement, and, unlike the situation in Wiebenson, there is no indication that the retirement system acted consistently with plaintiff’s expectations over a period of years so as to ratify the actions of the relevant DHHS officials. As a result, the superior court appropriately concluded, “Neither the elements of estoppel nor quasi-estoppel are present in this case.”

Affirmed.

Dissent

(Hunter, J.) Due to my belief that the superior court erred and that the contract entered into between plaintiff and the state was a lawful contract that in effect granted plaintiff five years of membership service in the retirement system, I respectfully dissent.

In the notarized settlement agreement, DHHS Secretary Odom “warranted that she was vested with the authority to execute the foregoing document.” DHHS has not breached this contract; however, respondent refuses to recognize the validity of the contract and claims that it violates N.C. statutes and regulations. I disagree.

Respondent has not pointed to any statutes or regulations that expressly prohibit the type of agreement at issue here. The majority acknowledges this fact but still holds that the contract is not binding on the retirement system because “‘membership service’ for purposes of determining eligibility for long-term disability benefits does not include periods when an employee is on unpaid leave.” Accordingly, the majority holds that membership service is granted based on a “day-for-day credit approach.”

25 N.C.A.C. Sect. 1B.0436(a) states, “Any settlement or consent agreement in a grievance or contested case which requires the processing of personnel action forms by the Office of State Personnel must be approved by the Office of State Personnel before such personnel action forms will be processed.” However, 25 N.C.A.C. Sect. 1B.0436(a) goes on to say, “This provision shall also not be construed to require approval of any settlement the terms of which allow an employee to substitute a resignation for a dismissal and to withdraw a grievance or a contested case action.”

While the settlement agreement went further than simply substituting a resignation for a dismissal, I still find that this provision is not applicable. Plaintiff did, in fact, substitute a resignation for a dismissal and withdrew his grievance against DHHS. Bill Guy, DHHS’ human resources assistant director and employee relations manager, testified at the hearing that it was his understanding that 25 N.C.A.C. Sect. 1B.0436(a) was not applicable for that very reason. Accordingly, I disagree with the majority’s position that the Office of State Personnel was required to approve the contract between plaintiff and DHHS.

25 N.C.A.C. Sect. 1E.1112(a) specifies the purpose behind short term leave without pay “to account for time that an employee is absent and has no accumulated or advanced leave credits.” However, an employee may be granted “Other Types of Leave Without Pay” “for any other reasons deemed justified by the agency head.” 25 N.C.A.C. Sect. 1E.1101. In this case, Secretary Odom, in her discretion, granted leave without pay to plaintiff under the terms of the settlement agreement.

25 N.C.A.C. Sect. 1E.1101 provides for leave for “any other reasons deemed justified by the agency head.” This personnel rule clearly grants the agency head, in this case Secretary Odom, the discretion to grant leave in situations outside of those defined in 25 N.C.A.C. Sect. 1E.1111 and 25 N.C.A.C. Sect. 1E.1112. At the hearing, Marshall Barnes, Deputy Director of the retirement system, was unable to cite any rules or regulations that would require an employee to exhaust his or her leave continuously before taking leave without pay.

The majority holds that membership service should always be calculated on a day-for-day basis, while I believe that an employee should be granted membership service credit for the entire month in some circumstances, such as in the present case.

At the hearing, Barnes testified that the practice of the retirement system is to grant a full month’s retirement credit in some situations, particularly for the first and last month of employment. This testimony does not support a day-for-day calculation method; rather, it supports the opposite position that in some circumstances an employee who contributes to the retirement system for part of a month is awarded a full month’s credit of membership service.

Clearly the retirement system is not strictly following a day-for-day accounting system. If the majority position is upheld, then the current policies of the retirement system will be deemed unlawful, an untoward result that would require the retirement system to prohibit the grant of membership service for the first and last month of employment where the employee did not work the entire month, or in those unique circumstances that Barnes alluded to in his testimony.

Plaintiff did not have to exhaust his sick and vacation leave prior to taking leave without pay.

Moreover, membership service is not always based on a day-for-day calculation method. I see no prohibition against the settlement agreement entered into by DHHS with plaintiff. This agreement reinstated plaintiff so that he could achieve five years of membership service in the retirement system.

Additionally, respondent has not pointed to a statute or regulation that requires an employee to fully exhaust his or her leave prior to taking a leave of absence. Because no laws were violated, there was nothing illegal about this arrangement.

It is important to note that the language of the contract explicitly stated that the purpose was to reinstate plaintiff “for the purpose of allowing him to use his accumulated sick and vacation leave hours to maintain his employment until he has attained five (5) years of contributing service in the Retirement System.” There was no attempt to hide what plaintiff bargained for, and he received assurances from DHHS that the settlement agreement was in compliance with all statutes, rules and regulations concerning retirement.

It is also important to recognize that, pursuant to this contract, plaintiff relinquished his right to pursue his grievance against DHHS and that plaintiff did not unilaterally propose this arrangement; rather, the state was involved in formulating the contract, which benefitted both the state and plaintiff. Respondent is now attempting to invalidate a valid contract because it does not approve of the result.

Though there is no case law directly on point, it is my firm belief that when a party enters into a lawful contract with one agency of the state, all other agencies are bound to abide by its terms.

If the legislature wishes to enact a statute expressly forbidding a contract of this nature, then it is free to do so. Moreover, the state itself may prohibit these types of contracts from being entered into by a state agency. However, as the laws and regulations currently exist, there is no prohibition in place that would make this contract unlawful.

Furthermore, because plaintiff relied on Guy’s assurances that the contract did not violate any rules or regulations of the retirement system, and the retirement system ratified Guy’s assertions by accepting the contributions from plaintiff and not returning them, I would hold that respondent is now estopped from denying plaintiff five years of membership service.

I would also posit that the state as a whole is estopped from denying plaintiff what he bargained for in the contract signed by DHHS, a state agency. The contract was lawful, clearly set out what plaintiff bargained for, and yielded a benefit to the state (plaintiff’s relinquishment of his right to pursue his action for wrongful termination). DHHS, the drafter of the contract, has never sought to have the contract declared unlawful, and the retirement system has no valid grounds for attempting to do so now.

I would reverse and remand to the superior court with instructions to remand to the retirement system’s board of trustees to amend its final decision.