In a Rare Appellate Decision, the Court Addresses What Constitutes “Special Compensation” For Calculating a Retirement Benefit

05.22.2019

On May 20, 2019, a California appellate court ruled that bonuses earned by Dr. Robert Paxton, a medical consultant in the Department of Social Services in the Disability Determination Service Division, were not “special compensation” and, therefore,  could not be included when calculating his pension benefits. (Paxton v. Bd. of Admin., CalPERS)  In reaching this conclusion, the Court of Appeal determined that Dr. Paxton’s bonuses were not “special compensation” under California Government Code section 20636 because the bonuses compensated consultants for additional work that was not part of their regular duties.  (Government Code § 20636(g)(4)(I).)

Background                                                                   

The Department of Social Services is the state agency responsible for determining, through its Disability Determination Service Division, the medical eligibility of disabled Californian’s who are seeking federal Social Security benefits or state Medi-Cal benefits.  Dr. Paxton is a medical consultant-psychiatrist who reviews claims for the federal program.  In 1993, as a result of periodic backlogs in reviewing cases in the federal program, the Department of Social Services received an exemption to temporarily pay its consultants overtime in order to deal with the overwhelming number of pending cases.  In 1996, the Department of Social Services was denied a request to continue paying its consultants overtime and, therefore, proposed for salaried consultants to continue to work extra hours without compensation.  The unions representing these consultants rejected the proposal.  The parties compromised and created a new “bonus program” that compensated consultants for each case closed above a certain threshold per week.  This solution allowed consultants to be compensated for their additional efforts and time and simultaneously decreased the number of pending cases.  Dr. Paxton was a participant in the bonus program from 2005 until 2011.  As a result of Dr. Paxton’s participation in the program, he earned over $1.2 million in bonuses.

Upon Dr. Paxton’s retirement in 2012, CalPERS determined that his bonuses were not “special compensation” for purposes of calculating his final retirement allowance.  Dr. Paxton appealed.  After a hearing, an administrative law judge determined that the bonus payments did not qualify as “special compensation” within the meaning of California Government Code section 20636.  The CalPERS Board adopted this decision with minor changes.  Dr. Paxton filed a writ seeking review of the decision in Superior Court, but the Superior Court upheld the underlying decision.

Analysis

The California Court of Appeal specifically considered whether Dr. Paxton’s bonuses were “special compensation” which should have been included when calculating his pension benefits.  The Court focused on the plain language of section 20636 in reaching its decision.

The Court noted that “special compensation” includes “[c]ompensation for performing normally required duties” and excludes “[c]ompensation for additional services outside regular duty.” (§ 20636, subd. (g)(3)(B) & (4)(I), italics added.)  Dr. Paxton argued that his bonuses were pensionable because they were earned for performing regular duties (i.e., reviewing files) and were not tasks completed outside his normal work hours as he testified to only working 40 hour weeks.  The Court was not persuaded by this argument and  instead held that while the work in question was performed during normal working hours, the duties for which Mr. Paxton received bonuses were not part of his normally required tasks, and thus did not constitute special compensation: “A bonus earned for purely voluntary services performed outside of an employee’s duties is not special compensation, regardless of the time frame in which it was earned.” Having determined that the bonus payments were intended to compensate Dr. Paxton for performing additional work outside of his regular duties, the Court of Appeal affirmed the judgment.

Importance of this Case

This case demonstrates that, when it comes to including items of compensation as part of “special compensation” for purposes of calculating retirement benefits, CalPERS will read the PERL narrowly, and will require strict adherence to the statutory language.

Special thanks to Maria Arroyo for assisting in drafting this alert. 

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