Retirement Benefits and the Basics of Contract Law

By lfsuser on January 28, 2015

An agreement to provide benefits for today does not insure that benefits will be provided next year.

In 2000, M & G Polymers, USA, LLC (“M&G”) purchased the Point Pleasant Polyester Plant. It also entered into a collective-bargaining agreement and related Pension, Insurance and Service Award Agreement (“P&I Agreement”) with its employee union. Under the P&I Agreement, eligible retirees, along with their surviving spouses and dependents, who retired after January 1, 1996 would receive a full company contribution towards the cost of the company’s health care benefits. The P&I Agreement had a term of three years after which it was renegotiated and a similar agreement was adopted in 2003.

In 2006, M&G announces that it would require retirees to contribute towards the cost of the company’s health care benefits. Hobert Tackett and other retirees sued M&G claiming that the language of the 2000 P&I Agreement created a vested right to lifetime contribution-free health care benefits.

The District Court dismissed the complaint for failure to state a claim, however, the Sixth Circuit Court of Appeals reversed based on the reasoning of its earlier decision in International Union, United Auto, Aerospace & Agricultural Implement Workers of Am. V. Yard-Man, Inc., 716 F.2d 1476. On remand the District Court ruled in favor of the retirees, and the Sixth Circuit affirmed.

On January 26, 2015, in M&G Polymers USA, LLC, et al. v Tackett et al., the U.S. Supreme Court overruled the Sixth Circuit’s decision that created a presumption that retiree medical benefits provided for in a collective bargaining agreement are per se vested, unless it can be proven by extrinsic evidence otherwise. The Supreme Court held that the Sixth Circuit’s decision rested on principles that are “incompatible with ordinary principles of contract law.” The Supreme Court explained, that “[a]s an initial matter, Yard-Man violates ordinary contract principles by placing a thumb on the scale in favor of vested retiree benefits in all collective-bargaining agreements. That rule has no basis in ordinary principles of contract law.”

The Supreme Court’s evaluation addressed several misconceptions encountered by the Court of Appeals in M&G and Yard-Man and lead to the following opinions:

  1. The Employee Retirement Income Security Act of 1974 (ERISA) establishes minimum funding and vesting standards for pension plans, but exempts medical benefits plans from those rules.
  2. When a collective-bargaining agreement is unambiguous, its meaning must be ascertained in accordance with its plainly expressed intent.
  3. The Yard-Man decision discounted the presence of durational clauses in collective bargaining agreements providing for the expiration of the agreement at the end of its term. It inferred that parties would not leave retiree benefits to the contingencies of future negotiations and that retiree health benefits continued so long as the beneficiary was retired. The Supreme Court rejected this reasoning stating that these decisions “distort the text of the agreement and conflict with the principle of contract law that the written agreement is presumed to encompass the whole agreement of the parties.”
  4. The Court of Appeals reasoning that because of certain employees would be eligible for the benefits during the term of the agreement, M&G’s promise to pay retiree medical benefits was “illusory.” The Supreme Court found that if the agreement benefits some class of retirees, then it may serve as consideration for all of the union’s promises. In addition, the Supreme Court reasoned that the Court of Appeals’ interpretation is inappropriate in the context of collective-bargaining agreements because they are negotiated on behalf of a broad category of individuals and consequently will often include provisions inapplicable to some category of employees.
  5. The Supreme Court reaffirmed that employers can and do create vested rights to retiree medical benefits where the collective bargaining agreement provides in explicit terms the continuance of such benefits after the agreement’s term expires. However, “when a contract is silent as to the duration of retiree benefits, a court may not infer that the parties intended those benefits to vest for life.”

This case was remanded back to the Sixth Circuit Court of Appeal to interpret the P&I Agreement according to ordinary contract principles.

Comments: There is no presumption that retiree medical benefits are vested beyond expiration of the original agreement providing the benefits. It is important that employers draft agreements regarding employee retirement benefits, including contributions made by retirees and types of coverage available to the retiree, explicitly and unambiguously stating the duration of continued benefits. When left for interpretation, the plain terms of the contract will be construed to encompass the parties’ entire agreement.

To read full text of the Supreme Court’s decision click here.

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