-: SJC-13229, Joseph O'Leary
v. Public Employee Retirement Administration Commission.
-: [Justice Wendlandt] Okay, Attorney Hill.
-: May it please the court, my name is Ken Hill.
I'm representing the Public Employee Retirement
Administration Commission or PERAC as it's easier known as.
PERAC is the agency charged with the administration
of the 104 retirement systems throughout the Commonwealth
pursuant to Mass general law chapter 32.
This is a matter before you of statutory interpretation.
The statute in question was passed by chapter 21
of the Acts of 2009.
Changes were made to definitions in chapter 32, section one,
specifically the definitions
of regular compensation and wages.
The underlying question before the court is whether
payments made in lieu of taking vacation time constitute
regular compensation and can be included in determining
a public employee's retirement benefit.
Prior to passage of chapter 21 of the Acts of 2009,
the definition of regular compensation and wages included
the phrase, "Other compensation in whatever form."
Now many employees use this language to monetize things
like housing allowances and car allowances
and clothing allowances.
The legislature sought to close that loophole.
The definition changed of regular compensation and wages.
The list of payments excluded from wages, okay,
was included and it included the phrase
as being excluded from wages "one-time lump sum payments"
for unused vacation time.
It did not exclude any--
-: Counsel, can I ask you to address?
So I see that language the one-time lump sum payments
in lieu of unused vacation, the vacation buyback, right?
In a lump sum form.
Ken: Correct.
-: But the statute also was amended to say,
"Shall not include without limitations."
So there's sort of a double negative built
into the statutory language.
Can I ask you to address that?
Ken: Absolutely.
-: So it doesn't include one-time lump sum vacation buybacks,
but why does that mean it doesn't include
vacation buybacks over time?
-: Well, I would argue that there has to be a reason
they included one-time rather than multiple.
And the without limitations aspect of it,
that's a catchall provision.
I believe that when the legislature passed the Acts of 2009,
they assumed in the future that employers would come up
with future unknown forms of compensation.
For instance, recently we've seen compensation paid out
for public safety officers using Narcan
in overdose situations.
That was not contemplated by the legislature back in 2009.
Multiple payments for unused vacation days was contemplated
by the legislature at that time and I think
they willfully excluded that or did not include that.
-: Well, Counsel, can I press you on that?
Because you're arguing the negative implication, right?
And just this week, we cautioned against that,
of looking at statutory language and using
the maximum of negative implication,
which is what you're doing.
Because we said in that decision just this Monday,
that the reason why you have to look at that cautiously is
because you have to look at the overall statutory purpose.
And you just said what it was.
People were bumping up their regular compensation
with all types of things to increase
their retirement benefit.
So if the legislature with the change in 2009 was trying
to circumscribe that, why wouldn't it make sense
that even though they said just the one-time
lump sum payment, that it also wouldn't include
the regular interval payments because it does
the exact same thing you said
that the legislature tried to obviate by having
people just bump up their regular pay to bump up
their retirement benefit?
-: Well, I think that it has to do with the one-time aspect
of it is because at the end someone's career,
they're paid out in a one-time lump sum
all of their accrued vacation time.
And that is an enormous benefit for some people.
And I think they wanted to be specific
that that is not included
in someone's retirement calculation.
I would also argue
that the without limitations needs to be read
in conjunction with the whole of the statute,
which includes the phrase, "And all payments
other than payment received by an individual
from his employing unit for services rendered
for such employing unit."
I would argue that the vacation buyback provision is
a service rendered.
It's a service both in the macro and in the micro.
As the macro, the employer is reaping a benefit.
By someone such as Mr. O'Leary working two weeks
instead of taking vacation time,
the employer does not have to hire someone new
and train them to take his spot for those two weeks.
Or, in the alternative to that, pay someone overtime
at time and a half to take his time.
In the micro, I would argue that it's a service
for the employer because he is there.
He's clocking in, he's working his shift,
he's performing duties, which is a service for his employer.
-: Going to the statutory interpretation,
help me out with this, though.
We have a change in the statute for the definition
of regular compensation and the change includes,
"Shall be compensation received exclusively as wages."
Help me out because when I hear vacation buyback,
that doesn't strike me as wages.
-: It is wages.
Justice Lowy: Why?
-: Because in the situation of Mr. O'Leary,
it was broken down.
He was not given a check for those two weeks.
It was worked into his 26 biweekly paychecks
and it became part of his wages.
It was essentially a raise.
Justice Cypher: A raise he gave himself.
-: No, his employer gave it.
It was collectively bargained for, it was a benefit.
-: Well, you mentioned collectively bargained for,
can you help me understand when, I guess I could.
This might be more appropriate for Mr. O Leary's counsel,
but the collective bargaining agreement that he signed
and was subject to accepted this
out of his regular compensation, right?
Hill: It did.
-: So he's not getting anything more than he bargained for.
-: You can bargain for anything, essentially.
Chapter 150 E does not trump chapter 32, however.
We frequently see situations where it's the averse of that,
where CBAs claim this will be deemed,
overtime pay will be deemed regular compensation.
And we say, no, no, no,
it's not under chapter 32, so it is regular compensation.
-: Well, can I press you a little bit more then?
So one of the things that,
that seemingly you were looking to was the memo.
Hill: Yes, sir.
-: And the memo sets out a two-part test, in instances
where you could define this as regular compensation.
The first one is the part that I'm struggling with
where the first part of the test talks
about payments may be deemed other base compensation
if the payment is of limited duration
or if the payments lack predictability.
When it says lack predictability, are they talking
about the interval of the payment or the payment itself?
The amount of the payment itself?
-: I think they're talking about both,
but I would argue that if you follow our memo,
as I'm sure you have looked at, we're telling the boards,
these are things you need to assess.
So the retirement board needs to look and see,
was this regular and recurring?
Was this predictable?
And it's arguable, again, the retirement board's supposed
to do the analysis.
It's arguable that Mr. O'Leary's case,
because he did it every year he was eligible for seven years
prior to his retirement, it was regular
and recurring and predictable.
-: Even if he chose not to do so.
I mean, you're arguing it that it's predictability
because he chose to do so, but there may have been a year
where he chose not to do so.
So wouldn't that be something
that the board could factor in.
And so isn't that a reasonable interpretation
that they haven't met the first step?
-: It's very possible.
Again, the retirement board is the entity
that's supposed to do that analysis though.
And here the Lexington Retirement Board did not do
that analysis.
Justice Budd: Okay, any other questions?
Thank you very much.
-: Thank you very much.
-: Okay, Attorney Becker.
-: May it please the court, John Becker representing
retired Lexington Police Captain Joseph O'Leary.
I wanted to address some of the issues
that the court has already brought up.
I think the question Justice Lowy had about wages.
I think it's important to look at it this way.
When a police officer or when an employee is earning
their base salary, their base salary does not include
vacation leave pay, sick leave pay.
These are all things that are in addition to base salary.
That's why they're using the term other base compensation.
One of the reasons.
Also things like educational incentive, longevity pay,
night shift--
Justice Cypher: They're not taxed either, are they?
John: What's that?
-: It's not taxed either by income tax,
the vacation pay and the?
-: It's, no, it is.
It's included the way that that other base is.
Justice Cypher: Okay.
-: But here's the thing.
If Mr. O'Leary took those two weeks every year of vacation,
he went on vacation, whatever he did, Disney World,
doesn't matter, he gets the two weeks of vacation pay,
correct?
That two weeks of vacation pay,
even though he's not working.
So he is not technically performing a service,
it's included in his regular compensation,
that two-week period is included in his creditable service
for purposes of calculating how much he's worked.
Same thing if he was out sick for a couple of weeks,
et cetera.
Worker's compensation is a different case
as we see in Vernava, but that's specifically
because of statutory exclusion.
Why is the pay that he received for those two weeks
any different if he receives it during the two weeks
he's on vacation or if he receives it
for not taking a vacation?
It's still the same money.
-: But it's extra.
Let's just say he just has two weeks of paid vacation
per week and we say a year is 52 weeks.
And in your calculation, he's being paid for 54, not 52.
-: I disagree, your honor.
I don't think he's being paid for 54.
I think he's being paid for 52 and he's getting
a raise for two of those weeks because he's got this.
It would be similar for,
let's say he, halfway through the year, he bid
for the night shift.
All of a sudden his pay goes up because now he's getting
night shift differential.
So here, he's getting vacation buyback as a benefit
for these two weeks.
I don't think he's working.
The difference is the salary augmentation plans
and things that they're concerned about
and amending the statute,
they have more to do with things like
in your last three years, you get a 20% raise.
It's obvious that that's an end run
around the predictability that's necessary to run
a retirement system, right?
But this case, you have a predictable and it's predictable.
And I think your honor's question is very important
that it's predictable in hindsight.
If he'd had taken a week off, he had taken a year off
and hadn't done it, the retirement board should knock
it right out and that's what PERAC's memo says.
PERAC's memo says you can't opt in, opt out,
opt in, opt out, then you're losing predictability.
So it's only.
And that's one of the reasons why they couldn't put
vacation buyback in the statutory, in the CMR,
840 CMR 1503, because it wasn't like longevity
or educational incentive in the sense that everyone who gets
educational incentive or longevity is gonna be included.
But not everyone who takes vacation buybacks is gonna be
included because you have to meet
the standard of predictability, regular and recurring.
And that's what PERAC, I think, reasonably did in its memo.
It set out certain standards to say, these are the three,
these are the ways in which we're going to find
that it's a regular and recurring and predictable.
They're also finding that it's for services rendered.
And I think just to follow up on what my brother said,
that the statute, the without limitation has to be read
in context with the last part of the sentence
that says, "Or other payments not for services rendered."
Otherwise without limitation could include
night shift differential, educational incentive, longevity,
things that we already know that PERAC has reasonably
and nobody's challenging that PERAC is including
in regular compensation.
So I think that those are important points.
I just wanted to use, I have a couple of minutes left.
I wanted to use this opportunity to talk
about the perspective and retroactive nature of the matter,
the amicus brief folks aren't able to argue.
And I think it's important to look at their reasons
as to why this should be prospective only.
I think this is a different case than Vernava.
I think it's a different case
than the Worcester Retirement Board decision that came out
in February.
You have a very serious situation here where this has been
something that retirement boards have been doing
since at least 2000.
There was a 2000 memo from PERAC that there are thousands
of retirees out there who are getting this
as part of their benefits, who made decisions based on this.
And this is one of the issues that comes up in the case
cited by one of the appellate amici,
it impacts people's behavior.
And one of the bases for using
the exception to the general rule,
that general rule is retroactive.
But I think you need to invoke the exception here
because there was reliance on the existing PERAC memo,
on the existing retirement board practices to include
some regular compensation people for went.
I believe that's the word,
their vacation opportunities in order to get
this additional pay.
You have a situation where, for all anyone knew,
including the retirement boards,
this was includable in retirement compensation.
If it's going to be changed,
and I hope you don't make that decision, obviously,
but if you do, I would strongly urge you to make
it prospective only.
I think that this case is important
because it shows that the legislature,
when it was making these amendments,
it was thinking not with the broad brush strokes,
but was thinking about the specifics.
And as my brother points out, one-time lump sum payment,
there's a reason why they said that.
That's the one that's the big inflating factor.
Every year, if you're getting it a small amount every year,
that's something the retirement system can handle
and the legislature recognized that.
They recognized that the big, when you retire the last day,
you get a big check.
Those are the things that are gonna mess with the system
and affect everybody else.
So thank you.
If they're other questions, I'll rest on my brief.
Justice Budd: Okay, thank you.
Attorney Parr.
-: Good morning, Chief Justice, associate justices.
May it please the court.
Kim Parr for the contributory retirement appeal board.
CRAB correctly concluded that the vacation buyback
payments made to Mr. O'Leary did not qualify
as regular compensation under general law
chapter 32, section one.
And I'd like to highlight three parts of CRAB's reasoning
today that the court has touched on a bit
with the appellants.
First, these payments are intrinsically extra pay.
It's not a raise.
It's a bonus at the employee's own election under the CBA.
This is precisely the type of advantageous payments
the legislature sought to exclude
from the retirement calculation.
For those 10 days, Mr. O'Leary worked
instead of taking vacation time,
he was paid once for his service to the department
and then again for forfeiting his vacation time,
his contractual benefit negotiated by the union.
Now that double payment is perfectly fine under the CBA,
but nothing in chapter 32 permits
both payments to be counted
toward the retirement benefit calculation.
And that is what the appellants are asking for.
This would result in the type of windfall to employees
that is just not permitted by chapter 32
and it would be at the expense of the retirement boards
or the retirement systems who weren't even parties
to these CBAs.
Second, these payments were not regular, ordinary,
non-discretionary, or guaranteed as required
by both the statute and the regulations.
As the court noted, Mr. O'Leary had to decide each year
whether to convert his unused vacation time to pay.
And if so, how many hours to convert.
That decision was his own to make and not part
of an established payment scheme that was paid out
automatically to all similarly-situated employees.
Now, two notes on this.
One, the fact that the vacation election may have been
available to other employees, who like Mr. O'Leary, attained
20 years of service is immaterial.
This is the lesson of Kearns, for example,
where all state troopers had the option of participating
or were required to participate in a physical fitness exam,
but only those who passed were able to get the bonus
and the bump in their pay.
Likewise, the fact that Mr. O'Leary repeatedly elected
or opted into this program and that the payments were
on a regular cycle is also not enough.
This is the teaching of Parente where legislators received
an expense allowance on a regular cycle,
but the court advised that you still must look
at the other factors in the regular compensation analysis.
I think the most meaningful one here is this third point
that Mr. O'Leary was not being paid for services rendered
to his employer.
I think Mr. O, I'm sorry, Attorney Becker or Attorney Hill,
I'm not sure who made the point that on a macro level
or posited that on a macro level, there was some benefit
to the employer in having Mr. O'Leary available
for these days.
I don't see how that fits into the legal analysis
or the statutory definition of regular compensation.
And on the micro point, again, Mr. O'Leary was paid
for the services rendered when he showed up
for that shift and he received his regular base pay.
These additional payments that were factored
into his paychecks in the next fiscal year were, again,
just a contractual benefit.
It was a way in which Mr. O'Leary was able to convert
his vacation time to money, essentially.
-: Parente says though, that the concerns
that the legislation had, they're addressed
by the prerequisites and then the 10 factors in the memo.
So this is not something that can easily be done
to maybe in the last three years or even five years,
perhaps, inflate your base for the purposes of your pension.
-: The idea of inflating base pay
at the end of your service goes
to the anti-spiking provisions of the law.
And I'd respond that that's not quite
what we're implicating here.
Yes, the legislature wanted to stop that from happening,
but it also wanted to stop ad hoc bonuses
or adventitious payments that were paid to some,
but not other employees from being included
in the retirement calculation at any point in time.
-: But the factors, those 10 factors,
they include that it's available to everybody
and it has to be for a, I can't remember the precise words,
but a significant duration.
And I only reference that in trying to figure out
what wages means.
-: I understand now, your honor.
Even if those are factors later on in the PERAC memo,
it's still impossible to get through those first two factors
of whether or not these payments are part of base salary
or other base compensation and whether they were
for services performed for the reasons
that I've just discussed.
And so the PERAC memo in CRAB's view
that the Superior Court supported,
and we hope this court supports it is an unreasonable
interpretation of the statute.
These vacation buyback payments can never get
through those threshold showings.
And I would also offer that it feels inconsistent
with this court's decision in Worcester
and the general application of the retirement law to place
this decision in the discretion of individual boards.
The better course seems to be to have
one prevailing definition of regular compensation,
something is or isn't counted.
So right now and apparently since the memo was issued
in 2012 and an earlier one in 2000,
retirement boards were able to look
at different vacation buyback programs
and make that decision, but that's led to inconsistency.
And so to the extent the court does consider
this perspective or retroactive analysis,
I would offer that that suggests there may not be
as much hardship or the decision may not be as novel
as appellants suggest.
Because at this moment in time, we know
of at least two boards that never included
vacation buyback payments as regular compensation,
obviously Lexington.
And one of the amici makes that statement, as well.
I think it was Norfolk.
No, it was Leominster.
And another wasn't even aware
of any vacation buyback programs in their system.
-: You may not know this and it may be beyond the record
and if it is, then obviously don't answer it,
but when there was a statutory change
in regular compensation and exclusively wages,
did that impact at all boards out there
as far as having the availability to be able to add
your vacation time for a couple of weeks?
-: I'm sorry, I couldn't hear the last part of that question.
-: Was there a change in policy of boards as far
as whether or not they would allow the vacation time to be
spread out over a couple of weeks for X amount of years
with an impact on the pension?
Did the statutory change have a behavioral change?
-: I'm not aware of that, it's outside of the record.
But if it did, I would suggest that shows
an attempt to manipulate the system
where one-time lump sum may have been excluded,
trying to find other ways to make
these payments to circumvent the statute.
And that's one of the reasons that that CRAB disagreed
with the appellants' position
about the one-time lump sum exclusion.
If you really do read the statute as only excluding
one-time lump sum payments, it leads to this absurd result
where whether a vacation buyback payment can be counted
as regular compensation depends wholly on these negotiations
between an employer and employee.
And the regular compensation analysis
really should not turn on that.
One other point I wanted to make about the 2009 amendments
is that prior to 2009 regular compensation was defined
to mean salary, wages, or other or compensation
in whatever form, da, da, da, da for individual service,
not including bonus overtime and severance pay
for any and all unused sick leave.
Once you understand that that language referred
to severance pay, I think the continuation
of the one-time lump sum exclusion makes
a little bit more sense
'cause that's typically how severance pay would be paid out
at the end of someone's employment period.
-: But sick pay is different from vacation pay, right?
-: It is, and vacation pay was not included pre-2009,
it was included post-2009.
Again, with that one-time lump sum language.
But importantly, the legislature included this,
presented this list of exclusions or introduced it
with a phrase, "without limitation."
And so it cannot fairly be read as an exhaustive list
of exclusions.
The better course and what the court has done
in the past is see if some type of payment is
on the list of exclusions.
If it is, it's out.
If it's not, you still have to consider the core definition
of regular compensation.
And under that core definition of regular compensation,
CRAB'S interpretation was both reasonable
and legally correct.
Vacation buyback payments should not be included.
If there are no further questions, we'll rest in our brief.
Thank you.
-: Thank you.
Okay, Attorney Sacco.
-: Thank you.
Good morning, Madam Chief Justice may it please the court,
Michael Sacco on behalf of the Lexington Retirement Board.
I want to use my five minutes judiciously.
So if there's any questions that anyone has,
I'm happy to address those right off the bat.
All right, hearing none I will just reinforce
some of the points that my sister made
and I think that the justices have made.
I'll start with Justice George's comment
about the one-time lump sum payment
that somehow two times having
a lump sum payment is acceptable when one time is not.
Clearly the legislative intent was to limit the compensation
upon which a retirement allowance can be based.
And to the extent that this was some new change in the law,
I would refer the court back and this is cited
in my brief, but to the BASAS case,
which this court decided in 1981, 40 years ago.
And I'm quoting, "Lump sum payments made to employees
in exchange for giving up or not having used leave time are
similar in some ways to overtime payments.
Employees work during time when they might have taken leave,
they are paid regular wages for those services
and, in addition, receive extra compensation for giving up
their free time or leave time.
Such adventitious extra payments have long been excluded
from regular compensation on the ground
that they would unduly inflate regular compensation
and impose justified burdens on retirement systems."
That was 1981, your honor.
And I would also point out that since PERAC's creation
in 1996, its own regulation excluded any amounts paid
for unused vacation time.
This is not a surprise to anyone that this is excluded.
And it's clear why it's excluded for the reasons
that my sister mentioned.
CRAB really mentioned five reasons
why it should be excluded.
It's not in the base.
It clearly is not base pay and when my brother suggests
that other base compensation is in reference to this type
of vacation buyback, I strongly disagree.
Someone who receives base pay, you're paid $50,000 a year.
If you're a police officer, a firefighter,
or you hold a special degree or some certification
that you get paid every year for that,
that's the other base compensation.
That is your base compensation.
And most importantly, these payments are not regular,
they're not recurrent, and they're not ordinary.
There's nothing ordinary about cashing in vacation time.
Vacation is a benefit.
There is no law in Massachusetts that requires
an employer to give vacation time.
So it is a benefit.
Granted it is treated as wages under the wage statute,
when you resign, if you have unused vacation time,
but overtime is wages, as well.
And that's excluded from the definition
of regular compensation.
It's not recurrent in Mr. O'Leary's case
and I would suggest in any of these cases
because there has to be an election.
An employer can never force you to not take vacation
and cash it in, you have to elect to do that.
So that makes it not guaranteed,
that makes it not predictable,
it's certainly not ordinary, and it's not recurrent.
And even if it were ordinary and recurrent and guaranteed
as the appeals court said in the Parente case
that the analysis does not stop there.
It has to be for services.
There is no services that are rendered
when you get a lump sum of vacation time.
You have a choice as an employee to either work.
-: Or you're working two more weeks than, I mean,
you're at work two more weeks than you would otherwise.
They would have to pay someone else, right?
So that part.
I see your first part of your argument,
that it's not regular compensation.
I don't really understand why it's not services.
'Cause it's not like you're getting nothing.
It's not like the worker's comp example
where you're not working.
You're working and otherwise someone else would have
to be paid, right?
They're getting services for it.
-: Well, your honor, the services,
the payment for services are working the two weeks
and they're electing to not work,
they're electing to work those two weeks
as opposed to taking vacation time.
So I don't think the services necessarily are being provided
to the employer.
You could extrapolate that out into ad infinitum
into how many circumstances it's a benefit to an employee.
Justice Kafker: I get it.
Before we leave, could you address the retroactivity point?
'Cause we got a lot of people out there who are clearly...
-: Sure.
Happy to, your honor, and I think this court,
which was the last time I was here addressed this
in the Worcester Regional case
in terms of the retroactivity.
What I would suggest to you, your honors, is
that this is not as big of an issue
as my brothers make it out to be.
We have six board that have weighed in on this,
including Lexington.
The other 98 have not.
I can tell you why 'cause I represent 53 of them
and they all agree with my analysis
and that it's not regular compensation.
And from a practical standpoint,
they're not gonna pay me to write a brief
that I already wrote for Lexington.
But what if you don't go back retroactive?
Does that mean that it is regular compensation?
-: You think it's confined to these three retirement boards
that we're talking about or?
-: I can tell you, your honor, in my own client base,
which is 53, I'm unaware of any boards that have included
unused vacation time.
I can't obviously speak to the other boards,
but one of the justices asked if there was a change.
I think Justice Lowy asked if there was a change in 2009,
there was not.
No one really even thought about it because as I said,
since PERAC's inception and prior to PERAC,
PERA, their predecessor agency always excluded
unused vacation time as regular compensation.
It wasn't until the PERAC memo in 2011
that this issue was brought
to the retirement board's attention.
At which time, I can say that I advised my clients
that it wasn't regular compensation,
Lexington being one of them.
Lexington, Mr. O'Leary's case was one of the first
that came to bear and that's why we're here today.
So I don't think the extraordinary circumstances
of hardship are there.
Some of the examples that were provided
from the Boston Retirement Board, I think there was
one person whose retirement allowance was gonna go
from 95,000 to 86,000.
Clearly that's a significant reduction.
We have cafeteria workers who work their entire lives
and make $20,000 a year.
So I don't see that this is a hardship per se,
clearly losing money in any context is a hardship.
But the other point that I think Boston made in lamenting
about having to give back five to 10 million dollars
in contributions.
Well, that pales in a comparison to the amount of benefits
that they're going to pay out if they don't,
if you were to find this is regular compensation
and they wouldn't have to return that money
because there would be money that would be owed back
by the members and you would just subtract the deductions
from that and the boards can waive the remainder of it.
So the protection is for the retirement system,
not for necessarily the individual.
And I think when looking whether or not to apply
this retroactively, if you don't do that
and I recognize the hardship, it will then cause
all the other retirement boards to have to look back
and see if they should have included it back then
because this is being a prospective rule only.
And I think that brings us full circle to BASAS
and I'm sorry that I'm running over.
I'll end with this,
that this court said 40 years ago, lump sum payments
for vacation are not regular compensation.
The change in the statute in 2009 was not to increase
what's considered regular compensation,
but to restrict it.
And on that note, I will end, your honors,
unless there's any questions.