California Ordered To Defend Disability Payment Structure

JUNE 7, 1999 VOLUME 6, NUMBER 49

Federal law (the Age Discrimination in Employment Act–the ADEA) prohibits discrimination “against any individual with respect to his compensation, terms, conditions, or privileges of employment because of such individual’s age.” The law specifically protects all employees over age 40.

Recently, the California Public Employees Retirement System (“CalPERS”) was accused of violating the terms of the ADEA in the way it calculates disability benefits. Under rules adopted in 1980, a disabled state employee is entitled to receive 50% of his or her income at the time disability began, but only up to the amount the employee would receive if he or she continued in active employment until age 55.

Imagine, for instance, that two California police officers were hired on the same day–one age 25 and the other age 45. One year later, they are both injured in the same accident. Under CalPERS rules, the younger officer receives half her salary at the time of the accident, but the older officer is limited to 20% of his salary.

In order to reach this result, CalPERS first assumes that both officers would have retired at age 55. Since the older officer would only have ten years of service, he would only be eligible to receive retirement benefits of 20% of his final salary. Since the younger officer would have thirty years of service, she would receive half her final salary in retirement benefits. In other words, the older officer would receive a lower disability benefit solely because of his age at the time of hiring.

But does this treatment discriminate against the older officer solely on the basis of age? California state employee Ronald Arnett and seven other employees argued that it did, and filed a class action against CalPERS and the State of California seeking to change the method of calculating disability benefits.

Prior to the 1980 change, CalPERS had paid 50% of the last salary to all disabled employees, regardless of age or remaining years of service. Of course, when the beneficiary reached retirement age, his or her benefit would then be converted into a retirement benefit, and an employee hired at an older age would find his or her retirement benefits reduced. In the meantime, however, the disability benefits would not be affected by the age of the employee at the time of hiring.

The 1980 change was adopted by the California Legislature as a cost-saving device. It seemed to have been approved by the U.S. Supreme Court’s holding in the 1993 case of Hazen Paper Co. v. Biggins. In that case, the employee alleged that his employer had dismissed him because he was just about to reach the number of years of service required for his pension plan to vest. That may be, ruled the U.S. Supreme Court, but it does not amount to age discrimination–if anything, it is discrimination on the basis of length of service, which is not the same thing as age.

In the CalPERS case, California argued that any disparate treatment was based on the prospective length of service, and so permissible. The U.S. Ninth Circuit Court of Appeals disagreed, and directed the case back to the trial court for a determination whether California’s 1980 law was in fact motivated by a discriminatory intent. While the California public employees did not win outright, they at least won their day in court. Arnett, et al, vs. CalPERS, June 2, 1999.

©2021 Fleming & Curti, PLC