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.

In 2012, Dr. Paxton sought to purchase five years of additional retirement service credit as permitted before the elimination of Government Code section 20909. While doing so, he realized that CalPERS miscalculated his pension by excluding his bonuses and effectively reducing the benefit he would receive upon retirement. Dr. Paxton appealed CalPERS’ decision to exclude his bonuses as “special compensation” for purposes of calculating his final retirement allowance. After a hearing, an administrative law judge determined that the bonus payments did not meet sections 20636’s requirements to qualify as “special compensation”. The Board adopted this same decision with minor changes. Dr. Paxton once again challenged the decision by requesting that a Superior Court review and reverse the administrative agency’s final decision. The trial court denied his petition.

Analysis

The California Court of Appeal specifically addressed whether the trial court made a mistake in concluding that Dr. Paxton’s bonuses were not “special compensation” that must be included when calculating his pension benefits. The Court focused on the plain language of section 20636 in reaching its decision.

The Court concluded that “special compensation” is “[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 highlighted that the real point of contention was not whether the duties had been performed during working hours, but rather whether the duties were part of his normally required tasks. “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.”

The Court ultimately found that the evidence supported the Board’s conclusion. The Court based its decision on the bonus program’s unusual history. Because the bonus program was based on the understanding that the program would compensate its consultants for additional work that was not part of their regular duties, the Court of Appeals determined that the trial court correctly concluded that the extra pay was not pensionable compensation as it did not fall within the “special compensation definition.” The bonus payments were intended to compensate Dr. Paxton for performing additional work outside of his regular duties, even if he completed the extra work within his normal 40-hour work week. The Court of Appeal of the State of California 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 constrictively apply the restrictions and prohibitions contained in the PERL and will require strict adherence to the language of applicable statutes.