December 2012

By: James B. Sherman, Esq.

In a controversial decision involving strongly worded dissenting opinions from three of the seven Justices, the Minnesota Supreme Court recently affirmed a ruling that requires the City of Duluth to provide retirees with lifetime health insurance benefits at the same level of benefits received by current employees. This was actually a victory of sorts for Duluth since the plaintiffs in the this class action suit, brought on behalf of all covered retirees, had argued their lifetime benefits were guaranteed at the previous, more generous levels provided when they retired. The case exemplifies what most employers in the private sector have long known – defined benefit plans and similar guaranteed employee benefits, cannot withstand the test of time in the real world economy. A more subtle lesson presumably not lost on the City of Duluth in this lengthy class action lawsuit, is that any employee benefit once given, may be extremely hard to change no matter the circumstances.

So what lessons does this important decision of the high court of Minnesota hold for other employers?

As with most legal issues involving employee benefits, the decision turned on the language of several union contracts where these lifetime health benefits were negotiated over a span of nearly 25 years. These contracts provided retirees with the same health benefits as “active employees…” The plaintiffs argued that this froze the benefits for life at the levels of employees active at the time those contracts were negotiated. Although the three dissenting Justices at least partially bought this argument the Court’s majority did not. Instead, the majority found the language unambiguous and allowed the City to change benefits for retirees to the same terms provided to “active employees,” now or in the future. However, the Court specifically stated it took no position on whether the City of Duluth could completely eliminate such benefits for retirees if it did so for current employees.

Employers cannot be too careful about the language used in collective bargaining agreements or any other documents concerning employee benefits. Caution is especially called for where benefits are changed, or may change, due to economic realities seldom acknowledged by unions or the employees they represent. The public sector – federal, state and local governments – once could afford to ignore these issues; however, this case is but one example of a City having to adjust benefits it could no longer afford. The state legislatures of Minnesota, Wisconsin and many other states have had to do the same, as has the U.S. Congress… well, sort of.