Thursday, August 16, 2012

Payments in contemplation of retirement excluded in determining an individual’s final average salary for purposes of retirement


Payments in contemplation of retirement excluded in determining an individual’s final average salary for purposes of retirement
Franks v DiNapoli, 53 AD3d 897

The Employees’ Retirement System member commenced service with the Town and served as its police chief from 1996 until his retirement in 2002. His first contracts as police chief provided for “executive longevity increments” that ranged from one-half day of pay per two-week pay period in 1996 to two days of pay per pay period in 2000.

A second contract as chief included executive longevity payments of executive longevity payments of 5½ days of pay per pay period for the first year and eight days of pay per pay period during the second year. The contract also specified that in the event the Chief continue his employment as chief beyond July 2002, his executive longevity increments would revert back to two days of pay per pay period effective August 1, 2002. The Chief served out the full term of his contract, retiring effective August 1, 2002.

When the Chief filed his application for retirement with State and Local Police and Fire Retirement System notified him that it had calculated his retirement benefits based on a final average annual salary of $166,463.40 which included only executive longevity payments equal to two days of pay per payroll period. If the amounts for the remaining six days were included, it would have increase the Chief’s annual salary to $237,114.18, significantly increasing his “final average salary” for retirement purposes.

The Retirement System said that including more than “two days per pay period of executive longevity payments” would constitute the inclusion of “compensation in anticipation of retirement,” the inclusion of which was barred by Section 302.9(d) of the Retirement and Social Security Law.

The Appellate Division rejected the Chief’s challenge of the Systems’ decision to include only “two executive longevity days per pay period” in determining his final average salary for the purposes of calculating his retirement allowance.

Retirement and Social Security Law Section 302.9(d) provides that the salary base used to compute retirement benefits "shall not include any form of termination pay or compensation paid in anticipation of retirement.” The courts said that “Regardless of the labels attached to compensation by the parties, the substance of the transaction and payments controls,” and the System’s determination in this instance is supported by substantial evidence.

In the words of the Appellate Division, “The contract dramatically increased the longevity payments compared to [the Chief’s] prior years as chief….” Although the Chief testified that the large increase in his “executive longevity payments” was negotiated in exchange for a waiver of overtime rights, the court said that the contract “does not mention such an exchange” and the Chief’s testimony in this regard “created a credibility issue which [the Retirement System] was free to resolve.”

Under the circumstances, said the court, substantial evidence supports Retirement System’s determination that the executive longevity increments in excess of two days of pay per payroll period constituted compensation in anticipation of retirement, which is properly excluded when calculating an employee's salary for the purpose of determining an individual’s retirement allowance.

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