Labor & Employment Law

Disciplinary settlement payment not annual salary for retirement purposes

Disciplinary settlement payment not annual salary for retirement purposes
Horowitz v NYS Teachers' Retirement System, App. Div., 3rd Dept., 293 A.D.2d 861; motion for leave to appeal denied, 98 N.Y.2d 614

The Horowitz case concerns the impact of making a lump-sum payment to an employee as an inducement to his or her submitting a resignation in lieu of being served with disci­plinary charges in determining his or her final average salary for retirement purposes..

In July 1988, the Jericho Union Free School District offered Marc W. Horowitz the opportunity to resign from his administrative position in lieu of his being served with disciplinary charges. As part of the settlement negotiations related to Horowitz's separa­tion, Horowitz was to receive a lump-sum payment of $123,789 consistent with a benefit set out in a then expired agreement between the District and the Jericho Administrators Association -- the Resignation-Retirement Incentive Benefit Program benefit.

The Teachers' Retirement System [TRS] refused to include the $123,789 lump-sum payment to Horowitz as part of his "final average salary" [FAS] for the purpose of deter­mining his retirement allowance. TRS viewed the payment "as an inducement for [Horowitz's] immediate resignation" rather than "compensation for accumulated sick time" as claimed by Horowitz.

Horowitz sued, seeking a court order directing TRS to include the $123,789 in calculating his FAS. The Appellate Division, Third Department, sustained the Supreme Court dis­missal of Horowitz's petition. Citing Section 501.11(a) of the Education Law, the Ap­pellate Division said an individual's FAS is defined as "the average annual compensation earnable as a teacher during any five consecutive years of state service." As noted in Moraghan v New York State Teachers' Retirement System, 237 AD2d 703, the purpose of the statute is to prevent artificial inflation of an individual's final average salary by payments made in anticipation of a member's resignation.

Accordingly, said the court, "a lump-sum payment may be excluded from the calculation of a teacher's five-year final average salary where the circumstances support the conclu­sion that the payment was made in exchange for resignation rather than in satisfaction of accumulated sick leave", citing Hall v New York State Teachers' Retirement System, 266 AD2d 638, [leave to appeal denied, 94 NY2d 759].

Although Section 5003.2 of the Rules of the Commissioner, [21 NYCRR 5003.2 (b)], provide that "termination pay" is includable computation if it constitutes compensation earned as a teacher," the Appellate Division ruled that 21 NYCRR 5003.2 did not apply in Horowitz's case.

Why not? Because, said the court, the timing of Horowitz's resignation rendered him ineligible for the lump-sum payment provided by the then expired collective bargaining agreement between the District and the Association. This apparently resulted in the Dis­trict and the Association entering "into a separate agreement designed to facilitate [Horowitz's] resignation."

According to the decision, the so-called "Horowitz Incentive Agreement" provided Horowitz with the same financial benefit that the expired collective bargaining agreement provided to eligible retirees for accumulated sick leave. However, the Horowitz Incentive Agreement described its benefit as "a pay differential equal to one year's salary" rather than the payment of accumulated sick leave credit and Horowitz's resignation was specif­ically conditioned on the receipt of this payment.

Other distinctive elements of the ?incentive agreement? noted by the Appellate Division: The Horowitz In­centive Agreement was executed on the same day as the stipulation, provided a benefit for which Horowitz was the only recipient and required Horowitz to act within two business days in order to obtain its benefit.

The Appellate Division ruled that the language and circumstances of the agreements involved here rationally support TRS' findings that the Horowitz Incentive Agreement was tailored to Horowitz's particular situation and was created "solely to induce his resignation." Under these circumstances, said the Appellate Division, Supreme Court did not err in upholding TRS' determination and dismissing Horowitz's petition.

The fact that the amount paid to the employee in connection with a disciplinary settlement was not deemed wages for the purposes of calculating the employee's FAS for retirement should not be viewed as suggesting that such a payment is not subject to withholdings for income tax and other purposes.

Full post as published by New York Public Personnel Law on May 09, 2008 (boomark / email).