Knowledgebase-City Manager Employment Agreements and Severance Pay


Information Product

Title:City Manager Employment Agreements and Severance Pay
Summary:MTAS was asked what the former city manager's rights to severance pay are under
the contract.
Original Author:Hemsley, Sid
Co-Author:
Product Create Date:04/10/97
Last Reviewed on::05/31/2017
Subject:City manager--Contracts; Contracts; Personnel--Dismissal; Personnel--Employment agreements
Type:Legal Opinion
Legal Opinion:

Reference Documents:

Text of Document: April 10, 1997

Your City Council terminated your city manager. The former city manager has demanded payment of severance pay in the amount of $54,904 in accordance with the terms of the contract between the city and him. Your question is, what are the former city manager's rights to severance pay under the contract?

The threshold question is whether the former city manager is entitled to severance pay at all. Under your City Charter the city manager is an at will employee. [Article V, Section 1.] There are no Tennessee cases on the question of whether a city can enter into a contract containing a provision for severance pay with an at will city manager. As far as I can determine that question has only arisen once, in New York. There it was held in Hansell v. City of Long Beach, 401 N.Y.S.2d 271 (Sup. Ct. App. Div.) that such a contract was no good for four reasons: the city manager's appointment was for an indefinite term; there was no provision in the city charter for an employment contract with the city manager; the city manager was a public officer; and the contractual provision violated the New York Constitutional provision against gifts of public money. Hansell gives your city an argument on precisely the same grounds that the contract between the city and the former city manager is ultra vires as beyond the scope of its authority.

In City of Lebanon v. Baird, 756 S.W.2d 236 (Tenn. 1988), the Tennessee Supreme Court discussed at length the effect of ultra vires contracts. It pointed to two kinds of ultra vires contracts: (1) Contracts wholly outside the scope of the city's authority under its charter or a statute; and (2) Contracts not undertaken consistent with the mandatory provisions of its charter or a statute. It declares that in the latter kind of ultra vires actions, the court will weigh the equities to determine if the action should be voided, including the equity of whether the contract is executory. However, if the contract between the city and the former city manager is an ultra vires contract, it is an ultra vires contract of the first kind. Baird also made it clear that where the charter or statute does not authorize the action in question, it is ultra vires and void or voidable, and that is the end of the inquiry.

However, in my opinion the Tennessee courts would not go as far as did Hansell. In fact, under the facts and circumstances of your city's case, I would advise the city to think very carefully before it spends money to litigate the question of whether its contract with the former city manager is valid. It is clear that under its charter, the city has the authority, "To contract and be contracted with." [Article II, Section 1(3).] In addition, the city council has the authority to "appoint and fix the salary of the city manager...." [Article V, Section 1.] Neither of those provisions expressly authorize the city to enter into a contract with a city manager in general, or to enter into a contract that contains a severance pay provision, in particular. However, the city's right to appoint and fix the salary of the city manager probably carries with it an implied power to enter into a contract with the city manager, provided the contract does not abrogate his at will status within the terms of the charter. I see no inconsistency between the city manager's at will status and the city's contract with him, particularly the severance pay provision at issue. Under that contract the city can still dismiss the city manager at will; he simply must be paid severance pay if the dismissal was without cause.

It is also the law that public legislative bodies, including municipal governing bodies, have broad authority to provide salaries and other forms of compensation to both elected officers and other officers and employees, to the extent not limited by the Tennessee Constitution. In Peay v. Nolan, 7 S.W.2d 815 (Tenn. 1928), it was held that the General Assembly could authorize payment of expenses of its members without violating Article 2, Section 23, of the Tennessee Constitution, which prescribes the compensation of the General Assembly. The Court reasoned that the constitutional prescription was a "salary" limitation and not a compensation limitation. Blackwell v. Quarterly County Court, 6222 S.W.2d 535 (Tenn. 1981) goes even further. In upholding the right of a county to modify a pension plan the Court, in sweeping language, in effect declared that, within constitutional limitations, governments at both state and local levels have broad authority relative to salary and compensation adjustments of elected as well as appointed officials. Those cases appear broad enough to support employment contracts between cities and city managers that include provisions for severance pay, and other fringe benefits.

In fact, in upholding the constitutionality of a statute requiring a city to indemnify policemen and firemen, the Tennessee Supreme court in City of Chattanooga v. Harris, 442 S.W.2d 602 (Tenn. 1969), spoke of the right of cities to provide such employees fringe benefits as well as salaries:

It is not to be questioned at this stage of the development of municipal activities that the maintenance of police and fire departments are proper corporate activities and for a public and corporate purpose. Nor, do we feel that, considering the difficulty encountered in filing and sustaining the ranks of these departments, it can be questioned that the giving of certain “fringe benefits” as well as salaries are necessary in order to effectuate these public purposes. In recognition of the necessity of providing such benefits, pension plans, tenure acts, retirement and vacation benefits have been adopted by individual cities by resolution, changes in charters, and often by acts of the Legislature. One method of approach in considering the instant statute is to consider it as providing another such fringe benefit. As it removes the burden from the individual of carrying insurance converge for, and defending against, suits which arise out of his employment, it might even be said that it provides an indirect pay raise for such employee. At the very least it makes employment in these departments more attractive for both the veterans and the recruit, just as other “fringe benefits” do. [At 606] [Emphasis is mine.]

While that case dealt with policemen and firemen, it unquestionably spoke to and applies to all municipal employees. Fringe benefits are an integral component of modern municipal employee compensation, and can be the product of municipal resolution as well as charters and legislative acts.

Along that line, city-city manager contracts containing severance pay provisions have become the norm rather than the exception. There are few, if any, professional city managers in Tennessee or elsewhere in the United States who work for a city without the benefit of an employment contract that provides the city manager some cushion upon termination. I find it unlikely that the Tennessee courts would overturn that practice and custom, particularly where the municipal charter in question provides for the city manager form of government, and expressly permits the city to appoint and fix the salary of the city manager. With respect to your former city manager's contract, it is not out of line with the benefits contained in other city-city manager contracts; if anything, it is less generous than some of them.

In my opinion, the city does have a slightly better argument that the former city manager's claims for insurance payments ($1,600) and retirement compensation ($2,047), in the total amount of $3,647, for "aggregate salary" are questionable. However, I think the former city manager would probably even prevail upon those claims; the city's argument is still too weak for it to invest money pursuing it. Under Para B of the contract, if the city manager is dismissed without cause he is entitled to a "lumps sum cash payment, as severance pay, equal to four month's aggregate salary, and this shall be the employee's sole relief against the employer." Nowhere in the contract is there found a definition of "aggregate salary," and the contract repeatedly separates salary and fringe-type benefits. But Section 5 of the contract says that, "The employer agrees to pay the employee for his services rendered pursuant hereto an annual base salary of $58,500 payable in installments at the same time as any other employees of the employer are paid...." In the same breath it says, "In addition, the employer agrees to increase the base salary and/or other benefits of the employee commensurate with the increases for other employees," suggesting that there is a linkage between base salary and "other benefits," and that "aggregate salary" apparently means something more than the total of four months base salary. Generally, insurance and retirement benefits, etc., are fringe benefits rather than salary or wages [Hamblen County Education Association v. Board of Education, 892 S.W.2d 428 (Tenn. App. 1994)], but I suspect the parties to the contract intended that the term "aggregate salary" included insurance and retirement payments. The major touchstone of contract interpretation is the intent of the parties.

For future reference, let me mention another potential problem with respect to city-city manager contracts of which every city and city manager ought to be aware: under a contract with an at will city manager, the contract may not survive the term of the appointing board. Washington County Board of Education v. Marketmedia, Inc., 693 S.W.2d 344 (Tenn. 1985), makes it clear that municipalities can enter into some contracts that extend past the term of the sitting board, but the Court in that case was careful not to overrule State ex rel. Brown v. Polk County, 54 S.W.2d 714 (Tenn. 1932), which involved an employment contract. In a footnote in Marketmedia, the Court, speaking of Brown, said:

It is also said that "the general rule is that contracts for employment for a period beyond the term of the employing board are not valid. The principle is of particular importance where the nature and character of an employment are such as to require a board or officer to exercise supervisory control over the employee." 63 Am. Jr. 2d Public Officers and Employees, sec. 334, at 911 (1984) Brown is of course consistent with this general rule. [Footnote 2 at 349.]

Other cases have held that the terms of municipal officers do not extend past the term of the sitting board. [Gay v. City of Somerville, 878 S.W.2d 124 (Tenn. App. 1994); Gamblin v. Town of Bruceton, 803 S.W.2d 690 (Tenn. App. 1990); Dingman v. Harwell, 814 S.W.2d 362 (Tenn. App. 1991).] The Tennessee courts have never adjudicated the question of whether a city manager is an officer or an employee. However, it has been held by courts in Missouri, Arkansas and New York that he is an officer. [Gay v. City of Somerville, 878 S.W.2d 124 (Tenn. App. 1994); Gamblin v. Town of Bruceton, 803 S.W.2d 690 (Tenn. App. 1990); Dingman v. Harwell, 814 S.W.2d 362 (Tenn. App. 1991), and Hansell.] I do not know what the Tennessee courts would do if faced with the question of whether the city's contract with the former city manager, or any other similar contract, expires with the term of the existing board. They could easily reach the same conclusion. In fact, the definition of "officer" in Gamblin is very liberal. Of course, there is no reason the charter could not give the city the authority to contract with the city manager past the term of the board.

I have tried to make three points:

1. While the city has an argument under Hansell that the former city manager's contract is invalid, the Tennessee courts will probably uphold the contract, at least during the term of the sitting board. For that reason, the city should probably think long and hard about litigating that issue.

2. The former city manager's claim for insurance and retirement benefits as "aggregate salary" are questionable, but not enough for the city to litigate that issue.

3. There is a possibility that the former city manager's contact, or any other contract with an at will city manager, is not valid past the term of the sitting board, unless the charter provides otherwise.

Sincerely,

Sidney D. Hemsley
Senior Law Consultant

SDH/

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