What can we help you find today?

Payment in Lieu of Insurance Coverage

Print This PagePrint This Page Send by EmailSend by Email
Reviewed Date: October 03, 2017

Original Author: 
Hemsley, Sid
Date of Material: 
Jun 5, 2001

Personnel--Fringe benefits

Payment in Lieu of Insurance Coverage

MTAS was asked whether a city can end a program under which several city employees received in pay the equivalent of the cost of their insurance coverage under the city's health insurance program.

June 5, 2001

Dear City Manager:

You have the following question: Was it legal for the city to end a program under which several city employees received in pay the equivalent of the cost of their insurance coverage under the city’s health insurance program?

The answer is yes.

The following facts are related to the question: Around October, 1999, the former city manager proposed, and the city council adopted, a policy under which 11 city employees were paid the cost of their health insurance. Most, if not all, such employees had coverage through their wives’ places of employment. Apparently the city council believed that the program would cost considerably less than it ultimately did. Those employees made the election to accept the money in lieu of the insurance, they were told that they might have trouble getting back on the plan at a future date. At the time the above policy was in effect the city was self-insured. It subsequently adopted the state plan. All the affected employees were notified several times after the city adopted the state plan that they had thirty days to enroll in that plan. The city has ended the policy of paying the affected employees compensation in lieu of insurance.

It has been held that absent a constitutional restriction, a local government has great latitude in the compensation of both its officers and employees, including the latitude to increase and lower pay, but that any compensation must be supported by legislation. [Peay v. Nolan, 7 S.W.2d 815 (1928); Blackwell v. Quarterly County Court, 822 S.W.2d 535, (1981). In the latter case it is said that:

Except as affected by a tenure or civil service system, a public employee ordinarily is not deemed to have a contract of employment within the meaning of the “impairment of contracts” provisions of the state and federal constitutions. This proposition was stated early in the history of this state in the case of Hayes v. State, 22 Tenn. 480, 9843. There the Court considered the question: ...”whether the compensation of officers of the government may be changed, modified, and reduced by the Legislature, during the time for which such officers may have been appointed. And there can be no doubt that such power exists, except in particular cases where by the constitution it is expressly prohibited.” 22 Tenn. At 481082....The Court further states: “The law fixing the compensation to be allowed for the discharge of the duties of an office does not constitute a contract with the officer who may be appointed, within the meaning of the Constitution of the United States. He takes the office with the liberty to relinquish it at any time he thinks proper, and with the understanding that his compensation is subject to legislative control. If this were not so, all of those provisions in the Constitution which prohibit the legislature from reducing the salaries of certain officers are unnecessary....As a general proposition therefore, the salaries and compensation of public employees may be raised or lowered by the employer during their period of service, insofar as constitutional prohibitions are concerned. Except as previously noted, even those holding elected or appointive office for a definite term have no fixed rate of compensation or guaranteed salary which is beyond modification by appropriate action of the public employers....Employees of public bodies, however, ordinarily are not hired by formal contracts, and compensation for them, even including officials with a definite term, is ordinarily subject to increase or diminution. [Emphasis is mine.]

In Hamilton v. Gibson County Utility District, 845 S.W.2d 218 (Tenn. App. 1992), the utility district provided health insurance to its office manager under a 1972 agreement between the utility district and Blue Cross/Blue Shield. The resolution authorizing the plan provided that upon 25 years of service or more or upon reaching the age of 60, the utility district would pay 100% of the employee’s health insurance premiums, and that the employee would remain under the planuntil reaching the age of 65, at which time he would be provided supplemental health insurance coverage. In 1985 a resolution of the utility district provided that:

An employee shall be covered by medical insurance or supplement under the group plan when the employee has attained the age of 60 years, or becomes disabled to serve as a full-time employee. At the age of 60 years such person will be classed as a 25 year employee, though he has not served that period.

However, in 1990, the utility district passed another resolution, as follows:

Attorney Gossum reported that the resolution adopted in May 1985 for payment of retired employees health insurance was in conflict with the Blue Cross-Blue Shield policy. Motion made by Bob Parkins, 2nd by Jim Holman to rescind the resolution adopted at the May 20, 1985 meeting. Motion carried by a vote of 3 to 1 in favor.
The retired office manager argued that the 1985 (and presumably the 1972 resolution) created a contractual obligation between him and the city under which he was vested. He had retired at 63 after working 28 years (from March 1962 until August, 1990).

Both sides asked for summary judgment in this case. The trial court granted it to the retired office manager, holding that the utility district had to provide the health insurance to the retired office manager. The Court of Appeals reversed the trial court, and sent the case back to the trial court for a finding of material facts. In doing so, the Court pointed to a heavy burden the office manager would have in proving his contractual claim in the trial court:

Insurance coverage provided to employees under a group health insurance plan are classified as “welfare benefit” plans as opposed to pension benefit plans, whereby retirement income is provided for employees. The law is clear that there is no legal requirement on the part of a governmental entity to provide a welfare benefit plan to its employees and if it chooses to do so, the plan may be modified or terminated at any time. State ex rel. Thompson v. City of Memphis, 174 Tenn. 658, 251 S.W. 46 (1923). [At 223] [Emphasis is mine].

Employee benefits in welfare benefits plans are not protected by ERISA’s vesting umbrella. Nonetheless, employers can contract to provide non-terminable, post-employment welfare benefits to retired employees irrespective of ERISA’s vesting protection. Retirees seeking to establish entitlement to such benefits have the burden of proving an employer’s non-termination intent. In the absence of ambiguity, resolution of this issue turns on the benefit plan documents. [Citations omitted.] [At 223]

Plaintiffs have the burden of proving vested welfare benefits. [Citation omitted.] Welfare benefit plans may be modified or terminated absent the employer’s contractual agreement to the contrary. [Citation omitted]. In DeGeare v. Alpha Portland Indus., Inc., 837 F.2d 812 (8th Cir. 1988), the court held that an employer’s promise to future retirees that benefits “will continue” could not be read as a promise of vested lifetime benefits in the face of a termination clause. [At 223]

In the case before us, we have no specific contract document pertaining to plaintiff’s employment. In addition, there is no employee handbook describing a benefit plan that might be considered a part of the employment agreement between defendant and plaintiff. What we do have are the 1988 [1985?] Board resolution, the BCBS booklet, and the contract between defendant and BCBS. [At 224]

....Article XVII of the same policy provides that the insurance contract may be terminated as set forth in Article XV or may be terminated at the end of any calendar year by either the defendant or BCBS, giving at least thirty days written notice. [At 224]

In addition, defendant’s employees were provided a booklet prepared by BCBS entitled “Custom Coverage Plan”, which contains the following language on its cover:

This booklet contains only a general description of the benefits available to you under your new Plan. The benefits described are subject to all the terms, conditions, limitations and definitions in your contract, as well as all provisions required by state law... [At 224]

Page 9 of the booklet reads in pertinent part as follows:

Continuation coverage will terminate: ...(b) where the employer cancels or otherwise terminates coverage for employees under the group master contract for which this booklet was prepared. [At 224]

Although Hamilton dealt with pension plan changes, it is very clear that it applies to any employee insurance benefits provided by a local government--employee “welfare benefit plans” Hamilton called them.

I find nothing in the facts given to me that your City ever entered into a contract with the 11 employees to whom it gave the right to reject certain health insurance benefits provided by the city, and to receive in salary the equivalent of the cost of providing the insurance to them past any change in the city’s insurance program, or past any time the city council wished to change that policy. Of course, if the employees could point to anything in any document indicating such a contract more substantive then anything I have seen, the answer might change. But given the employees’ burden of proof in showing such a contract on the part of the city, I doubt they could carry that burden.


Sidney D. Hemsley
Senior Law Consultant



About Our Knowledgebase

Information written by MTAS staff was based on the law at the time and/or a specific sets of facts. The laws referenced may have changed and/or the technical advice provided may not be applicable to your city or circumstances. Always consult with your city attorney or an MTAS consultant before taking any action based on information posted to this website.