Opinion 88-53


This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

PUBLIC OFFICERS AND EMPLOYEES -- Retirement Benefits (exclusion of compensation for working vacations from calculation of final average salary)

RETIREMENT AND SOCIAL SECURITY LAW, §§302(9)(d), 431: Compensation paid to police officers or firefighters for working scheduled vacations pursuant to a collective bargaining agreement is not includable in the calculation of one year final average salary.

You ask whether compensation paid to police officers or firefighters for working scheduled vacations pursuant to a collective bargaining agreement is includable in the calculation of one year final average salary under section 302(9)(d) of the Retirement and Social Security Law. You have also asked whether the New York State Constitution prevents the application of section 431 to exclude working vacation payments from the one year final average salary of individuals who joined the Retirement System before the effective date of that section.

Retirement and Social Security Law, §302(9)(d) provides as follows:

"d. By the adoption, filing and approval, where required, of a resolution in the manner provided by section three hundred thirty or three hundred thirty-one of this chapter, as the case may be, a participating employer may elect to provide that 'Final Average Salary' shall mean the regular compensation earned from such participating employer by a member during the twelve months of actual service immediately preceding the date of such employee's retirement, exclusive of any lump sum payments for sick leave, or accumulated vacation credit, or any form of termination pay: provided, however, if the compensation earned in said twelve months exceeds that of the previous twelve months by more than twenty percentum, the amount in excess of twenty percentum shall be excluded in the computation of final average salary; provided further, however, that the benefits computed pursuant to this paragraph shall be payable unless the member would otherwise be entitled to a greater benefit under other provisions of this subdivision, in which case such greater benefit shall be payable. The provisions of this paragraph shall apply only to employees of a participating employer who were such employees on or before June thirtieth, nineteen hundred seventy three." [Emphasis added]

Two recent court decisions interpreting this provision are relevant to this inquiry. In Hoffman v New York State Policemen's and Firemen's Retirement System, _____ AD2d _____, 531 NYS2d 141, the court specifically addressed the question of whether contractual payments for working vacations were includable in final average salary. In Hoffman, supra, a town employee worked 54 vacation days which were due him in his final year and received the cash value of that vacation time in his bi-weekly paycheck. The Comptroller had previously advised the employee that these "compensated time" payments would not be included as final average salary. Following an administrative hearing and appeal, this Office adhered to its position that payments for working vacations were not included as final average salary. The court confirmed the Comptroller's determination. In so concluding, the court relied on Hohensee v Regan, 138 AD2d 812, 525 NYS2d 733 mot for lv to app denied 72 NY2d 807.

In Hohensee, supra, the Third Department confirmed the Comptroller's determination that lump-sum cash payments for vacation credits not used are not includable in final average salary. The court in Hohensee stated as follows:

"Construing 'regular compensation earned *** during *** actual service' to mean fixed regular wages, as respondent has, is consistent with both the plain meaning of 'salary' and a legislative intention to guard against Retirement System members manipulating their pay to inflate their final average salaries." (138 AD2d at 813-4, 525 NYS2d at 734; citations omitted)

The court distinguished this lump-sum payment for working in lieu of vacation from "regular wages" which the individual would have received if he had taken his vacation:

"That lump-sum vacation payments are not regular compensation is clear from the fact that had petitioner taken his vacation he would have received his regular wages during that period. Having elected to forego his vacation and to work instead, the $2,558.43 payment, the cash equivalent he received in lieu of his ... vacation, was in addition to his regular compensation and thus extraordinary ...." (138 AD2d at 814, 525 NYS2d at 734-5)

Further, the court rejected the employee's contention that the exclusion in section 302(9)(a) for "accumulated vacation credit" was intended to exclude only those credits amassed in prior years and not credits accruing within 12 months of retirement. Thus, the Hohensee court appeared to base its decision both on the premise that the lump-sum payments were not includable as "regular compensation" and that the payments were excludable as "accumulated vacation credit" under section 302(9)(d).

The court in Hoffman, supra, noted that the only difference between that case and Hohensee, supra, was that the employee was paid bi-weekly for vacation time rather than in one lump sum at retirement. The court stated that "(p)etitioner's form of payment was little more than a thinly veiled attempt to obtain pension credits for unused vacation time, which is excluded from final average salary under Retirement and Social Security Law, §302(9)(d)."

Hoffman, supra, clearly stands for the proposition that compensation for working vacation constitutes an excluded payment for "accumulated vacation" within the meaning of section 302(9)(d), notwithstanding the fact that the payments were made in the member's regular biweekly paychecks. In addition, based on Hohensee, supra, we conclude that such compensation is in addition to, and outside of, "fixed regular wages" and, therefore, not includable in the calculation of final average salary, under section 302(9)(d). Accordingly, we conclude that the phrase "accumulated vacation" was used in section 302(9)(d) to distinguish between the includable "regular fixed salary" received while an individual is on vacation and the payments made over and above the regular salary paid to a member while on vacation.

In addition to the foregoing reasons for not including compensation for working vacations in determining final average salary, we believe that the Retirement and Social Security Law contains prohibitions against its inclusion (Retirement and Social Security Law, §§302(9)(d) and 431). Unlike section 302(9)(d), which applies only to the optional one year final average salary benefit which must be elected by the employer, section 431 provides limitations with respect to the salary base for the computation of retirement benefits in any retirement or pension plan to which the state or municipalities contribute. Subdivision (1) of section 431, like section 302(9)(d), expressly excludes payments for "accumulated vacation credit." In view of the similar wording of the "accumulated vacation" exclusions provided in sections 302(9)(d) and 431(1) and the fact that they are reflections of the same legislative intent to "guard against Retirement System members manipulating their pay to inflate their final average salary" (Hohensee, supra), it is our opinion that section 431(1) prohibits the inclusion of working vacation payments in determining "final average salary" for purposes of all retirement or pension plans to which the State or its municipalities contribute.

Retirement and Social Security Law sections 302(9)(d) and 431 also both provide that "any form of termination pay" (emphasis supplied) must be excluded from final average salary calculations. In our opinion, these provisions represent further independent authority for excluding working vacation payments where the terms of the collective bargaining agreement indicate that a purpose for the benefit is to increase the member's final average salary. Common examples are collective bargaining agreements which authorize working vacation payments for only a limited number of years (usually one or two) immediately prior to retirement, or for a year or years to be elected by the member. In those situations, we believe "working vacation" payments made during the last year of service are among those payments covered by the phrase "any form of termination pay" for the purpose of determining final average salary pursuant to sections 302(9)(d) and 431(2).

Section 431 also provides that "the salary base for the computation of retirement shall in no event include any of the following...(3) any additional compensation paid in anticipation of retirement" (emphasis added). It is our opinion that the drafters of section 431, by excluding "any form of termination pay" and "any additional compensation paid in anticipation of retirement", intended to exclude all payments that are paid or payable only during the final years of a member's service. This interpretation is based on the fact that the terminology used in the exclusionary language is quite broad, rather than specific or defined. Similarly, the exclusions for "any form of termination pay" and "any additional compensation paid in anticipation of retirement" (emphasis added) are each so broad that they tend to overlap further demonstrating that the section 431 limitations were intended to be broadly construed with respect to excluding payments which constitute "termination pay" or payments "in anticipation of retirement." We note that in determining whether payments are made in anticipation of retirement for section 431 purposes, it has been held that it is the "substance of the transaction, not what the parties may label it" which controls (Green v Regan, 103 AD2d 878, 478 NYS2d 115, 116).

With regard to whether there is any constitutional impediment to applying Retirement and Social Security Law, §431 so as to exclude working vacation payments from the one year final average salary of individuals who joined the Retirement System before the effective date of section 431, it is our opinion that there is no such obstacle. Pursuant to Article 5, §7 of the New York State Constitution, membership in any retirement system of the state after July 1, 1940 is "a contractual relationship, the benefits of which shall not be diminished or impaired." The application of Retirement and Social Security Law, §431 to individuals whose membership predates its effective date has been held not to violate this constitutional protection where, prior to its enactment, no administrative practice such as would have established a contract, had evolved (Weber v Levitt, 41 AD2d 452, 344 NYS2d 381, affd 34 NY2d 797, 359 NYS2d 39).

The Retirement System has never had the practice of knowingly including "working vacation" payments in final average salary. Accordingly, no administrative practice had evolved with respect to including working vacation in final average salary, and no such constitutional protection could have developed.

It is also our opinion that no such constitutional right could have prevented the application of the section 431 limitations to the one year final average salary benefit provided in section 302(9)(d) since section 302(9)(d) contains the same limitations with respect to "any form of termination day" and "lump sum payments for vacation credit" as section 431. Clearly, the State Constitution does not protect a practice which would be in contravention of existing law.

November 16, 1988
Terence M. O'Neil, Labor Counsel
City of Mount Vernon