Whalen, R. v. Public School Empl Ret Board, Aplt. ( 2021 )

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IN THE SUPREME COURT OF PENNSYLVANIA
MIDDLE DISTRICT
BAER, C.J., SAYLOR, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.
RAYMOND J. WHALEN, : No. 33 MAP 2021
:
Appellee : Appeal from the Order of the
: Commonwealth Court at No. 45 C.D
: 2020 dated October 27, 2020,
v. : Reversing the Order of the Public
: School Employees’ Retirement
: Board at No. 2016-05 dated
PUBLIC SCHOOL EMPLOYEES’ : December 6, 2019.
RETIREMENT BOARD, :
: ARGUED: October 26, 2021
Appellant :
OPINION
JUSTICE WECHT DECIDED: December 22, 2021
The question in this case is whether a lump-sum payment that a school district
made to settle a principal’s age-discrimination claim should be included in that employee’s
retirement benefit calculation. We conclude that the Commonwealth Court disregarded
the Retirement Code’s statutory definition of “compensation” and instead deferred to the
intent of the settling parties to treat the payment as retirement-covered compensation.
Accordingly, we reverse.
Raymond Whalen was a school principal at the Wyoming Valley West School
District (“District”) from July 1995 to September 2014. In May 2011, Whalen filed an age
discrimination charge against the District with the Equal Employment Opportunity
Commission (“EEOC”). Whalen alleged that, in 2010, he was excluded from pay raises
that the District awarded to younger principals. Whalen subsequently filed a federal age-
discrimination action in the Middle District of Pennsylvania in which he sought, among
other things, back pay and compensatory damages.
In June 2014, Whalen and the District entered into a settlement agreement, which
provided, in relevant part, that:
[the District] agrees to pay $15,000, in the form of a salary enhancement in
full and final settlement of this matter to [Whalen] and $5,000 in full and final
settlement of attorney’s fees and costs to [Whalen’s] attorney . . . . [The
District] will cause the salary enhancements to be made before the end of
business on June 30, 2014, and will make such payment and withholdings
as are required in the normal course of payroll payments. It is the intent of
the parties that this salary adjustment be income qualified for full pension
credit by PSERS to be allocated to the year 2013-2014.
Settlement Agreement & Release, 6/27/2014, at 2 (R.R. 63a).
According to the settlement agreement, the $15,000 payment to Whalen
constitutes “a full and final release of all claims of every nature and kind whatsoever and
that it releases all claims for injuries, losses, and damages that are presently known or
suspected and all claims for injuries, losses, and damages that are not presently known
or suspected but which may later develop or be discovered.” Id. at 3. The agreement
also required Whalen to “submit an irrevocable letter of retirement from his employment
with the [District] to be effective September 24, 2014.” Id.
Consistent with the settlement agreement, Whalen signed a separate document
irrevocably retiring from the District effective September 24, 2014. After Whalen’s
retirement, the Public School Employees’ Retirement System (“PSERS”) sent him a
Retirement Benefit Letter stating that his final average salary (“FAS”) for benefit
calculation purposes was $89,726.48—an amount that did not include the District’s
$15,000 settlement payment.1
1 FAS is a major component of the pension benefit formula, with a higher FAS
generally equating to a higher monthly pension benefit. Though the calculation varies
depending on a member’s “class of service,” most retirement-eligible PSERS members
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Whalen filed a benefit appeal with PSERS, arguing that the $15,000 payment
should have been considered retirement-covered compensation for the 2013-2014 school
year, as per the terms of his settlement with the District. PSERS rejected this argument,
explaining in a letter that “[t]he $15,000.00 settlement amounts to a damage award and
does not represent your standard salary or back wages and benefits for the period at
issue. PSERS cannot recognize a damage award as retirement-covered compensation.”
Letter, 2/3/2016, at 1 (R.R. 134a).
Whalen then appealed to the Public School Employees’ Retirement Board
(“Board”), again arguing that the entire settlement amount constituted back pay
attributable to a single year (the 2013-2014 school year). According to Whalen, the
settlement represented compensation that he would have received but for the District’s
alleged age discrimination. Thus, Whalen contended that the settlement amount should
have been included in his FAS. The Board rejected Whalen’s claim, finding that the
$15,000 settlement was not “compensation” as defined by the Retirement Code. “Rather,
it was a payment made in exchange for a release of all claims by [Whalen] against the
District and was made in conjunction with an irrevocable notice of retirement.” Board
Decision, 12/6/2019, at 9 (R.R. at 281a).
Reviewing the applicable statutes, the Board explained that the Retirement Code
defines FAS to mean “the highest average compensation received as an active member
during any three nonoverlapping periods of 12 consecutive months[.]” 24 Pa.C.S. § 8102.
“Compensation,” in turn, is defined in relevant part to mean “any remuneration received
as a school employee excluding reimbursements for expenses incidental to employment
and excluding any bonus, severance payments, any other remuneration or other
are entitled to a benefit equal to 2% of their FAS multiplied by the number of years of
“credited service.” See Hoerner v. Pub. Sch. Emps.’ Ret. Bd., 684 A.2d 112, 116 (Pa.
1996).
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emolument received by a school employee during his school service which is not based
on the standard salary schedule under which he is rendering service[.]” Id. This restrictive
definition of compensation reflects “the Legislature’s intention to preserve the actuarial
integrity of the retirement fund by ‘excluding from the computation of employe[e]s’ final
average salary all payments which may artificially inflate compensation for the purpose
of enhancing retirement benefits.’” Christiana v. Pub. Sch. Emps.’ Ret. Bd., 669 A.2d
940, 944 (Pa. 1996) (quoting Dowler v. Pub. Sch. Emps.’ Ret. Bd., 620 A.2d 639, 641
(Pa. Cmwlth. 1993)) (cleaned up).
The Board also explained that, while the Retirement Code does not recognize
damage awards or settlement payments as “compensation,” the Board nevertheless
“allows the constructive awarding of such amounts as ‘compensation’ when ordered by a
court for the purpose of upholding a member’s contractual rights for a specified period.”
Board Decision at 9. This allows PSERB members who settle adverse employment
actions “to be made whole while ensuring against potential windfalls.” Id. To have a
settlement payment recognized as retirement-covered compensation, the member “must
prove that the amount he received represents the actual pay that he would have earned
in that school year had the purported adverse employment action not occurred.” Id. “This
policy ensures that PSERS does not erroneously factor into a member’s FAS an arbitrary
payment that is not based on the member’s standard salary schedule under which he is
rendering service.” Id.The Board ultimately concluded that it was not authorized to include Whalen’s
$15,000 settlement in the computation of his FAS given that the Code specifically
excludes from the definition of compensation any remuneration “received by a school
employee during his school service which is not based on the standard salary schedule
under which he is rendering service[.]” 24 Pa.C.S. § 8102; see Board Decision at 9
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(“Neither PSERS nor the Board is authorized to recognize a damage award, a settlement
payment, a severance payment, or compensation that is not based on the standard salary
schedule as creating retirement credit where none is due.”). The Board found no support
for Whalen’s claim that the $15,000 payment constituted back pay that he should have
earned during the 2013-2014 school year. Indeed, the Board emphasized that the
settlement agreement did not reference or incorporate a standard salary schedule for
Whalen’s position. Furthermore, Whalen continued to work for the District for three
months following the settlement; yet, the undisputed evidence showed that Whalen’s
base salary did not increase by $15,000 during the post-settlement period.
Additionally, although the settlement agreement states that the entire $15,000
should be “allocated to the year 2013-2014,” Settlement Agreement & Release at 2,
Whalen himself claimed that the settlement represents wages that he lost during “the final
three years of his employment.” Board Decision at 9. The settlement agreement also
fails to mention “back pay” or “lost wages” at all, and it classifies the $15,000 payment as
a “salary enhancement” being paid as a “full and final settlement” to “effect a compromise
of a disputed claim.” Settlement Agreement & Release at 2. For these reasons, the
Board concluded that “there is no evidence that would indicate the ‘salary enhancement’
was to be anything other than a one-time payment, outside of [Whalen’s] standard salary.”
Board Decision at 11.
In a unanimous published decision, the Commonwealth Court reversed the Board.
The court acknowledged that “PSERS cannot be bound by characterizations of money
payments made to a PSERS member pursuant to a private contractual settlement to
which it is not a party.” Whalen v. Pub. Sch. Emps.’ Ret. Bd., 241 A.3d 1242, 1253 (Pa.
Cmwlth. 2020) (quoting Hoerner v. Pub. Sch. Emps.’ Ret. Bd., 684 A.2d 112, 117 n.10
(Pa. 1996)). Nevertheless, the court opined, “the Board must render a decision on
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whether such payment is [retirement-covered compensation] based on the evidence, and,
in doing so, must review the Settlement Agreement to ‘ascertain and give effect to the
parties’ intent.’” Id. (quoting Dick Enterprises, Inc. v. Pa. Dept. of Transp., 746 A.2d 1164,
1168 (Pa. Cmwlth. 2000)).
Turning to the instant settlement agreement, the court determined that the
document “clearly expresses the parties’ intent that the $15,000.00 payment was a salary
enhancement to resolve Whalen’s claim for back pay, and was to be [retirement-
covered compensation].” Id. (emphasis in original). The court underscored the
unambiguous language in the agreement stating that “[i]t is the intent of the parties that
this salary adjustment be income qualified for full pension credit by PSERS to be allocated
to the year 2013-2014.” Id. (quoting the settlement agreement). In the court’s view, that
provision constitutes “a clear expression of the parties’ intent that the payment was what
Whalen should have received as part of his salary and, thus, be credited to his pension.”
Id. Accordingly, the court held that the Board erred as a matter of law when it declined to
treat Whalen’s settlement as retirement-covered compensation.
The Board then petitioned this Court for allowance of appeal, which we granted to
consider whether the Commonwealth Court correctly concluded that Whalen’s settlement
constitutes “compensation” under the Retirement Code. As with all questions of statutory
interpretation, this case presents a pure question of law over which our standard of review
is de novo, and our scope of review is plenary. Brown v. Levy, 73 A.3d 514, 517 (Pa.
2013).
Before this Court, the Board continues to maintain that there is no proof that
Whalen’s $15,000 settlement represents additional salary that he would have earned
during the 2013-2014 school year but for the District’s alleged age discrimination. The
Commonwealth Court rejected this argument because it believed that “the amount
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Whalen sought was for raises he was not awarded due to alleged age discrimination and,
thus, the Settlement Agreement itself is evidence of the amount of actual pay he would
have received during the 2013-2014 school year.” Whalen, 241 A.3d at 1252 (emphasis
omitted). According to the Board, however, this approach conflicts with the Retirement
Code’s definition of “compensation” and with this Court’s holding in Christiana.
As explained above, the Retirement Code excludes from the definition of
“compensation” any “remuneration or other emolument received by a school employee
during his school service which is not based on the standard salary schedule under which
he is rendering service[.]” 24 Pa.C.S. § 8102. The Board argues that the Commonwealth
Court effectively ignored this exclusion when it ordered PSERS to include remuneration
that was not based on the District’s “standard salary schedule” in Whalen’s FAS. Id.
As for the intermediate court’s theory that the settlement agreement itself
establishes the parties’ intent to treat the payment as compensation for 2013-2014 school
year, the Board emphasizes that “PSERS cannot be bound by characterizations of money
payments made to a PSERS member pursuant to a private contractual settlement to
which it is not a party.” Brief for Board at 38 (quoting Hoerner, 684 A.2d at 117 n.10). In
the Board’s view, it is the Retirement Code’s statutory definitions—not the intent of the
settling parties—that controls whether remuneration constitutes retirement-covered
compensation.2
2 The Board alternatively argues that Whalen’s settlement was a severance
payment, given that the settlement agreement required him to submit an irrevocable letter
of retirement from his employment with the District. Because we conclude that the
settlement did not constitute “compensation” for other reasons, we do not address that
argument today. We simply note for the benefit of those reading this decision in the future
that the Retirement Code also explicitly excludes from the definition of “compensation”
“any additional compensation contingent upon retirement.” See 24 Pa.C.S. § 8102
(providing that “compensation” excludes “any bonus, severance payments, any other
remuneration[,] or other emolument received by a school employee during his school
service which is not based on the standard salary schedule under which he is rendering
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Whalen, on the other hand, argues that the nature of the settled claim itself
demonstrates that the settlement constitutes “compensation” under the Retirement Code.
Brief for Whalen at 16-17 (“Whalen’s entire claim, first to the EEOC, and then in his federal
lawsuit was to enforce the standard salary schedule as it applied to him, by eliminating
the invidious effects of the age discrimination he suffered.” (emphasis in original)). In
other words, Whalen contends that, because his EEOC charge and subsequent civil
complaint “expressly claimed back pay entitlement on account of age discrimination,” the
Board should have assumed that “his salary loss was equivalent to the amount received
by [the] agreement.” Id. at 17. Whalen also underscores that there is no evidence that
the settlement gave him a windfall. Id.
We are persuaded by the Board’s argument that the decision below deviated from
the Retirement Code’s statutory definition of “compensation” and instead relied on the
intent of the parties as reflected in the settlement agreement. While it acknowledged that
“PSERS cannot be bound by characterizations of money payments made to a PSERS
member pursuant to a private contractual settlement to which it is not a party,” Whalen,
241 A.3d at 1253 (quoting Hoerner, 684 A.2d at 117 n.10), the Commonwealth Court
nonetheless deferred unhesitatingly to the text of the settlement agreement. Indeed, the
court’s analysis hinges entirely on whether the parties intended for the $15,000 payment
to be “compensation” under the Retirement Code. The mere fact that the parties’ called
the $15,000 payment retirement-covered compensation is irrelevant. “You can call a
camel an elephant but that won’t make its hump disappear. Labels do not change
substance.” Houston Gen. Ins. Co. v. Brock Const. Co., 246 S.E.2d 316, 319 (Ga. 1978)
(Undercofler, P.J., concurring).
service” (emphasis added)); id. (defining severance payments to mean “[a]ny payments
for unused vacation or sick leave and any additional compensation contingent upon
retirement”).
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In Christiana v. Public School Employes’ Retirement Board., 669 A.2d 940 (Pa.
1996), for example, our court considered whether tax-sheltered annuities that a school
district purchased for its superintendent constituted compensation under the Retirement
Code. The retiree in that case, Robert Christiana, received sizable raises during his first
three years on the job, increasing his salary from $58,000 to $71,000. When Christiana’s
salary for the 1984-1985 school year was under consideration, members of the School
Board worried that additional raises would generate negative publicity given that articles
previously had appeared in a local newspaper noting that Christiana’s salary at that time
exceeded that of Pennsylvania’s Governor. Afraid of the public backlash that could
accompany further salary increases, the School Board elected to freeze Christiana’s
salary and purchase a single premium annuity, which Christiana could then use to
purchase prior years’ seniority pension credit.
The Board ultimately excluded the annuity payments from the calculation of
Christiana’s FAS. On appeal, the Commonwealth Court held that the Board did not err in
excluding the annuity payments. The court found that the record was devoid of any
evidence that the compensation package tracked the District’s regular and standard
yearly compensation practices, particularly those involving Christiana himself over the
ten-year term of his employment.
On further appeal, this Court found “substantial evidence in the record to support
the Retirement Board’s conclusions that the annuity payments were remuneration that
was not based on the standard salary schedule for which Christiana was rendering
service, and that the $19,200 payment was a severance payment.” Id. at 946. Thus, we
concluded that “the annuity payments were properly excluded from the computation of
Christiana’s final average salary.” Id. In so holding, we emphasized that “[t]he restrictive
definitions of compensation under the Retirement Code and regulations reflect the
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Legislature’s intention to preserve the actuarial integrity of the retirement fund by
excluding from the computation of employees’ final average salary all payments which
may artificially inflate compensation for the purpose of enhancing retirement benefits.” Id.
at 944 (quoting Dowler v. Pub. Sch. Emps.’ Ret. Bd., 620 A.2d 639 (Pa. Cmwlth. 1993))
(cleaned up).
As we explained in Christiana, the Board has a duty to “ensure the actuarial
soundness of the retirement fund” by “exclud[ing] nonregular remuneration, nonstandard
salary, fringe benefits, bonuses, and severance payments from inclusion as
compensation under the Retirement Code.”3 Christiana, 669 A.2d at 945. Yet, under the
Commonwealth Court’s holding below, an employer and employee could agree to bind
the retirement system to pay out a higher benefit than anticipated without an opportunity
for the system to evaluate whether the amount legitimately represents retirement-covered
compensation. This approach ignores our Court’s observation in Christiana that the
restrictive definitions of “compensation” set forth in the Retirement Code were an
intentional effort on the part of the General Assembly to exclude from an employee’s final
average salary any payments outside of the employee’s standard salary schedule
designed to artificially inflate the employee’s retirement benefits. Christiana, 669 A.2d at
944.
Here, the Board had ample reason to conclude that Whalen’s $15,000 settlement
did not constitute retirement-covered compensation. For one thing, the settlement
3 To hold otherwise could potentially allow employers to inflate an employee’s FAS
artificially. Imagine, for example, that a teacher who is approaching retirement has a valid
legal claim against her school district and is willing to settle the claim for $50,000. The
district could, in theory, make a low settlement offer—say, $25,000—but agree to call the
payment retirement-covered compensation and attribute it to a single year, thus inflating
the teacher’s future retirement benefits. This would essentially shift part of the district’s
liability onto the already-burdened pension system. This is why the Board has an
independent duty to exclude nonstandard payments like bonuses and severance
payments from inclusion as retirement-covered compensation.
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agreement itself states that the $15,000 payment is a “salary enhancement” to be paid
as a “full and final settlement” and “to effect a compromise of a disputed claim.”
Settlement Agreement & Release at 2. But the agreement fails to mention when the
“salary enhancement” was earned, which makes it impossible for PSERS to treat the
payment as “compensation” even if it wanted to do so. See 22 PA. CODE § 211.2(b) (“For
final average salary purposes, retirement-covered compensation is credited in the school
year in which it is earned, not paid.” (emphasis added)). And even though Whalen claims
that the settlement represents the wages he lost during “the final three years of his
employment” (which would be the 2011-2012, 2012-2013, and 2013-2014 school years),
the settlement agreement nevertheless states that the entire payment should “be
allocated to the year 2013-2014.” Settlement Agreement & Release at 2.
More importantly, the agreement does not reference or incorporate a standard
salary schedule—neither the schedule that Whalen was on nor the one he would have
been on absent the District’s alleged discrimination—and Whalen has not produced such
a schedule during this litigation. This is crucial, because the Code explicitly excludes from
the retirement calculation any remuneration not based on the employee’s standard salary
schedule. See 24 Pa.C.S. § 8102 (excluding from the definition of compensation “any
bonus, severance payments, [or] any other remuneration or other emolument received by
a school employee during his school service which is not based on the standard salary
schedule under which he is rendering service”). The Commonwealth Court disregarded
this exclusion when it ordered PSERS to include in Whalen’s FAS remuneration that could
not possibly have been consistent with the District’s standard salary schedule.4
4 Even though the District’s salary schedules are not part of the certified record
before us, we know that Whalen did not receive a $15,000 annual raise, because he
continued to work for the District for three months after the settlement, while nonetheless
continuing to receive his same, pre-settlement salary. Had the $15,000 settlement
payment been standard salary for Whalen for the 2013-2014 school year, there would
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The Commonwealth Court ignored the many defects in Whalen’s settlement
agreement and relied instead on the bald assertion in the contract that “[i]t is the intent of
the parties that this salary adjustment be income qualified for full pension credit by PSERS
to be allocated to the year 2013-2014.” Settlement Agreement & Release at 2. This was
error. The intent of the parties to treat the lump-sum as retirement-covered compensation
cannot overcome the Retirement Code’s unambiguous definition of “compensation,”
which plainly excludes “any other remuneration or other emolument received by a school
employee during his school service which is not based on the standard salary schedule
under which he is rendering service[.]” 24 Pa.C.S. § 8102. Accordingly, we reverse the
order of the Commonwealth Court.
Chief Justice Baer and Justices Saylor, Todd, Donohue, and Mundy join the
opinion.
Justice Dougherty files a concurring opinion.
have been a corresponding increase to Whalen’s annual base salary post-settlement.
Yet he continued to earn an amount consistent with his pre-settlement salary during the
short period that he worked after executing the settlement but before officially retiring on
September 24, 2014.
Whalen responds to this by suggesting that some portion of the $15,000 settlement
actually represented future pay for the time that he worked after the settlement. But that
argument conflicts with the text of the settlement agreement, which says that the entire
sum should be allocated to the 2013-14 school year, and with Whalen’s position in the
Commonwealth Court, where he argued that the full $15,000 payment was attributable to
either the 2013-14 school year or alternatively should be split evenly over his last three
years of employment.
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