School District Collective Bargaining; Deferential Essence Test and Public Policy Exception

Millcreek Township School District v. Millcreek Township Educational Support Personnel Association, 179 A.3d 1167 (Pa. Cmwlth. 2018), allocatur granted Oct. 11, 2018, appeal docket 37 WAP 2018

The Collective Bargaining Agreement (CBA) between Millcreek Township School District (District) and Millcreek Township Educational Support Personnel Association (Association) contained language regarding subcontracting and specifically stated: “No work of the bargaining unit shall be sub[]contracted for the life of the [CBA].” During labor negotiations in July 2016 (the CBA expired on June 30, 2016 but as required the parties maintained the status quo by adhering to the CBA), the District notified the Association that a Request for Proposals (RFP) for custodial services had been issued on March 29, 2016. The District provided the Association with the information it received from the successful bidder. However, the District did not enter into a contract with the successful bidder.  The Association filed a grievance, the case went to arbitration, the arbitrator found that the District had violated the CBA’s “no outside subcontracting provision” and that “the RFPs cannot be used in bargaining with the Association to secure [an] advantage.” The trial court affirmed.  On appeal to the Commonwealth Court, the District presented two issues: (1) whether the Award satisfies the essence test; and (2) whether the Award contravenes public policy.

The Commonwealth Court held that the Award did not satisfy the essence test, and that the Award violated public policy.  As to the essence test, the court found that the arbitrator failed to meet the first prong because he did not “properly define” the issue, and instead addressed an issue that assured a finding in favor of the Association. The court began by reciting the standard – grievance awards under the Public Employee Relations Act [(PERA) ] “are reviewed pursuant to the deferential essence test, which requires affirmance of an award if: ‘(1) the issue as properly defined is within the terms of the [CBA], and (2) the award can be rationally derived from the [CBA].’ Neshaminy  Sch[.] Dist[.] v. Neshaminy Fed[’]n of Teachers, 122 A.3d 469, 474 (Pa. Cmwlth. 2015) [(Neshaminy I)]. Slip Op. at 3-4.  As the court explained concerning the first prong:

The issue before the Arbitrator was whether “the District violate[d] the CBA by issuing [an RFP] for custodial services in the District[.] If so, what is the remedy?” R.R. at 8a. The issue the Arbitrator addressed was “whether the District ha[d] subcontracted out work . . . .” R.R. at 10a. Clearly, the issue the Arbitrator addressed falls within the CBA’s terms prohibiting subcontracting. However, since it is undisputed that no contract for custodial services had been signed, that issue was not before the Arbitrator.

Slip Op. at 4-5 (emphasis in original).

The court determined that the language of the CBA – “No work of the bargaining unit shall be sub[]contracted for the life of the Agreement” – is “clear and unambiguous,” completely silent on RFPs, and makes no reference to the subcontracting process, yet the arbitrator reached beyond the CBA and determined that outside contracting is a “process”  that begins as soon as the District decides to pursue the outside contracting avenue, and initiates RFPs.  Slip Op. at 5-6.

The court also determined that the Award failed to meet the second prong of the essence test, because it cannot be rationally derived from the CBA where the arbitrator went outside of the CBA to make his determination.  Slip Op. at 8.

As to public policy, the court also agreed with the District that the Award contravenes “the well-defined and established public policy of good faith bargaining.” Id.  The highly deferential essence test has a narrow exception by which an arbitrator’s award may be vacated if it violates public policy.  The court determined that there is a “well-defined, dominant public policy that public employers and their employees’ representatives have a mutual obligation to collectively bargain in good faith in Section 701 of PERA, which specifically mandates the parties to a CBA to ‘confer in good faith with respect to wages, hours and other terms and conditions of employment, or the negotiation of an agreement . . . .’” Slip Op. at 10.  The Award contravened the public policy in favor of good faith bargaining, the court concluded, because the District’s issuance of the RFP was designed, not to chill the CBA negotiations as the Arbitrator found, but rather to fulfill the District’s obligation to determine whether outsourcing some of the Association’s responsibilities was in the District’s financial interests.  Stated differently, the court concluded that the RFP was part of the necessary due diligence the District needed to engage in so as to be able to bargain in good faith with the Association for the elimination of the CBA’s subcontracting prohibition:

Here, the District was negotiating to eliminate the subcontracting prohibition from the CBA. In fulfilling its good faith bargaining duty, the District issued an RFP to determine whether it was financially feasible and thus in the District’s best interest to do so. The District presented the information it received from the successful bidder in order to provide the Association with an opportunity to match or counter the proposal.

Slip Op. at 11.

The Supreme Court has granted allocatur to review the Commonwealth Court’s setting aside of the Arbitrator’s decision notwithstanding the deferential essence test and the narrow public policy exception to the essence test.  The issues, as stated by petitioner, are:

(1) Whether the Commonwealth Court panel grossly departed from this Court ‘s accepted practices regarding review of labor arbitration awards and abused its discretion when it failed to give proper deference to the arbitrator ‘s factual findings and contractual interpretation.

(2) Whether the Commonwealth Court panel’s decision conflicts with numerous decisions of both this Honorable Court and the Commonwealth Court applying the deferential essence test and defining the authority of the arbitrator.

(3) Whether the panel erroneously held that the award violated public policy despite the fact that it specifically acknowledges and accounts for the District’s legal duty under [the Public Employee Relations Act].