Thank You For Submiting Feedback!
The first inquiry in determining whether a state law violates the Contract Clause, must be whether the state law has, in fact, operated as a substantial impairment of a contractual relationship. The severity of the impairment measures the height of the hurdle the state legislation must clear. Minimal alteration of contractual obligations may end the inquiry at its first stage. Severe impairment, on the other hand, will push the inquiry to a careful examination of the nature and purpose of the state legislation.
Allied Structural Steel Co., with an office in Minnesota, had a pension plan under which employees could receive a pension upon retirement at age 65 regardless of length of service. Furthermore, an employee's right to a pension vested prior to age 65 if certain requirements as to length of service and age were met. Allied was the sole contributor to the pension fund, but the plan neither required Allied to make specific contributions nor imposed any sanction for failing to contribute adequately. Allied retained a virtually unrestricted right to amend the plan, and was free to terminate it and distribute the assets at any time according to a predetermined method. Minnesota enacted a statute, under which private employers of 100 or more employees providing pension benefits under qualified plans were subject to a "pension funding charge" upon termination of the plan or closing of an office within the state. The charge was assessed if pension funds were not sufficient to cover full pensions for all employees working at least 10 years. After enactment of the statute, in a move planned before its passage, the company closed its Minnesota office. Several discharged employees, who had no vested pension rights under the plan, were nonetheless pension obligees under the statute. The state notified Allied that it owed a significant pension funding charge, and Allied brought suit in the United States District Court for the District of Minnesota for injunctive and declaratory relief, claiming that the act unconstitutionally impaired its contractual obligation to its employees under its pension agreement. A three-judge District Court upheld the statute as applied to Allied.
Did the application of the Act to Allied violate the Contract Clause of the Constitution?
The Court reversed the judgment that upheld the validity of the Act. As applied to the employer, the Act violated the Contract Clause because it operated as a substantial impairment of a contractual relationship. The Court noted that the State's police power was limited when its exercise effected substantial modifications of private contracts. The Act did not possess the attributes of the state laws that in the past had survived challenge under the Contract Clause. It was not enacted to deal with a broad, generalized economic or social problem. It invaded an area never before subject to regulation by the State. It did not effect simply a temporary alteration of the contractual relationships of those within its coverage, but worked a severe, permanent, and immediate change in the relationships, irrevocably and retroactively. Its narrow aim was leveled only at employers who voluntarily agreed to establish pension plans for their employees.