By Erica Shelley Nelson and Jordan L. Jones
In Rekhter v. Wash. Social & Health Servs. Dep’t, the Washington Supreme Court (WASC) upheld a jury finding that the Department of Social and Health Services (DSHS or State) violated the implied duty of good faith and fair dealing in its contracts with in-home care providers (providers). The WASC also held that the trial judge correctly granted summary judgment to DSHS on the providers’ claims that the State (1) wrongfully withheld wages in violation of RCW 49.52.050 and .070 and (2) failed to pay the providers for all hours worked, in violation of the Washington Minimum Wage Act (MWA).
DSHS contracts with providers to deliver assistance to individuals (clients) with disabilities. Subsequently, a “service plan” is developed between the providers and the clients that details the tasks that the providers will be asked to do (e.g., personal care services; household responsibilities). In addition, the “providers . . . agree that DSHS will pay only for authorized services in the client’s service plan and that their monthly payment will not exceed the amount authorized in the service plan.”
In 2003, under the “Comprehensive Assessment and Reporting Evaluation” or CARE process, DSHS developed the “shared living rule” “which automatically reduced assistance for in-home care by 15 percent for clients that live with their providers.” The WASC noted that the “rationale for the shared living rule was that the providers would already be performing certain household tasks . . . even if they were not providing in-home care for a disabled person.” The WASC also stated “[t]he shared living rule created an irrebuttable presumption that clients living with their providers needed 15 percent less paid assistance, even if those clients did need assistance with those household tasks.” In other words, this “shared living rule,” “resulted in DSHS requiring live-in providers to perform the same services as live-out providers for less compensation.”
The providers subsequently filed a class-action suit alleging that DSHS (1) breached an implied duty of good faith and fair dealing in its contracts with the providers; (2) wrongfully withheld wages in violation of RCW 49.52.050 and .070; and (3) failed to pay the providers for all hours worked, in violation of the MWA. DSHS contended that that the jury’s finding that DSHS violated the implied duty of good faith and fair dealing:
Fails as a matter of law because it (1) contradicts the jury’s other finding that DSHS did not breach a contract term; (2) adds a ‘free-floating obligation of good faith and fair dealing’ to its contracts, . . . and (3) enforces duties arising from a statute and not the terms of the contract.
The WASC held that the duty of good faith and fair dealing can arise even when there is no breach of an express contract term. The WASC stated that “[i]f DSHS’ assertion were true, there could never be a violation of a duty of good faith and fair dealing unless there were also a violation of an express contract term.” The WASC also dismissed DSHS’ argument that “the jury’s finding adds a ‘free-floating obligation of good faith and fair dealing’ to its contracts” and held that the “duty of good faith and fair dealing arises when one party has discretionary authority to determine a future contract term.”
Here, the contracts gave DSHS the discretionary authority to pay providers for authorized hours pursuant to the service plans, which were developed at the discretion of DSHS after the contracts were finalized. Thus, the duty of good faith and fair dealing arose in connection with those contract terms, and the jury found that DSHS breached that duty as to the performance of a specific contractual term.
In response to DSHS’s third argument that the jury’s finding “enforces duties arising from a statute and not the terms of the contract,” the WASC held that:
The contractual term is the determination of the hours of care for which each client is eligible, and DSHS had discretion in its performance of that term because it created the CARE process that made that determination. Therefore, DSHS had an implied duty of good faith and fair dealing in its performance of that term.
The WASC upheld the trial judge’s summary judgment ruling in favor of DSHS on the providers’ wage claims. The WASC found that RCW 49.52.050 and .070 apply to an employer’s agents and here “the providers have not shown any agency relationship” and noted that the MWA “applies to the employer-employee relationship, which does not apply to DSHS’s relationship with the providers.” The WASC stated that “DSHS’ role as a payor of Medicaid funds did not create an agency relationship between the client and DSHS [and that] the state is considered the employer of the providers ‘[s]olely for the purposes of collective bargaining.’”
This decision is important for recognizing the unique discretion DSHS had in applying the “shared-living rule” to unilaterally reduce the payments made to in-home care providers. The CARE tool referenced in the decision requires providers in community living facilities to provide certain services to residents regardless of whether or not DSHS will pay for it. This case potentially opens the door for other equitable claims by community living facility providers who are paid by DSHS to provide services to elderly and disabled residents in Washington.
