ON WRIT OF CERTIORARI TO THE SUPREME COURT OF MICHIGAN.
O'connor, J., delivered the opinion for a unanimous Court.
JUSTICE O'CONNOR delivered the opinion of the Court.
In 1987, the Michigan Legislature enacted a statute that had the effect of requiring petitioners General Motors Corporation (GM) and Ford Motor Company (Ford) to repay workers' compensation benefits GM and Ford had withheld in reliance on a 1981 workers' compensation statute. Petitioners challenge the provision of the statute mandating these retroactive payments on the ground that it violates the Contract Clause and the Due Process Clause of the Federal Constitution.
Since at least 1974, workers' compensation law in Michigan has been the subject of legislative study and bitter debate. VanderLaan & Studley, Workers' Compensation Reform: A Case Study of the Legislative Process in Michigan, 14 U. Mich. J. L. Ref. 451, 452-454 (1981). "Literally dozens of conflicting legislative proposals" were offered each year, and all were fought to a standstill by competing interest groups. Id., at 453. The legislative logjam was finally broken in 1980, when the Governor and four legislative leaders began a series of negotiations leading to an agreement on reforms. "Neither side was able to obtain everything it wanted -- possibly a good indication of the degree of balance this compromise represents." Id., at 458.
Among other things, the 1980 legislation raised maximum weekly benefits to 90% of the state average weekly wage, and provided workers injured before 1980 an annual supplemental adjustment of their benefits of up to five percent. Mich. Comp. Laws Ann. §§ 418.355(2), 418.352(1) (1982). In 1981, the legislature enacted a statute allowing employers to decrease workers' compensation benefits to those disabled employees eligible to receive wage-loss compensation from other employer-funded sources. Mich. Comp. Laws Ann. § 418.354 (1982). This provision, allowing what is called "benefit coordination," is at the heart of the controversy in this case.
The benefit coordination provision did not specify whether it was to be applied to workers injured before its effective date, March 31, 1982. Petitioners took the position that the 1981 law allowed them to reduce workers' compensation benefits to workers injured before March 31, 1982, who were receiving benefits from other sources. For example, GM cut respondent Romein's weekly payment by $132.00 per week, and Ford cut respondent Gonzalez's payment by $176.00 per week. The lower state courts disagreed with petitioners' interpretation, holding that coordination was allowed only for employees injured after 1982. See, e. g., Franks v. White Pine Copper Div., Copper Range Co., 122 Mich. App. 177, 185, 332 N. W. 2d 447, 449 (1982). Both Houses of the Michigan Legislature passed a concurrent resolution declaring that the coordination provisions were "not designed to disrupt benefits which were already being received by an employee prior to the effective date of this act or benefits resulting from injuries incurred prior to the act's effective date." See Senate Concurrent Res. 575, adopted by the Senate on April 1, 1982, and by the House on May 18, 1982. 1982 Senate J. 626, 706-707; 1982 House J. 1262. The same year, a bill was introduced in the Michigan Senate to amend the statute in this respect, but it was not passed. Senate Bill 834, introduced on May 26, 1982.
Meanwhile, petitioners continued to attempt to persuade the Michigan courts that the 1981 statute should be applied to workers injured before its effective date. In 1985, petitioners' interpretation was accepted by the Michigan Supreme Court. Chambers v. General Motors Corp., decided together with Franks v. White Pine Copper Div., Copper Range Co., 422 Mich. 636, 375 N.W. 2d 715. The court held that the benefit coordination provision applied to all payment periods after its effective date, regardless of the date the employee had been injured. The court also held that application of the coordination provisions to employees injured before 1982 did not violate the Contract Clause or the Due Process Clause.
After the decision in Chambers, employers who had not coordinated benefits for employees injured before 1982 began to demand reimbursement from these employees. See Jones, Firms Cut Checks for Disabled Workers, Detroit Free Press, Nov. 29, 1985, p. 3A. The Michigan Legislature responded almost immediately by introducing legislation to overturn the court's decision. On October 16, 1985, before the Michigan Supreme Court had ruled on the motion for rehearing in Chambers, House Bill 5084 was introduced. As amended and passed by the House on January 29, 1986, the Bill repudiated the Chambers decision, declared that employers who had not coordinated benefits before the Chambers decision could not seek reimbursement from affected employees, and required employers who had coordinated benefits before Chambers to reimburse their employees. Meanwhile, the Senate passed its own version of the bill, Senate Bill 67, also disapproving the Chambers decision and providing that employers could not require employees to reimburse them for benefits not coordinated after 1982. The Senate bill was amended by a Conference Committee to provide for reimbursement of benefits withheld as a result of coordination, putting employers who had coordinated benefits for previously disabled workers in the same position as those who had not. House Legislative Analysis of Senate Bill 67, p. 2 (May 7, 1987). The amended Senate bill passed into law on May 14, 1987. 1987 Mich. Pub. Acts No. 28.
As a result of the 1987 statute, petitioners were ordered to refund nearly $25 million to disabled employees. They protested that the provision requiring reimbursement of benefits withheld was unfairly retroactive and violated the Contract Clause and Due Process Clause. The Michigan Supreme Court upheld the statute against these challenges, on the ground that the employers had no vested rights in coordination for Contract Clause purposes, and that the retroactive provisions furthered a rational legislative purpose. 436 Mich. 515, 462 N.W. 2d 555 (1990). We granted certiorari, 500 U.S. (1990), and now affirm.
Article I, § 10 of the Constitution provides: "No State shall . . . pass any . . . Law impairing the Obligation of Contracts." Petitioners claim that the 1987 statute requiring reimbursement of benefits withheld in reliance on the 1981 coordination provisions substantially impaired the obligation of its contracts with its employees.
Generally, we first ask whether the change in state law has "operated as a substantial impairment of a contractual relationship." Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978); Energy Reserves Group, Inc., v. Kansas Power & Light Co., 459 U.S. 400, 411 (1983). This inquiry has three components: whether there is a contractual relationship, whether a change in law impairs that contractual relationship, and whether the impairment is substantial. Normally, the first two are unproblematic, and we need address only the third. In this case, however, we need not reach ...