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The Cargill Decision – What Does It Mean For
California Public Employers?
On February 26, 2004, the California Supreme Court decided the
much-anticipated case of Metropolitan Water District of
Southern California v. Superior Court (Cargill) (2004) 32
Cal.4th 491. In Cargill, the Supreme Court determined
that a public agency which contracted with the California
Public Employees’ Retirement System (“CalPERS”) must enroll
all its “common-law” employees in CalPERS, even if such
employees only provided services to the public agency through
private labor suppliers on a contract basis. While the
holding of Cargill would appear, at first glance, to
greatly expand the rights of contract employees who provide
services to California employers, the true impact of
Cargill is quite limited. As set forth in this article,
though California public agencies should take some
precautionary steps in light of Cargill, the decision
should not set off alarm bells or require drastic changes to
the way most employers currently provide services.
The Metropolitan Water District (“MWD”) is a public agency
that provides its employees with various benefits, including
the enrollment of its qualified employees in CalPERS. MWD had
entered into contracts with several private labor suppliers to
provide it with workers. MWD classified these workers as
“consultants” or “agency temporary employees” and neither
enrolled the contract workers in CalPERS, nor provided them
with benefits that MWD provided to its eligible, non-contract
employees.
The Cargill action was brought by
a class of contract workers who performed services for MWD
through contracts with private labor suppliers. The contract
workers alleged that MWD misclassified them as consultants and
agency temporary employees and thus unlawfully denied them
ordinary benefits of MWD employment, including CalPERS
enrollment. The class of contract workers sought writ relief
to compel MWD to provide them with compensation, benefits and
employment rights in accordance with MWD’s administrative code
and, in particular, to enroll the contract workers in CalPERS.
In a case management order, the trial
court determined that it would resolve the following issue
prior to trial: “Whether MWD is mandated by the [Public
Employees' Retirement Law ("PERL"), California Government Code
§§ 20000, et seq,] to enroll all common-law employees
in CalPERS.” After extensive argument, the trial court ruled
that MWD was mandated by the PERL to enroll the contract
employees in CalPERS. The Court of Appeal held that the trial
court resolved the issue correctly and the Supreme Court
granted review.
The Supreme Court began its analysis by
determining that, pursuant to various sections of the PERL,
only a public agency’s employees - and not those
performing services for a public agency on other terms – may
be enrolled in CalPERS. Having determined that only a public
agency’s employees can be enrolled in CalPERS, the Court
concluded that the term “employee” is not specifically defined
within the PERL. Accordingly, the Court held that – in the
absence of any definition of the term “employee,” – it was
appropriate to apply the common law test of employment to
identify whether the MWD had any common law employees.
The common law test of employment
requires that a court apply a variety of factors to determine
if one providing services to an employer is in fact an
“employee” of that employer. Relevant factors are whether the
employer has the right to control the manner and means by
which the individual works, the duration of the relationship
between the parties, whether the employer has the right to
discipline the employer and whether the employer’s supervisors
directly oversees and reviews the individual’s work. In
short, the Supreme Court held that if the contract
workers providing services to MWD are common law employees of
MWD, then the contract workers are entitled to enrollment in
CalPERS.
The Cargill decision has led many
to consider the impact of the Supreme Court’s holding on
California employers, and specifically public agency
employers. In recent years, many California employers,
including public agencies, have increasingly contracted with
outside firms for labor. The ability to obtain skilled labor
without paying high wages, offering benefits or providing job
security is an attractive proposition for many public
employers who have seen their budgets drastically shrink in
recent years. Indeed, some California employers have resorted
to permanently “contracting out” essential services. Many
have wondered if the Cargill decision opens the door
for contract employees to claim the same compensation,
benefits and rights that are usually reserved for an
employer’s regular employees?
The answer to this question is not addressed within the
Cargill decision. Rather, the Supreme Court emphasized
that the issue it was deciding was limited to whether or not
the MWD had to enroll any contract workers who qualified as
“common law employees” of the MWD into CalPERS. Though it
answered this issue in the affirmative, the Supreme Court took
some steps to reduce the impact of Cargill and to
curtail any overexpansion of its holding.
First, the Court emphasized that it was
not reaching any decision as to whether or not the contract
workers providing services to MWD qualified as common law
employees. Rather, this issue will be determined by the trial
court as the matter proceeds to trial. However, it should be
noted that the Supreme Court did state that the contract
workers for the MWD have produced some evidence to show that
they worked for MWD for indefinite periods, in some cases for
several years and that they were basically integrated into
MWD’s workforce.
Second, the Court stated that if the
contract workers did qualify as common law employees, thus
entitling the workers to CalPERS enrollment, the workers would
not necessarily be entitled to retroactive CalPERS enrollment
from the date the worker first began providing services to the
MWD. This issue is important for public employers since
employees with fewer than five years of service are ineligible
for CalPERS retirement benefits and because a contracting
agency’s contribution obligations are determined actuarially.
If enrollment is determined retroactively, more contract
workers (who qualified as common law employees) would likely
be entitled to CalPERS benefits.
Third, the Court made clear that it was
utilizing the common law employment test only for the
purpose of deciding whether contract workers were “employees”
of the MWD for purposes of CalPERS enrollment. The Court
refused to state whether the common law employment test would
be appropriate to determine whether the MWD’s contract
employees were entitled to any other benefits or rights
usually reserved for MWD’s regular employees, such as health
benefits, or pre-disciplinary due process rights.
Fourth, the Court emphasized that by
ruling that contract workers used by the MWD may be entitled
to enrollment in CalPERS, it was not deciding that the
contract workers were necessarily entitled to CalPERS
benefits. Specifically, the PERL excludes particular persons
from membership in CalPERS, including (1) independent
contractors who are not employees, (2) individuals providing
services pursuant to an employment contract less than six
months, or (3) individuals who work less than 1,000 hours
within the fiscal year. California Government Code Sections
20300(b) and 20305. CalPERS and a contracting agency can also
agree to exclude groups of employees (by department or
classification), but not individual employees, by amending
their contract with respect to future entrants into the
particular employee group. California Government Code Section
20502. Contract workers who fit within one of these statutory
or contract exclusions would not be entitled to CalPERS
membership.
Finally, it should be noted that the
Cargill decision only applies to the potential right of
contract employees to enroll in CalPERS. The decision does
not address any issues relating to the practice of many
California employers to employ so-called temporary, seasonal
or limited employees who are hired directly by the employer –
and not through an outside provider – for indefinite periods
of time. The risks inherent in allowing a so-called
“temporary” employee to provide services for a long period of
time exposes the employer to many legal risks, including
demands from the so-called temporary workers for the same
compensation, benefits and rights usually provided to an
employer’s “regular” employees. The problems inherent in
misclassifying temporary workers are not addressed in this
article, but are of critical importance for any California
employer who uses temporary, seasonal or limited employees.
In light of the narrow holding and subsequent impact of
Cargill, the case does not promise to force any drastic
changes. However, California employers can take certain steps
to reduce the exposure to the type of demands asserted by the
class of contract workers in Cargill.
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All California
employers should carefully track the length of time that any
contract employee provides services. The longer a contract
worker provides services, the greater the chance the worker
can successfully claim the status of common law employee.
Employers that contract with outside firms for labor should
specifically include a provision in the contract which sets
forth the length of service to be provided and should abide
by those limits. For public agencies, the service term
should be less than six months to avoid CalPERS coverage for
contract workers.
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In light of the
Cargill, employers should be aware of the factors
that a court will consider in determining whether a contract
worker qualifies as a common law employee. An employer can
take steps to reduce the chance that its contract employees
will be considered common law employees by reducing the
length of time such employees provide services and by
allowing the firm which provides the workers to assume more
of the control over the worker. In addition, employers that
utilize “independent contractors” should apply the common
law employment test to such contractors to determine if
there is any potential claim that the contractor is actually
a common law employee.
Review internal personnel rules and regulations that set
forth the benefits and which employees are entitled to
particular benefits. Make sure the rules specifically and
clearly identify those employees who are eligible for
particular benefits and excludes those who are not. Though
an employer who amends its rules may still be exposed to
potential claims from current contract workers who qualify
as common law employees, an employer can insulate against
future contract workers making similar claims.
As set forth above, the
Cargill decision should not require any drastic changes.
While contracting for services is still an attractive option
for many employers, it should be done with care and with
careful consideration to the potential exposure to contract
employees who claim entitlement to benefits or other rights
that are traditionally afforded to regular employees. |
