Third Party Independent Contractor Agreements Do Not Guarantee Protection from CalPERS Membership

Category: Blog Posts
Date: Jun 18, 2019 11:53 AM
Third Party Independent Contractor Agreements Do Not Guarantee Protection from CalPERS Membership

This post was authored by Kevin J. Chicas.

It is not uncommon for public agencies to contract with another organization or company to provide temporary services to cover for vacant positions. A recent decision issued by the CalPERS Board of Administration (the “Fuller” Decision) illustrates why public employers should be careful about classifying someone as an independent contractor just because they are retained through a third-party agency.

Relevant Background

The public district employer lost their Finance Manager with only a 30-day notice that created an immediate need for an experienced interim Finance Manager while the district recruited to permanently fill the position.  In order to find a competent interim Finance Manager, the district contracted with the Regional Government Services (“RGS”), a joint powers authority that does not contract with CalPERS.  RGS has worked with over 200 local agencies since approximately 2002 to provide government agencies with temporary professionals who can perform duties and provide services critical to the agency.

The district entered into a contract with RGS which stated, among other things, that the relationship of RGS to the district was “that of an independent contractor and all persons working for or under the direction of RGS are its agents or employees and not agents or employees of [the] Agency. The Agency and RGS shall, at all times, treat all persons working for or under the direction of RGS as agents and employees of RGS, and not as agents or employees of the Agency.”  The contract also specified that the district did not have the ability to direct how services were to be performed, specify the location where services are performed, or establish hours or days for performance of services.  The district only had the right to direct the results of RGS’ services.

The contract with RGS then reflected the service to be provided by a “RGS Staff Position.”  The contract named Tracy Fuller as the “RGS Staff Position” to “perform the functions of  Interim Finance Manager as assigned” at an hourly rate of $90.00.  The contract indicated that RGS employees may perform services at the district’s offices or at other locations.

The district did not contract with Fuller.  RGS, however, had an employment contract with Fuller.  The contract between RGS and Fuller clearly referred to Fuller as an “employee” of RGS and that the employment is subject to termination at any time at the sole discretion of the RGS executive director.  Fuller’s performance and compensation were to be reviewed at least annually by the RGS executive director.

The district paid RGS directly for Fuller’s services and RGS paid Fuller, although it is not clear if Fuller herself received the full hourly rate that RGS charged the district.  The district also paid a housing allowance for Fuller.

Fuller previously worked with other CalPERS member agencies and retired within the CalPERS system prior to her employment with RGS. Fuller performed the functions of interim Finance Manager for the district for approximately eight months. The district, believing Fuller was an independent contractor (by and through her employment with RGS), did not report Fuller’s hours and compensation to CalPERS.  Throughout Fuller’s retention, the district actively sought to (and eventually did) hire a permanent Finance Manager replacement.

CalPERS staff conducted a membership and payroll audit of the district in late 2014. As part of this audit, CalPERS reviewed the working relationship between Fuller and the district.  CalPERS staff issued a report finding Fuller was not an independent contractor, but rather an employee of the district. Therefore, the district was required to enroll Fuller in CalPERS as an eligible employee. Also note, because Fuller was previously an active member of CalPERS, she was entitled to immediate membership if employed by any CalPERS employer, regardless of position, length of employment, or hours worked.

The Decision of the CalPERS Board of Administration

The district appealed the determination by CalPERS staff.  The appeal was heard by an administrative law judge (“ALJ”) from the state Office of Administrative Hearings who issues a proposed decision to the CalPERS Board of Administration.  The ALJ issued a proposed decision finding Fuller was a District “employee” under the Public Employees’ Retirement Law (PERL), which defines an employee as “[a]ny person in the employ of any contracting agency.”  (Gov. Code § 20028(b); See also, Gov. Code §§ 20069; 20502.)

In particular, the ALJ relied on several factors supporting Fuller’s status as a district “employee” including 1) the district ultimately had the right to control the manner and means in which Fuller accomplished her assignments; 2) Fuller ultimately reported to the district’s General Manager; 3) the district determined, issued and evaluated her particular work, not RGS;  3) the district described Fuller as a staff member in its board minutes; 4) RGS and the district’s independent contractor agreement provided for an option to extend the agreement on a month-to-month basis, past the specified four-month term; and 5) although the district paid Fuller indirectly through RGS, Fuller was still paid by the hour, not the job.

On September 28, 2018, the CalPERS Board of Administration (“Board”) adopted the proposed decision as the final decision of the Board.  In February 2019, CalPERS staff recommended that the Board designate the Decision as a “precedential decision.”  The Board may designate a decision as precedential if it contains a significant legal or policy determination of general application that is likely to recur. If the Board designated the Fuller decision as precedential it would have the same effect as Board-adopted regulations and relied upon by future litigants in administrative and court proceedings as legal authority.

In March and April of this year, stakeholders were invited to provide feedback to the Board.  The recommendation of designating the Decision as precedential was added to the agenda for the June 19, 2019 Board meeting.  However, at the time of this blog, the agenda item was pulled from the Board’s agenda for reasons that are not entirely clear. We do not have further information as to whether the Board will possibly consider the Fuller Decision at a future meeting.

Impact and Effect of Decision

Regardless of whether the Fuller Decision is designated precedential, it did not establish any fundamentally different interpretation of the law or new administrative policy.  The Board previously issued a precedential decision regarding the test employed to determine if the so-called independent contractor is truly an employee subject to active CalPERS membership.  (See In the Matter of the Application for CalPERS Membership Credit by Lee Neidengard (2005) CalPERS Precedential Decision No. 05-01.) That was the first precedential decision of the Board on this subject following the California Supreme Court’s decision in Metropolitan Water District v. Superior Court (Cargill).  The Cargill decision held that an “employee” eligible for CalPERS membership is determined by the common law employment test, particularly in the case of presumed independent contractors.

As the Board of Administration relied upon and followed Cargill in this recent Decision, it did not establish a new analysis regarding independent contractor determinations.  If anything, Fuller stands as a cautionary tale about how intently CalPERS reviews independent contractor relationships and how narrowly they construe the test for common law employment.

While the ALJ relied upon several factors in finding Fuller was a common law employee, certain factors may weigh differently in other cases, but these are factors that could potentially serve as red flags for future CalPERS audits.

As it was before Fuller, employers are strongly cautioned about believing a person providing service to the agency is an independent contractor simply because they are retained through an outside agency or company.  The test remains the same whether the public agency contracts directly with the individual or contracts with another agency for the services provided by the individual. The fundamental test being that a common law employment relationship exists if the principal controls the manner and means by which the individual performs his/her services.

Contact Us

General Inquiries

info@lcwlegal.com

Contact a Specific Office

Our Locations

Media Inquiries

Please contact Cynthia Weldon, Director of Marketing & Training, 800.981.2000.

close

back