CalPERS Board Decision on Contract Workers Will Not Become Precedential. Now What?
Contract Workers May Still Be Reclassified as Employees by CalPERS
The CalPERS Board of Administration will not consider whether to establish the Tracy Fuller decision as a CalPERS precedent, we have confirmed. While the decision to not pursue Fuller as a precedential decision is welcome news for CalPERS employers, it is important that employers continue to exercise caution when hiring contract workers.
CalPERS employers often hire workers directly or through third parties to perform services as independent contractors – true independent contractors are ineligible for CalPERS membership. In Fuller, a public agency contracted with a third party for Fuller’s services and treated her as an independent contractor. CalPERS disagreed, concluding that Fuller was an employee eligible for CalPERS membership after applying the common law employment test. Among the factors critical to its determination was that Fuller had served in the capacity of interim finance manager for the public agency.
For the last few months, the CalPERS Board was contemplating adopting the Fuller decision as precedential. Doing so would have eliminated a considerable amount of flexibility and adaptability in CalPERS’ application of the common law employment test to CalPERS employers entering into independent contractor relationships. However, significant opposition to the adoption of Fuller as precedent appears to have dissuaded CalPERS from this path.
Although Fuller will not become a precedential decision, it would be a mistake to conclude that CalPERS employers can now contract with workers — or third parties who employ such workers — without the risk that they will be reclassified as common law employees who are eligible for CalPERS membership. Instead, CalPERS employers should still take precautions before entering into purported independent contractor arrangements, and be aware of the eligibility rules that may trigger membership in CalPERS.
First, a CalPERS employer must ensure that a contract worker is properly characterized as an independent contractor. If so, it is critical that what is in the contract be consistent with what happens in practice, and that the contract worker must not fill a regular position with the CalPERS employer (e.g., finance director, human resources director, city manager). Second, if independent contractor status is unclear, it is important to know the CalPERS membership status (i.e., retired, active, inactive or not a member) of the contract workers that will be assigned to perform services on behalf of the CalPERS employer. Knowing this will ensure that the proper rules (e.g., retired annuitant employment or CalPERS membership) are applied to avoid adverse consequences (e.g., reinstatement or unintended CalPERS membership). Third, employers should know the terms of their pension contract, as it may contain exclusions that supersede the CalPERS membership rules. Finally, once the proper rules are determined, employers must ensure that they are applied correctly and consistently to avoid any missteps.
For more information about what your agency can do to avoid adverse findings related to contract workers, please contact the author of this article in the Employee Benefits & Executive Compensation practice group or your BB&K attorney.
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