The CalPERS Board of Administration recently adopted the final regulations concerning the administration of pensionable compensation for “New Members” as defined under the Public Employees’ Pension Reform Act of 2013 (PEPRA).

Initially, employers should be familiar with the nomenclature that is used in reference to compensation that is reported to CalPERS. Compensation that may be reported to CalPERS is referred to as “compensation earnable” for Classic Members (i.e., members who are not New Members under PEPRA) and “pensionable compensation” for New Members. What is important to note is that there is no item of pensionable compensation for New Members that is not also compensation earnable for Classic Members.  Rather, it is the converse.  There are items of compensation earnable for Classic Members that are not considered Pensionable Compensation for New Members.   We highlight those notable differences as they appear in the new CalPERS regulations.

First, uniform pay for Classic Members is compensation earnable. The amount reported must be the amount paid as a uniform allowance to employees or the cost paid by the employer for the uniform and any maintenance which should be stated in the applicable memorandum of understanding.  CalPERS requires that uniform pay be reported each pay period as a fraction of the total annual cost per member, even where uniform allowance may only be paid to a member one-time a year.  Uniform pay for New Members, however, is not pensionable compensation in any amount.

Second, and of no surprise, is that Employer-Paid Member Contributions (EPMC) is not pensionable compensation for New Members which makes sense given employers are prohibited from picking-up any amount of a New Member’s normal member contribution rate. EPMC is compensation earnable for Classic Members if the employer, by contract amendment with CalPERS, agrees EPMC will be special compensation.

Third, bonuses are not pensionable for New Members. Bonuses remain compensation earnable for Classic Members if it is for superior performance such as “annual performance bonus” and “merit pay” provided it is not paid in the final compensation period.  A program must be in place to identify the performance goals and objectives.  Similarly, “management incentive pay,” is compensation earnable for Classic Members, if it is in the form of additional time off or extra pay due to the unique nature of their job, but not for overtime duties. Classic members cannot have the option to take time off or receive extra pay for this item of special compensation.  Management incentive pay is not pensionable compensation for New Members.

Fourth,  “temporary upgrade pay” is not pensionable compensation for New Members while it remains compensation earnable for Classic Members if it is paid to employees who are required by their employer or governing board or body to work in an upgraded position/classification of limited duration. Interestingly, recent legislation attempts to prevent employers from temporarily placing employees in upgraded positions for more than 960 hours in a fiscal year, otherwise the employer faces triple monetary penalties to CalPERS.  It comes as no surprise that this legislation was sponsored by labor unions and only for the purpose of preventing employers from leaving employees in out-of-class assignments rather than promoting the employee to the classification, even where there is no impact to the pension system.  Employers can refer to our recent blog regarding new Government Code section 20480.

Finally, CalPERS indicates that overtime hours that are built into the normal work schedule of the employee will only be pensionable for New Members who are in the local fire or local police membership classifications if it is pursuant to an FLSA 7(k) work schedule. The FLSA 7(k) work schedule provides a higher threshold for overtime for fire or police personnel depending on the work period established by the employer.  For Classic Members, the premium paid for FLSA overtime that is built into the normal regular schedule of the employee is considered compensation earnable, and is not limited to local fire or local police membership classifications.  Not the case for non-safety New Members.

This may cause some consternation for non-safety employees who work 24/7 operations under which FLSA overtime is built into the normal working schedule for that class of employees, for example, dispatchers or nurses. The result is that in cases of employees in the same non-safety classification with FLSA built-in overtime as part of the normal full-time working hours, there will be an inequity between Classic Members and New Members.

CalPERS’ interpretation, however, is not far-fetched as the PEPRA provides that pensionable compensation does not include “compensation for overtime work, other than as defined in Section 207(k) of Title 29 of the United States Code” (i.e., the FLSA 7(k) schedule). Nonetheless, the PEPRA also states that pensionable compensation is defined, in part, as “the normal monthly rate of pay or base pay of the member paid in cash to similarly situated members of the same group or class of employment for services rendered on a full-time basis during normal working hours, pursuant to publicly available pay schedules.”  Thus, for non-safety employees who receive built-in FLSA overtime premium pay as part of their normal full-time working, which is correspondingly reflected on a publicly available pay schedule, it would seem the overtime premium pay is pensionable compensation but for the exclusion listed above.

Employers should review their MOUs and personnel policies to ensure that provisions therein do not contradict the PERPA and CalPERS’ new regulations.