Retirement Sign.jpgThis blog post was authored by Michael Youril

If your agency is a contracting agency with the California Public Employees’ Retirement System (CalPERS), chances are you have heard about the important distinctions between an “employee” and an “independent contractor” under the Public Employees’ Retirement Law (PERL).  Whether an individual is an “employee” or an “independent contractor” determines whether the individual must be enrolled in CalPERS under certain circumstances and whether a CalPERS retiree can return to work with a CalPERS agency without being subject to post-retirement work restrictions.

The difficulty for CalPERS employers is that there is no single, absolute factor that distinguishes an “employee” from an “independent contractor.”  Rather, a myriad of factors are considered.  Accordingly, employers often find it difficult to ensure that the person they are contracting with is in fact a true independent contractor, rather than a common law employee. 

Many employers have agreements with individuals that clearly state that the individual is an independent contractor and that no employer-employee relationship exists.  However, the label actually matters very little when it comes to determining whether an individual is an “employee” or an “independent contractor.”  Rather, the actual relationship between the parties is paramount and the label may be one of the least important factors in such a determination.  Similarly, just because an employer issues an individual a Form 1099 instead of a W-2 does not guarantee that the individual will be deemed to be an “independent contractor.” 

Instead, when it comes to CalPERS, the “common law test” is used to determine whether an individual is an “employee” or an “independent contractor.”  The critical factor is whether the employer retains the right to control the manner and means of accomplishing the work to be performed.  As CalPERS puts it, “[a]n independent contractor is someone who contracts to provide a service or complete a task according to his or her own methods, and is not subject to contracting entity’s control as to the end product, final result of work, or manner and means by which the work is performed.”

Other factors that CalPERS and courts will use to determine whether an individual is an “employee” or an “independent contractor” include:

  1. Is the individual or the employer supplying the tools, instrumentalities, and workspace?
  2. Is the skill required in the occupation the type normally performed under the supervision of the employer or by a specialist without supervision?
  3. Is the individual involved in a distinct occupation or business?
  4. What level of skill is required in the occupation?
  5. Is the relationship between the employer and the individual finite or ongoing?
  6. Is the employee paid by the time or by the job?
  7. Is the work performed part of the employer’s regular business?
  8. How do the parties view their relationship?

As noted above, no single factor is controlling.  CalPERS or a court will look at the individual’s relationship with the agency in light of the above factors and balance them to see if the relationship weighs in favor of an employer-employee relationship or principal-independent contractor relationship.  Understandably, the fluidity of the test frustrates employers who must try to determine at the outset how CalPERS or a court will weigh the factors in the future.  This task is all the more daunting when the employer has not had significant experience in analyzing the factors.  Therefore, contracting agencies should contact legal counsel or develop procedures for analyzing whether an individual is an “employee” or an “independent contractor” in individual circumstances.

There are several mechanisms for CalPERS to be alerted to an individual’s misclassification as an independent contractor instead of an employee.  CalPERS periodically audits contracting agencies to determine, among other things, whether individuals have been improperly classified as “independent contractors” or “employees” for the purposes of the PERL.  CalPERS also can be alerted to certain employment arrangements by the media, taxpayer groups, and other employees. 

Even if an employee is properly classified as an independent contractor, there are additional nuances that an employer must address.  CalPERS has been inconsistent in its guidance and publications on how it treats independent contractors.  As we reported, CalPERS indicated in one of its publications that even true independent contractors, those individuals who are independent contractors under the common law control test, are subject to the PERL’s post-retirement restrictions when working directly for a CalPERS employer.  In Circular Letter No. 200-002-14, however, CalPERS backtracked from its previous language and stated that true independent contractors were not subject to the PERL’s requirements on post-retirement work.  As we discussed in our post on Circular Letter No 200-002-14, CalPERS did not clarify whether a CalPERS retiree who is a true independent contractor must still have his or her hours reported in my|CalPERS.  Employers must take care to remain well informed of additional CalPERS guidance and changing interpretations. 

It is important for CalPERS contracting entities to take careful stock of the individuals it treats as independent contractors and conduct an analysis of whether they are true independent contractors.  This analysis should be conducted as soon as possible in order for the agency to avoid unwanted consequences for the agency, as well as employees and retirees performing services for the agency.