For the second time in a month, the San Diego Union-Tribune’s Watchdog tattled on a CalPERS retiree working for a CalPERS employer post-retirement. The first incident the Watchdog tapped CalPERS to look into resulted in a finding of illegal post-retirement employment. CalPERS has not yet reached a finding in the second incident which involves the use of a CalPERS retiree as an “independent contractor.”
Employers must beware when employing CalPERS retirees. As we mentioned in our blog last week, the Legislature amended three of the laws affecting post-retirement employment of CalPERS retirees for the second time in less than six months.
What employers must be cautious of is that some of these legislative changes are not as significant as you may think. The danger presented by last week’s SB 1021 is that employers may slip back into relaxed employment practices when it comes to CalPERS retirees.
At the end of it all, here are the Top 5 Mistakes CalPERS agencies should avoid:
- A CalPERS retiree can work year-after-year so long as he/she never exceeds 960 hours in a fiscal year. No, not exactly. It is true that a CalPERS retiree employed under Government Code section 21224 is not per se prohibited from working for more than one year for a CalPERS employer. It is also true that no matter what, the retiree may not exceed 960 hours in any fiscal year (July 1 – June 30).
However, section 21224 permit employment of a CalPERS retiree in only two circumstances:
- When the retiree is simply employed because he/she has specialized skills needed in performing work of limited duration; or
- When the retiree is either appointed by the governing board, or simply employed during an emergency to prevent the stoppage of public business.
The length of the appointment/employment matters. Don’t be fooled.
- There is no limit to a CalPERS retiree’s service to a CalPERS agency because the retiree says they are an “independent contractor.” Sounds good in theory, but it’s reality that is the problem. It is true that if a CalPERS retiree is truly working for a CalPERS employer as an independent contractor, then the limits normally applied to retirees employed by a CalPERS agency do not apply.
However, the California Supreme Court held that when it comes to CalPERS, the common law definition of “employee” applies. The label of “independent contractor” matters little. We look at the totality of circumstances surrounding the working relationship and whether it appears to be one of employer-employee. The most important factor is if the employer has the authority to exercise complete control over the manner and means of accomplishing the job. If so, the retiree is not an independent contractor. There are also eight other factors looked at including:
- Who supplies the retiree with the tools and instrumentalities for work?
- Is the retiree engaged in an occupation commonly performed by a specialist? (Hint: a police chief is not an independent contractor).
- Is the retiree engaged in a stand-alone occupation or business?
- Does the job require a high degree of skill?
- Is the retiree retained for a finite project or duration?
- Is the method of payment more typical of an employer-employee relationship?
- Is the work performed part of the employer’s regular business?
- What do the parties think their relationship is?
In fact, CalPERS actually requires CalPERS agencies to have an independent contractor agreement involving a CalPERS retiree approved by CalPERS before the work commences.
- Bob retired on Friday and on Monday he can come back to work to help us while we train the new guy. Maybe. Bob might be okay if he satisfies the work limitations set by statute, but under any of the statutes if Bob is under the “normal retirement age” he has to have a bona fide separation from service, first.
A bona fide separation from service means that before a CalPERS retiree under the “normal retirement age” can work for a CalPERS employer there must be: (1) a separation in service of at least 60 calendar days between the date of retirement and the first day of post-retirement work; and (2) no predetermined agreement between the employer and retiree prior to retirement that the retiree would return to work for the employer after retirement.
- Good news! Bob is a miscellaneous employee who just turned 50 which is the minimum service retirement age under CalPERS so he does not need that bona fide separation from service. Wrong. A bona fide separation from service is required if the CalPERS retiree is under the “normal retirement age,” not the minimum service retirement age. “Normal retirement age” is a technical term coined by the Internal Revenue Service in implementing rules against in-service distributions from qualifying pension plans. It means the highest age that will be used to any retirement benefit formula that applies to the retiree. If Bob worked for a CalPERS employer at 2% at 60, and part of his benefits will be calculated at 2% at 60 then works for and retires from your agency at 2.5% at 55, Bob’s “normal retirement age” is 60.
By the way, the IRS issued a Notice of Proposed Rule Making to amend the guidelines on normal retirement age for governmental pension plans. These guidelines, which could be adopted in 2013, may affect these rules regarding bona fide separation from service for CalPERS retirees, including public safety employees, so stay tuned.
- There is no limitation to a CalPERS retiree working for our agency as a “volunteer.” Maybe. Did you know that CalPERS does not have a definition of volunteer? CalPERS in fact does not speak to volunteers at all. Instead, CalPERS uses the common law definition of employee. If that CalPERS retiree receives any form of compensation for their “volunteer” service to a CalPERS agency, chances are, those limits on post-retirement employment may very well apply.
Employers are cautioned not to fall prey to relaxed employment practices when it comes to CalPERS retirees. When in doubt, ask legal counsel for an opinion before the work commences.