Many CalPERS agencies hire CalPERS retirees for limited post-retirement work to help with overflow or special projects. Often times, these retirees are the agency’s former employees who are familiar with the agency and the work to be performed. CalPERS can review these arrangements and determine that the retiree was engaging in unlawful post-retirement work either during the retiree’s appointment or years after the retiree’s post-retirement work ended. If CalPERS determines that there is a violation, then CalPERS will send a letter to both the agency and the retiree of its determination and require that the retiree give back all the pension payments collected during the period of post-retirement work for up to three years of retroactive payments. We have seen seemingly minor violations result in demands for repayment for hundreds of thousands of dollars!
But Can’t We Employ Retired Annuitants?
Yes, CalPERS agencies can employ CalPERS retired annuitants. However, the general rule is that a CalPERS retiree needs to be reinstated back into CalPERS membership, i.e., “unretire,” unless they qualify for an exception. We typically see post-retirement work violations in this context when agencies do not strictly comply with the exception requirements. For example, a retiree may be paid an hourly rate higher than what was allowed under a publicly available pay schedule for an employee performing similar duties, received benefits in addition to an hourly rate, or performed work that suggests the retiree is filling a vacant position. For a more detailed on these exceptions, please see our previous blog post here.
But What if the Retiree is an Independent Contractor?
There is nothing that prohibits a CalPERS agency from obtaining the services of an independent contractor who also happens to be a CalPERS retiree. However, simply labeling someone as an “independent contractor” will not be sufficient to make it so. CalPERS will look at various factors, such as where the person works physically, whether the person wears a uniform, whether the person has an agency email, etc. The most important factor, however, is whether the agency controls the manner and means of how the individual performs the services. In cases where a retiree is misclassified as an “independent contractor,” CalPERS may find a violation of post-retirement work. For more details on whether an “independent contractor” may be misclassified, please see our previous blog post here.
What Are the Consequences?
If CalPERS finds a violation of post-retirement work, there are major consequences, for both the retiree and the agency. CalPERS will retroactively reinstate the retiree back into CalPERS membership as of the effective date of when he or she began the unlawful post-retirement work, with a three-year limit. Employers will then be liable for employer contributions and possibly employee contributions for any of the wages paid for the unlawful post-retirement work. In addition, CalPERS can assess administrative penalties against the employer for its efforts to resolve the issue (e.g., accounting or payroll consultants).
For retirees, on the other hand, CalPERS will demand that the retiree pay back up to three years of retirement benefit payments, or the length of the unlawful post-retirement work, whichever is shorter. So, for example, if a retiree has been engaged in unlawful post-retirement work for three years, CalPERS will demand that the retiree pay back all three years of pension payments. In addition, CalPERS can assess employee contributions on the unlawful post-retirement work earnings and administrative penalties. CalPERS can also reduce future pension payments from the retiree in order to recover these “overpayments.”
What Should We do if CalPERS Notifies Us of a Post-Retirement Work Violation?
We recommend you contact legal counsel and get advice on how to respond to CalPERS. The employer has a right to appeal CalPERS’ determination before an Administrative Law Judge (ALJ) with the California Office of Administrative Hearings (OAH).
LCW has a team of experts throughout California who have successfully represented employers against CalPERS before OAH on these matters. Each case is different, so each must be analyzed on its own facts to determine the best course of action.
If you would like to learn more about this topic, please view our webinars on-demand: