The use of independent contractors in the public sector is becoming more and more common. With rising pension costs coupled with budget cuts, utilizing an independent contractor in lieu of an employee to provide services may be considered a cost-effective approach.  These independent contractors can take the form of a “temp worker” or a specialized professional.  But, just because the agency and the independent contractor (or the contractor’s employment/temp agency) agree pursuant to a contract that the individual serves in an “independent contractor” capacity does not mean that CalPERS will consider the individual a contractor for the purpose of qualification for CalPERS membership.  Rather, CalPERS applies the common law definition of “employee” to determine whether the individual is a contractor or employee, irrespective of the parties’ contractual agreement regarding the nature of the relationship.  The common law test for whether an individual provides services as an employee considers several factors.  But, the single most important factor is whether the employer controls the manner and means of accomplishing the result desired.

Controlling the Manner and Means of the Work – The Neidengard Decision

The precedential decision issued by CalPERS, In the Matter of the Application for CalPERS Membership Credit by Neidengard and Tri-Counties Assoc. for the Developmentally Disabled (Precedential Decision No. 05-01), illustrates a common scenario and cautionary tale for public agencies on the use of independent contractors.  Importantly, the decision provides agencies with guidance on how CalPERS applies the “most important” factor in the common law test for defining an employee – whether the employer controls the manner and means of accomplishing the result desired.  In this case, due to budget cuts, various professional employees of the agency, primarily physicians, were terminated from employment.  However, the physicians were allowed to continue to provide their services on a contractual basis.  Accordingly, they entered into annual professional services agreements that designated their status as “independent contractors.”  These agreements were continuously renewed on an annual basis.  One of the physicians provided services in this capacity for about eight years, and later filed a request for service credit with CalPERS for that eight-year period.  CalPERS applied the factors of the common law test for defining an employee, and determined that the physician served as an “employee” of the agency, not an independent contractor, during that eight-year period.  CalPERS reasoned that the agency exercised “considerable if not complete control” over the individual’s work.  He used the agency’s examination rooms, supplies and equipment to perform his services.  The records for his patients were stored on agency premises.  Agency staff scheduled his clients for services, provided records for his review, and the agency required his participation at important agency meetings regarding the services and needs of the agency.  The agency selected the community forums and training sessions that he participated in.  And, his work was ongoing and continuous, not based on a specific time or project limitation.  In addition, CalPERS specifically noted that the individual’s right to pension benefits through CalPERS could not be waived by private agreement, e.g. the prior agreements between the agency and individual that designated him as an independent contractor.

Tips for Avoiding the Inadvertent “Employee” Designation

In many instances, independent contractors provide valuable and efficient services to a public agency.  Public agencies that utilize independent contractors should regularly review the manner in which the independent contractors provide services to the agency so as to avoid having a contractor later be designated as an “employee” of the agency for the purpose of CalPERS membership. Specifically, public agencies should consider the following guidelines in the review process.

  • Carefully track the length of time that any independent contractor provides services.  The longer the individual provides services, the greater the chance he/she can successfully claim the status of common law employee.
  • Agencies that contract with outside firms for labor should include a provision in the contract which establishes a specific length of service to be provided, and ties that length of service to a specific project/services to be completed.  Agencies should abide by those limits and guidelines.  In order to better avoid CalPERS coverage, the length of the service term should be less than six months.
  • Do not issue the independent contractor agency property, equipment or resources in a permanent manner.  For example, do not issue the individual a specific agency email address, business card, or permanent office space.
  • The independent contractor should not supervise agency employees.  Nor should agency supervisors supervise the independent contractor.  The independent contractor should not issue or be issued performance evaluations, or discipline.
  • The contractor should be paid on a project basis, rather than an hourly basis, except in limited circumstances (e.g., attorney services).

Careful consideration of the practical realities of the independent contractor relationship at the time of entering into an agreement will help to prevent unintended results and inadvertent CalPERS membership.