Several years ago, the federal appeals court covering California sent a shock wave throughout the employer community when it ruled that software giant Microsoft Corp. had to pay certain retroactive employee benefits to temporary workers improperly classified as independent contractors. Because misclassification problems are common, the decision signaled that many employers could be on the hook for expensive retroactive benefits they never intended to offer. Now, in another enormously costly ruling, a California appeals court has come down on the side of temporary workers at a public water district, highlighting the need for public employers to be on heightened alert for classification mistakes.
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Public Employer Hires Workers Through Private Temp Services
The Metropolitan Water District of Southern California hired workers through several private temporary agencies. The workers signed employment contracts with the agencies acknowledging that they were employed by the agency, not the water district. Under these contracts, the agencies paid the workers’ salaries, withheld taxes and provided some benefits. The benefits were significantly less than those provided to regular water district employees through the California Public Employees Retirement System (CALPERS). The water district classified these workers as temporary independent contractors or consultants even though most of them had worked at the district for years.
Workers Sue For Retirement Benefits
The workers eventually sued the water district, claiming they were actually water district employees and therefore eligible for CALPERS retirement benefits. The workers charged that the water district hired and supervised them just like its regular employees but kept them technically employed by private agencies to avoid the cost of providing CALPERS benefits. The private agencies, the workers argued, were merely a payroll service.
The water district countered that the workers weren’t eligible for CALPERS benefits because they were paid through the private service pro- viders. The district also argued that the workers waived their right to CALPERS benefits by signing individual employment contracts with the private agencies.
Workers Eligible For Benefits
A California Court of Appeal has now sided with the workers. Under state law, the court explained, workers for a public agency that contracts with CALPERS are eligible for CALPERS benefits if: 1) they qualify as employees, and not independent contractors, and 2) a contract between the public agency and CALPERS doesn’t exclude them from coverage.
In this case, no contract excluded the workers. And they were employees rather than independent contractors, the court said, because the water district set their salaries and schedules, made work assignments and had the right to evaluate, promote, discipline and fire them. Plus, the water district interviewed and selected the workers and then referred them to a private temporary agency for placement with the water district. The court also pointed out that because CALPERS eligibility is set by law, the workers couldn’t waive their eligibility rights by signing individual contracts with the temp agencies.
Ruling’s Impact
This ruling could directly affect about 2,000 water district workers and cost tens of millions of dollars in retroactive benefits. Note, too, that although the workers sought only retirement benefits, other retroactive employee benefits, such as health insurance, can also be at stake when workers are misclassified.
Although this decision pertains to public employers covered by CALPERS, the issue of whether workers are properly classified for benefits purposes impacts all employers. Generally, the more control a public or private employer has over how someone does their work, the more likely the person is an employee.
If you use contract workers or long-term temps, here’s how you can limit your risk for a similar challenge:
- Audit your workforce. Robert A. Blum, a partner in the San Francisco law firm of Hanson, Bridgett, Marcus, Vlahos & Rudy LLP, recommends that you audit your contractors and temporary workers to ascertain whether each person is correctly classified. Use a checklist based on the common factors courts typically look at to establish whether someone is an employee or independent contractor. Teach supervisors who are involved in the review how to apply the factors.
- Review contracts with temporary agencies. Look at what your agreements say about whether you or the agency has control over the worker. If the contract vests the agency with the right to control workers, examine whether that’s really happening or whether in actuality you’re primarily in control.
- Analyze possible solutions. If your audit turns up classification errors, you can either: 1) fix the problem going forward by reclassifying workers; 2) fix the problem retroactively; or 3) do nothing, taking a wait-and-see approach to determine if a problem is actually going to develop. Each avenue can have expensive ramifications, so it may be best to consult an expert to help determine the appropriate solution.