In a decision that could be enormously costly for some California public employers, the state’s high court has ruled that long-term temps hired by the Metropolitan Water District of Southern California (MWD) through private temporary agencies may be eligible for full CalPERS retirement benefits. This opinion highlights the need for employers to be on high alert for mistakes in how workers are classified.
Temps Sue for Retirement Benefits
The water district hired workers through several private temporary agencies, classifying them as “consultants” or “agency temporary employees.” The water district didn’t enroll these workers in the CalPERS (California Public Employees Retirement System) retirement benefits plans that regular district employees were enrolled in. Some of these temporary employees had worked at the water district for several years and had been integrated into the MWD workforce and supervised by MWD supervisors. The private temp agencies generally only provided payroll services for the temporary employees.
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The workers sued the water district, claiming they were actually water district employees and therefore eligible for CalPERS retirement benefits. The water district countered the workers weren’t eligible for the benefits because they were paid through the private service providers.
Workers Eligible for CalPERS
The California Supreme Court sided with the workers. The court said under the water district’s contract with CalPERS, the water district must enroll all employees who are not independent contractors, except for certain types of employees specifically excluded by law. (The law excludes “safety employees” and certain part-time and temporary employees, including seasonal, limited-term, or other “irregular” workers who are employed for fewer than six months at a time or 125 days (or 1,000 hours) in a fiscal year.) Whether a worker is an employee or independent contractor depends on how much control the employer has over the person’s work. Thus, said the court, long-term temps could qualify for CalPERS retirement benefits if the water district had sufficient control.
The court also pointed out that because CalPERS eligibility is set by law, the workers didn’t waive their CalPERS rights by signing individual contracts specifying they were employed by the temp agency only.
The case will now return to the lower court, where the workers will have to demonstrate they are employees, rather than independent contractors, and aren’t otherwise excluded by law from CalPERS eligibility. The water district will have to retroactively pay CalPERS contributions for any worker who qualifies as an employee.
Practical Impact
This ruling could affect several thousand water district workers, potentially costing the water district tens of millions of dollars in retro-active benefits. And, although this decision pertains specifically to public agencies that contract with 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 risks:
- Audit your workforce. Audit your contractors and temps to be sure each person is correctly classified. Use a checklist based on the factors courts typically look at to establish whether someone is an independent contractor or an employee.
- Review contracts with temp agencies. Look at what your agreements say about who has control over the worker. Even if the agency is granted the right to control work-ers, examine whether that’s really happening in the workplace or whether the reality is that you’re primarily in control.
- Analyze possible solutions. If your audit turns up classification problems, you can either: 1) fix the problem going forward by reclassifying the workers and providing appropriate benefits; 2) fix the problem both retroactively and going forward by reclassifying the employee and retroactively paying benefits that were improperly withheld; or 3) do nothing, taking a wait-and-see approach to see if a problem develops. Each avenue can have expensive ramifications, so it may be best to consult an expert to help determine the appropriate solution.
Remember that even if you believe a worker isn’t an employee, the final determination rests with the IRS, DOL, and Department of Industrial Relations.