An Unholy Mess: Recent Cases Confirm the Legislature, Courts and CalPERS Have Derailed the Public Agency Employee/ Contractor Distinction

If there’s one thing we can say for sure, it’s that the courts, administrative bodies, and the state legislature have made an unholy mess of the employee/independent contractor distinction. In private-sector employment law, of course, the buzz is about Dynamex Operations West, Inc. v. Superior Court. Although Dynamex currently applies to public-sector employers in only a few circumstances, that could change if the legislature enacts Assembly Bill (AB) 5, which would make the Dynamex test applicable for all provisions of the Labor Code and the Unemployment Insurance Code, some of which cover public agencies.

Common-law ‘control’ test generally applies in public sector

For now, the older common-law “control” test generally applies in the public sector when a state or local statutory scheme or charter doesn’t define the term “employee” precisely. Under the common-law test, the primary focus is “on the degree of a hirer’s right to control how the end result is achieved,” but courts also consider a range of secondary indicia, including:

  1. Whether the person performing services is engaged in a distinct occupation or business;
  2. The kind of occupation, with reference to whether the work is usually done under the direction of the principal or by a specialist without supervision;
  3. The skill required in the particular occupation;
  4. Whether the principal or the worker supplies the instrumentalities, tools, and place of work;
  5. The length of time the services are to be performed;
  6. The method of payment, whether by the time spent working or by the job;
  7. Whether the work is a part of the regular business of the principal; and
  8. Whether the parties believe they are creating an employment relationship of employer-employee.

CalPERS can’t resist an opportunity to overstep

Recently, the California Public Employees’ Retirement System (CalPERS) has been putting a lot of effort into recharacterizing public-sector independent contractors as employees by relying on the common-law control test. This crusade runs counter to long-settled precedent that holds, in essence, that someone is a public employee only if he goes through the appropriate testing process to become a public employee.

That restrictive rule makes sense in the public sector. The so-called merit system derives from the abuses of the Tammany Hall era, when “ghost” employees were frequently added to the payroll with the approval of the legislative body. Public employment comes with valuable perks, including pension and fully paid health insurance. There’s a strong public interest in ensuring workers cannot become full- fledged employees when the legislative body hasn’t authorized their positions.

Public employers are perplexed. Aside from appeasing unions and realizing a very modest increase in contributions, why is CalPERS so anxious to dole out the generous benefits typically associated with public employment to independent contractors at the expense of the public agencies that are struggling to keep up with CalPERS’ soaring contribution rates? And why has CalPERS anointed itself the enforcer of the employee/contractor distinction?

Recent case reveals the dysfunction

Whatever the answer to those questions, the current mess CalPERS is mucking about in was on full display in a recent California Court of Appeal decision, Bennett v. Rancho California Water District. The water district classified Shawn Bennett, who performed IT help desk functions, as an independent contractor. He worked under a contract between the district and his company, Strange PC, which specified that he was in fact an independent contractor.

In 2012, Bennett claimed he had been misclassified as an independent contractor. The district disagreed but presented him with a revised contract with a modified “statement of objectives,” presumably to clarify his role as an independent contractor. After some additional correspondence and a meeting, the district terminated Bennett’s contract. He then sued, alleging, among other things, that he had been misclassified and was terminated because of his complaints about the misclassification.

Before the case went to trial, two separate state agencies had a crack at the issue. The Employment Development Department determined Bennett was an employee, but the Unemployment Appeals Board reversed, finding he didn’t meet the common-law control test. CalPERS, on the other hand, determined Bennett was an employee. An appeal was heard by an administrative law judge (ALJ), who found that various elements of the common-law control test cut in different directions. Ultimately, the ALJ found the district had the burden of proving Bennett wasn’t an employee and it hadn’t satisfied that burden by a preponderance of the evidence.

One of Bennett’s claims at trial was that he had been fired for being a whistleblower, in violation of Labor Code Section 1102.5. To sue under that section, he was required to prove he was in fact an employee. However, the trial judge determined, based on the CalPERS ruling, that the district was barred from presenting evidence that Bennett was an independent contractor under a doctrine referred to as “collateral estoppel.” That doctrine is intended to prohibit the relitigation of issues that have previously been decided.

The court of appeal reversed because CalPERS had placed the burden on the district to prove Bennett was an employee, while Bennett was required to prove he was an employee to make his case in court. Because the burdens of proof were different, the issue decided by CalPERS wasn’t identical to the issue before the court.

The district also argued that it should have prevailed because, under the law, Bennett wasn’t an employee since he hadn’t “obtained a duly authorized employee position in compliance with the [district’s] applicable statutory and regulatory procedures.” More specifically, it argued that it didn’t “employ” Bennett within the meaning of Labor Code Section 1102.5 because he hadn’t been “duly hired pursuant to [its] Administrative Code and Employee Policy & Procedure Manual.” That argument was based on the view that under a public-sector merit system, there’s a specific procedure for how employees are hired.

The court of appeal disagreed, relying on Metropolitan Water District of Southern California v. Superior Court, the leading California Supreme Court case holding that the common-law test applies to employee classification under the Public Employees Retirement Law, to conclude that the term “employee” isn’t defined by Labor Code Section 1102.5. Importantly, however, the court reinforced other cases in which courts have held that when the term “employee” is defined by a statute or charter, the common-law test doesn’t apply. In particular, the court cited Holmgren v. County of Los Angeles and Estrada v. City of Los Angeles, two cases in which courts didn’t apply the common-law test because the term “employee” was defined by statute. The court distinguished those cases because there was no statute that defined “employee” in Bennett’s case.

Bottom line

First, the private-sector battle over the so-called gig economy is spilling over to the public sector. Public employers need to be very careful when bringing on contractors who become integrated into the regular workflow, including contractors who serve as “interim” employees or IT help desk employees.

Second, charter cities have a solid argument that to the extent they define employees as individuals who are hired through appropriate hiring processes and put into positions created by the legislative body, they may be able to avoid the application of the common-law test.

Third, courts need to pay more attention to the principles underlying merit system hiring and the public sector generally. Those principles are in place to protect public money and thwart sweetheart deals.

Fourth, CalPERS needs to focus on its primary mission—making sure it invests public employers’ money effectively—and avoid putting further strain on public employers that, ironically, are turning increasingly to contracting because rapidly rising pension costs mean they can’t afford full-time employees with benefits. Having depleted the resources of public agencies throughout the state, CalPERS has very weak moral authority to undercut local agencies’ attempts to hold on.

The way public and private services are performed is changing rapidly. California lawmakers, courts, and administrative agencies need to adjust the rules accordingly. And the answer is not to simply hammer a square peg in a round hole with more force. But that’s clearly the trend.

For further information, please contact:

Jonathan Holtzman

Jonathan Holtzman
jholtzman@publiclawgroup.com
415.848.7235

2019-08-16T08:32:10-07:00August 8th, 2019|