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.

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.