Who is an 'employee' under the CalPERS common law test? The stakes are too high not to know.

CalPERS contracting agencies often require independent contractors (contracted through a private agency) to perform jobs requiring particular skill and experience not found within the agency's workforce. When the independent contractor is also a CalPERS retiree, it is imperative that the agency understands the important distinction between an "employee" and "independent contractor" under the Public Employees' Retirement Law, as this distinction determines whether the individual must reinstate for CalPERS purposes or is subject to post-retirement work limitations. This issue was at the center of a seven-year legal battle, which CalPERS settled last month, abandoning its attempt to claw back thousands of dollars in pension payments made to retirees whose post-retirement service as independent contractors was instead deemed by CalPERS to constitute unlawful employment. (CalPERS v. Sandhu et al., OAH No. 2025040541.)

This settlement was reached after an administrative law judge applied a 3-year statute of limitations barring CalPERS from recovering the overpayments. CalPERS agreed in the settlement to implement the ALJ's proposed decision but declined to adopt that decision as precedential. Although the outcome of the litigation and application of the statute of limitations were wins for the retirees involved--and perhaps chart a course for other agencies to take in similar situations--the case did not definitively resolve the broader issue of who is an employee under the PERL.

CalPERS employers have long grappled with the difficult task of distinguishing an "employee" from an "independent contractor" because the common law employment test CalPERS applies is fluid and involves a myriad of factors. In the landmark case of Metropolitan Water District v. Superior Court, 32 Cal.4th 491 (2004), the California Supreme Court held the CalPERS employer was required to enroll "common law employees," despite these workers being supplied by private companies. The Court applied the common law employment test set forth in Tieberg v. Unemployment Ins. App. Bd., 2 Cal. 3d 943 (1970). Under that test, the most important factor is whether the employer retains the right to control the manner and means of accomplishing the work. Notably, the employer need not actually exercise control over the worker; an employment relationship may be found if the employer maintains the right to exercise control. To add to the uncertainty, CalPERS and courts consider a myriad of other secondary factors, including:

1.      Whether the individual performing services is engaged in a distinct occupation or business;

2.      The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer seeking to have the services performed or by a specialist without supervision;

3.      The skill required in the particular occupation;

4.      Who supplies the instrumentalities, tools and the place of work for the individual performing the services;

5.      The length of time on the job;

6.      The method of payment, whether by time or the job;

7.      Whether the work is part of the regular business of the entity seeking the contractor's services; and

8.      Whether or not the parties believe they are creating the relationship of employer-employee.

In applying the common law employment test, CalPERS acknowledges each determination is made "based on the totality of facts and circumstances and generally no one factor is used to make this determination." ("A Guide to CalPERS Employment After Retirement," updated November 2024, available at https://www.calpers.ca.gov/documents/employee-or-independent-contractor-factsheet/download.) In the absence of a bright-line rule or a single factor, employers and retirees are left with uncertainty when attempting to determine at the outset how CalPERS or a court should subjectively weigh the factors at a later time.

To add to the frustration, CalPERS does not have a statutory safe harbor for employers and retirees to rely on in determining at the outset of work whether an individual is a true independent contractor. Although CalPERS offers in published guidance to review proposed independent contractor agreements, employers should be careful in relying upon such determinations as there is no guarantee CalPERS or a court will not later make a contrary determination.

In contrast, the Legislature created safe harbor provisions in the Education Code, which allow California State Teachers Retirement System contracting agencies to rely on guidance and determinations made and published by CalSTRS. (Educ. Code, § 22325.) Here, in the absence of a statutory safe harbor determination from CalPERS that can be relied on at the outset of employment, CalPERS employers should, at minimum, comply with the following best practices when hiring independent contractors:

·         Confirm through a written agreement the worker is an independent contractor, not an employee, and the employer has no right to control the manner and means of the work performed. Include language that allows the contract to be severed by either party at any time.

·         Avoid providing dedicated office space, email address or supplying any specific tools needed for the contractor to perform work.

·         Avoid requiring the contractor to attend meetings or other employee-specific events.

·         Avoid identifying the contractor as an "employee" in any manner.

·         Avoid allowing the contractor to direct other employees.

·         Avoid bringing back individuals who performed the same or similar services for the employer prior to retiring.

·         Conduct an internal audit of workers currently treated as independent contractors and conduct an analysis to determine if they meet the common law employment test.

·         Obtain a determination from CalPERS in advance of the worker beginning work as to whether the worker is a true independent contractor but be cautious in relying upon such determination alone.

It is important for CalPERS employers to carefully analyze if a worker is truly an independent contractor prior to beginning employment and working with legal counsel to make such determination at the outset. Additionally, employers should ensure independent contractors continue to function as independent contractors while working for the employer. CalPERS employers should also ensure that the individual performing the underlying services clearly understands the risks of improper CalPERS reporting, including, but not limited to, reinstatement of retired individuals for CalPERS purposes.