A client is contemplating a "leased employee" arrangement with a private sector firm. Question: What impact will the plethora of cases like Microsoft have on a State or Local Government? The leasing company is covered by ERISA and the Government Agency (a city) is not. State statute does not contemplate these arrangements. Any ideas, or sources of information?

My personal advice? Don't even go there! (Needless to say, as a lawyer, I have to explain that this is only personal advice, not legal advice. )

The problem is that the determination of whether these people are governmental employees is governed not by the terms of the contracts with the leasing agency, but by the traditional 20-factor test as interpreted by cases such as Microsoft. Since these tests are as clear as mud, you may well discover that the employees argue that they are employees of either the government agency or the leasing company, whichever happens to be the most favorable to them at any particular point in time. And since the issue is determined on an employee-by-employee basis, even if you are successful in litigation with one employee, the next one can still come along and argue the same issues.

Some examples: suppose you decide that as leased employees, these individuals are not covered by a state retirement system which would have covered them had they been employees of the entity which leases them. Given that the state statute does not contemplate leased employees, the statute presumably includes some general language to the effect that "employees" in certain categories are covered. A leased employee could argue that even though the contract with the leasing agency says s/he is employed by the leasing agency rather than by any governmental entity, s/he is actually a common-law employee of the governmental entity, and is therefore covered under the state retirement system.

And of course, the employee cannot be expected to argue this during employment, when employee contributions would be due. Instead, the argument would typically come up at retirement, when the employee would argue entitlement to a pension. That means that by the time the issue would even be litigated, you would have a lot of affected employees, and the potential for a class action suit against you, as well as not having collected employee contributions for all those years. And if the leased employee were also covered under a plan of the leasing agency, s/he might even end up with double coverage.

Conversely, suppose that the state retirement system does cover these individuals. In that instance, a leased employee could argue that s/he was not a governmental employee, and therefore that the plan was, at least as to that employee, a plan covered by ERISA. This argument would be particularly likely if the employee died at a point when s/he was not entitled to benefits. A surviving spouse could argue that the preretirement survivor annuity provisions of ERISA applied, and therefore that the spouse was entitled to a retirement benefit which the retirement system never contemplated.

Or suppose that the leased employees are covered by a plan maintained by the leasing agency. As an entity covered by ERISA, the leasing agency would normally have the right to cease benefit accruals at any time. However, an employee could argue that because s/he was really an employee of a governmental entity, federal and/or state Constitutional principles would preclude any diminution of the future benefit formula as applied to employees hired before the date of any such change.

The best idea here would be to pay the leasing agency to perform administrative services, if needed, but to treat the individuals for all purposes as employees of the governmental entity. If you want to cut them out of particular benefits, amend the plan document to exclude them, rather than trying to argue that they are someone else's employees. Of course, this doesn't work in the case of a 403(B) plan which includes salary reduction contributions. And if you've got a state plan covering local employees, this may require some cooperation from your state legislature.

And yes, I do understand the political pressures in many states to "privatize" employees, even if in practice they stay at the same desks performing identical jobs. In some instances, we have been able to come up with some fuzzy language which causes people to be arguably "privatized" while still being treated as governmental employees for withholding and employee benefits purposes. But trying to treat employees as leased from an agency can bring you into litigation which can be expensive even if you win, and can be lots worse if you lose.
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Employee benefits legal resource site

Thank you for responding to my question. I'm sure that many of our Public Employee HR and Union folks are also thanking you as well.

Suppose a city leases employees to a private company. Would you recommend terminating their coverage under the public pension plan or would you recommend continuing it? I think they will continue to be public employees because they are still employed by the city.

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The real question is whether the employees continue to be common law employees of the city, or whether they in fact become employees of the private agency. This depends not on who pays them, or what their contracts say, but on who actually has direction and control over them. And since that determination is now governed by a 300 million factor test which depends on the color of the moon over Aunt Minny's mimosas on the 23rd of August (okay, so maybe I'm exaggerating!), it's very hard to be sure that the employees remain true employees of the city when their day-to-day work is regularly, over a long period of time, being supervised by someone else.

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Employee benefits legal resource site




[This message has been edited by CVCalhoun (edited 03-03-2000).]

First, I want to say that I've known Carol Calhoun for many years and I respect her opinions.

Second, while it is true that some truly ugly situations can arise, there may be situations where, based upon the particular facts, the level of risk is tolerable for the parties involved. This particularly true if the leased employees will only be there for a short duration, as is often the case. Thus, for example, the amount of benefits that the leased employees could potentially claim under the governmental unit's pension plan (should they raise that argument) would only be nominal, at best.

Third, I must confess that I represent a client that leases employees to governmental units, so that may flavor my views.

Fourth, I would restate Carol's admonition to be "Don't even go there, unless your eyes are wide open."

Gee, Kirk, after all that, will it be too much of a let-down if I actually agree with you?

Seriously, I don't have a serious problem with arrangements of a limited duration, in which the employee maintains clear ties to the entity which leases the employee to another entity. My concern is more with the horror stories I've seen, in which employees go on for years in fact working for one entity, and theoretically working for a third party leasing agency. You're right that so long as the leasing arrangements are short-term and casual, not only is the risk of their recharacterization lowered, but the risks if they are recharacterized can also be small.

Since both of the learned counsel have had their say on this subject, I might as well have my say from the standpoint of a practicing consultant, since I began the discussion. Possibly we should consider taking a slightly different turn in order to protect the employer and the employees whether they turn out to be "leased" or not. The issue, as I understand the question, is whether or not to terminate the public pension plan, which I will assume is state run such as CalPERS here in California.
I also will assume that the employees are not now covered by Social Security, but will be covered if considered to be "private sector" employees of the leasing company.

From the standpoint of the employer, if any pension plan is provided, it will be in addition to Social Security costs.

1.Some thought might be given to a "local agency" plan provided to these employees, totally separate from the Public Plan provided to the rest of the employees. You might cover this by contract with the leasing company. By doing this you may possibly avoid the need to cover the employees with SSA, since they would be covered by a public system, since no one really knows who the employer is--GET A PLR and a ruling from SSA on this one.

Also check the "contract" between the City and the Pension system to determine if they will let the employees out, since no one really can tell you who the employer is (again)

2. Form a separate government entity from the City, file it as a new government and contract the leased employees and a local pension system without the above concerns.
Closely examine the Pension "contract" with the Public Pension firm, and make sure they will acquiesce to these employees being excepted from their contract.