Metropolitan Water District v. Superior Court

BAXTER, J.

I respectfully dissent. In the case of a local public agency, such as defendant Metropolitan Water District of Southern California (MWD), that has voluntarily contracted with the California Public Employees’ Retirement System (CalPERS) to include its eligible “employees” in CalPERS, the Public Employees’ Retirement Law (PERL; Gov. Code, § 20000 et seq.)1 grants service credit, upon which all pension rights are based, only for work compensated from funds controlled by the contracting agency itself. The agency’s obligation to make pension contributions on a worker’s behalf—the sine qua non of the worker’s membership in CalPERS— also depends entirely on service compensated by agency-controlled funds. Plaintiffs here are workers employed by private labor suppliers. Though plaintiffs were assigned to perform services for MWD, their pay came entirely from the private employers, which used their own funds for that purpose. Hence, these services neither qualified for CalPERS pension benefits, nor gave rise to an obligation of MWD to pay contributions to CalPERS. Accordingly, plaintiffs neither were nor are eligible “employees” of MWD who must be enrolled as CalPERS members.

The majority’s contrary conclusion, wrong on the law, also has potentially unfair, even calamitous, consequences for the agencies that have volunteered to provide their true employees with CalPERS benefits. CalPERS, which has primary responsibility for determining who are “employees” covered by the *521system (§ 21025), has long known that public agencies were making increased use of leased workers. Indeed, CalPERS’s staff internally noted the “escalating]” implications of this practice for CalPERS pension purposes.

Yet, though it now supports plaintiffs’ belated claims for membership, CalPERS never alerted contracting agencies that leased workers are the agencies’ own “employees” in this regard. It never required these workers’ enrollment in the system, and it never assessed ongoing employer and employee contributions toward their CalPERS pensions. On the contrary, internal memoranda indicate that CalPERS avoided the issue except in scattered individual cases. CalPERS deferred pertinent regulations and guidelines, decided only to “research^ further [its] position,” and placed the problem on the “back burner,” meanwhile conducting “a fact-driven review of each request for membership.” In 1996, a knowledgeable CalPERS official stated internally that leased workers were “justifiably excluded” under current conditions.

The result of CalPERS’s misleading procrastination is that MWD and many other local contracting agencies, which have budgeted on the assumption that leased workers were not their “employees” for pension purposes, may now have to enroll significant numbers of such workers, nunc pro tunc, as CalPERS members. Aside from future contributions to the system on the workers’ behalf, these agencies may also now have to make up previously unpaid contributions that are actuarially necessary to finance full pension rights of those leased workers who have already worked long enough to “vest” in the system. I cannot join the majority’s decision to expose financially strapped local agencies to this crushing burden.

In reaching their result, the majority essentially reason as follows: Unless the worker is expressly excluded by contract or statute (see, e.g., §§ 20300 et seq., 20502), the PERL requires every “employee” of an agency, such as MWD, which has agreed with CalPERS to participate in the CalPERS pension scheme (hereafter, a local contracting agency), to be a member of CalPERS as of the inception of the agency’s CalPERS contract, or the employee’s entry into employment, whichever is later. (§§ 20281, 20283.) The statute broadly describes an “employee” for this purpose as “[a]ny person in the employ of any contracting agency.” (§ 20028, subd. (b).) Because section 20028, subdivision (b) does not forther define or limit “employ” or “employee” in this context, we must assume the statute intends the multifactor common law test of employment. Hence, since MWD’s contract with CalPERS did not expressly exclude workers furnished and paid by private labor suppliers, MWD must enroll all such workers, not statutorily ineligible for membership, who were MWD’s common law employees.

*522I believe this analysis is flawed. The majority reject the argument of MWD and its amici curiae that workers are a local contracting agency’s “employee[s],” for purposes of CalPERS enrollment, only if their work is compensated from funds controlled by the agency itself Focusing exclusively on section 20028, which defines “[ejmployee,” the majority note that while subdivision (a) expressly limits the employees of the state, a state university, or a county school superintendent to those workers compensated from funds “directly controlled” by such entities or officials, separate subdivision (b), applicable to the employees of “[local] contracting agenc[ies],” contains no similar express limitation.

The majority dismiss the contention that by virtue of other provisions of the PERL, a control-of-funds rule is implied in subdivision (b) of section 20028, and restricts the class of eligible “[e]mployee[s]” who must be enrolled in CalPERS. However, I find that interpretation persuasive.

We must construe specific statutory provisions in the context of the overall scheme of which they are a part (e.g., Robert L. v. Superior Court (2003) 30 Cal.4th 894, 903 [135 Cal.Rptr.2d 30, 69 P.3d 951]; Horwich v. Superior Court (1999) 21 Cal.4th 272, 280 [87 Cal.Rptr.2d 222, 980 P.2d 927]; Lungren v. Deukmejian (1988) 45 Cal.3d 727, 735 [248 Cal.Rptr. 115, 755 P.2d 299]), avoiding, if possible, anomalous or absurd results that contravene the Legislature’s presumed intent (see, e.g., Diamond Multimedia Systems, Inc. v. Superior Court (1999) 19 Cal.4th 1036, 1047 [80 Cal.Rptr.2d 828, 968 P.2d 539]). The PERL’s purpose is, of course, to establish a public employee pension system administered by CalPERS and funded by employer and employee contributions, and to determine eligibility for the system’s benefits. As MWD and its amici curiae point out, the PERL makes clear that one who claims CalPERS pension benefits through a local contracting agency may only obtain such benefits for service compensated from funds controlled by the agency itself.

Because CalPERS membership simply reflects the member’s potential eligibility for CalPERS benefits, it seems apparent that one cannot be a local agency’s eligible “[e]mployee,” and thus a compulsory member of CalPERS, if his or her only service fails, ab initio, to qualify for such benefits by reason of the control-of-funds rule.

Moreover, the PERL states explicitly that a CalPERS “[m]ember” is “an employee who has qualified for membership in this system and on whose behalf an employer has become obligated to pay contributions. ” (§ 20370, subd. (a), italics added.) As I will explain, a contracting local agency’s obligation to make pension contributions on behalf of a worker, like the worker’s eligibility for benefits, is based solely on service compensated by agency-controlled funds.

*523The path to these conclusions is clear. We necessarily begin with the PERL’s definition of “[s]tate service”—the basis upon which all CalPERS eligibility, benefits, and contributions are calculated. Under section 20069, subdivision (a), “ ‘[s]tate service’ means service rendered as an employee . . . of ... a contracting agency, . . . and only while he or she is receiving compensation from that employer therefor . . . . ” (Italics added.) Section 20630 provides, in turn, that “[a]s used in this part, ‘compensation’ means the remuneration paid out of funds controlled by the employer in payment for the member’s services . . . .” (Italics added.)2

A member may retire “for service” only “if he or she has attained age 50 and is credited with five years of state service. ” (§ 21060, italics added.) Upon such “retirement for service” (§ 21350), the “service retirement allowance” (ibid.) of a “local miscellaneous member” is calculated on three variables—the member’s age at retirement, his or her years of “service,” and his or her “final compensation.” (§ 21354, italics added.) Under the statutory definitions set forth above, the applicable years of “service” are only those years of work compensated from funds controlled by the local contracting agency, and the worker’s final “compensation” must itself have been paid from such funds. To put it simply, no CalPERS service retirement allowance can be obtained or calculated except upon the basis of work so compensated. (But cf. fn. 4, post.) Accordingly, one is not eligible to receive a CalPERS service retirement allowance for work on behalf of a local contracting agency if the work was compensated entirely from funds outside the agency’s control.3

As noted, the CalPERS pension system is funded by contributions from both CalPERS members and the public agencies that employ them. The normal rate of the employee contribution for local miscellaneous members is “7 percent of the compensation paid that member for service rendered on and *524after June 21, 1971.” (§ 20677, subd. (a)(2), italics added.) Hence, the employees’ contribution is based solely on work compensated by funds controlled by the public agency.

The employer’s contribution is an amount calculated to produce, when combined with its employees’ contributions, service retirement allowances for eligible employees in the amounts specified by the PERL. (See §§ 21350, 21354.) This contribution, actuarially determined on an annual basis, is not a uniform rate, but must be assessed, as to each employer, on the basis of that employer’s “own experience” with respect to its employees’ eligibility for retirement benefits. (§ 20815, subd. (a); see also § 20814, subd. (b).)

Thus, the employer’s duty to contribute is limited to the amount actuarially necessary, when combined with employee contributions, to pay pensions for its eligible workers on the terms and conditions set by the PERL. As explained above, that pension eligibility is based upon state service—service compensated from funds controlled by the employer—and calculated on the basis of the employees’ final compensation—compensation paid from funds controlled by the employer. It follows that a CalPERS employer has no obligation to contribute on behalf of workers who have not rendered service, or received compensation, from funds controlled by the employer, and are thus not eligible to receive CalPERS retirement benefits. And persons for whom the employer is not obligated to contribute need not be enrolled as CalPERS “[m]embers.” (§ 20370, subd. (a).) That is the status occupied by the plaintiffs in this case.4

The majority suggest the issue whether plaintiffs must be enrolled as CalPERS members—all the majority purport to decide here—is separate from their eligibility, if any, for CalPERS retirement benefits. I disagree. As indicated above, the statutory scheme, read as a whole, restricts and limits compulsory CalPERS membership to those workers who can qualify for CalPERS retirement benefits. Under the control-of-funds rule that underlies *525all eligibility for such benefits, plaintiffs, whose work was entirely compensated by private labor suppliers, are unable to do so. Indeed, as MWD and its amici curiae stress, the Legislature cannot have intended to compel the meaningless act of CalPERS enrollment for persons who, from the outset, are unable to qualify for CalPERS benefits.5

The majority, like plaintiffs and their amici curiae, insinuate that to exclude leased workers from CalPERS under a control-of-funds requirement is to encourage and reward an easy subterfuge, by which public agencies may bypass their merit hiring systems, and may deny the full benefits of public employment to large numbers of persons who essentially function as employees. But plaintiffs have raised no challenge to the legality of MWD’s use of leased workers. They simply seek to “have their cake and eat it too.” They agreed to be employed, not by MWD, but by private entities that leased their services to MWD. This choice spared them the rigors of a competitive merit selection system in obtaining their positions. It may well have enhanced their take-home pay, as well as increasing their flexibility and mobility. They have made no contributions to CalPERS, and, as MWD and its amici curiae point out, they may already be covered under pension plans provided by their private employers. Yet, without assuming the burdens of competitive merit employment by a public agency, they now seek the very benefits they decided to forgo.

Moreover, though the majority suggest otherwise, it is entirely rational for the Legislature to determine, by means of a control-of-funds requirement, that workers employed and paid by others, like independent contractors (§ 20300, subd.(b)), should be excluded from CalPERS. In one case, the agency *526contracts with an individual for his or her independent services; in the other, it contracts with an independent entity for the services of persons the entity employs. The evidence indicates that public agencies tend to use independent contractors and leased workers in similar ways—to obtain flexible temporary assistance, or focused technical or consulting skills, that are needed only on a special or intermittent basis, without resort to the civil service system and its implications of tenured employment. It is hardly remarkable that the Legislature would consider both categories of workers to be appropriately excluded from the PERL’s provisions for lifetime public pension benefits.

By concluding otherwise, after CalPERS’s long failure to provide guidance to its contracting agencies, the majority impose, at this late hour, the potential for new and unexpected financial liabilities, significant in amount, on local government agencies throughout this state that already face unprecedented fiscal challenges. As I have explained, the current legislative scheme does not dictate such a result. Given the very substantial implications, it might now be well for the Legislature to confront and consider directly the issue how the growing phenomenon of leased workers is to be treated for public pension purposes.

In the meantime, I cannot join the majority’s reasoning, or their result. I would reverse the judgment of the Court of Appeal.

Chin, 1, concurred.

All subsequent unlabeled statutory references are to the Government Code.

Section 20284 provides that when “an employee of the state," as defined by section 20028, subdivision (a), is assigned to work for which, “pursuant to statute or duly authorized contract entered into by the state or the state agency by which the person is employed,” he or she is compensated from “funds not directly controlled by the state,” the person continues, while in that status, as an “ ‘employee of the state,’ ” and the person’s work during such assignment “shall be ‘state service’ notwithstanding [sjections 20028 and 20069.” (Italics added.) No similar expansion of the definition of “state service” applies to local contracting agencies and workers who provide services to such agencies.

Similar principles apply to eligibility of a local miscellaneous member for a disability retirement pension, and to the calculation of the final amount of such pension. Thus, a local miscellaneous member is eligible for a CalPERS disability retirement allowance only “if . . . credited with five years of state service.” (§ 21150, italics added.) As indicated above, “state service” is service compensated from funds controlled by the CalPERS employer. Moreover, the final amount of a disability pension is based on the employee’s “final compensation” and credited “years of service” (see §§ 21423, subds. (a), (b), 21427)—both of which require payment for service from funds controlled by the CalPERS employer.

The majority point to several sections of the PERL, cited by CalPERS, which, they assert, suggest that a CalPERS pension need not always be calculated exclusively upon the basis of work compensated from funds controlled by the CalPERS employer. For example, section 20024 defines “current service”—one component upon which the final amount of a pension is calculated (see. e.g., § 21350, subd. (b))—to include not only “state service,” but also “service in employment while not a member but after persons employed in the status of the member were eligible for membership.” Whatever the technical meaning of this provision, it does not undermine the requirement of minimum “state service”—i.e., service compensated from funds controlled by the employer—as a prerequisite to the eligibility of a local miscellaneous member for any retirement pension, whether “service” or “disability.” (§§ 21060, 21150.) Similarly, to the extent a pension is calculated on such bases as the worker’s “final compensation,” “special compensation,” “compensation earnable,” and “payrate” (§§ 20037, 20636) none of these technical terms is defined to suggest that the “compensation” referred to in these phrases is other than “compensation” as defined generally for all PERL purposes, which “compensation” must be paid from funds controlled by the employer. (§ 20630.)

The majority suggest that membership enrollment is necessarily separate from determinations of pension eligibility because CalPERS itself has the authority to decide in the first instance, subject to judicial review, each individual member’s eligibility for a CalPERS pension. (See § 21025.) I find these principles irrelevant to the situation presented by this case. Certainly, CalPERS, as the expert agency charged with administering the PERL, should take positions on issues of coverage affecting CalPERS employers and members (see text discussion, ante), and it may determine eligibility in individual cases by applying the legal principles set forth in the PERL to decide disputed facts, or mixed questions of fact and law. But courts may always decide pure questions of law on undisputed facts. Here it is undisputed that plaintiffs’ paychecks were issued by private labor suppliers, not by MWD. The suppliers charged MWD fees for the workers’ labor, which fees were based on the workers’ agreed pay rate plus a “markup” for the services of the companies that employed and supplied the workers. Though the majority suggest otherwise, I believe this arrangement takes plaintiffs out of eligibility for CalPERS membership or pension benefits, as a matter of law, by virtue of the PERL’s control-of-funds rule.

Though CalPERS now supports plaintiffs’ position, the majority are not so bold as to invoke the principle of deference to CalPERS’s expert agency interpretation. Their restraint on this point is wise. As indicated above, CalPERS dithered and delayed on the matter and never promulgated a formal construction of the PERL in line with its apparent current stance.