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Risk Management/Best Practices When Using Independent Contractors

A number of agencies have recently experienced audits and adverse findings from CalPERS regarding their use of independent contract services, resulting in enrollment of independent contractors in PERS plans, at potentially significant cost to these public agencies. Regional Government Services Authority (RGS) has provided services as an independent contractor to approximately 300 public agencies since 2002. RGS would like to share our substantial experience with the issues that agencies face in safeguarding the independent contractor status of service providers.

The current tests for common law employment status are fact-based, and there is little in the way of regulatory or statutory guidance to assist. CalPERS states that it uses a version of the “common law employment” test to determine whether a worker is an employee or independent contractor. In this test, it is generally of primary importance whether the person to whom service is rendered has the right (whether exercised or not) to control the manner and means of accomplishing the result desired.

Secondary factors include: right to discharge workers; whether the worker is engaged in a distinct occupation or business; skill required in the occupation; who pays for equipment and business expenses; length of time services are to be performed; method of payment, whether by hour or job; whether the work is part of the employer’s regular business; whether the parties believe they are creating an employer-employee relationship; opportunity for entrepreneurial profit or loss; worker’s use of helpers or replacements; and degree of permanence of the working relationship. According to IRS guidance on the common law test, “Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.” Every case is fact specific.

Agencies can and should take precautions to keep contractors from being treated as common law employees by their retirement systems. For future retention of “independent contractors”, public agencies will need to develop and follow very specific practices. Best practices for professional service agreement language includes:
1) Describing services in terms of specific deliverable products and outcomes.
2) Avoiding any language analogous to a task list and language that describes working relationships.
3) Eliminating or strictly limiting use of indicia of employment like titles, business cards, email addresses, equipment, office space.
4) Documenting communications requesting additional work or scope modifications, and channeling these to the contractor’s authorizing personnel for agreement, not to the worker(s) delivering services and products.
5) Explicitly noting that the work is to be done without control by the agency, and that work may be performed remotely or onsite as a matter of the contractor’s choice to expedite product or service delivery.

Other best practices for agencies when working with contractors are to review managerial approaches and to appropriately take and relinquish control of work. For example, managing the delivery of contract services requires negotiation and collaborative communication. Managers of contract services need to recognize that while they may provide feedback or make suggestions, the contractor is the ultimate decision maker as to how his/ her service or product is delivered. Agency managers should also clearly take responsibility for managerial action—regardless of the recommendations, analysis, draft documentation, and proposed process activities provided by a consultant, it is the manager’s job to decide what the organization will do, to authorize organizational action, and to direct agency staff to carry this action out.

In addition, where there is a vacant position driving temporary outsourcing of projects, agencies should assign an internal manager to be responsible for agency operations, and the services provided under a PSA should be easily distinguished from this internal role.

Other management best practices include an annual “cleanup” of position allocations and active class specifications approved by the governing body. This has always been a best practice for transparency purposes and compensation management. Clarity about the allocation of jobs can also demonstrate a policy decision on the part of the organization as to what work and services are intended to be provided by employees.

Keenly aware of risk management for public agencies, RGS continually evolves its contracting practices to better protect client agencies, RGS employees and the sustainability of RGS services. Here are some RGS best practices already in place:
• A standard Professional Services Agreement that incorporates best practices and mutual indemnification as well as language that clarifies control of the worker
• A policy to not provide “interim” assignments; instead RGS Advisors provide mentoring and coaching to less-experienced internal appointees
• Specific standard language for scopes of work
• Assignment of RGS lead advisors for all work, with the lead advisor directing the delivery of services through a team of advisors, appropriately involving multiple specialists and providing overall coordination of the RGS team’s work
• Outsourced project and service delivery
• Active dialog with agencies to engage in risk awareness, education and mutual support
• A policy of declining work when risks cannot be mitigated

RGS is skilled at helping partners define specific services and projects that can be accomplished through focused third-party expertise. Please feel free to contact Sophia Selivanoff, Deputy Executive Director, at 650-587-7315 or to discuss your agency’s needs.

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