King County Bill Opens the Door for Extensive Misclassification and Outsourcing of Public Employees
Analysis of EHB 2771
In a little-known 2011 decision (Dolan v. King County), the WA State Supreme Court ruled that attorneys working for nonprofit public defender agencies in King County were entitled to participate in the PERS retirement system, because the County was exercising complete control over the agencies, and therefore the agencies were “arms of county government.” The decision was based on common law and administrative decisions dating back to the 1950’s.
King County, in an effort to make sure employees of similar agencies cannot qualify for PERS, introduced last-minute legislation several weeks ago to exclude from PERS all employees of any contractor to any government agency in the state, including captive corporations completely controlled by the government. The bill is now in the Senate Ways and Means Committee after passing the House.
King County is promoting the bill with scare tactics, claiming the Dolan decision will lead to a landslide of private workers claiming PERS status, ignoring the facts and logic of the decision, which was clear that only nonprofits that were effectively controlled by government agencies should be in PERS.
This bill is much broader than pension rights. It would promote outsourcing, in which government agencies can set up and control nonprofit corporations to perform government functions and make those captive corporations into phony “employers” of their public workers assigned to them. The effect would be to deny these workers public employee rights and benefits, including collective bargaining rights and statutory rights such as pensions.
Nine years ago, the Center for a Changing Workforce, with the help of public employee unions and the State Labor Council, passed the Public Employee Misclassification Act, RCW 49.44.160 and .170, which outlawed the practice of government agencies misclassifying public workers by using labels such as “temporary” or “contract” work to avoid providing benefits. HB 2771 would undermine the Misclassification Act, by replacing objective standards, particularly control by the public employer, with misleading labels such as “contractor.”
The Misclassification Act was passed in reaction to widespread misclassification of public employees by King County and the Cities of Bellevue and Seattle. Passing the Act took three years of discussion and debate, and the final version was support by the Association of Washington Cities. In contrast, HB 2771 was introduced at the very last possible moment, bypassing the policy committees in both houses, with little opportunity for discussion or debate.
How Misclassification Works Under HB 2771
Under HR 2771, any governmental agency may create a contractor in name only to perform any government function (even a constitutionally mandated one such as public defense), be its incorporator, draft and change its articles of incorporation and bylaws, appoint the members of the board, provide all of its funding, appoint the manager or director of the “contractor,” have veto power over all actions of the “contractor,” set pay rates and class the employees, and so long as the entity is called a “contractor,” the entity’s employees are not government employees and not eligible for PERS.
Thus, under HR2771 public employees could be transferred to the governmentally controlled “contractor” and they would not be public employees eligible for employee benefits. Similarly, any individual hired by the “contractor” would not be public employees. Government employees lose their jobs and employee benefits because the government transfers government work to a fake contractor, a
government-created and controlled entity that is, under the bill, not the government simply because it is labeled a “contractor,” even though in fact, the contractor is completely controlled by the government.
Under HR 2771, an entity called a “contractor” is always a contractor even if in fact the “contractor” is not a genuine contractor but is instead really a part of the government. The bill creates a giant loophole for all public employers, a real threat as budget cuts decimate state and local governments, increasing pressures to reduce public employee pay and benefits.
The Supreme Court used a hypothetical example to show how misclassification could work in King County. “Under its reasoning, the county could turn its sheriff’s department into a nonprofit corporation and because the sheriff generally has authority to hire and fire and carryout police work, the sheriff’s department would become an independent contractor [whose employees would be excluded from LEOFF and PERS] ” 172 Wn.2d at 318. And yet, this very situation is drafted into the bill by changing the definition of “public employer” in LEOFF as well as PERS, making the Court’s hypothetical regarding sheriffs’ deputies legal.
The bill King County supports would allow public agencies to remove employees and bargaining units from PERC jurisdiction by making public employees into employees of nonprofit corporations subject, according to King County’s Supreme Court argument in Dolan, to exclusive NLRB jurisdiction. Unions would therefore, according to the County, have to go through NLRB processes to represent any employees or bargaining units that are “outsourced” to the captive corporations.
While King County says they want to exempt the public defender employees from the legislation, even that is not clear. The bill’s “curative and remedial” language implies intent to make the act retroactive, and the emergency clause making the legislation effective “immediately” could affect the Dolan case in its final stages.
Below is the defining language in HB 2771:
(c) Except as otherwise specifically provided in this chapter, "employer" does not include a government contractor. For purposes of this subsection, a "government contractor" is any entity, including a partnership, limited liability company, for-profit or nonprofit corporation, or person, that provides services pursuant to a contract with an "employer." The determination whether an employer-employee relationship has been established is not based on the relationship between a government contractor and an "employer," but is based solely on the relationship between a government contractor's employee and an "employer" under this chapter.