C. C. Smith v. State Employees' Retirement Board (Majority Opinion)

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IN THE COMMONWEALTH COURT OF PENNSYLVANIA Christopher C. Smith, Petitioner v. State Employees Retirement Board, Respondent BEFORE: : : : : : : : No. 1407 C.D. 2007 Submitted: December 28, 2007 HONORABLE BERNARD L. McGINLEY, Judge HONORABLE ROCHELLE S. FRIEDMAN, Judge HONORABLE JIM FLAHERTY, Senior Judge OPINION NOT REPORTED MEMORANDUM OPINION BY JUDGE McGINLEY FILED: February 25, 2008 Christopher C. Smith (Smith) petitions for review from an order of the State Employees Retirement Board s (Board) denial of Smith s request for service credit from October 13, 1997, to October 15, 2004. On October 17, 2004, Smith notified the Pennsylvania Higher Education Assistance Agency (PHEAA) and the State Employees Retirement System (SERS) that: In filling out this form, I have indicated Yes to the question Have You Ever Been Employed By The Commonwealth Before? because it is my honest belief that my consultant duties here at PHEAA over the past consecutive seven years constitute common law employment . I wish to complete a Request for Cost Statement and desire to have my past seven years of service to PHEAA formerly [sic] recognized and credited toward retirement in the State Employee s [sic] Retirement System. PHEAA State Employee s [sic] Retirement System Questionnaire, October 17, 2004, at 1; Reproduced Record (R.R.) at 246. On February 3, 2005, PHEAA replied: As you know, the State Employees Retirement System has taken the position that you have no standing to claim entitlement for retirement benefits for the time served as an employee of Ajilon because you were not an employee of the Commonwealth. My office independently investigated this matter and has reached the same conclusions, i.e., that under the State Employees Retirement Code, as set forth at 71 Pa. C.S. § 5102, you do not qualify as a state employee for purposes of benefits entitlement and/or service credit . . . . .... We have reached a similar conclusion in connection with your entitlement to service credit in the Pennsylvania Employees Benefit Trust Fund under the applicable Trust Agreement . . . . Because our investigation has concluded that you were not a Commonwealth employee during the relevant tine [sic] period, we have determined that you are not eligible for service credit for any other Commonwealth provided benefits as governed by the referenced Agreement. Thomas M. Rineer, Vice President of Human Resources, February 3, 2005, to Smith at 1-2; R.R. at 254-55. On February 10, 2005, SERS responded: Our review of information you submitted in support of your request and information provided to this office by PHEAA indicates that you were an independent contractor during this period in question. Since service rendered as an independent contractor does meet the 2 definition of State Employee, as defined in Section 5102 of the Retirement Code, we must deny your request. In addition, your service rendered with the Fort Indiantown Gap does not meet the definition of State Employee, therefore, your request to purchase this service must also be denied. Debra G. Murphy, Director Membership Services Division to Smith, February 10, 2005, at 1; R.R. at 200. Smith appealed. At hearing, Smith testified that [b]eginning on October 13, 1997 through October 15, 2004, I worked onsite at a PHEAA building . . . under the guidance of Mr. Jim Tarlecki, vice president of Information Engineering, Architecture and Technology at the Pennsylvania Higher Education Systems Agency. Hearing Transcript (H.T.), April 19, 2006, at 43; R.R. at 88. Over those seven years, I did a variety of different tasks . . . I worked alongside with a variety of PHEAA employees, as well as other contract staff from a variety of different consulting firms. H.T. at 43; R.R. at 88. Smith acknowledged that he became a recognized employee of PHEAA on October 18, 2004. H.T. at 67; R.R. at 112. Finally, on cross, Smith admitted that his W-2 forms indicated that Ajilon was his employer from 1997/98 through 2004 and that he ended his employment with Ajilon on October 15, 2004. H.T. at 84 and 86; R.R. at 129 and 131. Debra Murphy (Murphy), Director of Membership Services for SERS, testified that she conducted an investigation into whether Smith was a state employee from October 13, 1997, through October 15, 2004. Murphy said that a review of the state payroll records indicated that Smith was not on the payroll 3 during this time period. H.T. at 90; R.R. at 135. Murphy contacted PHEAA to see if they had any information . . . [and] [t]hey provided us with a letter that he was not an employee. H.T. at 91; R.R. at 136. Specifically, Murphy received a Master Agreement entered into between Ajilon and PHEAA where [a]t the bottom of the page it says PHEAA is absolved of any responsibility to provide benefits of employment to Ajilon staff members . . . [s]uch benefits include but are not limited to: medical, retirement, leave and any other type of employment benefits. H.T. at 98; R.R. at 143. Jeffrey M. Briel (Briel), Senior Account Manager for Ajilon, testified that Ajilon began as Comp-u-Staff back in the late sixties . . . [i]t was acquired by ADIA, a temp service company and changed their name to ADIA Information Technologies . . . [a]nd subsequently they changed their name to Ajilon. H.T. at 112; R.R. at 157. Briel stated that Smith came on board and went to Grove Manufacturing . . . [h]e started in May of 95 . . . [w]hen that assignment was over, he ended up going to Parrow Systems, in Mechanicsburg, and eventually to PHEAA. H.T. at 113; R.R. at 158. An employee s compensation was based upon the following criteria [w]hen somebody works more than 40 hours a week, they were given the option of either taking overtime pay as a bonus or taking comp time . . . [and] [w]e have a 401(k) plan that s been longstanding. H.T. at 115; R.R. at 160. Briel said Smith was an employee of Ajilon during the time in question and that [a]fter 2004 Smith no longer received compensation from Ajilon. H.T. at 115 and 122; R.R. at 160 and 167. 4 James Tarlecki (Tarlecki), Vice President, Information Engineering, for PHEAA, testified that Mr. Smith was a contracted employee assigned to our department to help with the overview and working with the technology people. H.T. at 133; R.R. at 178. Tarlecki handled any disciplinary issues concerning PHEAA employees and for contractors any problem was brought to Ajilon s attention to their Employee Satisfaction Survey and they would address it with their employees. H.T. at 134-35; R.R. 179-80. Tarlecki distinguished the difference between an Ajilon employee and a PHEAA employee: Contractors, their normal hour work week was 40-hour a work week. The PHEAA employees are 37-and-a-half hour work week. Ninety-nine percent of the time PHEAA employees do not get compensated for overtime, although contractors did, or the assumptions were they billed for them. My DBA [Data Base Administrators, PHEAA employees] . . . are . . . required to be on call 24/7 and would receive phone calls at nights. The consultants in my department were not required to be on call during this time period. H.T. at 138; R.R. at 183. Finally, Tarlecki stated that Smith became a PHEAA employee in October of 2004. H.T. at 136; R.R. at 181. On December 27, 2006, the Hearing Examiner issued his opinion and recommended that SERS deny Smith s request for service credit from October 13, 1997, through October 15, 2004. On January 21, 2007, Smith filed exceptions to 5 the Hearing Examiner s opinion and recommendation. The Board reviewed the record and made the following pertinent findings of fact:1 1. Christopher C. Smith ( Claimant ) became a member of . . . SERS on October 18, 2004, by virtue of his employment with . . . ( PHEAA ). 2. Between May 1995 and October 15, 2004, Claimant [Smith] was employed by . . . ( Ajilon ). (emphasis added). 3. While Claimant [Smith] was employed with Ajilon, Ajilon had a contract to perform work with various state agencies including PHEAA. In the case of PHEAA, the work was done on a time and material basis. (emphasis added). 4. Ajilon placed Claimant [Smith] on the PHEAA assignment for the period from October 13, 1997, through October 15, 2004. (emphasis added). 5. During the period between October 13, 1997 and October 15, 2004, while employed by Ajilon, Claimant [Smith] worked exclusively on the contract between Ajilon and PHEAA at PHEAA s location. (emphasis added). .... 7. From October 13, 1997 through October 15, 2004, Ajilon continually employed Claimant [Smith]; he participated in its 401(k) plan; its health plan; its dental plan; its life insurance plan; and received all other benefits similar to those received by other Ajilon employees. (emphasis added). 8. Claimant [Smith] received a W-2 from Ajilon for each year in which he was employed with Ajilon, inclusive of 1 Although the Board adopted the Hearing Examiner s findings of fact, discussion, and recommendation in substantial part, this Court will recount only the Board s findings and discussion. 6 the time period from October 13, 1997 through October 15, 2004. (emphasis added). .... 10. No Commonwealth payroll or personnel records for Claimant [Smith] for any previous service with the Commonwealth were found as a result of the investigation. (emphasis added). .... 14. PHEAA did not consider Claimant [Smith] to be an employee for the period October 13, 1997 through October 15, 2004. The documentation provided by PHEAA showed that Claimant [Smith] was an employee of Ajilon during the period in question. (emphasis added). .... 17. Ms. Murphy received a letter from Ajilon dated May 17, 2005 wherein Samantha L. O Neil, the Vice President of Human Resources, confirmed that Claimant [Smith] was employed with Ajilon Consulting for the period from May 1995 through October 2004. .... 27. Hearing Examiner Bangs issued an opinion dated December 27, 2006 in which he recommended that Claimant s [Smith s] claim be denied. Opinion of the Board, June 27, 2007, Findings of Fact (F.F.) Nos. 1-5, 7-8, 10, 14, and 17 at 1-4; R.R. at 671-74. The Board denied Smith s request for service credit and concluded: 5. Claimant [Smith] was an employee of Ajilon between October 13, 1997 and October 15, 2004. 6. Claimant [Smith] was not an employee of PHEAA between October 13, 1997 and October 15, 2004. 7. Claimant [Smith] was not a State employee as defined in 71 Pa. C.S. §5102 between October 13, 1997 and October 15, 2004. 7 8. SERS determination that Claimant [Smith] was not an employee of PHEAA during the period of October 13, 1997 through October 15, 2004, is overwhelmingly supported by substantial evidence in this case. .... 13. The granting of retirement benefits to State employees is wholly governed by the Retirement Code and the Internal Revenue Code does not control the determination as to whether a person is a State employee as defined by the Retirement Code and therefore eligible for membership in SERS. 14. PHEAA did not consider Claimant [Smith] to be an employee for the period October 13, 1997 through October 15, 2004. The documentation provided by PHEAA showed that Claimant was an employee of Ajilon during the period in question. Opinion of the Board, Conclusions of Law (C.L.) Nos. 5-8 and 13-14 at 25-27; R.R. at 695-692. I. Whether Smith Was A State Employee Eligible For State Service Credit Based Upon His Previous Contract Service Rendered To PHEAA? Essentially, Smith, appearing pro se, contends2 that he should be allowed to purchase State service credit from October 13, 1997, through October 15, 2004, because he was an employee of PHEAA during this time period. Smith poses that because his job responsibilities were similar to PHEAA employees he was in fact a state employee.3 This Court disagrees. 2 This Court s review of the Board s final adjudication is limited to a determination of whether the adjudication is supported by substantial evidence, whether there is an error of law, or whether constitutional rights were violated. McCormack v. State Employees Retirement Board, 844 A.2d 619 (Pa. Cmwlth. 2004). 3 This Court has foregone the sequence of Smith s numerous arguments and consolidated them into three specific arguments. In his Statement of Questions Involved (Questions to be Answered by the Court), Smith lists the following issues: (Footnote continued on next page ¦) 8 Section 5102 of the State Employees Retirement Code (Retirement Code), 71 Pa. C.S. § 5102, defines the term state employee as [a]ny person holding a State office or position under the Commonwealth, employed by the State Government of the Commonwealth, in any capacity whatsoever, except an (continued ¦) 1. Does SERS have the authority, by statute, to determine the employment relationship between the petitioner [Smith] and AES/PHEAA, when the relationship and the facts surrounding the relationship are in dispute? 2. Based upon the common law principals which the Courts of the Commonwealth routinely utilize, who was the Petitioner s [Smith s] true employer (or Master ) during the period in question? 3. If found to be a common law employee of AES/PHEAA, is Petitioner [Smith] entitled to benefits as detailed by AES/PHEAA s policy regarding the Benefits Rights of Permanent and Temporary Employees? 4. Is the provider of pay and benefits a factor when determining if one is a State Employee ? 5. Is AES/PHEAA independent of the Commonwealth? 6. Did Petitioner s [Smith s] service to AES/PHEAA for the time in question qualify him for retirement benefits as a State Employee ? 7. Is SERS complying with Internal Revenue Code? Does Petitioner [Smith] classify as a Leased Employee ? Is this Court the appropriate venue to rule on SERS compliance with federal statutes? 8. Did representatives of AES/PHEAA provide false information as part of this official process? 9. Was [were] the Petitioner s [Smith s] due process rights violated? 10. Did various individuals opposing the Petitioner [Smith] during the process quite possibly break the law and/or their professional and ethical obligations of their positions and responsibilities in this proceeding? Petitioner s Brief, Questions to be Answered by the Court, at 4. 9 independent contractor or any person compensated on a fee basis or any person paid directly by an entity other than a State Employee Retirement System employer . . . . (emphasis added). In the present controversy, the evidence established that Smith was not a state employee during the period from October 13, 1997, through October 15, 2004. First, Briel, Senior Account Manager for Ajilon, stated that Ajilon hired Smith as an employee in April of 1995, and that his first assignment was with Grove Manufacturing. H.T. at 113; R.R. at 156. Briel stated that Smith was then assigned to Parrow Systems and eventually assigned to PHEAA in October of 1997. H.T. at 113; R.R. at 156. Second, Smith was paid by Ajilon and participated in Ajilon s employee s benefits program during the period in question. See Letter from Robert S. Nisley to Debra Murphy, April 28, 2005, at 1-2; R.R. at 215-16. In fact, Ajilon was listed as Smith s employer on his W-2 forms for the years 1997 through 2004. Third, Ajilon and PHEAA entered into a Master Agreement where Ajilon assigned Smith to PHEAA. Ajilon controlled Smith s assignment to PHEAA and Ajilon could have reassigned Smith to a different agency and replaced Smith with a different Ajilon employee. Agreement, Replacement, at 3; R.R. 452. See Master At PHEAA, Smith was required to complete Ajilon s Consultant Time Slips indicating his weekly hours and submit it to Ajilon. See Time Slip at 1; R.R. at 459. Fourth, pursuant to the Master Agreement, PHEAA was required to complete the Customer Satisfaction Survey for Smith. See Customer Satisfaction Survey at 1-2; R.R. at 438-39. If PHEAA was not satisfied with Smith s performance, Ajilon would address the problem directly with Smith. Although PHEAA could request Ajilon to reassign Smith 10 because of poor performance, it could not terminate Smith s employment. Fifth, the evidence established that Smith was aware that he was an employee of Ajilon when he actively sought employment with PHEAA when a job became available. See H.T. at 140; R.R. at 185. Last, Smith admitted that he left his employment with Ajilon in October of 2004, so that he could become an employee with PHEAA.4 There is substantial evidence to support the Board s determination that Smith was not a state employee and therefore entitled to state service credit during this time period. II. Whether The Board Lacked The Legal Authority To Determine Smith s Employment Status For Purposes Of Membership In SERS? Smith next contends that the Board lacked the legal authority to determine whether he was a state employee and therefore a member of SERS. Smith asserts that because Section 5102 of the Retirement Code, 71 Pa. C.S. § 4 K. Kevin Murphy, attorney for SERS, to Smith: Q: Let me turn your attention, Mr. Smith, to A-13. This is more recent, dated October 8, [2004] signed by you, in which you informed Robert Martin, that you were terminating your position with Ajilon to pursue other career opportunities. Is this when you were transitioning over to full-time employment with PHEAA? Is that why you terminated with Ajilon? (emphasis added). A: Yes. (emphasis added). .... Q: Finally, Exhibit I is an Employment Application from PHEAA. I suppose that this was what you filed to start employment with PHEAA. I noticed it s dated September of 2004, at the top right. You had listed on page 2 previous employment positions, the most recent being Ajilon in computer consulting. (emphasis added). A: Yes. (emphasis added). Q: Do you recall submitting this document? (emphasis added). A: Yes. (emphasis added). H.T. at 83-84; R.R. at 128-29. 11 5102, does not define the terms, employment , employment relationship , or independent contractor, this Court must resort to common law principles to determine whether Smith was an employee of PHEAA during the time period in question and therefore entitled to service credit from SERS. Initially, [w]hether . . . [an individual] qualifie[s] as a State employee . . . for the purpose of retirement benefits is a matter of law which this Court may review. Trotz v. State Employees Retirement Board, 495 A.2d 650, 651 (Pa. Cmwlth. 1985), (citing Luckhardt v. State Employees Retirement Board, 459 A.2d 1347 (Pa. Cmwlth. 1985)). Also, this Court has previously determined that [the Board,] as an agency charged with execution and application of the retirement statute, . . . is entitled to considerable deference in its construction of the Retirement Code and the regulations promulgated thereunder; therefore, the Board s construction may not be overturned unless it is clearly erroneous. (emphasis added). McCormack, 844 A.2d at 622 n.2. There is no dispute that the above-mentioned terms are not defined in Section 5102 of the Retirement Code, 71 Pa. C.S. § 5102. However, again, as stated earlier, Section 5102 of the Retirement Code does define the term state employee as a person employed by the state government in any capacity and as such its members have only those rights granted by the retirement benefit statute. McCormack, 844 A.2d at 622. 12 Here, SERS conducted an extensive review of Smith s employment record and was unable find any evidence that Smith was a state employee from October 13, 1997, through October 15, 2004. All the evidence indicated Smith was, in fact, an employee of Ajilon during this time period. This Court is unable to find any error with the Board s statutory determination that Smith was not a state employee and not a member of SERS. III. Whether The Internal Revenue Code Is Applicable? Smith has raised a number of arguments in support of his contention that pursuant to Sections 401(a) and 414(n) of the Internal Revenue Code, 26 U.S.C. §401(a) and §414(n), he was a leased employee and subject to membership in SERS. This Court rejects Smith s IRS arguments pursuant to the Board s determination: Claimant [Smith] displays a basic misunderstanding of the nature and operation of the Internal Revenue Code and the IRC §401(a) qualification rules generally, and IRC §414(n) specifically . . . . .... Claimant [Smith] obviously is confused concerning the interplay between the IRC s requirements for maintaining qualified status and SERS substantive eligibility provisions. A correct understanding of the law shows that his syllogism is flawed and does not result in either SERS membership for him or disqualification of SERS under IRC §401(a). . . . Although Claimant s [Smith s] brief on exceptions cites to the IRC §414(n)(2) definition of leased employee . . . Claimant [Smith] has not tied the facts of this case to the IRC definition, other than making a conclusory statement in his brief . . . . We have been unable to find any clear application of this provision to the facts of the case which permits us to make a finding that Claimant 13 [Smith] was a leased employee for purposes of Section 414(n) of the Internal Revenue Code. Therefore, we decline to make such a finding. Even if we assume arguendo that Claimant [Smith] is able to establish he is a leased employee, such a determination does not entitle Claimant [Smith] to membership in SERS. The relevant provisions of Section 414(n) state: (n) Employee leasing. (1) In general. For purposes of the requirements listed in paragraph (3), with respect to any person (hereinafter in this subsection referred to as the recipient ) for whom a leased employee performs services(A) the leased employee shall be treated as an employee of the recipient, but (B) contributions or benefits provided by the leasing organization which are attributable to services performed for the recipient shall be treated as provided by the recipient. .... (3) Requirements. For purposes of this subsection, the requirements listed in this paragraph are(A) paragraphs (3), (4), (7), (16), (17), and (26) of section 401(a), (B) sections 408(k), 408(p), 410, 411, 415, and 416, and (C) sections 79, 106, 117(d), 120, 125, 127, 129, 132, 137, 274(j), 505, and 4980B. 26 U.S.C. §414(n). It is immediately obvious that, under IRC §414(n), a leased employee is treated as an employee of the recipient only for purposes listed in paragraph 3, all of which have to do with the Internal Revenue Code. Nothing in IRC §414(n) provides or requires that a leased employee is to be treated as an employee for any other 14 purpose or law. Leased employees are considered employees merely for tax qualification and other federal law purposes and not for the purpose of determining whether or not someone is a State employee under the State Employees Retirement Code. A closer examination of Section 414(n)(3) reveals several more important features. First, none of the provisions listed in subparagraph 414(n)(3)(C) have anything to do with pension plans. Second, the provisions listed in subparagraphs (A) and (B) relate to testing qualifications standards. For example, when determining if SERS satisfies the qualification rules under IRC §410(a)(17) pertaining to limits on retirement covered compensation, a leased employee would be included in the testing, and a violation regarding compensation of the leased employee could be considered be considered a violation by SERS. It does not require that the leased employee be a member of SERS. To the contrary, IRC §414(n)(1)(B) specifically says that the pension benefits applicable to the leased employee by virtue of his employment with the leasing entity are to be used to test the qualification requirements. Thus, the leased employee is still a participant in the leasing entity s pension plan instead of the recipient s pension plan, as in the case where Claimant [Smith] was a member of Ajilon s pension plan instead of a member of SERS. In this case, if Claimant s [Smith s] retirement covered compensation recognized by Ajilon s plan satisfied the IRC §401(a)(17) requirements, then this particular requirement of IRC §414(n)(3)(A) is satisfied. Third, many of the qualification requirements listed in IRC §414(n)(3)(A) and (B) are not applicable to SERS as a multiple employer cost sharing defined benefit plan. Of those requirements that are applicable, Claimant [Smith] has made no showing that his pension plan benefits from Ajilon violated those particular testing requirements. We also note that 26 U.S.C. §414(n) contains a safe harbor provision . . . . Although we have been unable to find evidence regarding the safe harbor criteria in the 15 record, we note that the evidence shows Claimant [Smith] participated in the retirement plan offered by Ajilon during the time at issue in this appeal. The Board agrees with SERS that nothing in 26 U.S.C. §414(n) requires us to provide Claimant [Smith] with service credit for the period between October 13, 1997 and October 15, 2004 so long as, if he is in fact a leased employee and the safe harbor provision does not apply, he is included in testing for satisfying the qualification requirements that actually apply to SERS. As SERS correctly points out, the Internal Revenue Code does not control our determination as to whether a claimant is a State employee as defined in the Retirement Code. The granting of retirement benefits is wholly governed by the Retirement Code. The purpose of IRC §414(n) is to prevent pension plan sponsors from avoiding the qualification rules by playing games with leased employees so as to manipulate their workforces to satisfy the letter of the qualification rules while thwarting the intent of Congress. Furthermore, the qualification status of SERS is not at issue in this matter-whether or not Claimant [Smith] is a State employee and thus eligible for SERS membership is. Therefore, we reject Claimant s [Smith s] argument that the terms of 26 U.S.C. §414(n) require him to be granted member ship in SERS for the period of time at issue in this appeal. (emphasis added and in original and footnote omitted). Opinion, Discussion at 19-24; R.R. at 689-94. Accordingly, this Court affirms. ____________________________ BERNARD L. McGINLEY, Judge 16 IN THE COMMONWEALTH COURT OF PENNSYLVANIA Christopher C. Smith, Petitioner v. State Employees Retirement Board, Respondent : : : : : : : No. 1407 C.D. 2007 ORDER AND NOW, this 25th day of February, 2008, the order of the State Employees Retirement Board in the above-captioned matter is affirmed. ____________________________ BERNARD L. McGINLEY, Judge

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