Whether a member of a state board is an employee for the purposes of the Kentucky Retirement Systems

OAG 15-010 August 13, 2015 Subject: Whether a member of a state board is an employee for the purposes of the Kentucky Retirement Systems Requested by: William A. Thielen, Executive Director Kentucky Retirement Systems Written by: Matt James Syllabus: A member of a state board is not an employee for the purposes of the Kentucky Retirement Systems, and may receive a per diem payment for service on a board. Statutes construed: KRS 61.637; KRS 61.645 OAGs cited: OAG 80-501; OAG 80-347 Opinion of the Attorney General William A. Thielen, Executive Director of Kentucky Retirement Systems, has requested an opinion of this office regarding whether a member of a state board receiving a per diem is an employee for the purposes of the Kentucky Retirement Systems. We advise that a member of a state board is not an employee for the purposes of the Kentucky Retirement Systems. An active state police employee was elected to the Kentucky Retirement Systems Board of Trustees to fill the position dedicated to “a member or retired from the State Police Retirement System” by KRS 61.645(1)(c). Subsequent to his election, the police employee retired. Prior to the employee’s retirement, he did not receive a per diem for board duties due to receiving a salary from the state treasury. Subsequent to the police employee’s retirement, Kentucky Retirement Systems advised him that he would not be eligible for the per diem compensation provided by KRS 61.645(7), which provides that “trustees who do not otherwise receive a salary from the State Treasury shall receive a per diem of eighty dollars ($80) for each day they are in session or on official duty, and they shall be reimbursed for their actual and necessary expenses.” Kentucky Retirement Systems advised the retired police employee that he is not eligible for the per diem because he was elected when he was still active as a police employee, and therefore did not complete the mandatory separation of service, as it maintains that board membership coupled with receipt of per diem payments is employment under KRS 61.637. At issue is whether the retired police employee is eligible for the per diem payments. KRS 61.637(17) provides restrictions on reemployment in state agencies following retirement. KRS 61.637(17)(a) provides for retirees of the Kentucky Retirement Systems generally: Except as provided by paragraphs (c) and (d) of this subsection, if a member is receiving a retirement allowance from one (1) of the systems administered by Kentucky Retirement Systems, or has filed the forms required to receive a retirement allowance from one (1) of the systems administered by Kentucky Retirement Systems, and is employed in a regular full-time position required to participate in one (1) of the systems administered by Kentucky Retirement Systems or is employed in a position that is not considered regular full-time with an agency participating in one (1) of the systems administered by Kentucky Retirement Systems within three (3) months following the member's initial retirement date, the member's retirement shall be voided . . . . KRS 61.637(17)(a) provides that if a member receives or files for a retirement allowance, and is employed in a regular full-time position or a position that is not considered regular full-time within three months of the retirement date, that member’s retirement is voided. 105 KAR 1:390 provides further regulations governing reemployment which follow KRS 61.637(17). Kentucky Retirement Systems maintains that “board membership coupled with receipt of per diem payments is employment pursuant to KRS 61.637” as a “position that is not considered regular full-time.” Regarding whether service on a public board and payment of a per diem constitutes employment, “there is no one fact or circumstance that is conclusive as to whether the master servant relationship exists; however, the right to direct what work shall be done and the manner it shall be done and the power to discharge the alleged employee from service are the most prominent factors.” Am. Commerce Ins. Co. v. Brown, 168 S.W.3d 386, 388 (Ky. Ct. App. 2004). Applying these criteria, public board members are not employees of the institutions they govern. Public board members direct the work that shall be done by the institutions they govern; the institutions do not govern them. Institutions generally do not have the power to remove their board members; board members are generally elected or appointed independently of the institutions they govern. Rather, service on a public board created by statute is a public office, and not public employment. In Nichols v. Marks, 215 S.W.2d 1000 (Ky. 1948), the court stated the general distinction between public office and public employment: The general rule in determining whether or not a position is a public office or one of public employment appears to be that a position is a public office when it is created by law, is continuing in nature, and the incumbent, in the fulfillment of his duties, exercises some portion of the sovereign power, in the performance of which the public is concerned; while a public employment is a position which lacks one or more of these elements. Id. at 1003. Service on a public board created by law is therefore a public office and not public employment. In OAG 80-501, discussing a Board of Aldermen, we advised that “a member of the Board is not an employee as such nor can he be construed to be one . . . . A member of the Board of Alderman is undoubtedly a public officer . . . .” Cases and authority from other jurisdictions confirm this interpretation. “Members of boards or commissions in this State, unless provided for otherwise by legislation, are not employees in the usual sense of the word or within the meaning of the Pension Law. Historically they have been regarded as public officers and not public employees.” Wharton v. Everett, 229 A.2d 492, 494 (Del. Super. Ct. 1967). In Chavero v. Local 241, Div. of the Amalgamated Transit Union, 787 F.2d 1154 (7th Cir. 1986), the court considered whether union board members were employees for the purposes of Title VII: Directors are traditionally employer rather than employee positions. Although a director may accept duties that make him also an employee, a director is not an employee because he draws a salary. Rather, the primary consideration is whether an employer-employee relationship exists. . . . Although the board undertakes investigations of all grievances and disputes between union members and the company, it reports to no one other than itself. As such, the individual board members are not employees . . . . Id. at 1157 (citations omitted). Other jurisdictions have similarly reasoned that board members are not employees, including in the context of retirement systems. In summary, we advise that members of public boards are not considered employees for the purposes of the Kentucky Retirement Systems. Since service on a public board does not constitute employment, a member of a public board who is retired from one of the Kentucky Retirement Systems may receive a per diem without affecting the member’s retirement. JACK CONWAY ATTORNEY GENERAL Matt James Assistant Attorney General In OAG 80-347, we addressed compensation of active state employees appointed to public boards. We advised that an active state employee may not “engage in ‘double dipping’ in the state treasury and receive two salaries, or a salary and a per diem. If a state . . . employee . . . is appointed to the board . . . , he should be paid either his regular salary on that day or his per diem, while serving on the board, but not both.” Id. Kentucky Retirement Systems administers the County Employees Retirement System, Kentucky Employees Retirement System, and State Police Retirement System. KRS 61.645. See generally Ky. Unemployment Ins. Comm’n v. Landmark Cmty. Newspapers of Ky., Inc., 91 S.W.3d 575, 579 (Ky. 2002). In support of its position, Kentucky Retirement Systems states that it reports the per diem payments on an IRS W-2 form and makes the necessary withholdings. However, use of a W-2 form, while it may be evidence of an employer-employee relationship, is not determinative. See Verchick v. Hecht Invs., Ltd., 924 So.2d 944, 945-46 (Fla. Ct. App. 2006) (“The existence of W-2 tax forms does not create a disputed issue of fact concerning the existence of an employer-employee relationship . . . . It is well-established that the main test in determining the existence of an employer-employee relationship is whether the employer has direction and control over the employee.”); Boudrot v. Dir., Div. of Taxation, 4 N.J. Tax 268, 275 (N.J. Tax Ct. 1982) (“The evidence refutes the conclusion that the issuance of Form W-2 is indicative of an employer-employee relationship.”). Kentucky Retirement Systems also states that the definition of “employee” in 26 U.S.C. § 3401(c) expressly provides that “for purposes of this chapter, the term ‘employee’ includes an officer, employee or elected official of . . . a State, or any political subdivision thereof . . . . The term ‘employee’ also includes an officer of a corporation.” First, federal law concerning employment is not controlling on state law governing retirements. Further, 26 U.S.C. § 3402 (a)(1) requires that “every employer making payment of wages shall deduct and withhold upon such wages a tax,” and 26 U.S.C. § 3401(a) defines wages as “all remuneration (other than fees paid to a public official) for services performed by an employee for his employer.” The withholding provisions by their terms apply only to employers paying wages to employees. In order to determine whether a person is an employee, the Internal Revenue Service applies a twenty factor test set out in Rev. Rul. 87-41, 1987-1 C.B. 296. The factors are: 1) instructions, 2) training, 3) integration, 4) services rendered personally, 5) hiring, supervising, and paying assistants, 6) continuing relationship, 7) set hours of work, 8) full time required, 9) doing work on employer’s premises, 10) order or sequence set, 11) oral or written reports, 12) payment by hour, week, month, 13) payment of business and or/traveling expenses, 14) furnishing of tools and materials, 15) significant investment, 16) realization of profit or loss, 17) working for more than one firm at a time, 18) making service available to general public, 19) right to discharge, and 20) right to terminate. Id.; see also United States v. Garami, 184 B.R. 834, 837 (M.D. Fla. 1995). Applying these factors, we advise that public board members do not meet the federal twenty factor test for an employment relationship either. We further note that “per diem payments are traditionally seen as reimbursements for expenses, including room and board when traveling, and are not generally considered regular taxable wages.” Custom Ship Interiors v. Roberts, 300 F.3d 510, 514 (4th Cir. 2002); see also 26 C.F.R. § 31.3401(a)-4(a) (“If a reimbursement or other expense allowance arrangement meets the requirements . . . and the expenses are substantiated within a reasonable period of time, payments made under the arrangement that do not exceed the substantiated expenses are treated as paid under an accountable plan and are not wages.”); but see 26 C.F.R. § 31.3401(a)-4(b) (reimbursements in excess of substantiated expenses are treated as wages). Also, “‘wages,’ in the withholding context, is defined more narrowly than income. . . . Even though certain payments of expenses to an employee may constitute income to the employee, it does not necessarily follow that they will be deemed ‘wages’ subject to the withholding provision.” Gen. Elevator Corp. v. United States, 20 Cl. Ct. 345, 351 (Cl. Ct. 1990). We express no opinion on whether Kentucky Retirement Systems is required to withhold taxes on per diem payments to public board members. OAG 15-010 Page 6