All County Superintendents of Schools,
District Superintendents of Schools,
Community College Districts, and
Other Employing Agencies

EXECUTIVE OFFICE

Administrative Directive 97-02
Service by Independent Contractors who are Not Retired
Members of the STRS Defined Benefit Plan

This Administrative Directive (AD) Supersedes AD 93-01, as Amended on March 8, 1994, only with regard to "Active Workers Prior to Retirement"

PURPOSE

The purpose of this directive is to inform employers of the reporting requirements for service performed by a person who is retained by an employer as an independent contractor or an employee of a third party firm. This directive applies only to service performed by an independent contractor or an employee of a third party firm who is not a retired member of the State Teachers' Retirement System (STRS) Defined Benefit Plan.

SCOPE

This directive applies to all county superintendents of schools, school districts, community college districts and other employing agencies that employ persons to perform creditable service under the STRS Defined Benefit (DB) Plan.

DISCUSSION

Education Code Section 22119.5 defines "creditable service" by specifying the types of activities that are creditable when performed for an STRS employer. A person who performs activities identified in the definition of creditable service would usually be an employee of an STRS employer. Creditable service performed by an employee is subject to the provisions of Part 13 of Division 1 of the California Education Code and must be reported to STRS in accordance with the provisions of the Teachers' Retirement Law and applicable STRS Administrative Directives.

Employers sometimes retain the services of an independent contractor or employee of a third party, typically a consulting firm. The services provided by an independent contractor or employee of a third party firm occasionally include activities identified as creditable service under the provisions of Section 22119.5.

Service performed by an independent contractor or employee of a third party firm is not subject to coverage under the STRS DB Plan. Compensation for service performed by an independent contractor or employee of a third party firm is not subject to contributions to the DB Plan. Compensation for activities identified as creditable service should not be reported to STRS unless the independent contractor or employee of the third party firm is a retired member of the STRS DB Plan. (Refer to Administrative Directive 97-01 for the treatment of creditable service by an independent contractor or employee of a third party firm who is a retired member of STRS.)

STRS cautions that it is the employer's responsibility to comply with the Internal Revenue Code requirements in determining independent contractor status. STRS will rely on the employer's certification of a person's status as an independent contractor or employee of a third party firm. STRS will not render an opinion concerning a person's status as an independent contractor; however, the System recommends that the employer seek counsel to ensure that the performance of service by an independent contractor is in compliance with all applicable provisions of state and federal law and related regulations.

ACTION

A STRS employer that retains the services of an independent contractor or an employee of a third party firm continues to be responsible for determining that person's status as an independent contractor. Upon engagement of an independent contractor or employee of a third party firm to perform any activity included in the definition of creditable service, the employer must complete and retain on file an "Employer Certification of Independent Contractor Status" form MR-732. This form must be available for review upon request by STRS staff.

The employer must not report to STRS service performed by an independent contractor or employee of a third firm party unless the person is a retired member of the DB Plan. In the event the employer subsequently alters the person's status from independent contractor to employee (for instance, pursuant to an Internal Revenue Service finding), the employer must report to STRS all creditable service performed on and after the date of the determination that the person is an employee of the STRS employer. Member and employer contributions are immediately due to STRS for all creditable compensation for creditable service performed by an employee who is a member of the STRS DB Plan, commencing with the date of the determination that the person is an employee of the STRS employer.

If the person is not already a member of the STRS DB Plan at the time he or she is determined to be an employee, the employer must determine when the employee qualifies for mandatory membership. Creditable service performed as an employee of the STRS employer prior to the membership date must be reported to STRS as non-member service.

Employer questions regarding this Administrative Directive should be directed to your STRS Reporting Section Technician or Analyst.

JAMES D. MOSMAN
Chief Executive Officer