Applying the different California Public Employees’ Retirement System (“CalPERS”) rules related to Temporary Upgrade Pay, out-of-class appointments, and non-reportable extra-duty pays can be unnerving. For classic employees, compensation for appointments meeting the definition of Temporary Upgrade Pay are reportable to CalPERS and is included in pension benefits. For out-of-class appointments, the Government Code establishes a 960-hour per fiscal year limit, regardless of whether the employee is a classic or new member. Some compensation is reportable as Temporary Upgrade Pay and the hours are reportable as an out-of-class appointment. Other appointments might meet the definition of Temporary Upgrade Pay but do not meet the definition of an out-of-class appointment. And, whether the employee is a new member subject to the California Public Employees’ Pension Reform Act (“PEPRA”) or a classic member might change the answer.
As discussed in more detail below, for classic members, where an appointment meets the definition of Temporary Upgrade Pay, but not out-of-class appointments, the compensation is reportable to CalPERS and included in the employee’s pension benefits. However, the hours are not reportable for the purposes of the 960-hour limit on out-of-class appointments. For a classic member, where an appointment meets the definition for Temporary Upgrade Pay and out-of-class appointments, the compensation is reported to CalPERS and included in pension benefits, and the hours are reported to CalPERS for the purposes of tracking the 960-hour limit for out-of-class appointments. For new members, compensation for Temporary Upgrade Pay is not reportable to CalPERS for the purpose of inclusion in pension benefits, but the hours may be reported to CalPERS for the purpose of tracking the 960-hour limit if the appointment meets the definition of an out-of-class appointment.
Few items of special compensation reportable to CalPERS have caused as much confusion as Temporary Upgrade Pay. CalPERS even had difficulty determining whether Temporary Upgrade Pay would be reportable for CalPERS new members after PEPRA was enacted. Initially, CalPERS indicated in a circular letter that Temporary Upgrade Pay would not be reportable for new members who were subject to PEPRA. CalPERS later reversed course and indicated that Temporary Upgrade Pay would be reportable for new members. Finally, after a brief standoff with then-Governor Brown, CalPERS excluded Temporary Upgrade Pay from reportable compensation for new members under its final regulation.
Temporary Upgrade Pay is an item of “special compensation” that is reported to CalPERS for the purpose of inclusion in CalPERS pension benefits for classic members. Under the applicable regulation, Temporary Upgrade Pay is defined as follows:
Compensation to employees who are required by their employer or governing board or body to work in an upgraded position/classification of limited duration.
In a 2014 Circular Letter, CalPERS noted that many agencies were incorrectly reporting certain assignments as Temporary Upgrade Pay. Specifically, CalPERS takes the position that when an individual maintains the duties of their current position and takes on some or all of the duties of an upgraded position, the compensation for taking on the additional duties is non-reportable overtime.
For example, many agencies have “out-of-class” or “acting” pay in their MOUs that provide an employee with additional compensation for taking on a portion of the duties of an upgraded classification. In some cases, multiple employees will split the duties of a higher position and receive additional compensation. Under CalPERS’ interpretation, since the individual retains the duties of their current position, the compensation is not reportable to CalPERS for new or classic members.
To complicate matters further, on January 1, 2018, Government Code section 20480 went into effect. This new law places limits on certain out-of-class appointments, and provides for penalties on out-of-class appointments that exceed 960 hours in a fiscal year. As with Temporary Upgrade Pay, an out-of-class appointment under the Government Code has a specific definition. An “out-of-class appointment” is “an appointment of an employee to an upgraded position or higher classification by the employer or governing board or body in a vacant position for a limited duration.” A “vacant position” is defined as “a position that is vacant during recruitment for a permanent appointment.” The definition of “vacant position” excludes a “position that is temporarily available due to another employee’s leave of absence.” If the appointment meets the definition of an out-of-class appointment, the hours must be reported to CalPERS in the my|CalPERS system, but the compensation is only reportable if the appointment meets the definition of Temporary Upgrade Pay and only if the employee is a classic member.
It would have been convenient for the definition of Temporary Upgrade Pay under the regulations and out-of-class appointments under the Government Code to have the same definition, but that would be too easy. As the definitions above illustrate, an appointment might meet the definition of Temporary Upgrade Pay without meeting the definition of an out-of-class appointment. For example, if a CalPERS classic employee is placed in an upgraded position while the permanent employee is on an extended leave of absence, assuming the technical requirements in the regulation are met as they relate to all items of special compensation, the compensation would be reportable as Temporary Upgrade Pay. However, the appointment would be expressly excluded from the definition of an out-of-class appointment and the hours would not have to be reported in my|CalPERS for the purposes of tracking the 960-hour limit. Similarly, if an individual serves in an upgraded position, but the agency is not recruiting to fill the position, the additional compensation may be reported as Temporary Upgrade Pay, but does not meet the definition of an out-of-class appointment.
With the mix of overlapping and divergent definitions for Temporary Upgrade Pay, out-of-class assignments, and non-reportable extra-duty pays, it is important to apply each definition separately to the appointment and compensation when reporting compensation as Temporary Upgrade Pay or reporting the hours for out-of-class appointments. Agencies should also audit any out-of-class, upgrade pays, interim pays, acting pays and extra-duty pays to determine whether these pays are reportable as special compensation, and when they may meet the definition of out-of-class appointment for the purposes of tracking the 960-hour limit.
Want to learn more? Join us on Tuesday, September 17th for at the one-hour webinar “Is is Pensionable? Hybrids, Lump Sums, & Other Pensionable Compensation Challenges” presented by Partner Laura Drottz Kalty. Register Today! And if you can’t attend the webinar, you can register to receive the recording so you don’t miss any important information!