Districts tempted to hire a retiree through a third-party entity or as an independent contractor to avoid surcharges and annuity payment reductions should proceed with caution.
Teacher Retirement System of Texas (TRS) rules treat employment in a TRS-covered employer through a third-party entity the same as district employment. Surcharges and annuity reduction will occur unless an exception (e.g., substitute or part-time) applies. A third-party entity, according to TRS, is an entity or company retained to provide personnel that perform duties or provide services employees of the TRS-covered employer would otherwise perform. Retirees hired by a third party before May 24, 2003 are not subject to these restrictions.
Independent Contractor Arrangements
TRS rules provide exceptions to surcharges and employment restrictions for retirees who are hired by a covered entity as an independent contractor. For these exceptions to apply, the district must ensure the working arrangement meets all the legal tests for this type of relationship.
A review of the criteria for determining independent contractor status and associated challenges is available in past HRX articles:
- Classifying Workers as Employees and Independent Contractors
- Trending Topics: Independent Contractors
Misclassification of a retiree as an independent contractor can have staggering financial consequences. If a worker is misclassified, the individual will be considered an employee of the TRS-covered employer and subject to surcharges, loss of annuity, and rules regarding termination of employment and waiting periods for reemployment. Failure to follow the applicable rules could result in financial consequences for the retiree, including revocation of retirement and repayment of all annuity payments. The employer also will be subject to surcharges applied retroactively to the date the person should have been considered an employee.
Establish Processes for All Hiring Arrangements
HR should ensure all hiring arrangements, including third-party workers and independent contractors, are subject to review before any work is performed. Campuses and departments should not be allowed to make arrangements and process payments through accounts payable without oversight. Requiring processes to flow through HR will allow for a thorough assessment of independent contractor status, ensure required background checks are conducted, and ensure information is reported to the state new-hire registry.
Consider the Issues Carefully
The issues related to third-party employment and working as an independent contractor are addressed in detail in the TRS publication Employment After Retirement. Any entity or employer considering hiring retirees under the alternative arrangements should consult this and other references provided in this article before they move forward. Additional information on employment of retired personnel can be found in the HR Library.
April Mabry oversees HR Services training services, member library products, and the HRX newsletter. She has provided HR training and guidance to Texas public schools since 1991. Mabry was a classroom teacher for 11 years in Texas and Michigan.
Mabry has a bachelor’s degree in education from the University of Michigan and certification as a professional in human resources (PHR) and is a SHRM-CP.