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The Griffin Foundation v. Arizona State Retirement System

Court of Appeals of Arizona, First Division

May 17, 2018

THE GRIFFIN FOUNDATION, Plaintiff/Appellant,

          Appeal from the Superior Court in Maricopa County No. LC2016-000008-001 The Honorable Patricia A. Starr, Judge

          Jaburg & Wilk PC, Phoenix By Kraig J. Marton, Jeffrey A. Silence Counsel for Plaintiff/Appellant

          Arizona State Retirement System, Phoenix By Jothi Beljan Counsel for Defendant/Appellee

          Presiding Judge Randall M. Howe delivered the opinion of the Court, in which Judge Kenton D. Jones and Judge James B. Morse Jr. joined.


          HOWE, JUDGE.

         ¶1 The Griffin Foundation Inc. ("GFI") appeals the superior court's decision affirming the Arizona State Retirement System's ("ASRS") administrative decision holding that GFI owed past-due contributions for its employees from October 2010 to July 2015. GFI claims that during that time, its workers were not ASRS-eligible members because they were "leased" through third-party companies and therefore it did not owe any past-due contributions. A "leased employee" is an individual that is not an employee of an ASRS employer, but performs services under the employer's primary direction or control and performs those services under a leasing agreement between the employer and another person on a substantially full-time basis for at least one year. A.R.S. § 38-711(23)(f). We hold that when a business enters into an agreement to serve as a "co-employer" of those working under its direction or control, those persons cannot be considered "leased employees" within the language of A.R.S. § 38-711(23)(f). We therefore affirm the ASRS Board's decision.


         ¶2 GFI operates three charter schools in Tucson. In September 2001, GFI became a participating ASRS employer by executing a supplemental retirement plan under A.R.S. §§ 15-187(C) and 38-729, which allow charter schools to enter ASRS as political subdivisions. After entering ASRS, GFI began remitting contributions to ASRS on behalf of its employees.

         ¶3 In 2010, GFI's CEO, Lee Griffin, met with GFI's business manager, to discuss budget issues. The business manager informed Griffin about using leased employees, a concept she first heard about while attending an ASRS workshop. The business manager solicited more information about leasing employees from ASRS. ASRS responded that leasing employees was a practice that ASRS had seen but did not "support." GFI subsequently met with businesses that it believed satisfied the requirements to serve as a leasing company. GFI contracted with Administaff[1] for such services. GFI subsequently stopped remitting contributions to ASRS on behalf of its workers, who GFI claimed were no longer ASRS-eligible members since the workers were by then leased through Administaff.

         ¶4 In February 2011, the business manager informed ASRS that on October 26, 2010, GFI "contracted with Administaff to provide payroll management services, including shared employment." ASRS responded that it was not familiar with the term "shared employment" and that it needed additional information about GFI and Administaff s contractual relationship. ASRS requested information on whether GFI had its own employees or leased them through a third-party company. The following month, GFI responded that effective October 25, 2010, it no longer had employees, but leased its workers from Administaff. GFI also attached a copy of the signature page from GFI's contract with Administaff.

         ¶5 Five months later, ASRS assistant director Patrick Klein requested the entire contract between GFI and Administaff. After receiving the contract, ASRS asked Administaff about its contractual relationship with GFI. Administaff responded that it had a "co-employer relationship" with GFI, "under which our worksite employees are employed by both co-employers." Administaff also stated that it was a professional employer organization ("PEO") and that the Arizona Professional Employer Organization Registration Act governed its relationship with GFI.

         ¶6 In September 2011, citing inconsistencies between GFI's and Administaff s characterization of their relationship, ASRS informed GFI that it was liable for all contributions not withheld from October 25, 2010, to the present and attached a Contributions Not Withheld ("CNW") form for GFI to submit for each employee. GFI responded that its "workforce is employed through a leasing agency/PEO program" and that Administaff s PEO program "offers much more than the basic function of leasing employees [.]"

         ¶7 This led ASRS to again seek information from Administaff about whether it leased its employees to GFI. Administaff stated that it was a PEO "that co-employ [ed GFI's] employees, not a leasing agency" and that "it d[id] not lease and never has leased employees." It also explained that it entered into separate employment agreements with the employees so that they became co-employees and Administaff could provide payroll and human resource services. Finally, Administaff stated that after it became aware of GFI's possible obligations to ASRS, it offered to provide a mechanism GFI could use to satisfy those obligations but GFI declined the help. For that reason, Administaff terminated its business relationship with GFI. Accordingly, in November, ASRS informed GFI that the alleged leasing relationship with Administaff was "unfounded" and again attached CNW forms for GFI to complete for the delinquent contributions.

         ¶8 In response, GFI told ASRS on November 30, 2011, that GFI had ended its relationship with Administaff and contracted with ADP TotalSource, another "leasing agency/PEO program." GFI also stated that ADP's PEO program "offers much more than the basic function of leasing employees" and that ADP "understands that [GFI] has no employees." GFI concluded that "any actions to withhold [GFI's] State Equalization funding will result in legal action."

         ¶9 A year later, in December 2012, GFI requested instructions from ASRS on how to rejoin ASRS before the year ended. ASRS responded that GFI would receive a letter addressing ASRS's issues with it. In ASRS's subsequent letter to GFI, it reiterated GFI's request to be reinstated as an ASRS participating employer but explained that GFI had always been an "employer partner with the ASRS prior to [its] suspension of ASRS contributions in the fall of 2010." ASRS then stated that it had never received documentation between GFI and ADP following the November 30, 2011 letter supporting GFI's claim that it leased its employees from ADP. After requesting supporting documentation, ASRS explained that its records would continue to show that GFI owed contributions, plus interest, from October 2010.

         ¶10 Over the next year, GFI and ASRS communicated twice. In April 2013, GFI's attorney explained to ASRS that (1) GFI was not required to make ASRS contributions while it leased its employees, (2) ASRS failed to make its position clear and therefore GFI reasonably believed that it was not required to make contributions to ASRS, and (3) GFI should be allowed to reenter ASRS. The attorney explained that GFI "requests to be reactivated into the ASRS, now, so that it can begin making ASRS contributions once again while the parties work on a solution to address the past due issue." In May, ASRS responded that GFI had been an employer partner with ASRS since September 2001. ASRS also requested documentation supporting GFI's contention that it had only leased employees and continued that "[o]ur position is and has been that [GFI] ...

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