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D'Agostino v. Dinapoli

April 10, 2009


The opinion of the court was delivered by: Gerald W. Connolly, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the printed Official Reports.

The instant article 78 proceeding challenges respondents' letter determination dated August 19, 2008 which terminated petitioner's pension benefits and his membership in the New York State and Local Retirement System. It further required petitioner to return six years of benefits amounting to $605,874.79 within 30 days. Petitioner had maintained part time "employment" with various public agencies, including three school districts, the County of Nassau, the Town of Hempstead and the Village of Valley Stream, while also maintaining a private law practice. For decades, the Comptroller's predecessors and the retirement system accepted petitioner's employers' representations that he was an employee and not an independent contractor. Indeed, all three school district positions and the position with the County of Nassau were formally created and approved by the Nassau County Civil Service Commission. On two different occasions petitioner's applications to respondents' predecessors for retroactive service credit were granted, with his tier status changing first from Tier 3 to Tier 2, and then from Tier 2 to Tier 1. He was also formally allowed to purchase additional service credit by changing his school district employment from a 10 month basis to a 12 month basis. Based upon the change in tier status, he received reimbursement of his retirement system contributions. In addition, the retirement system conducted an investigation into the issue of whether petitioner was an employee or an independent contractor with respect to his position with Nassau County and determined that he was an employee entitled to service credit. Petitioner thereafter retired and began receiving benefits in 2000.

By letter dated April 23, 2008, respondents suspended petitioner's pension payments. The letter stated that the determination was based upon a preliminary review of respondents' records and that an investigation was required of the circumstances under which petitioner received service credit. By letter dated June 27, 2008 respondents made a preliminary determination that petitioner "was registered as an employee when, in fact, [he was] an independent contractor." The letter stated only that such determination was based upon retirement system records, records provided by the employer and other unspecified documentation. Such letter gave petitioner 15 days to submit information in support of retaining petitioner's service credit and benefits. The final determination letter of August 19, 2008 merely stated that based upon a review of petitioner's relationship with the three school districts and the county, including the information provided by petitioner, it was determined that petitioner was an independent contractor rather than an employee. No factual basis or reasoning for the determination was provided.

The petition herein alleges that respondents arbitrarily and capriciously substituted their judgment for that of petitioner's employers and respondents' predecessors, that it was arbitrary and capricious and contrary to law retroactively to apply new policies, that the suspension and revocation of benefits and membership violated petitioner's contractual property rights guaranteed by the New York State Constitution, article V, section 7, that the procedures followed violate petitioner's due process right to a pre-deprivation hearing, that Retirement and Social Security Law § 74 is not applicable to these circumstances, that petitioner was not provided with adequate notice of the basis for respondents' actions, that the burden of proof was impermissibly placed upon petitioner to show that he was an employee, that petitioner will be required to present his case without knowledge of the basis for respondents' actions, that the determination is contrary to 2 NYCRR part 370, and that respondents have no authority to change petitioner's status absent an error in calculations or fraud.

Respondents have moved to dismiss the petition on the grounds that it fails to state a cause of action, that petitioner has failed to exhaust the administrative remedy of a hearing provided by Retirement and Social Security Law § 74, that the issues are not ripe for judicial review and that there can be no estoppel against respondents. Petitioner's opposition to the motion to dismiss expressly states that petitioner is not relying upon a theory of estoppel and a review of the petition indicates that no such theory is asserted. Accordingly, the Court need not address respondents' arguments concerning estoppel.

Petitioner contends that he does not have any administrative remedy available because Retirement and Social Security Law § 74 hearings are limited to determinations concerning applications for retirement benefits (see Matter of Deputy Sheriff's Benev. Assn of Onondaga County v Regan, 106 Misc 2d 258, 261-262 [1980] affd on other grounds 86 AD2d 680 [3d Dept 1982]). Indeed, the language of the statute provides that an applicant for a retirement allowance or other benefit may demand a hearing following receipt of a determination of such an application. Petitioner contends that his application for retirement was submitted and finally determined eight years ago and thus the statute is inapplicable.

Notwithstanding the restrictive language of Retirement and Social Security Law § 74, there is a longstanding history of providing and/or requiring a hearing upon a determination with respect to retirement system membership or service credit (see Matter of Cole-Hatchard v McCall, 4 AD3d 715 [3d Dept 2004]; Matter of Graham v New York State Police and Fire Retirement Sys., 188 AD2d 826 [3d Dept 1992]; Matter of Brosnahan v New York State Employees' Retirement Sys., 174 AD2d 954, 955 [3d Dept 1991]). Such a hearing would be authorized pursuant to the Comptroller's inherent authority (see Uniform Firefighters of Cohoes, Local 2562, IAFF, AFL-CIO v City of Cohoes, 175 Misc 2d 726, 730 [Sup Ct, Albany County 1998], mod on other grounds 258 AD2d 24 [3d Dept [1999], affd 94 NY2d 686 [2000]) as well as the general requirement that statutes be construed to uphold their constitutionality (see McKinney's Statutes § 150), as an administrative hearing may be required to provide procedural due process (see Matter of Brennan v Kaluczky, 226 AD2d 953, 955 [3d Dept 1996]) notwithstanding the absence of any specific statutory provision (see Matter of Economico v Village of Pelham, 50 NY2d 120, 127 [1980], overruled on other grounds Cleveland Bd. of Educ. v Loudermill, 470 US 532 [1985]). It is therefore determined that petitioner does have an administrative remedy available.

Petitioner contends that even if there is an available administrative remedy, because he has raised constitutional issues he is not required to exhaust such remedy (see e.g. Watergate II Apts. v Buffalo Sewer Auth., 46 NY2d 52, 57 [1978]). Petitioner contends that his retirement benefits are constitutionally protected, and as such, he has raised a constitutional claim sufficient to except the proceeding from the exhaustion requirement. However, the New York State Constitution, article V, section 7, merely provides that retirement system benefits are contractual in nature and may not be impaired or diminished by state action. Such guarantee does not render an individual retirement system member's benefits inviolate. Rather,

"[t]he purpose of the constitutional provision is to insure that pension and retirement benefits [are not] subject to the whim of the Legislature or the caprice of the employer' (Matter of Village of Fairport v Newman, 90 AD2d 293, 295, lv denied 58 NY2d 1112). There is no constitutional violation unless the contractual benefits are unilaterally diminished (id., 90 AD2d at 295-296; see, Rosen v New York City Teachers' Retirement Bd., 282 App Div 216, 218, affd. 306 NY 625)." (Matter of Delaney v Regan, 183 AD2d 981, 982 [3d Dept1992]).

The benefits are subject to and may be altered or waived by collective bargaining (see Matter of McGarrigle v City of New York, 23 AD3d 196, 198 [1st Dept 2005]) indicating that the constitutional protections apply at a contractual level with no guarantee of any specific individual's benefits. Essentially, the constitutional provision grants the petitioner a property interest in his retirement benefits. However, it does not significantly increase or enhance the nature of the property interest to require a heightened level of due process. At a procedural level the provision merely requires that the procedures applicable to any reduction or termination of benefits not be changed to reduce the amount of protection provided so long as the prior procedures complied with due process requirements. To the extent that the petition may be read as contending that petitioner's benefits and membership may never by terminated it fails to state a cause of action.

Petitioner's claims of violations of the New York State Constitution, article V, section 7, allege the retroactive application of new policies, practices and procedures which diminish plaintiffs' benefits. The recently promulgated regulations at 2 NYCRR § 315.3 (c) (2) (i) set forth 17 factors supporting a conclusion that an individual is an employee rather than an independent contractor and at (ii) set forth six factors supporting a conclusion that an individual is an independent contractor rather than an employee. Petitioner contends that these 23 factors constitute an impermissible change in the 20 common law factors established by the Internal Revenue Service and utilized by respondents' predecessors to determine the existence of an employer/employee relationship. It is also alleged that respondents are now using forms which include only 13 or 14 factors to consider in making the determination. A review of the 23 regulatory factors and the form questions establishes that they are similar to the 20 common law factors historically applied. In the absence of a specific administrative record it is impossible to determine how the Comptroller will apply the new regulations and forms. The 23 factors might be applied as a mere clarification of the historical 20 common law factors, in which case there would be no constitutional violation. Moreover, it is noted that the Comptroller has historically applied a " results-means' control test" to determine whether a retirement system member was properly designated an employee, rather than an independent contractor (see Matter of Brosnahan v New York State Employees' Retirement Sys., 174 AD2d at 955). Whether the determination to terminate petitioner's benefits and membership constitutes application of longstanding policies and procedures or is actually an improper retroactive change is necessarily fact intensive and would clearly benefit from a fully developed administrative record (see Matter of Schulz v State of New York, 86 NY2d 225, 232 [1995]; Matter of Finch, Pruyn & Co. v Kearns, 282 AD2d 858, 859-860 [3d Dept 2001]). Petitioner has therefore failed to show an applicable exception to the exhaustion requirement with respect to the claim of violation of the New York State Constitution, article V, section 7 (see Matter of Cole-Hatchard v McCall, 4 AD3d at 716). As such, that portion of the petition is premature and must await the outcome of an administrative hearing. Therefore, the motion to dismiss such claim shall be granted.

Petitioner also contends that the summary termination of benefits and removal from the retirement system violates the fifth and fourteenth amendments of the United States Constitution by depriving him of procedural due process. Defendants have failed to establish that there is any available administrative procedure to challenge the constitutionality of the administrative process itself. In addition, in contrast to the preceding claim, whether the administrative procedures provide procedural due process is primarily a question of law with no need for a detailed factual record.

Petitioner contends that a hearing pursuant to Retirement and Social Security Law ยง 74 would fail to provide due process on the grounds that the statute fails to provide a pre-termination hearing, that petitioner has not been given adequate notice of the claims against him and that it would impermissibly transfer the burden of proof to petitioner to establish that there was no error. In determining the extent of process which is due in any specific situation, the Court must consider and weigh the nature of the private interest affected, the risk of error under the challenged procedures compared with that of alternative procedures and the interests of the ...

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