The Risky Business Of Using Contingent Workers

Sunday, February 1, 2009 - 01:00

Although many companies assume they have no liability for temporary, leased or outsourced employees - collectively referred to as "contingent workers" - the use of such workers does not automatically relieve a company of employment-related liability.Companies that use contingent workers are increasingly being sued by these workers as a "joint employer" and are being held liable for noncompliance with employment statutes.While the use of contingent workers may provide companies with such benefits as increased business flexibility, reduced employer costs and specialized employee skill sets, there are legal and practical considerations that companies must take into account.

Temporary employees are recruited, hired, employed and paid by a temporary staffing agency but assigned to work for a specific company (referred to as the "user employer") to supplement the user employer's workforce. Outsourced employees are also employed and paid by an independent company that has contracted with the user employer to outsource specific functions such as accounting, human resources, security, food service and janitorial services.The term "staffing employer" refers to any entity that provides contingent workers to the user employer. While the user employer is not the actual employer of the contingent worker, the staffing employer and user employer may be considered joint employers, which results in individual and joint liability for noncompliance with employment-related statutes.

Why Should A Company Care If It Is A Joint Employer Of Contingent Workers?

Although many companies use contingent workers to eliminate liability to such workers, the use of contingent workers can give rise to significant liability under different employment laws.

1. Joint employer finding may cause employers to exceed numerical employee thresholds, making them subject to various state and federal employment laws. This point is illustrated by a recent case, Moldenhauer v. Tazewell-Pekin Consolidated Communications Center (Tazcom) , in which the Seventh Circuit held that the City of Pekin and Tazewell County were not joint employers of Moldenhauer and therefore dismissed Moldenhauer's FMLA claim because Moldenhauer's employer, Tazcom, did not have the 50 employees required to be liable under the FMLA.

2. Who is liable for the alleged discrimination when contingent workers bring a discrimination complaint? In 1997, the EEOC issued an Enforcement Guidance to employers clarifying employers' liability for contingent workers under the statutes administered by that agency (i.e., Title VII, ADEA, ADA, Equal Pay Act).The Guidance specifies that both the staffing employer and user employer may be liable as joint employers under those statutes for discrimination against contingent workers.The Guidance provides that (1) staffing employers must hire and make job assignments in a nondiscriminatory manner; (2) the user employer must treat workers assigned to it by staffing employers in a nondiscriminatory manner; and (3) the staffing employer must take immediate and appropriate corrective action if it learns that a user employer has discriminated against its workers.

In December 2000, the EEOC issued another Enforcement Guidance dealing exclusively with the ADA.In addition to addressing disability-related inquiries, medical examinations and selection criteria in the context of contingent workers, the 2000 Enforcement Guidance outlines when the user employer and staffing employer are responsible for providing a reasonable accommodation during the application process and states that both entities are responsible for providing a reasonable accommodation for the disabled contingent worker to perform the job if they are joint employers.

3. If the user employer and staffing employer are joint employers, each entity will be individually and jointly liable for minimum wage and overtime violations under the FLSA with respect to the contingent worker's entire employment for the particular workweek.So, if company X and Y are joint employers and a contingent worker works 20 hours at company X and 30 hours at company Y, both company X and company Y are responsible for paying overtime on the 10 hours worked in excess of 40 hours for the workweek.The staffing employer typically has primary responsibility for complying with the recordkeeping requirements of the FLSA.

4. While the FMLA does not address joint employer liability, the DOL has issued regulations setting forth situations where joint employer liability may be found under the FMLA: (1) Where two or more businesses exercise some control over the work or working conditions of the employee, the businesses may be joint employers. Joint employers may be separate and distinct entities with separate owners, managers and facilities.Where the employee performs work that simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek, a joint employment relationship generally will be considered to exist in situations such as where there is an arrangement between employers to share an employee's services or to interchange employees; where one employer acts directly or indirectly in the interest of the other employer in relation to the employee; or where the employers are not completely dissociated with respect to the employee's employment and may be deemed to share control of the employee, directly or indirectly, because one employer controls, is controlled by or is under common control with the other employer; and (2) It is unlawful for an employer to interfere with an employee's rights under the FMLA. An employer may be liable for FMLA violations relating to contingent workers. 29 C.F.R. § 825.106(a).

Courts analyzing joint employer liability under the FMLA consider the employment situation as a whole, analyzing the amount of control the alleged joint employer had over the working conditions of the employee.

Only the primary employer, which is often the staffing employer, has the responsibility of providing notices to the worker, providing leave and maintaining health benefits and job restoration. The secondary employer may not interfere with the contingent worker's efforts to exercise FMLA rights or retaliate against the worker for exercising FMLA rights and must place the worker returning from FMLA leave into the position the employee held when he/she took FMLA leave if the secondary employer still has a contingent worker in that position.

5. Under the workers' compensation laws of most states, employers are protected against work-related personal injury claims by its employees because workers' compensation is the employee's exclusive remedy for work-related injury.However, if the user employer is not the contingent worker's employer, the user employer does not provide workers' compensation coverage. Accordingly, the user employer may be subject to tort liability if a contingent worker is injured while working on the employer's premises.

6. When an employee commits a tort within the scope of employment, an employer is liable for any harm caused by the tortious act.But when a tort is committed by a contingent worker on the user employer's premises, the user employer may be liable if (1) the user employer exercises sufficient control over the contingent worker; and (2) the contingent worker is acting within the scope of employment with the user employer when the tortious conduct occurs.

7. Under OSHA, an employer is required to provide a safe working environment and comply with all OSHA regulations. 29 U.S.C. § 654(a). This includes keeping records of workplace illnesses and injuries. 29 C.F.R. § 1904.2(a). Because an employer is required to protect everyone in its workplace, an employer's responsibilities under OSHA include contingent workers, regardless of whether they are considered "employees."

8. In a joint employer situation, the unfair labor practice of one employer may be vicariously imputed to the other. A joint employer has a duty to bargain with the employees' collective bargaining representative. For example, if the contingent workers elect to be represented by a union, even in the absence of any regular full-time employees of the user employer, the user employer and staffing employer, as joint employers, are both required to bargain with the union.

Tips For Avoiding And Managing Joint Employer Liability

There may be instances where a user employer cannot avoid being a joint employer of its contingent workers due to the nature of the relationship between the user employer and the contingent worker.However, joint employer liability can be avoided, minimized or better managed.

1. Written agreements between the user employer and staffing employer should articulate what each entity is responsible for, including all aspects of the contingent workers' employment as well as compliance with all employment laws.

2. The contract between the user employer and staffing employer should require the staffing employer to indemnify the user employer for any liability under federal or state employment laws arising out of any function for which the staffing employer is reasonably or contractually responsible.

3. Only hire experienced and reputable staffing firms. Obtain references from the staffing employer and conduct due diligence as to its compliance with employment and contractual obligations. A court may determine that the user employer and the staffing employer are joint employers of contingent workers, in which case the user employer may be responsible for the staffing employer's mistakes and noncompliance.

4. The user employer should verify that the staffing employer has appropriate insurance coverage for workers' compensation and employment practices liability insurance.

5. Benefit plans should clearly define "employee" and explicitly exclude contingent workers if that is what the user employer intends.

6. For the user employer to argue reasonably that it is not a joint employer of the contingent worker, the user employer should require that the staffing employer be responsible for tracking hours worked by contingent workers, paying wages to contingent workers and withholding and remitting to applicable employment related taxes (including FICA, unemployment taxes and Social Security).

7. Even if the staffing employer is required by contract to track hours worked, pay wages and withhold and remit taxes, the user employer should monitor the staffing employer's compliance with applicable wage and hour laws. A user employer, if determined to be a joint employer, will be on the hook for noncompliance.

8. Contingent workers should be told at the start of their assignment with the user employer that they are not employees of the employer. The contingent worker should not be given business cards, listed in the company directory as an employee, invited to company social events or covered by the user employer's personnel policies.

9. The less control the user employer has over the terms and conditions of employment of the contingent worker, the less likely the user employer will be deemed a joint employer. Therefore, the user employer: should avoid or minimize supervisory responsibility for the contingent worker at the employer's job site; should direct employee relations issues relating to the contingent worker to the staffing employer; should not have supervisors assign additional projects to the contingent workers other than what is permitted by the written contract between the user employer and staffing employer; should not become involved with the staffing employer's recruiting, hiring, training and disciplining of contingent workers; should not conduct performance evaluations of contingent workers; should not set work schedules for contingent workers; should not approve overtime and/or vacation requests for contingent workers; and should not determine the pay, bonuses and benefits for contingent workers. Also, the contingent worker should call out sick to the staffing employer.

10. The user employer's employees should not treat contingent workers like employees or refer to them as "employees who are hired" but rather "workers who are assigned."Train employees, particularly supervisors, how to interact with and treat contingent workers.

To realize all the advantages of using contingent workers, user employers must understand the legal obligations and risks associated with using contingent workers and structure the contingent worker relationship in a way that addresses those obligations and minimizes legal risks.

Caroline Austin is a Partner in WolfBlock's Employment Services Practice Group. Her practice focuses on employment litigation, employment policy development, preventative counseling and training designed to avoid litigation, unionization and employee attrition.

Please email the author at caustin@wolfblock.com with questions about this article.