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Published: 2008-03-26

Negotiating the Hidden Hazards of Hiring Contingent Workers



Businesses representing virtually every sector of the South Carolina economy "from textiles to technology" are turning with increasing frequency to so-called "contingent" workers to supplement their regular workforces. Although many employers assume that contingent workers are not their employees for liability purposes, this is far from true. The reality is that hiring contingent workers can be risky. This article highlights a few of the risks involved with the use of contingent workers.

Common examples of contingent worker arrangements include the following:

Temporary Employees--workers are recruited, tested, screened, and employed by a temporary-help agency, which assigns the workers to its clients. Generally, temporary employees support the client's own workforce during employee absences, temporary skill shortages, seasonal workloads, and special assignments.

Employee Leasing--a company's employees are transferred to the payroll of an employee leasing firm, which then leases the workers back to the client company. The leasing company performs most of the functions normally carried out by a human resources department, such as issuing paychecks, maintaining records, and administering benefit programs.

Outsourcing--an independent firm with expertise in operating a specific function, such as security, cafeteria food service, or a variety of computer-related jobs (such as developing custom software applications or correcting Year 2000 problems), contracts to take full operational responsibility for performing that function for its clients.

Independent Contractors--a company retains self-employed individuals whose services are engaged on a contract basis to perform specialized tasks generally requiring a high level of independence, judgment, skill, and discretion. Independent contractors are compensated on a contract or fee basis and are free to render services to other organizations.

Using contingent workers can help employers reduce personnel costs, retain flexibility, and remain competitive. However, employers often assume, incorrectly, that they have no legal obligations to temporary, leased, or outsourced workers because they "belong" to the firms that provide them. Also, many employers seem to believe that simply classifying a worker as an independent contractor relieves the employer of any employment or labor law related obligations to the worker.

In fact, as courts and regulatory agencies catch up with the contingent workforce trend, client companies are discovering that they may face sole liability or share joint liability with providers of contingent workers or with independent contractors, depending on two factors: (1) how much supervisory control the client company and/or the provider exercise over the day-to-day activities of the workers, and (2) the specific law under which the issue arises. South Carolina lawyers can help clients anticipate and reduce such liability by becoming familiar with this area of the law and by taking a more proactive role in structuring and managing contingent worker arrangements.

I. Supervisory Control

As explained in Part II below, application of the joint employer doctrine varies somewhat under the different employment and labor laws. The most important factor under almost every statute, however, is supervisory control. Generally, if both the client company and the provider of contingent workers exercise control, both may be considered joint employers.

In the typical temporary and leased employee situation, joint employment is likely to be found because the temporary agency or leasing company recruits, screens, hires, and pays the employee, while the client directs and controls the work, provides the work setting and equipment, and determines the standards of production and performance. Simply classifying workers as employees of a temporary agency, does not dispose of the issue of supervisory control. For example, the U.S. District Court for the Western District of Washington recently ruled that certain Microsoft Corporation workers, who had been classified as employees of temporary agencies that supplied personnel to Microsoft on an as-needed basis, were actually employees of Microsoft and not of the temporary agencies. Microsoft had denied the workers health and retirement benefits and discount stock purchase options reserved for Microsoft employees. The court ruled that the employees were entitled to participate in the benefit plans during the time they were classified as temporary employees. Vizcaino v. Microsoft Corp., No. C93-178D, 1998 U.S. Dist. LEXIS 11282 (W.D. Wash. July 15, 1998). Apparently, the only contact the plaintiffs had with their temporary agencies was to receive paychecks and W-2 forms. Id. at *11.

In contrast, in an outsourcing arrangement the contracting firm normally fulfills all of the roles of an employer, while the client simply receives the services of the contracting firm and its workers. The employer should exercise caution in entering agreements with contracting firms to make sure that the elements of control remain with the contracting firm, so that the employer can avoid liability for employer obligations.

Finally, as long as they are properly classified, independent contractors are their own, sole employers. But classifying workers as independent contractors is not dispositive either. For example, in Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997), cert. denied, 118 S. Ct. 899 (1998), the Ninth Circuit, sitting en banc, affirmed in part a decision allowing some Microsoft employees, whom Microsoft classified as independent contractors, to participate in Microsoft employee benefit plans during the time they were classified as independent contractors. The plaintiffs had worked on the same teams as regular Microsoft employees, shared the same supervisors, performed identical functions, and worked the same core hours. 120 F.3d at 1008.

II. Statutes

In conjunction with determining which party exercises supervisory control over the workers, the courts and regulatory agencies look to the statutes and regulations at issue in deciding how to apportion liability for breaches of employer obligations. Following is a summary of joint liability issues arising under the major statutes impacting the employment relationship.

Discrimination. The U.S. Equal Employment Opportunity Commission (EEOC) has issued an enforcement guidance explaining its position that clients and contingent worker providers may be jointly liable for violating the rights of contingent workers (other than independent contractors) under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act (ADEA), the Equal Pay Act (EPA), or the Americans with Disabilities Act (ADA). Joint liability arises when both businesses have the right to exercise control over the worker's employment. E.E.O.C. Enforcement Guidance No. 915.002, Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms (December 3, 1997). Applying a similar analysis, the U. S. District Court for the Middle District of North Carolina recently held that both a bank and a temporary agency that assigned a temporary loan secretary to the bank were joint employers of the secretary for Title VII purposes. Mullis v. Mechanics & Farmers Bank, 994 F. Supp. 680, 685 (M.D.N.C. 1997). The court went on to deny in part the temporary agency's motion to dismiss the Title VII claim against it. Id. at 686.

The EEOC guidance also states that clients and providers must count contingent workers over whom they exercise control in determining whether the coverage threshold of 15 employees for Title VII and the ADA, or 20 employees for the ADEA, is met. (Counting issues do not arise in EPA claims because that Act generally applies to any employer who has more than one employee.) For example, if an employer has 10 employees and then engages five temps from an agency, the employer will usually be covered under Title VII and the ADA because it is considered to have 15 employees.

Wages and Hours. According to the U.S. Department of Labor (DOL) regulations interpreting the Fair Labor Standards Act (FLSA), if a worker is jointly employed by two or more employers, and the employers are not completely disassociated from one another, all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the [FLSA], including overtime provisions. 29 C.F.R. 791.2(a). In its FLSA regulations, the DOL provides a three-part test for determining whether a worker is jointly employed by two or more employers. 29 C.F.R. 791.2(b). According to the DOL test, joint employment generally will be considered to exist where the employee performs work that simultaneously benefits two or more employers and: (1) the employers arrange to share the worker's services; or (2) one employer is acting in the other employer's (or employers') interests regarding the employee; or (3) the employers are not completely disassociated and share control of the employee because one employer controls, is controlled by, or is under common control with another employer. Id.

The Fourth Circuit has developed a more detailed nine-factor test to determine whether a client company is a joint employer with a contract worker provider in FSLA and Migrant and Seasonal Agricultural Worker Protection Act (AWPA) cases. See Barrientos v. Taylor, 917 F. Supp. 375 (4th Cir. 1996) (finding farm owner and farm labor contractor were joint employers of migrant workers). The terms employ, employee, and employer as they are used in the AWPA are given the same meaning as those terms are defined in the FLSA. 29 CFR 500.20(h).

Family and Medical Leave. The Family and Medical Leave Act (FMLA) generally requires employers with 50 or more employees to provide any eligible employee with up to 12 weeks of unpaid family and medical leave in any 12 month period, while maintaining the employee's health insurance benefits and, in most circumstances, to restore the employee to the same or an equivalent position upon returning from leave. 29 U.S.C. 2612. The DOL has issued regulations specifically addressing joint employment under the FMLA in the contingent worker context. See 29 C.F.R. 825.106. According to the FMLA regulations, two or more employers may be joint employers where each exercises some control over the working conditions of the employee. 825.106(a). The regulations specify that joint employment will ordinarily be found to exist when a temporary or leasing agency supplies employees to a second employer. 825.106(b).

The regulations distinguish between primary employers and secondary employers. In the temporary/leasing employment context, the temporary/leasing firm will most commonly be the primary employer. 825.106(c). Only the primary employer is responsible for giving FMLA notices to eligible temporary or leased employees, approving required leaves, and maintaining health benefits during leaves. 825.106(c). Job restoration is the primary responsibility of the primary employer. 825.106(e). The secondary employer must generally allow a temporary employee returning from FMLA leave to continue working at the client site, even if that means bumping another temporary worker sent to replace the employee on leave. Id.

Client companies will usually have to count temporary and leased employees in determining whether the 50-employee threshold for FMLA coverage is met. 825.106(d).

Occupational Safety and Health. The Occupational Safety and Health Review Commission has taken the position that client companies employing temporary workers are primarily responsible for compliance with the Occupational Safety and Health Act (OSHA). In Manpower Temporary Services, Inc., OSHRC Docket No. 76-980, 5 O.S.H. Cas. (BNA) 1803, 1977 OSAHRC LEXIS 1279, aff'd, 5 O.S.H. Cas. (BNA) 1803, 1977 OSAHRC LEXIS 579, Manpower was cited for workplace hazards that led to the death of a temporary employee assigned by Manpower to a shipping company. The Commission, however, vacated the citations, concluding that it would be unconscionable to impose any liability on Manpower for OSHA violations of the client company that created the hazard and supervised the employee. Id. at *13. The Commission found a client company employing contract workers liable in Loomis Cabinet Co., despite the client company's assertion that it was not the employer of the affected workers. OSHRC Docket No. 88-2012, 15 O.S.H. Cas. (BNA) 1635, 1992 OSAHRC LEXIS 65. According to the Commission, the client company controlled the cited work place and the workers there.

Labor Relations. The National Labor Relations Board (NLRB) considers client companies and contingent worker providers to be joint employers for purposes of the National Labor Relations Act (NLRA) when both entities co-determine essential terms and conditions of employment of contingent workers. For example, in Quantum Resources Corp., 305 N.L.R.B. 759 (1991), the NLRB concluded that Florida Power & Light Company (FP&L) was a joint employer with Quantum of temporary employees provided by Quantum to FP&L. According to the NLRB, FP&L exercised sufficient control to justify joint employer status because it was involved in hiring, firing, promoting, and determining the wages of the temporary employees. Id. at 761.

One practical effect of a joint employer determination is that the client company may be held liable for the provider's unfair labor practices. An additional question that may arise is whether contingent workers should be included in a bargaining unit with regular employees of the client company. Under Greenhoot, Inc., 205 N.L.R.B. 250 (1973), employees of one joint employer may not be placed in the same bargaining unit with workers of another joint employer without the consent of both employers. Id. at 251. At the urging of the AFL-CIO, the NLRB is now considering liberalizing its joint employer status and consent tests in the context of two cases involving temporary employees. Jeffboat Division, 9-UC-406, and M.B. Sturgis, Inc., 14-RC-11572.

On August 27, 1998, the NLRB issued two decisions addressing the application of the NLRB to delivery drivers who signed independent contractor agreements. Roadway Package Systems, Inc., 326 NLRB No. 72 (1998), and Dial-A-Mattress Operating Corp., 326 NLRB No. 75 (1998). In RPS, the Board concluded that the drivers were employees under the Act. The Board found it significant that the drivers did not operate independent businesses, but performed functions that were a central part of RPS' normal operations. The drivers did not need to have any prior training or experience, but received training from the company. The drivers did business in RPS' name, and regularly received assistance and guidance from the company. In Dial, the Board reached a different conclusion, holding that the drivers were independent contractors and not employees under the Act. The Board distinguished RPS because Dial exercised less control over the drivers' manner and means of accomplishing their work.

Employee Benefits. On October 26, 1998 the DOL filed suit against Time Warner, Inc. in the U.S. District Court for the Southern District of New York, alleging that the company denied benefits to eligible full-time workers by incorrectly classifying them as temporary employees or independent contractors. According to the complaint, the workers were common law employees because, among other things, the company controlled their schedules and issued business cards to them. Dept. Of Labor v. Time Warner, Inc., No. 98 CIV 7589 (S.D.N.Y. filed Oct. 26, 1998).

As a general rule, client employers must include most leased employees in their employee headcounts to determine if their benefit plans qualify for favorable tax treatment under the IRC's coverage and non-discrimination tests. Nevertheless, several courts have concluded that nothing in the IRC or the Employee Retirement Income Security Act prevents employers from excluding contingent workers from benefit programs. For example, in Clark v. E.I. DuPont de Nemours & Co., Inc., 105 F.3d 646, 1997 U.S. LEXIS 4432 (4th Cir.), cert. denied, 117 S. Ct. 2425 (1997), the Fourth Circuit ruled that it is not unlawful for an employer to exclude leased employees from participation in its benefit plans.

Employment Taxes. Under the Internal Revenue Code (IRC), the responsibility for paying federal payroll withholding taxes is borne by the entity responsible for paying the worker, usually the contingent worker provider. See General Motors Corp. v. U.S., 1990 U.S. Dist. LEXIS 17986 (E.D. Mich. 1990) (GM not liable for employment taxes owed by firm that provided GM with design engineers; provider firm billed GM for services of workers and then paid wages and benefits of workers); In re Critical Care Support Services, Inc., 138 B.R. 378 (Bankr. E.D.N.Y. 1992) (bankrupt provider of nursing services to hospitals held solely responsible for employment taxes of nurses; provider firm billed hospitals for services and then paid wages and benefits of nurses). But cf. In re Earthmovers, Inc., 199 B.R. 62 (Bankr. M.D. Fla. 1996) (client company that leased employees from leasing firm held employer for purposes of IRC and jointly responsible for employment taxes).

An independent contractor is considered self-employed and must comply with tax rules without the direct involvement of the company using his or her services. 26 U.S.C. 1401, 1402. Employers continually struggle with determining whether some workers should be classified as employees or independent contractors. In 1996 the IRS published its training manual for agents regarding worker classification issues. In the manual, the IRS acknowledged that, in recent years, some of the factors previously considered important in determining worker classification have become less relevant. While the IRS will continue to apply its so-called 20 Factor Test, the ultimate determination rests on whether an employer has the right to direct and control the means and details of the work performed. I.R.S. Training Manual 3320-102 (Rev. 10-96), Independent Contractor or Employee?

Immigration. The Immigration Reform and Control Act (IRCA) requires employers to verify and document employees' legal entitlement to work in the United States. 8 U.S.C. 1324a. The DOL's regulations interpreting IRCA, however, remove most client companies that receive contingent workers from the definition of employer. See 8 C.F.R. 274 a.1(g) (In the case of an independent contractor or contract labor or services, the term employer shall mean the independent contractor or contractor and not the person or entity using the contract labor.). Accordingly, contingent worker providers and independent contractors will usually be solely responsible for IRCA compliance.

III. Practical Tips

South Carolina lawyers can help clients balance the costs savings and flexibility of using contingent workers against the joint liability issues by taking a role in structuring and managing contingent worker arrangements. The following are several recommendations for client companies and provider firms to consider.

  1. Carefully select reputable and solvent contingent worker provider firms. Ask firms under consideration to provide bank references to verify financial stability.
  2. State in a written contract the legal duties assumed by the provider firm. Require provider firms to agree to follow all applicable employment and labor laws. Also, require provider firms to indemnify the employer for the provider firm's violations of employer obligations.
  3. If the employer is considering obtaining an employment practices liability insurance policy, it should make sure the policy defines employee broadly enough to cover temporary, leased, and outsourced workers.
  4. As soon as temporary, leased, or outsourced workers begin an assignment with the employer, the employer should furnish the workers with copies of its equal employment opportunity, sexual harassment, and grievance policies. Treat any complaint of discrimination from such workers like a regular employee's complaint by investigating promptly, and, if necessary, taking corrective action.
  5. Do not make requests of a contingent worker provider that could be interpreted as a request to engage in discriminatory conduct, such as requesting that temporary employees assigned to the company be of a certain gender or national origin, or requesting that an agency remove an outsourced worker from an assignment because he or she has a disability.
  6. Employers that use temporary or leased employees should accurately report all overtime to the temporary or leasing firm and promptly look into any complaints that the temporary or leasing firm is not paying the employees properly.
  7. Make it clear in employee benefit plans whether contingent workers are covered.
  8. Finally, employers should have a written agreement with independent contractors. An agreement by itself is not enough to make a worker an independent contractor, but it will help show government agencies that both the employer and the worker intend to create a client-independent contractor relationship. In addition, employers should be aware that the IRS has determined that independent contractors who receive all their income from one source are probably employees. Rev. Rul. 87-41, 1987-1 C.B. 296. Finally, employers that issue W-2s and 1099s for similar services, or that issue 1099s for work traditionally performed by employees, may be subject to close scrutiny by the IRS.

In conclusion, as the use of contingent workers continues to expand, courts and government agencies are devoting increasing attention to joint liability and other employment or labor law issues. By properly managing and structuring contingent worker arrangements, employers can avoid creating unanticipated obligations toward non-traditional workers.