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When are Temps
Employees?
(last updated February 1999)
It is an understatement to say
that employing a person in the State of California is a highly
regulated activity. Many businesses believe that they can
rid themselves of such complications by using leased or temporary
employees from a Professional Employer Organization or a
Temporary Employment agency (collectively referred to as
Staffing Services). Business owners know that such workers
have a formal employment relationship with the Staffing Service.
For this reason, business owners often will assume that they
have no legal relationship of their own with the workers,
and that the Staffing Service will be solely liable for employee
injuries, discrimination claims and wrongful termination.
Unfortunately, such assumptions can result in costly mistakes
for the business. Businesses using such services should be
aware of the risks as well as the benefits and take steps
to protect themselves when deciding to use a Staffing Service.
When Are Workers Employees? Under
many laws, the question of
who is the legal employer will
depend on the economic realities
of the relationship. A court
or enforcement agency will
look at factors such as:
- Who controls and directs
the employee’s day-to-day activities;
- Who is in the best position
to ensure safe working conditions;
- Who interviewed and selected
the employee;
- Who provides the equipment
and tools;
- Where is the work performed;
- How long has the person worked
for you;
- Who determined the employee’s
pay level.
Accordingly, even when workers
are hired and paid by a Staffing Service, they may still
be considered your employees. In other words, if the workers
look, act and sound like your employees, they probably are.
This can be true even if the Staffing Service is claiming
to be the worker’s employer; the court may recognize you
both as joint employers. The Federal Court of Appeals covering
California has issued rulings imposing liability on businesses
for benefits owed to leased workers.
In a recent case, PG&E had thirteen workers who initially
worked at PG&E through various outside staffing firms and
were classified as temporary or leased employees. They were
trained by PG&E, used PG&E equipment, and were provided
with PG&E business cards and letterhead. The staffing agencies,
however, paid them and claimed to be the employer. After several
years, PG&E changed the arrangement, transferring day-to-day
control to the staffing agency, and stopped allowing the workers
to use PG&E business cards and letterhead or otherwise
to hold themselves out as PG&E employees. The employees
were laid off and then sued for unpaid benefits. PG&E argued
that the workers were employees of the staffing agency, and
that the benefits plans excluded leased workers.
The Court of Appeals reviewed
the IRS Code, which defines leased employees as:
- Non-employee workers who
work for you for more than one year;
- Are supplied under an agreement
between you and a Staffing Service, and
- Are under your control.
The Court questioned whether
the PG&E workers were truly “non-employee” workers, based
on consideration of 20 separate factors, including:
- How much control PG&E
had;
- Who provided equipment and
tools;
- Where the work was performed;
- Discretion over hours and
time of work, and
- All the other factors mentioned
above for determining who is the employer.
Under these criteria, many workers
are likely to be judged to be employees, much to the surprise
of the company leasing them. In the PG&E case, it was
sent back to the trial court to determine whether or not
they were employees.
Remember the Microsoft Case? The
court for the PG&E case
is the same court that previously
issued a similar ruling against
Microsoft. In that case, the
IRS had audited Microsoft’s
records and concluded that
many of their independent contractors
were actually employees for
the purpose of withholding
and employment taxes. The misclassified
workers then brought suit to
obtain certain employment benefits
that Microsoft had made available
only to its employees. The
court held that thousands of
workers should collect retroactive
401(k) benefits and stock worth
$133 a share that the employees
were allowed to buy at $5 per
share in 1987!
Precautions You Can Take: As
more companies turn to contingent
workers, concern over claims
of misclassification and imposition
of employer obligations will
grow. Qualified and experienced
legal counsel can protect you
by:
1. Properly Structuring
the Arrangement: A business
using a Staffing Service can
protect itself from unexpected
joint employer liability in
two ways. It can try to avoid
joint employer status by structuring
the staffing arrangement in
such a way that the business
exercises little or no control
over the workers. However,
this option may present operational
difficulties for managers.
Or, the business can accept
the prospect of joint employer
status and include as part
of the staffing agreement a
clear and solid indemnification
provision that apportions liability.
In either event, a good indemnification
agreement is a prudent precaution.
If you are engaging an individual
as an independent contractor,
a written agreement and clear
understanding of the arrangement
is also essential.
2. Use a Quality Staffing
Service: Make sure that
the Staffing Service is solvent
and reputable; ask if they
can provide proof of bonding
or insurance. Obtain written
assurances that the Staffing
Service properly follows all
applicable labor and employment
laws, and explore what that
means to them.
3. Review Your Benefit Plans: If
you are not providing your
own company’s benefits to the
contingent workers, make sure
that your plan documents clearly
state that the plan only includes
workers who are listed on your
payroll as regular employees
and make specific exclusions
to address the contingent worker
issue. In doing so, you should
first consult with legal counsel
to ensure that you are properly
able to exclude certain groups
of workers from any selected
benefit plan.
4. Require a Waiver: Assuming
proper exclusion, you may also
gain protection by having all
contingent workers sign a waiver
of any rights to employee benefits
for the period during which
you had designated them as
contingent workers. |
