Managers who rely on temporary employees should factor in the growing legal risks of using temps and independent contractors.
Increasingly, courts are looking at the employer's degree of control to decide whether workers are temps or independent contractors, or, in reality, employees. If employers misclassify employees, liability may arise under a host of federal and state employment laws.
Misclassification can be costly. In December 2007, the Internal Revenue Service (IRS) ordered a transportation company to pay $319 million in unpaid employment taxes and penalties after the agency determined that drivers were misclassified as independent contractors. IRS officials are now scrutinizing the misclassification of workers as independent contractors more closely. According to a May 15 New York Law Journal article, the IRS has entered into data-sharing agreements with at least 29 state workforce agencies to share the results of employment tax examinations.
Lawmakers rumble about the misclassification of employees in state capitals and on Capitol Hill. Massachusetts Gov. Deval Patrick, a Democrat, issued an executive order on March 12 to intensify the state's enforcement initiatives against employers who misclassify workers as independent contractors. Employers who violate Massachusetts' independent contractor law now face treble damages for all wage and hour violations.
And on May 21, Rep. Rob Andrews, D-N.J., chair of the U.S. House Education and Labor Committee's Subcommittee on Health, Employment, Labor and Pensions, introduced the Employee Misclassification Prevention Act (H.R. 6111) to clarify that the Fair Labor Standards Act (FLSA) prohibits misclassifying employees as independent contractors.
The misclassification of workers is surfacing in litigation as well, including a troubling federal appeals court decision this year that shows the risk to employers from courts' application of the joint employer test.
Legislators' and judges' increased attention to the misclassification of workers should concern even employers with few workers. Some are discovering in court that employment laws they assumed did not apply to them, including the Family and Medical Leave Act, in fact do.
The term "temporary employment"—also known as "contingent employment"—typically refers to a situation in which an employee is hired with the expectation that he or she will leave employment within a certain period of time, which is often not spelled out in detail. The employee may be either full time or part time, and may be hired through an agency or a company's hiring process. The employee can be under contract or without any written performance parameters. Some companies provide health care benefits to certain contingent workers; others do not.
The wake-up call for employers about the legal risks of temporary employment began in earnest when the 9th U.S. Circuit Court of Appeals decided that "temporary" employees at Microsoft were entitled to the same benefits as full-time employees (Vizcaino v. Microsoft, 173 F.3d 713 (9th Cir. 1999)). The decision resulted in unanticipated and substantial financial liability: The case, initiated in 1992, concluded in 2005 with a distribution of $97 million to 10,000 temporary employees.
In numerous other cases, temporary employees initially hired and designated as independent contractors ultimately have been deemed employees because of the level of control exercised over the workers.
The courts have applied a "totality of the circumstances" analysis to determine whether an employer-employee relationship exists, and have relied on the nonexhaustive list of factors set forth by the U.S. Supreme Court in Nationwide Mut. Ins. Co. v. Darden (503 U.S. 318 (1992)).
These factors include:
- Skill level of the job provided.
- Source of the equipment and tools used by the individual.
- Location where the work was done.
- Duration of the employment relationship.
- Whether the employer is free to assign additional projects to the employee.
- Employee's control of his or her own work schedule.
- Method of payment.
- Employee's role in hiring and paying assistants.
- Whether the work is part of the regular business of the employer.
- Whether the employer is in business.
- How employee benefits are conducted.
- Tax treatment of the employee.
Various other control tests include the IRS's former 20-factor test and current 11-factor test, the "relative nature of the work test" employed in many workers' compensation cases, and the so-called "ABC" test often used in the unemployment benefits context.
Whether the employer actually controls the means and manner of the individual's work proves the most important consideration in all of these tests. More control typically results in a court's determination that an employment relationship exists.
Most employers now recognize that to avoid liability as an unintended statutory employer, they must avoid the type of control that might lead an individual otherwise designated as an independent contractor to be viewed as an employee for purposes of federal employment law. However, even in circumstances where companies share control of a temporary employee's duties, liability may be assessed in certain situations.
For instance, in a 2003 case in New York, a grocery chain and a placement agency were held to be joint employers for payment of minimum wages and overtime under the FLSA to temporary workers who delivered groceries on foot to residents in New York City (Ansoumana v. Gristede's Operating Corp., 255 F. Supp. 2d 197 (S.D.N.Y. 2003)).
Even more troublesome, in a 2002 case, an individual sought employment with a janitorial contractor after being released from federal prison. He was hired by the contractor and assigned to a medical center. When medical center managers found out about the worker's prior incarceration, they refused to let him work there.
The individual sued the hospital under Title VII, and the hospital filed a motion to dismiss, alleging that the individual had no standing to sue.
The court disagreed and let the case go forward on both the Title VII race discrimination claim and a claim that the hospital had tortiously interfered with future employment opportunities. The court extended its analysis beyond the direct employment relationship to create employer liability against a company that merely was in a position to interfere with the plaintiff's future employment relationships (Caston v. Methodist Medical Center of Illinois (215 F. Supp. 2d 1002 (C.D. Ill. 2002)). While the holding in this district court case is limited geographically and may be somewhat anomalous, it is worth noting as an example of the direction these cases have been moving.
Integrated Employer Test
In analyzing whether liability attaches to an entity for claims brought by a temporary employee, courts typically use the "integrated employer" test, where separate but related entities are deemed to be parts of a single employer for purposes of the federal statute at issue, or the "joint employer" test, where two separate, unrelated entities each have sufficient control over an individual worker to create liability for either.
The integrated employer test generally involves four factors in determining whether two entities should be treated as an integrated employer:
- Common management of the two companies.
- Interrelation between the operations of the companies.
- Central operation of labor relations.
- Some degree of common ownership or financial control.
Typically, the integrated employer test is used when determining whether the appropriate employees are aggregated for the numerosity test in applying a federal statute, for instance, 15 employees for purposes of Title VII. While common ownership of two companies, standing alone, is not enough to create an integrated employer, identical officers, boards and principal places of business might be sufficient.
This analysis is seldom successful when applied to a situation involving a temp agency and a client because the two companies rarely share business resources. Typically, there will not be shared management, shared resources or central control of labor relations, even though two entities will maintain a working relationship with the temporary employee.
Joint Employer Test
Increasingly, courts are using the joint employer test to assess liability against companies hiring temporary workers through a staffing agency. These cases usually involve a staffing service and a client that exercise some level of joint control over an individual employee. Unlike the integrated employer, joint employers may be separate and distinct entities with separate owners, boards of directors and managers, but they almost always share certain aspects of the control over the work and working conditions of the temporary employee.
A joint employer relationship can exist:
- When two companies share an employee's services or interchange employees.
- When one company acts directly or indirectly in the interest of the other company in relation to the worker.
- When the two companies may be viewed as sharing control of the employee because one entity controls, is controlled by or is under common control with the other.
The use of a temporary agency can expose the agency and its client to liability under the second prong because the agency can be deemed to be working in its client's interest by managing the staffing needs of that client.
Staffing companies often offer the flexibility companies need. While alternate staffing arrangements have distinct advantages, employers should factor in and take steps to limit their legal risks, particularly as courts scrutinize these arrangements more closely.
The author is an attorney with Ogletree Deakins in Pittsburgh.