Co-employment Raises New Legal Risks in Contingent Workforce Management
Ronald E. Wainrib, Esq.
January 15, 2005
Any company or agency that hires, refers, or manages temporary or contract workers faces the costly legal risks as "co-employer" or "joint employer" of temporary, contract or other contingent workers who sue an employer for violating federal or state statutory or common law. Under some circumstances your company may even be liable under a strict liability standard when you’ve done nothing wrong, but a law suit is filed against another firm with whom you may have a service, vendor or other third party contract.
Discovering your company is a "co-employer" or "joint employer" can be particularly devastating when you consider the person bringing the lawsuit to be someone else’s employee. If you manage your company’s contingent workforce, complex and changing legal requirements are dramatically changing the legal risks and potential liabilities from decisions you make every day. You need to know when these laws affect your company and how to recognize and avoid potentially costly these legal pitfalls.
What is Co-employment?
Co-employment is a legal doctrine which applies when two businesses exert some control over an employee’s work or working conditions. Relationships between temporary staffing agencies and business clients are typical examples and consequently, easy targets for lawsuits initiated by temporary or other contingent workers.
Co-employment liability is incorporated in various Federal (and state) statutes and regulations governing workplace. It has been applied by Courts in various significant Federal (and State) Court decisions.
Federal Laws
Various federal laws and regulations incorporate the co-employment doctrine and provide for co-employment employment liability.
A. Labor and Employment Laws and Regulations
· The Fair Labor Standards Act (FLSA), which governs worker wages, hours, overtime and minimum wage and related matters through regulations issued by the Department of Labor, provides specific protections involving co-employment and joint employment relationships.
· Labor Department regulations offer specific criteria describing when joint employment relations may exist, where: 1) there is an arrangement between the employers to share the employee’s services, 2) one employer is acting in the interest of another employer in elation to the employee, and 3) the employers may be "deemed to share control" of the employee. If a joint employment relationship is identified, both employers can be held liable for violating FLSA’s wage and hour laws. The Labor Department’s Wage and Hour Division states that "employees of a temporary help agency working on assignment in various business establishments are joint employees of both the agency and the business establishment in which they are employed.
· The Family and Medical Leave Act provides for co-employer liability when temporary employees are involved. Temporary and leased employees are counted as employees for FMLA compliance and must be included by employers to determine whether its “head count” of the “total number of employees” reaches the minimum 50 employee threshold required to be governed by FMLA and its regulations (29 CFR 825.106(d)) for FMLA compliance.
· Many lawsuits involving co-employment liability under FMLA focus on whether the employees of the other/“co-employer” are sufficient to reach this 50-employee threshold to mandate FMLA compliance.
· Labor Department regulations (29 CFR 825.106) incorporate joint employment, stating that “two or more companies may be joint employers where each exercises some control over the working conditions of the employee.” (29 CFR 825.106(a)). Under these regulations, joint employment will ordinarily exist when a temporary staffing agency or leasing company supplies employees to its business client/ employer (29 CFR 825.106(b)).
· Under FLMA regulations, temporary staffing agencies are generally designated as “primary” employers and their business clients (employers) as “secondary” employers. Primary employers (agencies) are responsible for approving FMLA leave and giving FMLA notice to eligible temporary employees, and maintaining their health benefits, and restoring the employee to his/her job following the leave under FMLA requirements. As “secondary employer”, the business client is responsible for accepting the employee back after the leave (as long as the company continues to use the services of a temp employee from that staffing agency, the employee’s “primary employer”. This responsibility holds even if this means bumping another temp worker who replaced the employee on FMLA leave.
· FMLA prohibits a “secondary employer”/business client employer that uses temp employees from interfering with the temporary employee’s rights under the FMLA. An employer/business client could be held liable for violating FMLA for such interference under FMLA regulations (29 CFR 825.106; 825.220.).
· Federal laws prohibiting employment discrimination, including the Americans with Disabilities Act (ADA), ADEA (Age Discrimination in Employment Act), Title VII of the Civil Rights Act of 1964 (Title VII), and Equal Pay Act (EPA), through regulations administered by the Equal Employment Opportunity Commission (EEOC), incorporate and apply co-employment liability when contingent workers bring discrimination claims.
· The EEOC issued “Policy Guidance on Contingent Workers” in December 1997 (included in full text in Section V of the Contingent Employment Law Manual). The agency Guidance states that “a staffing firm must hire and make job assignments in a non-discriminatory manner”, and “the (business) client must treat the staffing firm worker (temporary or contract employee) assigned to it in a non-discriminatory manner”.
B. Tax Code (Internal Revenue Code and the IRS) and Employment/Payroll Taxes
· Generally, staffing agencies and leasing firms are responsible for payroll and unemployment taxes when they contract to pay temporary or leased employees directly who perform services for the workplace (business client) employer. The business employer (client) is considered a “recipient organization” under Section 3401(d)(1) of the Internal Revenue Code (I.R.C.). If it does not control the actual payment of wages and taxes, it is not liable for payroll taxes under the Tax Code.
· Contracts/agreements between agencies and business clients should include a provision that makes the staffing agency responsible for payment of all federal, state and local employment taxes, including federal income taxes, FICA and unemployment taxes.
C. Immigration Law (IRCA) applies to employees but not to independent contractors. Employers who hire foreign workers through temporary staffing agencies should obtain written assurance that the agency is complying with all requirements of IRCA and other immigration laws.
D. National Labor Relations Act (NLRA), administered by the National Labor Relations Board (NLRB) and enforced by the Courts, guarantees rights of workers (private sector) to unionize. It covers employees but not independent contractors.
· The NLRB recently made a very significant reversal of its policy on co-employment affecting temporary employees and staffing agencies in the case of H.S. Care LLC, d/b/a/ Oakwood Care Center (November 19, 2004) when it reversed and criticized its own prior landmark decision just four years earlier (M.L. Sturgis case (2000)) and other cases based on its Sturgis decision. This case is discussed later in this article.
E. Occupational Safety and Health Act (OSHA) requires employers at whose business location the contingent/temporary worker is assigned is the first employer that Courts will look to for liability when it comes to workplace-related injuries, since this is likely the employer who created the hazard and supervised the injured worker(s) exposed to the hazard. OSHA’s general policy is less stringent on staffing agencies than other workplace regulatory agencies. Generally, the party in direct control of the workplace and actions of the employees is cited for OSHA safety or health violations. Co-employment liability is more limited under OSHA, as staffing agencies will generally be cited only if necessary to correct a violation, or if the agency knew or should have known of the unsafe or hazardous condition.
· The workplace employer is also generally the first (and only) party that is legally required to comply with OSHA’s record-keeping guidelines. Workplace employers are required to maintain records of illnesses and injuries of temporary workers if the temp employees are subject to the workplace employer’s supervision, which is typically the case.
· Workplace employers must also notify temporary employees under OSHA’s “Hazard Communication Standard”, which requires employers to notify all employees (including temps) of hazardous substances in the workplace.
Case Law
· In a landmark decision in December, 2001, the 1st Circuit Court of Appeals upheld the Labor Department’s policy in the case of Baystate Alternative Staffing v. Herman. The Court ruled in favor of temporary employees seeking overtime pay under the Federal Fair Labor Standards Act (FLSA) after the temporary agency that had placed them refused to pay them time and ½ for hours worked over the 40-hour week. The Court rejected the agency’s arguments that the workers were independent contractors of the staffing agency because they had signed contractor agreements stating that they were independent contractors, and that in any case the business client was the employer, not the staffing agency. The Court held that temporary employment agencies were employers of the people they recruited and placed for work at client businesses and both the staffing agency and its business client were co-employers were the workers’ employers under the FLSA.
Courts Expand Reach of Federal Laws to Cover Non-Employees
Since then, Federal Appeals Courts across the country have expanded, and in some cases limited, how co-employment is defined and applied under FMLA, FLSA and other Federal laws.
Recently, a series of major, landmark Federal Appeals Court cases during the past year have reshaped, stretched and redefined co-employment liability under the various Federal laws described above, with different standards now existing in various federal circuits covering different regions of the country. Each applies as law in its Circuit only, but each is also interpreted by other Appellate and trial (District) Courts nationwide.
1. Co-employment and outsourcing: the new frontier.
In December 2003, the 2nd Circuit greatly expanded co-employment to include outsourcing firms in the landmark case of Zheng v. Liberty Apparel Co. Inc (No. 02-7826, December 30, 2003) The Zheng case established liability for the first time on firm performing outsourced contract labor. The 2nd Circuit changed its test for determining joint employer status when it affirmed employer liability as joint employer under the FLSA in a case involving outsourced contract manufacturing in the garment industry. The Zheng court held that both defendant garment manufacturers and outsourced contract manufacturers were both liable as joint employers under FLSA and NY labor law. It established a six-factor test to determine whether a company is a joint employer of an employee of a subcontractor:
1. Whether the company's premises and equipment are used for the employee's work;
2. Whether the subcontractor has a business that can or does shift as a unit from one putative joint employer to another;
3. The extent to which the employee performs a discrete line-job that is integral to the company's process of production;
4. Whether responsibility under a contract between the subcontractor and the company could pass from one subcontractor to another without material change;
5. The degree to which the company or its agents supervise the employee's work; and
6. Whether the employee works exclusively or predominantly for the company.
The 2nd Circuit noted that its test was designed to ensure that companies do not utilize outsourcing schemes that lack a substantial economic purpose to avoid the FLSA, but should not bring normal contracting arrangements within the realm of the Act.
In light of Zheng, a business seeking to minimize the risk that it is held jointly liable for FLSA violations committed by subcontractors with whom it has entered into outsourcing agreements should consider the following provisions, among possible others, with respect to those agreements:
· Outsourced work should be done off-premises to the greatest extent possible, understanding that in many contexts, such as office or cafeteria services, this is not possible;
· The subcontractor should own and maintain the equipment needed to perform the outsourced services to the greatest extent possible;
· The subcontractor should be a sufficiently large and profitable company in its own right such that it is simultaneously engaged in similar outsourcing relationships with other clients – or, at the very least, has the resources to do so;
· The employees should expressly "belong to" the subcontractor in the outsourcing agreement and move with the subcontractor when the agreement terminates;
· The subcontractor should be responsible for setting work schedules, rates and methods of pay, and disciplining the employees if necessary – ideally through on-site supervisors. "Quality control" should be vested in the subcontractor’s supervisors to the greatest extent possible, although the client retains the right of ensuring contract performance; and
· The outsourcing agreement should conform to any applicable state law requirements. California, for example, has recently enacted legislation containing specific requirements for outsourcing agreements in certain contexts, including the outsourcing of janitorial and security services. Cal. Lab. Code § 2810.
· The subcontractor should have a record of complying with the FLSA and state labor laws in all jurisdictions in which it performs under outsourcing agreements.
The 2nd Circuit remanded Zheng to the lower court for application of the six factors, but did not rule on the merits of the case.
Since Zheng, Appellate Courts across the country have set various criteria for determining co-employment liability. While each decision applies only in the particular Circuit, it also sends a message to other Circuits across the country
·
Co-employment and service providers – head counts for
FMLA coverage and (avoiding) compliance: Moreau v. Air France (9th
Circuit) In March 2004, the 9th Circuit held that Air France was not
liable for its violations of the FMLA because it was not a co-employer with its
ground service companies, and therefore did not have a sufficient number of
“employees” to be governed by the FLMA, which requires 50 employees within 75
miles of the worksite.
· In September 2004, the 11th Circuit in Morrison v. Magic Carpet Aviation, RDV Sports, Inc., Harry Mitchel, Alticor, Inc., f.n.a. Amway Corporation (No. 03-15340, September 8, 2004) established a 3-factor test for determining whether an entity is an individual's "co-employer" under FMLA when it found that the defendants lacked “shared control” of the plaintiff, a pilot employee. The Court found that defendants lacked “shared control” of plaintiff, a pilot employee, basing its opinion on Moreau v. Air France and therefore no joint employment liability when an employer contracts for the services by another party.
· In April 2004, in a labor relations case under the NLRA, the D.C. Court of Appeals affirmed an NLRB ruling (Dunkin' Donuts Mid-Atlantic Distribution Center Inc. v. NLRB, No. 02-1334, April 2, 2004) that a both a leasing firm, Aldworth Co., and Dunkin' Donuts, the company that leased the employees from Aldworth, were joint employers who both violated the NLRA. Aldworth violated the Act when it refused to recognize and bargain with the employees' union, undermined the union's support and prevented a fair election. The Board ordered both companies to: 1) offer reinstatement to employees who were unlawfully discharged; 2) compensate employees for losses; 3) purge their files of employees who suffered illegal discharges or discipline; 4) post remedial notices, and 5) engage in collective bargaining with the union.
· In July 2004, the 2nd Circuit held in Coke v. Long Island Care At Home, Ltd., that home care workers employed by home care agencies or other "third parties" are covered by the overtime and minimum wage provisions of the FLSA and are entitled to overtime pay. The Court determined that the long-standing DOL regulations which applied the "home care exemption" to home heath-care aides employed by third-party companies or agencies, is unenforceable. As a consequence, nursing agencies employing home health aides in those states must provide overtime compensation for hours worked in excess of forty in a work week based on each home care worker's regular rate of pay. The court found no fault with the definition of the companionship exemption, however, it said the regulation was unenforceable when applied to employees of nursing agencies and other third parties.
· NLRB’s Double Reversal on Temporary Workers and Co-employment – November 19, 2004
This landmark decision by the NLRB was discussed earlier. The Board reversed and overturned its own landmark ruling in M.B. Sturgis (2000) in which it held that bargaining units of solely and jointly employed employees are permissible under the NLRA. In its landmark decision in H.S. Care LLC, d/b/a/ Oakwood Care Center in November 19, 2004 the NLRB held that bargaining units of jointly employed employees require parties' consent, and that the NLRA does not authorize the Board to direct elections in units encompassing the employees of more than one employer (joint employers), thus returning to its own prior (to M.B. Sturgis) case law. The Board criticized its own prior (Sturgis) decision as a “loss of direction”, "misguided" statutory interpretation, and a "departure from directives of the NLRA and decades of Board precedence". It described as "anomalous" its own decisions following Sturgis, including Gourmet Award Foods, in which it held that a collective bargaining agreement between an employer and its employees included temporary employees supplied by a temporary staffing agency
Both Sega and Spherion, without admitting liability, agreed to conduct training to prevent future discrimination, and Spherion agreed to update its anti-discrimination policies according to the EEOC's guidelines on contingent workers.
· Finally, in December, 2004, just one month ago, in another landmark FLMA case involving co-employment liability, the 10th Circuit held DOL’s regulation under the FMLA that defines a joint employee's worksite to be invalid when applied to an employee of joint employers (Harbert v. Healthcare Services Group, Inc. (December 13, 2004). As stated earlier, this ruling does not apply to temporary workers placed by outside temp staffing agencies.
Conclusion
If your business uses temporary or leased employees, learn what steps your placement agencies or employee leasing firms are taking to avoid potentially costly employment liability risks, and what additional steps you can take to avoid potential claims by your contingent workers.