Hiring Contingent Workers Becomes a Riskier Business

    For years employers have hired non-permanent or "contingent" workers --- or classified workers as independent contractors --- to reduce costly overhead.  The savings from payroll expenses (employment taxes covered permanent W-2 employees, not independent contractors) and employee benefit costs (provided under benefit plans to permanent employees, not independent contractors) became a low-risk cost reduction strategy.

    The popularity of this strategy was evidenced by its rapid spread throughout industry. In 1997, according to the Bureau of Labor Statistics, 1 out of every 10 American workers was a contingent worker. In certain segments (such as high technology), the proportion is far higher.

   Recent legal developments, however, have sent a very different message throughout the business community. The most recent bombshell was launched May 12 from the 9^th Circuit Court of Appeals reviewing the class action case of Vizcaino v. Microsoft. It came decade after IRS auditors had found that Microsoft was intentionally misclassifying its temporary employees as independent contractors. Microsoft’s savings (and those of many other companies across the country who were engaging in what the IRS labeled a rampant practice) came at huge costs --- billions of dolllars in tax revenues -- to the IRS. Microsoft responded by complying with the IRS and reclassifying many of its workers. It  assigned others out to temporary staffing agencies. The result was a satisfied IRS, but very unsatisfied workers, as the company continued to deny them access to its employee benefits plan. Several workers filed a class action lawsuit against Microsoft claiming their rights to equal treatment with the company’s permanent employees including itsbenefits plan (participation in its Employee Stock Purchase Plan was the basis of this ruling )..

      Legally, the Appellate Court’s ruling in favor of the workers simply reversed a lower court’s order that had reduced the size of the lawsuit class (how many workers were eligible to participate as class members). On a practical level the Court’s ruling promises to have a dramatic and potentially staggering financial affect on Microsoft and across American industry. Some industry analysts have estimated Microsoft's costs alone will be $10-20 million.  

    Suddenly and dramatically, employers began asking whether the routine practice of hiring temps to save costs  had become a risky business?   What are a companies' potential risks and exposures for employee misclassification, benefit plan participation (including retroactive benefits) and related liabilities?  

Are We at Risk?: Beyond Microsoft

     Any company that hires or places contingent workers may be at risk  It is important to note that these risks may not be limited to the tax and benefit issues in the Microsoft case. That court applied an important and emerging legal doctrine of "co-employment", which both staffing agencies and their business clients may be held liable for legal claims brought by those workers. In a recent landmark case the First Circuit held several staffing agencies liable under the Fair Labor Standards Act for overtime worked by temporary employees. In holding the agencies liable as "co-employers", the Court rejected the agency’s defenses that the workers were "independent contractors" and that they were not the workers' employers.

Government agencies have enhanced their enforcement efforts. The  Labor Department's high profile suit against Time Warner, Inc. and its subsidiaries filed last fall is illustrative. The DOL charged Time Warner with employee misclassification and denying its employees their rights to participate in the company's benefit plan. It was the first time the agency has taken such agggressive enforcement action on this issue.   The Equal Employment Opportunity Commission (EEOC) recently issued guidance for employers to comply with discrimination laws applied to contingent workers.

The combination of  increased employment liabilty claims (including sexual harassment, discrimination, wage and hour violations), emerging co-employment doctrine, and active government enforcement have  raised the stakes and consequent risks for employers far beyond the tax and benefit issues in Microsoft.

Minimizing Risks

What can you or your client do to minimize or control these emerging new risks? The following questions are designed to provide a starting point:

1. Are employees being properly classified? What is the IRS "20 Common Law Factors" test? What are the standards of other federal (and state) agencies?

2. Who is covered, and specifically not covered, by your employee benefits plan?

3. Are contingent workers covered in your Employee Handbook?

4. Does your company provide training in sexual harassment prevention?

5. Do you know what questions to ask your legal counsel (are you familiar with the rapid changes occurring in contingent employment law?)

6. Where else can you go to find accurate, reliable advice to minimize your potential risks and liabilities?

7. Review your insurance policy. Does it cover the risks of contingent employment, including "co-employment" and other employment liability risks?

These questions illustrate the breadth of  issues that may arise in this controversial field.  Learn more about your (or your client’s) current policies and practices. Do they need revision or correction? All legal issues should be reviewed by appropriate legal counsel.  However, you need to know what questions to ask and where to look for them in order to get the information you need to protect yourself and avoid potentially costly mistakes.

The Risks Are Real, but New

The risks are real, but also relatively new. As a result, there is precious little knowledge even among the "experts" of reducing exposure. Some nationally renowned employment law firms reacted to the decision quickly by advising clients to eliminate any wording in their benefit plan that allows for participation by ‘common law employees’. How advisable this advice is remains to be seen. Some advocate the protective shield provided by such insurance policies as Employment Practices Liability Insurance (EPLI). Protections provided by insurance policies may raise more questions than answers. Many insurance policies have traditionally considered temporary and contract workers to be high risk workers and therefore not covered.

It’s Not Over

       The Microsoft case continues. Microsoft will appeal this ruling. The question of participation in Microsoft’s 401(k) plans has still be to determined. A second class action  by other Microsoft employees is still pending (Hughes v. Microsoft).

     This ruling is the latest salvo in this ongoing case which sparked the "worker status" controversy in our highest courts three years ago. Since that time other Appellate Courts in Circuits across the country have reached different conclusions, in favor of employers and rejecting contingent employees’ claims. However, no other Circuit Court case has gone to the Supreme Court, which denied certiorari (in effect confirming the 9^th Circuit’s holding) two years ago.

   It has raised important questions about the policies of hiring temporary workers as a "cost-saving" measure. As the message that temporary workers may be legally considered your employees even if they are paid by a staffing agency or other outside payroll service penetrates throughout our economy, the impact on contingent employment may be dramatic.

    The stakes of employee misclassification and other employment litigation involving contingent workers has leveled the playing field to the point where "hiring a temp" may no longer be considered a less costly or low risk measure. For those charged with managing and controlling corporate risk, the risk/cost side of the equation has risen dramatically. 

    Risk managers, corporate counsel, CEO’s and human resource directors have received a loud "wake-up call". Their responses, future court decisions and actions by contingent employees may determine the hiring policies and practices and of employers across the country as we manage our contingent workforce in the next millenium.

Full details in the "Contingent Employment Manual"

For Our Special Summer Offer, Click Here!

[Home]