Remember Microsoft: The Need for Effective Risk Management as to Contract Employees

By Robert G. Chadwick, Jr., Managing Member, Seltzer Chadwick Soefje & Ladik, PLLC

The number of workers supplied to businesses by staffing agencies has been steadily increasing for some time. According to the American Staffing Association, “[e]very day staffing businesses send three million employees to work in America’s offices, factories, hospitals, warehouses and other worksites –virtually every place that people work, staffing employees are on the job.” The Bureau of Labor Statistics predicts this number will reach four million by 2022.

The reasons for a company to forego regular employees in favor of staffing agency employees include flexibility, time, cost and expertise. For many companies, these benefits offset the mark-up charged by staffing agencies.

As companies have learned over the years, however, a staffing agency arrangement does not necessarily determine who the legal employer of a contract worker is. Depending upon the situation, a contract worker may be legally regarded as an employee of the staffing agency, an employee of the host company, or both. If the host company is the contract worker’s sole or joint employer, it is not necessarily shielded by the staffing agency arrangement from potential liability to the worker under applicable employment laws. Furthermore, if the host company is the worker’s sole or joint employer, it must include the worker when determining whether it employs the requisite number of employees to be subject to certain employment obligations.

One of the more infamous examples of the legal risks faced by companies who use staffing agency employees is Vizcaino v. Microsoft Corp., a federal class action brought in 1992 alleging improper denial of benefits under the software company’s Employee Stock Purchase Plan (“ESPP”). The claimants, however, were not regular employees of Microsoft. Instead, the potential class was made of thousands of workers classified by the company as independent contractors (sometimes called freelancers) or temporary agency employees (also called temps). Protracted litigation resulted in a court opinion that the freelancers and temps were common law employees of Microsoft, which was sufficient to be participants in the company’s ESPP. In 2000, Microsoft agreed to pay $97 million to settle the class action.

In recent years, federal government agencies have raised the legal stakes even further for companies who use procure workers through staffing agencies. On April 29, 2013, the Occupational Safety & Health Administration (“OSHA”) launched the Temporary Worker Initiative as part of “a concerted effort using enforcement, outreach and training to assure that temporary workers are protected from workplace hazards.” According to OSHA News Releases, more than 50 citations addressing temporary workers have been issued by the agency against “host employers” and/or “staffing agencies” since April 29, 2013.

On August 27, 2015, a decision by the National Labor Relations Board (“NLRB”) in Browning-Ferris Indus. Of California, Inc. found its previous joint employer standard had failed to keep pace with “the recent dramatic growth in contingent employment relationships.” The NLRB announced a new standard, which is currently pending review by the D.C. Court of Appeals, which makes it easier to show that client companies are joint employers of workers supplied and paid by staffing agencies. The new standard paves the way for joint collective bargaining responsibility for a client company and staffing agency as to contract workers.

On January 20, 2016, the Wage & Hour Division of the U.S. Department of Labor (“DOL”) released an Administrator’s Interpretation which identifies scenarios under which a business and a staffing agency can share joint responsibility to pay minimum and overtime wages to staffing agency employees. The DOL also published a new Fact Sheet addressing joint employer coverage under the Family & Medical Leave Act.

There are other potential liabilities undertaken by companies with contract employees. As early as 1997, the Equal Employment Opportunity Commission (“EEOC”) published guidance as to the application of federal employment discrimination laws to contingent workers placed by temporary employment agencies and other staffing firms. This guidance was updated by the EEOC in 2000 to address the unique issues presented by the Americans with Disabilities Act.

Even as they enjoy the benefits of staffing agency arrangements, therefore, companies must be mindful to manage the legal risks presented by such arrangements. The terms of the written contract with a staffing agency are certainly a good starting point, but should not be the sole focus, of this risk management process. Even a well-drafted contract cannot insulate a company from (1) responsibilities which cannot legally be delegated or indemnified by contract, (2) non-monetary judgments or decrees, (3) the risk of insolvency of the staffing agency, or (4) the up-front expenses which may need to be incurred to enforce the contract.

The degree of control possessed over contract workers may also be addressed by a company but, again, should not be over-valued as a risk management option. Separate management structures by a host company and staffing agency were insufficient to foreclose a finding of joint employer responsibility in the NLRB’s decision in Browning-Ferris Indus. of California. The “ultimate” right of control as to the workers was found to still lie with Browning-Ferris.

Rather, to be effective, a company’s risk management efforts as to contract workers must be similar to the risk management efforts applicable to its regular employees. Specifically, the company must adopt processes which empower and protect the company through interactions and communications with the workers. For a potential legal claim, these interactions and communications may ultimately be the difference between a finding in favor of the worker and a finding in favor of the company. Similarly, for a union-organizing campaign, these interactions and communications may be the difference between a union victory and a union defeat.

The threat of increased government scrutiny and legal liability may not diminish the growing popularity of staffing agency arrangements. History, however, teaches that blindly reaping the benefits of staff agency arrangements without managing the risks of such arrangements can have dire financial consequences. Remember Microsoft.

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