Michael P. Royal Fisher & Phillips LLP 500 North Akard Street Suite 3550 Dallas, TX (214) mroyal@laborlawyers.com

Transcription

1 Trade Winds of Change: The Perils and Profits Associated with Contingent Workers Michael P. Royal Fisher & Phillips LLP 500 North Akard Street Suite 3550 Dallas, TX (214) ABA EMPLOYMENT RIGHTS & RESPONSIBILITIES COMMITTEE MIDWINTER MEETING March 22-26, 2011

2 TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS Page I. TERMINOLOGY... 2 II. INDEPENDENT CONTRACTORS... 2 A. RISKS AND BENEFITS OF CLASSIFYING WORKERS AS INDEPENDENT CONTRACTORS... 3 B. INDEPENDENT CONTRACTOR TESTS... 3 C. THE IRS TEST Behavioral Control Financial Control Type of Relationship... 6 III. JOINT EMPLOYMENT... 6 A. EMPLOYER STATUS... 6 B. JOINT EMPLOYMENT EQUALS JOINT LIABILITIES... 7 C. THE THREE ZONES OF LIABILITY... 7 D. JOINT EMPLOYER TESTS... 8 IV. FAIR LABOR STANDARDS ACT (FLSA)... 8 A. JOINT EMPLOYMENT... 8 B. JOINT LIABILITIES... 9 V. FAMILY AND MEDICAL LEAVE ACT (FMLA)... 9 A. JOINT EMPLOYMENT B. JOINT LIABILITIES VI. TITLE VII A. JOINT EMPLOYMENT B. JOINT LIABILITIES Joint Liability for Participation Joint Employment is not Necessary for Liability Under Title VII VII. AMERICANS WITH DISABILITIES ACT (ADA) A. JOINT EMPLOYER B. JOINT LIABILITIES Reasonable Accommodation Disability Related Inquiries VIII. NATIONAL LABOR RELATIONS ACT (NLRA) A. JOINT EMPLOYERS B. JOINT EMPLOYER LIABILITIES IX. EMPLOYEE BENEFITS A. LAWS GOVERNING EMPLOYEE BENEFITS ERISA Internal Revenue Code State Laws B. ISSUES RAISED BY INDEPENDENT CONTRACTORS, LEASED EMPLOYEES AND TEMPORARY EMPLOYEES.. 14 C. ISSUES RAISED BY CO-EMPLOYEES X. TAX IMPLICATIONS A. TYPES OF EMPLOYMENT TAXES FICA Taxes FUTA and SUTA Taxes Income Tax Withholding at the Source Other Employment Taxes B. PRIMARY RESPONSIBILITY TO PAY AND REMIT EMPLOYMENT TAXES Self-Employed Independent Contractors TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - i

3 2. Leased Employees and Temporary Employees Individuals Co-Employed with a PEO C. POTENTIAL LIABILITY FOR EMPLOYMENT TAXES THAT ARE NOT PAID AND REMITTED Self-Employed Independent Contractors Leased Employees and Temporary Employees Individuals Co-Employed with a PEO XI. WORKERS COMPENSATION XII. WHO CARES ABOUT PROPER WORKER CLASSIFICATION A. PROPOSED FEDERAL LEGISLATION B. HEIGHTENED ENFORCEMENT OF EXISTING LAWS C. WHAT THIS COULD MEAN TO YOUR BUSINESS EX. 1. EX. 2. EX. 3. BEST PRACTICES FOR CREATING THE INDEPENDENT CONTRACTOR RELATIONSHIP BEST PRACTICES FOR MAINTAINING THE INDEPENDENT CONTRACTOR RELATIONSHIP IRS INDEPENDENT CONTRACTOR TEST TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - ii

4 TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS The term contingent workforce at one time referred to a relatively small group of workers employed in temporary or other transient positions, sometimes through personnel agencies and at other times, directly with employers. The scope of the term, and the size of the workforce working in a contingent capacity, has expanded dramatically. The contingent workforce now includes many non-traditional employment relationships, such as leased labor, temporaries, contractors, functional outsourcing, and human resources specific outsourcing. Rising labor costs have played a significant role in the growth of contingent workforces. Dramatic increases in costs associated with health benefits, worker s compensation insurance, and employment taxes have led to the use of contingent workers for cost savings attributable to economies of scale that a third party labor agency may bring to the table. The effectiveness of such economies of scale have been mixed. The marketplace for benefits and insurance does not always allow true economy of scale savings, sometimes penalizing the use of contingent workers with increased costs rather than cost savings. On the other hand, in the right situation, a partnership between the employer and a contingent workforce provider can lead to significant cost reductions. That being said, in recent times, federal and state governmental agencies have signaled their clear intent to more seriously investigate the misclassification of employees in contingent workforce categories, specifically those who have been classified as independent contractors. State and federal agencies often look at classification decisions very closely because independent contractors are not covered by most employment laws (i.e., because they are not employees ). Additionally, classification of individuals as independent contractors deprives federal and state governments of tax revenue associated with work performed by such individuals, as they are not subject to payroll taxes. For instance, the federal government lost an estimated $34.7 billion in tax revenue between 1996 and 2004 due to the classification of many workers as independent contractors. However, the goal of transferring the legal burdens and risks of employment to third parties is not always successful. Most employment laws now contemplate the multiple employer situations created by companies utilizing contingent workers. In many contingent worker cases, current law is such that the employer may not truly transfer its employment liabilities. But, through the use of contingent workers, the company may gain a partner with which to share potential obligations and liabilities (e.g., an employee leasing agency). In the final analysis, the concept of contingent workforces is here to stay, and the law is rapidly evolving to address the potential liabilities for all parties concerned with such relationships. Virtually every employer of any size either currently has or will have contingent workers of some kind, whether they be independent contractors, leased employees, or some other sort of contingent laborers. With the increased spotlight on enforcement and proposed legislation to crack down on misclassifications, every employer should take note of its obligations and liabilities for contingent workers in order to reduce their exposure. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 1

5 I. TERMINOLOGY There is no universally accepted definition for contingent workforce, however, a handful of concepts have emerged that generally illuminate our understanding. For the most part, the contingent workforce concept can be boiled down to the following basic categories. 1. Independent Contractors: Workers who are self-employed and provide specialized skills on a contract basis with little to no supervision by the hiring company. 2. Temporary Employees: Workers who are provided and assigned by an agency to a specific employer for a limited period of time on a fill-in basis or for a finite project. The key attribute of temporaries is the short-term nature of their position. 3. Leased Employees: Workers who are assigned by an agency to fill positions on a long term basis. These employees generally are not permanent, but their employment is longer term than typical temps. 4. Professional Employer Organization ( PEO ): All or most of an employer s workers are hired by the employer but then co-employed by the PEO, which assumes the employer responsibility for employment taxes, benefit plans, and other human resources related obligations. 5. Human Resources Outsourcing ( HRO ): Human resources functions are assigned to an outside agency. The HRO agency does not assume the role of an employer in this model. When discussing contingent worker relationships, one challenge is selecting terminology that appropriately describes the multiple parties in the relationship. As will be discussed in detail below, a contingent worker often is considered to have two employers: (1) the agency from whom, or through whom, the worker is employed, and (2) the employer who actually uses the personal services or labor of the employee. For purposes of this paper, we will refer to the agency employer as the Staffing Company and the employer actually using the personal work services of the laborer as the Work Site Employer. These terms are gaining popular acceptance in the staffing industry, and often appear in the contracts utilized by staffing companies. II. INDEPENDENT CONTRACTORS In plain terms, an independent contractor is an independent business or person hired to perform a specific service with little to no outside supervision. Of course, the legal definition is more complex, and there are many factors that go into determining whether someone is really working as an independent contractor. Clearly, just calling someone an independent contractor does not make them one and that s so even when the employee has agreed in writing to accept that status. While state laws vary, generally speaking, workers will be found to be employees rather than independent contractors if they are subject to another s right to control the manner and means of performing the work. In contrast, independent contractors are individuals who obtain customers on their own to provide services. They may have other employees working for them, and they are not subject TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 2

6 to close control over the manner by which they perform their services and accomplish the goal for which they have been engaged. A. Risks and Benefits of Classifying Workers as Independent Contractors Before describing the tests that are used to determine independent contractor status, it is important to note the significant risks associated with misclassifying a laborer who is an employee rather than an independent contractor. With respect to acknowledged employees, the employer must comply with federal tax obligations that require withholding and/or payment of wage taxes, mandatory Social Security contributions, and unemployment compensation taxes. These withholding obligations do not extend to independent contractors. Because the employer pays one-half of the Social Security contributions for employees and all of the unemployment compensation tax, classifying a worker as an independent contractor can result in substantial payroll savings (or liabilities in the case of a misclassified contractor). Additionally, independent contractors generally save the employer workers compensation premiums because employers do not have to provide workers compensation coverage for non-employees. However, insurance carriers frequently audit clients for the improper use of independent contractors, and the carrier may assess retroactive premiums and penalties when misclassifications are uncovered. Furthermore, independent contractors are not considered when determining whether an employer has met threshold numbers of employees required for coverage under many employment laws, such as Title VII (15 or more employees) and the Family and Medical Leave Act (50 or more employees). Accordingly, whether a worker is an independent contractor or not may be crucial for determining whether an employer is subject to specific employment statutes. Some disadvantages of using independent contractors include a lack of control because you cannot supervise or monitor their work. The work product may be more inconsistent or of lesser quality than work received from an employee that you closely supervise. Independent contractors will most likely come and go, which can be inconvenient or even disruptive to your business. Your rights to terminate the services of an independent contractor are dictated by the contract with that party. Copyright issues may also come into play when dealing with the work product produced by an independent contractor versus work produced by your employees. Of course, you run the risk of being audited by any number of government agencies who may determine that you have misclassified independent contractors. B. Independent Contractor Tests There is no single test for determining independent contractor status. Rather, the definition varies depending on the legal issue and the agency that may be enforcing applicable laws. For example, differing definitions and tests for independent contractor status may be found in the Internal Revenue Code, state unemployment insurance codes, federal and state wage payment laws, and state workers compensation statutes. The various tests used to determine independent contactor status, while often similar, sometimes give rise to anomalous results where a worker may be deemed an independent contractor under one legal doctrine, but not another. For example, it is possible for a worker to be deemed an independent contractor for state workers compensation purposes, but not an independent contractor for federal tax purposes. Even stranger, a worker may be an independent contractor for federal tax purposes, but not with respect to certain state taxes. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 3

7 However, the various independent contractor tests have a common denominator they are all variations of the common law doctrine of agency. Accordingly, each of these tests focus on which party has the right to control the means and manner of the worker s performance. C. The IRS Test Until recently, the IRS used a 20-Factor Test to determine employee versus independent contractor status. No single factor was determinative in the 20-Factor Test; however, the control-oriented factors were generally given the most weight. The IRS has since streamlined the test by reducing it to the three primary factors that were almost always the most determinative. 1. Behavioral Control Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done so long as the employer has the right to direct and control the work. Behavioral control factors fall into the following categories: Type of instructions given Degree of instruction Evaluation systems Training Types of Instructions Given An employee is generally subject to the business s instructions about when, where, and how to work. All of the following typify instruction considerations: When and where to do the work. What tools or equipment to use. What workers to hire or who is to assist with the work. Where to purchase supplies and services. What work must be performed by any particular individual. What order or sequence to follow when performing the work. Degree of instruction means that the more detailed the instructions, the more apparent control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions may suggest less control, indicating that the worker may be an independent contractor. Note: The amount of instruction obviously varies significantly based upon job content. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance, or instead, has given up that right to the judgment of the contractor. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 4

8 If an evaluation system measures details about how the work is to be performed, this factor suggests an employment relationship. If the evaluation system measures just the end result, then this may suggest an independent contractor situation. If the business provides the worker with training on how to do the job, this indicates the business wants the job done in a particular way. Such circumstances are strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. Independent contractors ordinarily use their own methods to achieve a desired end result. 2. Financial Control Financial control refers to facts that show whether or not the business has the right to control the economic effects of the worker s job performance. The financial control factors fall into the following categories: Significant investment Unreimbursed expenses Opportunity for profit or loss Services available to the market Method of payment An independent contractor often has a significant investment in the equipment that he or she uses when working for someone else. However, in many occupations (such as construction), workers spend thousands of dollars on the tools and equipment yet are still considered to be employees. There are no precise dollar amounts that must be met in order to show a significant dollar investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business. The opportunity to make a profit or incur a loss is another important factor. If the worker has a significant investment in the tools and equipment and the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). The possibility of incurring a loss supports the argument that a worker is an independent contractor. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market. An employee is generally guaranteed a regular wage for an hourly, weekly, or other period of time. Such periodic compensation arrangements usually indicate that the worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 5

9 3. Type of Relationship Type of relationship refers to how the worker and business perceive their relationship. These factors generally touch upon the following considerations: Written contracts Employee benefits Permanency of the relationship Services provided as key or control to the activities of the business Although a contract may state that the worker is an employee or an independent contractor, this is not by itself determinative. The IRS is not required to accept a contract stating that a worker is an independent contractor who is responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor. Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not confer these benefits to independent contractors. However, the lack of such benefits does not necessarily mean the worker is an independent contractor. If you hire a worker with an expectation that the relationship will continue indefinitely rather than for a specific project or time period, this is generally considered evidence of intent to create an employment relationship. If a worker provides services that are key or control to the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney s work as its own and would have the right to control or direct that work. This would indicate an employment rather than a contractor relationship. III. JOINT EMPLOYMENT Moving beyond independent contractors, the majority of contingent worker arrangements involve actual or potential joint or co-employment arrangements. These arrangements, typified by a company hiring a temporary employee through a staffing agency or by leasing an employee for a specified term, potentially lead to the worker having two employers: (1) the Staffing Company whose name appears on the worker s pay check; and (2) the Work Site Employer who utilizes the personal labor of the worker and supervises the worker. When both the Staffing Company and the Work Site Employer have legal obligations as an employer, the dual employer status is commonly called joint employment or coemployment. For ease of discussion, we will use the term joint employment which is the more commonly used of the two terms. A. Employer Status TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 6

10 The Staffing Company, particularly in the case of temporary and leased employees, will generally present itself as an employer, and in most cases will be treated as such. In these situations, the point of the business relationship is to utilize the Staffing Company as the employer. These relationships allow the clients of the Staffing Company to take advantage of the human resources, payroll, benefits, and other personnel administration services offered by the Staffing Company. In most of these arrangements, it is the desire of the Work Site Employer to shift potential employer status (and accompanying liabilities) to the Staffing Company, even if that means giving up certain rights it would otherwise have in terms of workforce supervision and control. In other contingent worker arrangements, such as the PEO model, the Work Site Employer is less desirous of giving up employer rights and status. In the PEO model, the PEO generally becomes an employer of all of the Work Site Employer s employees, not just the transient positions filled by temporary or leased employees. In such cases, the Work Site Employer maintains significant control over the workers and the details associated with hiring, supervision, and termination. Nevertheless, for liability purposes, even in the PEO model, the Work Site Employer is very interested in how the law will view the Work Site Employer in terms of employer liability. B. Joint Employment Equals Joint Liabilities The fundamental challenge associated with joint employer status is determining which employer is liable for compliance with which laws, and ultimately in the context of defending litigation. This generally involves applying a joint employer standard specified by the statute or regulation in question. For example, suppose a temporary employee is harassed by a supervisor that is employed by the Work Site Employer. Who is liable for the harassment? The first step toward answering that question is to determine whether the potentially liable entities are joint employers. If they are, then the liability tests must be applied to both entities. The test for the Work Site Employer may be different than for the Staffing Company, but if they are joint employers, they both have at least potential liability. On the other hand, if they are not joint employers, then it is likely that only one of them will have potential liability, and that will be the entity with employer status. C. The Three Zones of Liability Remember Venn diagrams from your childhood math classes? Joint employer status can be viewed as two overlapping spheres that create three zones of potential liability: (1) the Staffing Company s liability; (2) the Work Site Employer s Liability; and (3) the joint liabilities of the two entities when they are joint employers. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 7

11 Joint Employers: Three Zones of Liability Staffing Company Liability Work Site Employer Liability Joint Liability Due to the tripartite nature of potential liability in the joint employer context, there generally is a two-step process that must be employed to determine who is liable for what. The first step is to determine whether there is joint employer status. If there is no joint employer status, the analysis becomes no different than any other employment case and the sole question is whether the employer, whoever that may be, is responsible for the conduct at issue. On the other hand, if there is joint employer status, then the question becomes determining which of the three liability zones the case falls into: (1) the Work Site Employer zone; (2) the Staffing Company zone; or (3) the joint liability zone. The following sections of this paper address these questions under some of the most frequently litigated employment laws. D. Joint Employer Tests Much like the varying tests used for independent contractor status, there are different tests used for determining whether there exists a joint employment relationship. In general, under the joint employer doctrine, the issue is whether one employer has sufficient control over another company s employees to show that the two companies are acting as one, i.e., a joint employer of those employees. The doctrine recognizes that the business entities involved are in fact separate but that they share or co-determine essential terms and conditions of employment. This doctrine should not be confused with the issue of integrated employment, whereby two employers are so functionally interrelated that they constitute a single employer. IV. FAIR LABOR STANDARDS ACT The Fair Labor Standards Act imposes the federal minimum wage and requires employers to pay their non-exempt workers overtime (time and a half) when they work more than 40 hours in a work week. Employers who violate Fair Labor Standards Act requirements may be liable for a variety of penalties and unpaid wages. A. Joint Employment The FLSA expressly recognizes joint employment. The regulations interpreting the Act provide that [a] single individual may stand in the relation of an employee to two or more TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 8

12 employers at the same time under the Fair Labor Standards Act of C.F.R (a). When determining whether two entities may be joint employers under the FLSA, courts consider the economic realities of the relationship and apply a multi-factor test known as the economic realities test. There is a split amongst federal circuits as to the precise factors to consider. Some federal circuits, such as the Eleventh, apply an eight-factor test, while others, such as the Second, apply a six-factor test. Still others, such as the First and Ninth Circuits, apply a four-factor test. Unfortunately, the various factors considered by each federal circuit do not always overlap. However, for the most part, the various economic realities tests incorporate the traditional common law test for employment with various economic considerations. These economic considerations focus on financial dependency. In other words, courts look to see whether the employee depends upon the alleged employer for his economic livelihood based upon the parties actual working relationship. Whether or not the parties intended to create a joint employment relationship is irrelevant under the FLSA. B. Joint Liabilities If a joint employment relationship is found under the FLSA, then both employers will be responsible for compliance with the Act. For example, if a temporary employment agency supplies an employee to a company that fails to pay proper overtime compensation, both the temporary agency and the company may be liable for the unpaid wages and other amounts owed. Occasionally, a Staffing Company may have someone working for two Work Site Employers, with or without their knowledge. Who pays the overtime compensation when the worker s cumulative hours exceed 40 hours in one week? If a joint employer relationship exists between the Staffing Company and both Work Site Employers, failure by all of the parties to pay overtime will violate the FLSA. The parties might consider stating in their contract(s) that the Staffing Company will be responsible for paying the overtime wages, and in accordance with the contract, should either charge or not charge either Work Site Employer, or charge both on a prorata basis. Also, the Work Site Employer should request that the worker disclose whether or not he or she is working for another client of the Staffing Company so as to avoid unknowing FLSA violations. V. FAMILY AND MEDICAL LEAVE ACT The Family and Medical Leave Act (FMLA) requires that those who employ 50 or more employees provide up to 12 weeks of unpaid, job-protected leave for the employees own serious health condition or to care for specified family members with serious health conditions, as well as for the birth of a child and to care for a newborn child, or because of the placement for adoption or foster care of a child with employees. It also requires employers to maintain the same health care coverage for employees while they are on leave that was provided when they were actively employed. Specifically excluded from the FMLA protection are individuals employed by entities with 50 or fewer employees within 75 miles of their worksite. In the context of co-employment TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 9

13 analysis, this exclusion is critical. Who counts as employees for the purposes of the FMLA? What is the definition of the worksite? Which entity has responsibility under the FMLA? The answers to these questions often turn upon whether the Work Site Employer and Staffing Company constitute joint employers under the FMLA. A. Joint Employment FMLA regulations provide that [a] determination of whether or not a joint employment relationship exists is not determined by the application of any single criterion, but rather the entire relationship is to be viewed in its totality. For example, joint employment will ordinarily be found to exist when a temporary or leasing agency supplies employees to a second employer. 29 C.F.R (b) (emphasis added). However, as previously explained, the economic realities test varies amongst the federal circuits. As such, the test for joint employment under the FMLA may similarly vary. Furthermore, it should be noted that case law on this issue is still early in development, and there are likely to be additional permutations as other federal courts weigh in. B. Joint Liabilities Although the U.S. Department of Labor ( DOL ) regulations apply the theory of coemployment to FMLA eligibility issues, the regulations distinguish between the primary and secondary employers for purposes of FMLA responsibilities. Not surprisingly, the primary employer will be the employer with the primary FMLA responsibilities, e.g., that employer will be responsible for providing the required notice to employees, designating the leave, maintaining health benefits during the period of the leave, and restoring the employee to the same or an equivalent position. 29 C.F.R (c). In determining which entity is the "primary" employer, DOL regulations stipulate the factors to be considered: authority/responsibility to hire and fire, assign/place the employee, make payroll, and provide employment benefits. Id. According to the DOL, in the context of temporary help or leasing agencies the Staffing Company will most likely be the primary employer. See id. VI. TITLE VII Title VII, the omnibus federal anti-discrimination law, is silent on the issue of joint employer liability. However, in 1997, the Equal Employment Opportunity Commission (EEOC) issued an enforcement guidance that addresses application of federal discrimination statutes, including Title VII to contingent workers employed by staffing firms. Arguably, this enforcement guidance applies to PEOs, Temporary Placement Agencies, and Employee Leasing Companies. A. Joint Employment There is no clearly defined standard for determining whether a joint employment relationship exists for purposes of Title VII. Nevertheless, for the purpose of Title VII liability, courts will often treat independent entities as joint employers when they share or co-determine matters that affect essential or core terms and conditions of employment. Usually, the key issues are whether the alleged employer has the right to hire, supervise, and fire employees. However, TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 10

14 as described more fully below, regardless of whether a true joint employment relationship exists, Work Site Employers and Staffing Companies may still be jointly liable for Title VII violations. B. Joint Liabilities 1. Joint Liability for Participation According to the EEOC, Staffing Company and Work Site Employers have EEO duties and obligations to their contingent workers, and they may be jointly liable for harassment and discrimination where the parties are deemed to be co-employers and both participate in such misconduct. In terms of discrimination, a Staffing Company or Work Site Employer is considered to have participated in the discrimination if it honored a discriminatory request from the other party and/or when it knew or should have known of the discrimination and failed to take corrective action. In terms of harassment, case law suggests that a typical defense of remedial action is available to each party on an individual basis. In other words, one employer might successfully defend a harassment claim by demonstrating that it adequately responded to a harassment scenario, while the other employer may still be liable if it failed to take independent and appropriate corrective action. 2. Joint Employment is not Necessary for Liability Under Title VII It is important to note that a joint employment relationship is not always necessary for there to be joint liability under Title VII. EEOC regulations provide that an employer may be responsible for the acts of non-employees with respect to sexual harassment. The EEOC will consider the extent of the employer s workplace control and other legal responsibility which the employer may have with respect to the conduct of non-employees. 29 C.F.R (e). Thus, regardless of whether there exists an actual joint employment relationship, so long as the employer has some significant control over a contingent worker and becomes aware of harassing conduct, appropriate corrective action should be taken immediately lest there be adverse EEOC consequences. A Work Site Employer can also face liability under a third-party interference theory. Title VII not only prohibits an employer from discriminating against its own employees, but it also prohibits employers from interfering with an individual s employment opportunities with other employers. Thus, even where a joint employment relationship does not exist, a Work Site Employer that discriminates against a Staffing Companies employee can be liable on the basis that the Work Site Employer unlawfully interfered with the individual s employment opportunity. The Work Site Employer likely does not qualify as a joint employer of the worker because it didn t have an ongoing relationship with the worker and it did not have the ability to control the manner and means of the worker s performance. Nevertheless, if the Work Site Employer employees at least 15 individuals (the requisite number of employees to be covered under Title VII), the Work Site Employer may nonetheless be liable under Title VII for interfering with the worker s employment opportunities with the staffing firm. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 11

15 VII. AMERICANS WITH DISABILITIES ACT In 2000, the EEOC released additional guidance on American with Disabilities Act (ADA) issues affecting contingent workforces. This enforcement guidance reiterated that there is potential joint liability where either the Work Site Employer or the Staffing Company facilitates discriminatory practices of the other in violation of the federal law. A. Joint Employer Under the ADA, the standard for showing a joint employment relationship is the same as under Title VII. That is, a Work Site Employer and a Staffing Company will generally be considered joint employers where both entities have the ability to control the matters that affect the essential terms and conditions of employment. B. Joint Liabilities 1. Reasonable Accommodation The EEOC guidance on contingent workforce ADA concerns also states that both the Work Site Employers and Staffing Companies are obligated to provide reasonable accommodations absent undue hardships. If neither the Staffing Company nor the Work Site Employer has the financial resources to accommodate, they will both be excused from the obligation. Conversely, if both of the parties are able to provide a reasonable accommodation, they each have an independent obligation to do so. In this situation, if one of the parties refuses to financially participate, the other must still provide the accommodation, even where the non-participating party may be in breach of a contract between the parties by not participating. The EEOC acknowledges that some temporary jobs only last for a brief period of time, and therefore, an undue hardship may exist if providing a disabled worker with an accommodation would prevent the timely completion of an assignment. 2. Disability Related Inquiries The ADA includes rules that govern when an employer may ask disability-related questions, or require medical examinations of applicants or employees. Prior to an offer of employment, an employer may ask about an applicant s ability to perform specific job functions, but it may not ask any other disability-related questions. However, after an offer of employment has been made, an employer may generally ask disability-related questions or require medical exams so long as the inquiries are job-related and consistent with business necessity. In the context of temporary employees, when is an offer of employment deemed made? According to the EEOC guidance, an offer of employment is not extended until a temporary employee is actually given an assignment with a particular client. This means that a Staffing Company cannot ask specific questions about an employee s limitations until after that employee is placed with the Work Site Employer. This is problematic because temporary assignments often arise with little notice. However, the EEOC does acknowledge that in circumstances where the Work Site Employer requires a medical examination, the offer may be revoked if the results of the medical exam are not available prior to the start of the assignment. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 12

16 VIII. NATIONAL LABOR RELATIONS ACT The National Labor Relations Act (NLRA) guarantees the right of employees to engage in union-related activity. Under the NLRA, employees have the right to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other group protection. The Act applies to all employers and employees whose activities affect interstate commerce. A. Joint Employers Under the NLRA, a Work Site Employer and a Staffing Company will constitute joint employers if both entities share or codetermine those matters governing the essential terms and conditions of employment. In other words, the alleged employer must be able to meaningfully affect such matters as hiring, firing, discipline, direction and supervision of employees. B. Joint Employer Liabilities If a joint employment relationship exists under the NLRA, both entities may be vicariously liable for the unfair labor practices that are committed by either within the scope of the joint employer relationship. Specifically, the National Labor Relations Board ( NLRB ) has stated that it will find joint liability for unlawful labor practices where (1) the non-acting employer knew or should have known that the other employer acted against an employee in violation of the Act, and (2) the non-acting employer acquiesced in the unlawful action by failing to protest it or to exercise any contractual right it might posses to resist the unlawful action. Aside from joint liability for unfair labor practice, when a joint employment relationship exists, the major issue is whether employees who are jointly employed may join bargaining units with other regular employees. There is case law holding that contingent workers cannot join a bargaining unit with regularly employed workers, without first obtaining the consent of both the Work Site Employer and the Staffing Company. IX. EMPLOYEE BENEFITS Generally, an employee benefit plan may cover only the employees of the entity who sponsors the plan and certain closely-related entities. Accordingly, a Work Site Employer s employee benefit plans generally may not cover independent contractors, leased employees and temporary employees who provide services to the Work Site Employer. If a Work Site Employer co-employs individuals with a PEO, generally, the co-employees may be covered under both the Work Site Employer s employee benefit plans and the PEO s employee benefit plans. A. Laws Governing Employee Benefits Before discussing employee benefits issues that may arise within a contingent workforce, it is useful to consider the laws that govern employee benefits. Below is an overview of the three main laws that affect employee benefit plans. 1. ERISA TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 13

17 The Employee Retirement Income Security Act of 1974, as amended ( ERISA ), is the primary federal law that governs employee benefit plans. ERISA does not require employers to establish any particular employee benefit plan. However, if an employer chooses to establish an ERISA-covered employee benefit plan, it must comply with ERISA in the establishment and operation of the plan. With few exceptions (as discussed below), any state law that otherwise would apply to an employee benefit plan covered by ERISA is preempted by ERISA, which means the state law will have no effect on the plan. Included within ERISA are other wellknown federal laws that affect employee benefit plans, such as COBRA and HIPAA. 2. Internal Revenue Code The Internal Revenue Code of 1986, as amended (the IRC ), is the other most significant federal law that affects employee benefit plans primarily tax-qualified retirement plans like pension, profit sharing and 401(k) plans. Like ERISA, the IRC does not require employers to establish any particular employee benefit plan. However, if an employer chooses to establish an employee benefit plan that is covered by the IRC, it must comply with the IRC in the establishment and operation of the plan. 3. State Laws As discussed above, with few exceptions, state law that otherwise would apply to employee benefit plans covered by ERISA are preempted by ERISA, which means that the state law will have no effect on the plan. State insurance laws are the primary exception to this rule. If an employer sponsors an insured group health plan, both ERISA and applicable state insurance laws will govern the plan. In order to avoid state insurance law mandates (for example, a law that requires all group health insurance policies to cover a particular medical procedure), some employers choose to self-insure their group health plans, which means that they pay claims directly (usually through a third-party claims administrator and oftentimes with stop-loss insurance coverage for extraordinarily large claims), rather than paying premiums to an insurance company. Some traditional employee benefits, such as paid time off (e.g., vacation, sick leave, etc.) and severance programs, are generally not covered by ERISA, in which case all state laws are generally applicable. B. Issues Raised by Independent Contractors, Leased Employees and Temporary Employees As discussed previously, a Work Site Employer s employee benefit plans generally do not cover independent contractors, leased employees and temporary employees who provide services to the Work Site Employer. Accordingly, most employee benefit plans are structured to exclude these individuals from eligibility to participate. The primary issues raised by this structure are the need for appropriate plan eligibility language and the risks of misclassification. C. Issues Raised by Co-Employees Oftentimes, ability to access employee benefit plans sponsored by a PEO is a major factor in an employer s decision to co-employ its employees with a PEO. Depending upon the circumstances, the use of a PEO can create unique employee benefits issues. If a Work Site Employer does not sponsor its own employee benefit plans, but rather, its employees participate TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 14

18 only in benefit plans sponsored by the co-employing PEO, many of the employee benefits issues relate to the initiation and termination of the PEO relationship. X. TAX IMPLICATIONS The use of contingent workforce employees may implicate important tax considerations. The primary tax issues associated with contingent workforce employees relate to who is primarily responsible for paying and remitting employment taxes, and who may be held liable in the event such taxes are not paid and remitted. A. Types of Employment Taxes Before discussing employment tax issues raised by contingent workforces, it is useful to enumerate the various taxes with which we are concerned: 1. FICA Taxes FICA (what is generally known as Social Security tax), includes Social Security Old Age, Survivor and Disability Insurance taxes ( Social Security Taxes ) and Medicare Hospital Insurance taxes ( Medicare Taxes ). Social Security Taxes are 6.2% of wages, up to a particular annual wage base that is adjusted each year for inflation ($90,000 for 2005), and Medicare Taxes are 1.45% of all wages. These amounts are paid both by the employer (i.e., out of its own pocket and not withheld from the employee s wages) and by the employee (i.e., withheld from wages and remitted by the employer). Self-employed independent contractors in effect end up paying both the employer and employee portions of these taxes in the form of so called SECA taxes. 2. FUTA and SUTA Taxes FUTA and SUTA are generally known as unemployment taxes. FUTA taxes are paid to the federal government and SUTA taxes are paid to the state government. The amount of these taxes varies, depending upon the state and several other factors, including an employer s unemployment experience. These taxes are paid by the employer only, and no amounts are withheld from the employees wages. 3. Income Tax Withholding at the Source Federal and state income taxes must be withheld by employers and remitted to appropriate governmental agencies for all taxable wages paid. The amount of these taxes varies, depending upon the state and several other factors, including the amount of taxable wages paid to an employee, and his or her entitlement to certain withholding exemptions. 4. Other Employment Taxes Some states, such as California, have state-sponsored disability insurance programs that may impose other employment tax obligations on both employers and employees. The existence and amount of these taxes varies state-by-state. TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 15

19 B. Primary Responsibility to Pay and Remit Employment Taxes 1. Self-Employed Independent Contractors Self-employed independent contractors are responsible for paying and remitting their own employment taxes. Accordingly, if an employer receives the services of a self-employed independent contractor, it may pay the gross amount for such services and generally will report such payment on an IRS Form Leased Employees and Temporary Employees The Staffing Company is responsible for paying and remitting employment taxes for leased employees and temporary employees. Accordingly, if an employer receives the services of leased employees or temporary employees, it may pay the gross amount for such services to the Staffing Company, which also will be responsible for reporting the leased employees or temporary employees wages on IRS Form W Individuals Co-Employed with a PEO The primary responsibility for paying and remitting employment taxes for individuals coemployed by a PEO can be with either the Work Site Employer or the PEO, depending upon the circumstances. However, in most circumstances, the PEO is primarily responsible, in which case the Work Site Employer may pay a gross amount of wages to the PEO, which also will be responsible for reporting the employees wages on IRS Form W-2. C. Potential Liability for Employment Taxes that are not Paid and Remitted 1. Self-Employed Independent Contractors If a purported self-employed independent contractor fails to remit his or her own employment taxes, the employer who received his or her services may be liable for such (plus penalties and interest) if the individual should have been classified as an employee of the employer, but instead was misclassified as an independent contractor. This is one of the major risks associated with misclassifying an individual as an independent contractor when he or she really is an employee. 2. Leased Employees and Temporary Employees In most cases, a Work Site Employer cannot be held liable for paying the employment taxes of leased or temporary employees if the Staffing Company fails to pay and remit such taxes. However, if a Work Site Employer can be found to have been in control of the employees wages (which is generally not the case for leased and temporary employees), or if the Work Site Employer knows that the Staffing Company is not paying and remitting the employment taxes but nonetheless continues to do business with the Staffing Company, the IRS and/or state revenue agencies may attempt to seek payment from the Work Site Employer, and there may be liability. 3. Individuals Co-Employed with a PEO TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 16

20 In most cases, a Work Site Employer cannot be held liable for paying employment taxes for individuals that are co-employed with a PEO if the PEO fails to pay and remit such taxes. However, if a Work Site Employer can be found to have been in control of the employees wages (which is generally not the case in PEO relationships, but may be more likely with leased and temporary employees), or if the Work Site Employer knows that the PEO is not paying and remitting the employment taxes, but nonetheless continues to do business with the PEO, the IRS and/or state revenue agencies may attempt to seek payment from the Work Site Employer, and there may be liability. XI. WORKERS COMPENSATION The theory of joint employment traces its roots to the common law borrowed servant doctrine. In terms of workers compensation, rather than applying the more modern joint employer test(s), most states continue to apply the borrowed servant doctrine to contingent workforce arrangements. In a borrowed servant arrangement, employers loan the services of their workers to unrelated employers, who borrow their services. The loaning employer is referred to as the general employer and the borrowing employee is referred to as the special employer. In the workers compensation context, where a worker is injured while in service of the special employer, the worker may generally collect workers compensation benefits from the general employer s insurance. However, due to the exclusive nature of the workers compensation remedy, he usually cannot sue the general employer in tort. To what extent may the worker sue the special employer in tort? Is the special employer protected by the exclusive remedy as well? The answer typically depends on the details of the relationship between the worker and the special employer, and of course, on the law of the particular jurisdiction in which the injury occurs. XII. WHO CARES ABOUT PROPER WORKER CLASSIFICATION. A. Proposed Federal Legislation. Last year, the Fair Playing Field Act of 2010 was introduced in both the Senate and House of Representatives. The proposed legislation would close what the sponsors of the legislation, Sen. John Kerry (D-Mass.) and Rep. Jim McDermott (D-Wash.), refer to as a tax loophole allowing businesses to misclassify workers as independent contractors. The Fair Playing Field Act seeks to close Section 530 of the Revenue Act of 1978, which currently affords businesses a safe harbor to treat workers as independent contractors for employment tax purposes if the company has a reasonable basis for such treatment and has consistently treated such workers as independent contractors by reporting their compensation on Form 1099s. The Act would require that businesses who regularly use independent contractors provide them with a written statement informing them of their federal tax obligations. Additionally, the Act would eliminate the reduced penalty provisions of the tax code for failure to withhold income taxes and the employee s share of FICA taxes in situations where the company did not have a reasonable basis for treating a worker as an independent contractor. Another bill, the Employee Misclassification Prevention Act, proposed in Congress in April 2010, was the subject of hearings by the Senate Committee on Health, Education, Labor and Pensions in June. The Employee Misclassification Prevention Act would amend the Fair TRADE WINDS OF CHANGE: THE PERILS AND PROFITS ASSOCIATED WITH CONTINGENT WORKERS - 17