by Joel A. Klarreich, APCNY General Counsel
Temporary help services have existed in this country from the time President Calvin Coolidge quipped that America’s business was business. Since the 1920s, temporary help services have expanded their services to accommodate the changing needs of business. In the last two decades, with big businesses getting bigger and small business finding their way into the fastpaced Wall Street world via the internet, temporary help services has grown from 0.6% of the U. S. workforce in 1982 to 2.7% in 1998, by which time it had become a $60 billion industry. By 1999, at least two million people were working as temporary employees. Client firms that utilize temporary help services to fill their work force are under the impression that they are not really employing but rather borrowing employees from staffing firms and are insulated from the liabilities imposed by employment laws pertaining to the temporary workers. Unfortunately, the courts and administrative agencies recognizing these changes in the workforce are, in many cases, finding that there is a joint employer relationship between staffing firms and their clients regarding temporary employees. Fueled by pension plan concerns and the recent Microsoft cases, many employers have viewed “coemployment liability” as the dark side of using temporary workers and many fear that “staffing out” may cause them more liability than benefit. This article will discuss briefly, from various perspectives, an assortment of issues often raised by clients concerning coemployment liability. This article focuses primarily on temporary help services whereby an organization hires its own employees and assigns them to clients to support or supplement the client’s work force in work situations such as employee absences, temporary skill shortages, seasonal workloads, and special assignments and projects. It is important to understand other arrangements encompassing a contingent workforce such as Long Term Staffing, Payrolling, Employee Leasing and Managed Services all vary significantly from temporary help services and may affect coemployment issues.

FLSA and Title VII
Federal courts, perhaps due to the social sensitivity of The Fair Labor Standards Act of 1938 (” FLSA”) and Title VII of the Civil Rights Act (” Title VII”), tend to hold both the staffing and client firms accountable for violations of these acts by imposing coemployment liability using various control theories. Under the FLSA an employer must pay minimum wage currently set at $5.15 an hour and employees must be paid overtime, generally computed at 1.5 times the regular rate in excess of forty hours per week. To curb the broad scope of the FLSA definition of employ and employee, the FLSA applies the factors of the “economic reality” test to
any business in which a temp worker is assigned in order to determine if that firm controls the employee in an employer capacity. The test measures the degree
of control exercised by the employer over the employee, the employee’s opportunity for profit or loss and their investment in the business, the degree of skill and independent initiative required to perform the work, the permanence or duration of the working relationship, and the extent to which the work is an integral part of the employer’s business. Therefore, if a client firm exercises day to day control over the employee as an economic reality even though the staffing firm has the hire/ fire privileges of an employer, they will be considered “joint employers” and coemployment liability will be imposed on both firms for the payment of wages under
the FLSA. Assuming the staffing firm pays the wages, this should pose no risk to the client. Title VII, which is enforced through the Equal Employment Opportunity Commission (” EEOC”), deems it unlawful for an employment agency “to discriminate against, any individual because of their race, color, religion, sex, or national origin.” The remedial purpose of Title VII is so broad that every party to a staffing arrangement may be liable for discriminatory acts directed against a “covered” staffing firm employee. Most states have comparable statutes. As an employer, a client firm under the EEOC must make job requests in a nondiscriminatory
manner and will be liable if it sets discriminatory criteria for the assignment of workers or rejects workers for discriminatory reasons. A staffing firm could also face liability if it honors any client firm’s discriminatory assignment request. In short, a client firm’s liability under Title VII will not diminish by blaming the act of discrimination on the staffing firm’s deployment of a certain type of employee when they were responsible for making the discriminatory request. Even if the cli

ent firm does not qualify as an “employer” under the Title VII definition, the antidiscrimination statutes prohibit interfering with an individual’s employment
with another employer (Aiding and Abetting). For example, a temp employee assigned by a staffing firm to work for a client firm could challenge
discrimination by the client firm either on the basis that the client firm was the joint employer, or, if the control qualifications are not met, that the client firm, by requesting a different employee based on Title VII discriminatory categories, interfered with their employment opportunities with the staffing firm.
In examining liability theories under the FLSA or Title VII, it is important to be mindful that the standards set for client firm liability are no greater against staffing firm employees than for its own permanent employees. Where the combined discriminatory actions of a staffing firm and its client firm result in harm to the worker, both will be jointly and severally liable for back pay, front pay and compensatory damages. Notwithstanding those liability fears, client firms should note that the manner in which civil rights laws have evolved in recent years, rarely could anyone escape accountability when perpetrating any form of discriminatory practice.

Workers’ Compensation The control factors for “joint employer” liability are not solely used as a sword to impose liability upon client firms but are often used as a shield for protection from lawsuits. For example, the workers’ compensation statute provides employees, as their exclusive remedy against their employer, a guaranteed “nofault” compensation payment for medical care and lost wages when injured on the job. Such employees are consequently prohibited from
bringing any further law suits against their employer. Though in most states staffing firms are required to provide workers’ compensation coverage for its employees,
both the staffing firm and client firm may be considered employers for worker’s compensation protection purposes. This dual coverage affords the client firm protection from injured employees who seek to collect their exclusive remedy workers’ compensation from their staffing firm employer and then separately sue the client firm claiming that its not the employer for workers’ compensation purposes. Staffing and client firms protect each other from liability by either being covered under the workers’ compensation policy itself or through indemnification provisions backed by adequate liability insurance coverage in the event of a claim.

Unemployment Insurance and Withholding Taxes

The staffing firm is considered the sole employer for the payment of employment and withholding taxes because the staffing firm controls the payment of wages. In most states the staffing firm is also considered the sole employer for unemployment insurance purposes. The staffing firm must supervise the implementation of these rules even though the client firm may ultimately direct the employee’s duties.

In addition to unemployment insurance and withholding tax responsibilities, because of their hire and fire responsibilities, under the Family and Medical Leave Act of 1993 (” FMLA”) it is the staffing firm, as the primary employer, who must actually comply with the FMLA. Even though for FMLA purposes, staffing firms and client firms are considered “joint employers” and must count the temporary employees to determine if they have the requisite number of employees to be liable under the act, it is the staffing firm that must restore the temp or leased employee to their same or equivalent position upon return from their leave. The client firm’s
responsibility as secondary employer is merely not to interfere with an employee’s attempt to exercise their rights under FMLA and make sure that the temp position is available upon return. However, the client firm does not have to make up or create new jobs for those temps returning from leave.

Bargaining Units
Though the control test has been used in a majority of court rulings to determine client firm liability, a recent decision by the NLRB has changed the standard slightly. Until recently, staffing firm employees could not readily join the client firm bargaining units because, as multiple employers, both the staffing firm and client firm would have to agree on the inclusion of temp employees into the bargaining unit – which was unlikely. Nevertheless, in the Summer of 2000, the NLRB (31) ruled that temps, if they work sidebyside with fulltime employees and share a “community interest”, are considered employees of the client firm and thus may join bargaining units at the client firm to which they are assigned. Most authorities agree that longerterm temporary workers will be most affected by this new ruling because those who stay six months or longer on a job have a much greater incentive and chance of organizing than someone who fills in for a week or two.

Medical Benefits
As a fringe benefit, employers, under the current employment laws of this country, bear no obligation to provide health or medical benefits to their employees or to employees of any staffing firm they contract with.

Pension Plans
Though no federal or state law presently requires employers to provide pension benefits to their employees or to anyone else’s employees, many employers do offer pension and profit sharing plans. Those employers that do elect to create pension and profit sharing plans for employees must comply with certain “quota” requirements which mandate that the employer’s pension plan include a certain percentage of their lower paid workforce in order not to favor higher paid employees over others. According to certain IRS legislation, a control test is applied for determining who is considered an employer for quota compliance purposes. This control test has forced employers to include temporary employees as part of the work force for counting purposes though they do not have to include them in the plan itself. Unlike other broad control tests discussed earlier in this article, there are a number of client firm exceptions. First, a temporary employee who works less than 1500 hours for a client in a twelve month period or performs less than 75% of the number of hours customarily worked by the client’s employees is not covered under the test. Furthermore, if temporary employees who perform more than 1500 hours of service make up less than 5% of the employer’s total lowerpaid workforce then they too are not covered under the test. The narrow applicability of the control test goes even further. Even if employees do meet the hour and workforce percentage standards, to qualify to be included in the workforce, the coverage test looks to who controls and directs the work of the temporary employee notwithstanding who pays wages or withholds taxes. Some relevant factors of control include whether the client firm has the right to direct where, when and how the employee is to perform the services, whether the client firm has the right to direct who performs the services, whether the client firm supervises the person, and whether the employee must perform services in the order or sequences set by the client firm. As a result of this control test, another classification of employees are excluded from the IRS head count beyond those that are excluded because of certain demographics of the client firm. For example, professionals such as attorneys and accountants, who make use of their own judgement and discretion on matters of importance and are guided by professional, legal and industry standards, need not be counted even though the client firm requires their services to be performed on site and in accordance with client firm determined timetables and techniques. Managed services are also usually not included by their definition because, even though they may still be part of the general work force, they are internally directed
by their own supervisors. Clerical staff however, such as secretaries and nurses, in most instances, are counted because of their lack of direction under the
control test. Experience has shown that because of the exceptions for employees who work less than the specified number of hours and the socalled 5% rule, most
client firms should not face pension plan compliance issues when utilizing temporary help services. However should the number of contingent workers working 1500 hours or more exceed 5% of the client’s lower paid work force, these employees need to be counted for coverage tallying purposes only. They need not be included in the plan. In instances where a temp employee is counted under the coverage test, the client firm may receive a “credit” for the benefits already paid by the staffing firm to that leased employee by comparing the benefits provided by both the staffing and client firm so there would not be a double pension allotment for the employee. Separate from the counting rules, concern about granting temporary employees pension benefits really developed in the 1990s following the publicity of the Microsoft case. In a previous article we discussed the case of Vizcaino v. Microsoft and how temporary employees claimed they were employees of Microsoft and therefore entitled to the benefits of a Microsoft employee, including stock options under Microsoft’s plan. The 9 th Circuit ruled those temporary employees to be common law employees who were under the control of the client firm and thus owed benefits. The Microsoft decision however did not represent that temporary workers treated as or held to be employees would be eligible for the same benefits as the permanent employees of the client. Temporary employees would only be entitled to benefit plans if they had the specific requirements necessary to be eligible for that particular plan. In reviewing the lessons of Microsoft, perhaps some clear policies can be established to help clarify a distinction between “staffing out” and coemployment. From Microsoft we recognized that the temporary worker must be clearly established as an employee of the staffing firm with no employeremployee relationship with the client firm. As we have examined throughout this article through notions of control, it is possible for a client firm to be a “joint employer” with the staffing firm and therefore precluded from averting liability imposed by employment laws. Nevertheless, inclusive with the considerations expounded upon in this article, the following are some suggestions of ways that staffing firms and their clients may prevent the possibility of temporary workers being characterized as the clients’ employees for benefit plan purposes.

¨ Relying on the staffing company to hire and recruit flexible employees.
¨ Client firms should provide only jobrelated direction needed in the performance of a specific assigned job.
¨ Staffing firms should maintain the authority to reassign, discipline and terminate the flexible employee.
¨ If training is necessary, other than safety or work site orientation, the staffing firm should provide such training.
¨ Client firm should provide performance feedback of temp employees to the staffing company.

¨ Allow the staffing company to provide the performance feedback to its employees.
¨ Any complaints or concerns about the work site should be handled by the staffing company.
¨ Clients should not have the ability to dictate changes in the temp employee’s terms of employment,including pay rates, raises and benefits.

¨ Payroll checks, as well as expense checks, should be distributed by the staffing company.
¨ Badges, where used, should distinctly identify flexible employees as outside contractors.
¨ Draft employee benefits plans to exclude all nonemployees from eligibility to participate.

While coemployment exists in fact, the fiction is that it has an adverse effect on the client’s scope of liability. While on the one hand, courts and administrative
agencies have begun to create a dark side to temporary help by imposing joint liability staffing and client firms violate certain employment laws, no organization has any greater liability to a staffing firm employee than it would otherwise have for its own employees.

Joel A. Klarreich is a partner at the New York City law firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP, where he chairs the Franchise Department
and CoChairs the Corporate Department. Eric R. Stern, an associate of Tannenbaum Helpern Syracuse & Hirschtritt LLP, assisted with the preparation of this article.

As recently as July 27, 2000, Senator Edward M. Kennedy (DMA) introduced a bill entitled “Employee Benefits Eligibility Act of 2000” which would drastically affect a client firm’s right to exclude temporary employees from its benefit plans by prohibiting the exclusion of “temporary,” “leased,” “agency,” or “contract” workers who (1) are common law employees of the customer, (2) perform substantially the same work as employees covered under the plan, and (3) meet the plan’s minimum service requirement. The bill has been met with some opposition and similar bills have not garnered much support in the past. Experts feel it is unlikely this bill will see action this year.

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