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Column Corner: Employment Law -- Affirmative Action and Temps - CWS 30 January 2.2

Contingent Workforce Strategies 30

By Eric H. Rumbaugh and Charmaine Butler

Does your business have an affirmative action plan (AAP)? Is it required to have an AAP? Is it permitted to have an AAP? If your business has an affirmative action duty, what does that entail and what does it mean for your contingent workforce? These have been difficult questions over the years, and the grey answers have, in many cases, resulted in litigation and several generations of rulings from the courts.

This year, many employers that did not previously have affirmative action duties may now face audits or record-keeping requirements, as the American Recovery and Reinvestment Act (ARRA) includes AAP requirements. If a business is required to have an AAP, any systematic problem in classifying contingent workers can have very significant consequences -- consequences that can ripple out in several directions.

Employers should consider three important questions:

  • Am I required to have an AAP?
  • What other requirements do I have?
  • How do I classify a contingent workforce?

What is an Affirmative Action Plan?
Depending on the circumstance, affirmative action can mean hiring or promoting people because of their membership in a protected class, but in the great majority of cases this is actually not true. Most affirmative action duties entail "counting" the workforce to see if there are any imbalances vis-a-vis the applicable census data, then taking steps to identify and remove any barriers to the hiring and advancement of any groups that appear to be disadvantaged. The fact that this is easier said than done has led to a lot of writing and litigation.

There are four main ways that employers can have affirmative action duties:

Court Order. An employer can be required to engage in affirmative action pursuant to a court order, usually as a remedy for past discrimination. Court orders can take many forms, and can include specific numerical hiring requirements.

Industry requirement. An employer can participate in an industry or project in which the federal government, or a state or local government, has required affirmative action, or has set aside contracts or jobs for particular minority groups. This usually follows a finding that the industry historically has excluded particular groups.

Voluntary action. An employer can engage in private, voluntary affirmative action if it determines that its own workforce has a conspicuous imbalance in traditionally segregated job categories. There are limitations on private, voluntary affirmative action. Most notably, such a plan cannot serve as an absolute bar to hiring non-minorities; and such a plan must end when a balanced workforce has been achieved -- it cannot continue, or come back to life, if the workforce falls out of balance again.

Government contract. An employer can have a contract or sub-contract with the federal government, or with a state or local government. The federal government, and many state and local governments, require contractors and sub-contractors to engage in affirmative action, and to maintain a formal affirmative action plan. An AAP can be a highly technical, detailed document.

Federal affirmative action duties for government contractors and subcontractors arise chiefly out of Executive Order 11246 (a presidential executive order), which requires federal government contractors and subcontractors to take various actions as a condition of holding government contracts or subcontracts.

The Office of Federal Contract Compliance Programs (OFCCP) is the government agency that has principal responsibility for enforcing federal affirmative action. Many states, counties, municipalities and other government agencies also have affirmative action rules and agencies that enforce those rules. (Other federal laws that require contractors to have an AAP are the Rehabilitation Act, and the Vietnam Era Veterans' Readjustment Assistance Act.) The remainder of this article deals with OFCCP affirmative action duties arising under Executive Order 11246.

Employers and AAP

It is essential that employers determine whether or not they are covered by the OFCCP regulations and are required to have an AAP. If an employer is required to have an AAP, but does not have one, possible consequences include being barred from holding federal government contracts or sub-contracts (debarment). For many employers, this could effectively constitute a "death penalty."

Employers with contracts or subcontracts with the federal government are required to prepare an AAP within 120 days of the commencement of the contract, which is enforced by the OFCCP. An AAP sets standards for the recruiting, hiring and promotion of women and minorities in order to eliminate the present effects of past employment discrimination. The requirements for an AAP apply to contractors or subcontractors with annual federal contracts totaling $50,000 or more and at least 50 employees, as well as some entities that have "government bills of lading," depositories of "government funds," and issuers and paying agents for savings bonds and savings notes.

One of the least clear areas in OFCCP's jurisdiction is what constitutes a "subcontract." The federal regulations define a subcontract as a contract to perform services "necessary" to the performance of a government contract. Case law interpreting whether a particular contract is really "necessary" to the performance of a government contract is limited, sometimes conflicting, and often unhelpful in guiding business decisions. Entities that do business with government contractors -- entities that might be considered subcontractors -- should consult counsel to help make this important determination.

This determination may be especially difficult in the case of contracts to supply contingent labor. In many cases, suppliers of contingent labor will not be covered sub-contractors simply because they supply contingent labor to a government contractor. Depending on the services supplied, however, and depending on the government contract at issue, some contingent labor supply contracts might constitute sub-contracts. Again, these determinations generally require case-specific analysis.

Employers that benefit from American Recovery and Reinvestment Act (ARRA) money must also have an AAP. This encompasses a large group of employers that were not previously subject to the OFCCP. Furthermore, OFCCP jurisdiction was previously triggered only by federal contracts and subcontracts, but now receiving federal grants and financial assistance may subject an employer to OFCCP jurisdiction.

Dealing with Contingents

When an employer is obligated to create an AAP, it will likely face the issue of how to deal with its contingent workforce, including independent contractors and temporary employees. For purposes of an AAP, the OFCCP defines "employee" as "any individual on the payroll of an employer who is an employee for purposes of the employer's withholding of Social Security withholding." The term does not include persons who are hired on a causal basis for a specified time, or for the duration of a specified job. In most cases, it is the contingent labor suppliers that withhold Social Security taxes, and so the supplier will count the contingent worker in its AAP (if the supplier is required to maintain an AAP). In most cases, non-compliance by a contingent labor supplier will not affect a government contractor. If the supplier is found to be a subcontractor, however, the result could be different.

Perhaps the greatest source of risk arises from the classification of independent contractors. The use of independent contractors has increased significantly in the last several years as employers strive to reduce costs and keep their workforces flexible, and as more and more of the modern workforce wants the flexibility of independent contractor status. It is often difficult, however, to determine whether an individual should be classified as an employee or an independent contractor.

Legal misclassification of an independent contractor can lead to serious and expensive problems, especially in the case of an OFCCP audit. Additionally, workers misclassified as independent contractors will often present wage and hour and employee benefit liability issues. Businesses classifying some of their workforce as independent contractors should consult with counsel to assess their level of classification compliance.

For affirmative action purposes, independent contractor classification is absolutely critical. An AAP measures the actual workforce against the available workforce and calculates shortfalls. If a business leaves independent contractors out of its calculation as "employees," it will (necessarily) leave those individuals out of its AAP. Additionally, businesses maintaining AAPs are required to document their recruitment efforts, and keep records regarding applicants for positions they fill. If a business classifies an individual as an independent contractor, it is unlikely to document its recruitment efforts in a manner anything like the manner required for AAP documentation.

Certainly, the business is unlikely to attempt to discern the availability of women and minorities for independent contractor positions, or take any steps to make sure that its applicant pool includes women and minorities. Lastly, businesses classifying workers as independent contractors are very unlikely to maintain documentation of their recruitment efforts in, as would be required for employment positions covered by an AAP. Accordingly, in addition to all of the other problems presented by independent contractor misclassification, if a business has a significant number of employees misclassified as independent contractors, it will necessarily have significant gaps and errors in its AAP. This can lead to significant problems in the event of an audit, and possibly significant consequences. Getting independent contractor classifications "right" is critical for federal government contractors and subcontractors.

A further complication for government contractors/subcontractors using contingent labor relates to immigration control and the E-Verify system. If a business has incorrectly classified a worker as an "independent contractor," the business almost certainly will not be in compliance with its immigration control duties. In addition to the other liabilities faced by government contractors, independent contractor misclassification presents the additional risk of sanctions -- including possible debarment -- for immigration violations.

The threshold issue when classifying employees/independent contractors is to consider whether the employer controls how the work will be performed or simply oversees the result. For purposes of Affirmative Action, two legal tests are used: The Common Law "Right to Control" Test and The Economic Reality Test.

Right to control. The common law "right to control" test is used to determine employee status in various types of cases and focuses on the following 10 factors:

  1. the extent of control which, by agreement, the hiring party may exercise over the hired party;
  2. whether the hired party is engaged in a distinct occupation or business that is usually done by a specialist without supervision;
  3. how the worker's helpers are hired and whether they are paid by the hiring party or the worker;
  4. the skill required in the particular occupation;
  5. who supplies the means, tools, and place of work;
  6. the length of time for which the person is hired;
  7. the method of payment, whether by time or the job;
  8. whether the work is part of the regular business of the hiring party;
  9. whether the parties believe they are creating an employment relationship; and
  10. whether the hired party is an actual business entity.

Economic reality. Along with the "Right to Control" Test, employers should also consider the Economic Reality Test. This test focuses on six considerations:

  1. the degree of control exercised by the employer over the worker;
  2. the worker's opportunity for profit or loss depending upon managerial skills;
  3. the alleged worker's investment in equipment or material required for the tasks or the employment of helpers;
  4. whether the service rendered requires special skills;
  5. the degree of permanence of the working relationship; and
  6. the extent to which the work is an integral part of the employer's business.

If an individual is an independent contractor and not an employee, then that individual should not be included in the employer's AAP or any other OFCCP reporting or tracking requirements. If the individual is an employee, and not an independent contractor under these tests, then the employer must count the individual in their AAP, as well as other reporting and tracking.

Employers must also consider whether a temporary or staffing employee should be included in the employer's AAP. A temporary employee may be an individual who is employed by a temporary employment agency and placed in a temporary job at another company's work site. Generally, temporary employees need not be included in an AAP. Instead, that individual would be counted in the temporary employment agency's AAP, should the agency be required to have an AAP. Generally, employers will make it a goal in their AAP to use temporary staffing agencies that have their own equal opportunity and affirmative action policies to the extent possible.

Employers must be aware of their OFFCP obligations, including their obligation to have a written AAP, in order to avoid time-consuming, expensive surprises. Once an employer has determined whether or not they need an AAP, they must also consider any other possible requirements that come with state or federal contracts or financial assistance. In addition, employers must carefully consider the classification of employees in terms of their contingent workforce to avoid miscategorizing an employee.

Affirmative Action Criticisms

Critics have sometimes alleged that Executive Order 11246 (and the OFCCP rules enforcing it) require de facto quotas, and require employers to hire minorities or women in certain numbers. OFCCP has consistently denied this, and has argued that the Executive Order does not authorize or permit preferences. In testimony to Congress, Shirley J. Wilcher, deputy assistant secretary for federal contract compliance, employment standards administration, U.S. Department of Labor, posed the following question and provided the following Answer:

Q. Does affirmative action under Executive Order 11246 require employers to hire or promote women or minorities on the basis of race or sex?

A. Absolutely not. No requirement exists that any specific position be filled by a person of a particular race, gender or ethnicity, even where the phenomena of jobs traditionally segregated by race or sex, remain intact. Instead, the requirement is to engage in outreach and other efforts to broaden the pool of qualified candidates to include groups previously excluded. The selection decision -- to hire, promote or lay off -- is to be made on a non-discriminatory basis.

The OFCCP rules require employers to find and eliminate barriers to the recruitment, hiring and promotion of women and minorities. Employers also are required to engage in outreach efforts to ensure that their applicant pools contain minorities and women. Employers are also required to determine the availability of women and minorities for jobs, and set goals for hiring women and minorities to have the workforce match the ratios of those available.

Availability is usually determined by looking at census data showing the percentage (by race and gender) of individuals in particular metropolitan areas holding particular jobs. Critics have alleged that these goals are really "stealth quotas." Wilcher denied this allegation in her testimony to Congress, and has stated as follows:

Q. Are goals intended to achieve proportional representation or equal results?

A. Not at all. Numerical goals do not create guarantees for specific groups, nor are they designed to achieve proportional representation or equal results. Rather, the goal-setting process in affirmative action planning is used to target and measure the effectiveness of affirmative action efforts to eradicate and prevent discrimination. While the employer's performance in achieving goals may indicate the effectiveness of that employer's current efforts, the goals are not ends unto themselves. Moreover, the numerical benchmarks are realistically established based on the availability of qualified applicants in the job market or qualified candidates in the employer's workforce.

The difficulty is that, if employers do not meet their goals, or if their workforce shows fewer women or minorities employed than are available per census data, they are subject to audit by the OFCCP, and potentially subject to significant financial liability for any demographic shortfall determined by OFCCP. The line between "goals" and "quotas" is subtle and highly charged; and it has been and likely will continue to be the subject of considerable legal wrangling.

Duties in Addition to an AAP

In addition to an AAP, federal government contractors also have a duty to utilize E-Verify, an Internet-based system operated by the Department of Homeland Security and the Social Security Administration that allows participating employers to verify electronically the employment eligibility of newly hired employees. They also must participate in applicant tracking, and comply with OFCCP on-site or off-site audits.

In addition to collecting the relevant applicant and employee data and creating an AAP, employers should also:

  • Ensure that their AAPs are updated annually with current employee and applicant flow data;
  • Maintain an applicant flow log, including Internet and email applicant data;
  • Conduct an annual self-evaluation of hiring and promotion practices and procedures to identify and remove any barriers to hiring or promoting protected groups;
  • Conduct a self-evaluation of compensation practices to ensure that there do not appear to be any pay disparities among employees of different races, ages, or genders; and
  • If such compensation disparities are identified, employers should adopt a reasonable plan of action to address and correct such disparities.

Eric H. Rumbaugh is a partner and Charmaine Butler is an associate with law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee ( They represent employers in labor, employment and employee benefits law matters.


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