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Legal Eagle: Joint Employer Liability - CWS 30 April 2.8

Contingent Workforce Strategies 30





In a recent case, Vondriska v. Cugno, the U.S. Court of Appeals for the Eleventh Circuit reinstated a Fair Labor Standards Act (FLSA) wage and hour collective action against a professional employer organization (PEO) and its client. The issue in the district court was whether the PEO was the "employer" of the plaintiffs within the boundaries of the FLSA.

The plaintiffs tried to introduce evidence on that issue in the form of depositions taken prior to the PEO's involvement in the case. The district court held that the depositions were not admissible, thus the plaintiffs had no evidence that the PEO was their employer and the case against the PEO was dismissed.

The Eleventh Circuit reversed the district court's ruling, however, holding that the depositions were admissible. The case was remanded to the district court for a determination of whether (with consideration of the newly admitted deposition testimony) the PEO was the plaintiffs' employer. The case really does not add or change anything about the law relating to co-employment. The traditional "employer" went bankrupt; so the affected employees looked elsewhere for relief. The case is really more about federal court evidentiary rules than it is about co-employment. The significance for businesses supplying or using contingent labor is that the case is another reminder that plaintiffs will look to everyone involved in the process for relief.

A professional employer organization (PEO) provides integrated services which enable business owners to cost-effectively outsource the management of human resources, employee benefits, payroll and workers' compensation. PEOs, like staffing firms, are often joint or co-employers along with the client company.
Typically, the client directs the employees' day-to-day duties and activities. But the PEO is the "employer of record" on an employee's W-2. It delivers and manages benefits, processes payroll, and deals with certain issues like workers compensation, state unemployment insurance, EEOC claims etc.
After the Eleventh Circuit's decision, the case will be sent to the trial court to answer the vital question: who is the plaintiffs' employer and can multiple entities be held jointly responsible?

While it remains to be seen how the court will finally answer this question, companies and their staffing firms should anticipate that this decision will further refine joint employer liability analysis under the FLSA (and potentially under other laws).

Wage and hour lawsuits have been drawing media attention. But it's not just about FLSA violations. As this case demonstrates, the legal landscape is becoming more complex, and both staffing firms and clients are facing an increasing number of lawsuits by workers alleging both are jointly liable for non-compliance with employment laws.

Conventional wisdom has it that staffing customers should require indemnification agreements from their PEO or staffing firm. But there are other options. "In many cases, an agreement between the parties to purchase particular insurance in particular amounts, naming particular entities as 'insured' parties and allocating the cost of insurance by contract, is less expensive and provides greater and more predictable risk management than indemnification. An indemnification agreement that assigns risk to a party that did not create the risk might not be enforceable; and, in any case, the agreement is only as good as indemnifying party's ability to pay," says Eric Rumbaugh, a partner at law firm Michael Best & Friedrich LLP. "Here, however, the claims likely were not insurable. In this case, whichever party was making the decisions that lead to liability, it is fair for that party to bear the risk -- and a contract saying so could be reasonable."

Good risk management still comes down to the basics: do your best to have compliant systems in place, and work with business partners that do the same.

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