SI Review: July 2012

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The Myths, the Reality

Various court decisions alter the staffing industry’s legal landscape

By Eric H. Rumbaugh and Mark Lotito

Even as staffing firms have become more important for meeting clients’ contingent workforce needs, certain myths about using contingent workers have persisted.

Sometimes, companies believe that by engaging the services of a staffing firm, they have reduced, or even completely eliminated, the risks associated with engaging contingent workers. As recent case law shows, however, engaging contingent workers requires a more thoughtful approach to potential problems that may arise. Debunking some of these staffing myths will help staffing firms and their client companies better understand the potential risks and decide how to address them in their engagement agreements.

Myth 1

Worker Reclassification Automatically Leads to Employee Benefits Liability

Since the 1990s, employers have been aware of the significant benefits liability risk posed by worker reclassification. In the leading case Vizcaino v. Microsoft, former Microsoft freelancers argued — despite written agreements to the contrary — that they should have been eligible for Microsoft’s employee stock purchase plan. After years of litigation, Microsoft ultimately settled the claims for more than $96 million. The case put employers on notice that written agreements with contingent workers might not be sufficient to prevent benefits liability in the event of reclassification.

A recent case demonstrates how the result in the Microsoft litigation could have been avoided if Microsoft’s benefit plans had been drafted to account for contingent workers. Plaintiffs in Kalksma v. Konica Minolta Business Solutions U.S.A. Inc. applied for full-time jobs, but insisted on working only part-time hours. To accommodate their request, the company engaged the workers as independent contractors. The plaintiffs were dissatisfied with this arrangement, and one requested that the IRS determine federal employment tax status of her services. After the IRS determined that the worker could not be treated as an independent contractor for tax purposes, the company conducted an internal audit and negotiated new employment terms with the plaintiffs.

The plaintiffs claimed that they experienced “retaliation” because of their change in classification, including that as employees they were called upon to assist coworkers and work overtime. The plaintiffs filed suit seeking damages for unpaid benefits during the period they worked as independent contractors and retaliation under ERISA. The court determined that the plans’ language specifically excluded independent contractors and the plaintiffs were “ineligible for benefits even if that classification is subsequently found to be legally erroneous.” It did not matter that the IRS reclassified the workers. Under the plan, eligibility was not based on legal classification status — the plan gave the plan administrator direction to determine eligibility. Because the law defers to plan administrators, even if they are wrong, the employer won. The plaintiffs’ retaliation claim also failed because they were not eligible for benefits under any ERISA plan.

Myth 2

Outsourcing Always Protects the Client Company Against Claims Brought by the Subcontractor’s Workers

Many companies outsource certain aspects of their operations. Often, the workers who perform services on behalf of a client company are at locations far removed from the company’s own place of business. Generally, the client company will not be responsible for the offsite working conditions. A good example is Lepkowski v. Telatron Mktg. Group Inc. In that case, the plaintiff was one of 200 call center employees who worked exclusively for the same client company. The plaintiff alleged violations of the Fair Labor Standards Act (FLSA), including failure to compensate for time spent logging into computer systems. The plaintiff filed suit against the call center and its client company and sought class certification. The client company successfully argued that under the FLSA “economic realities” test it was not the worker’s joint employer. In its decision, the district court focused on the “totality of circumstances” and applied factors used in other circuits to reject the plaintiff’s joint employer theory.

Nevertheless, client companies cannot rely on the outsourcing relationship as an absolute protection against liability. A cautionary example is found in Ling Nan Zheng v. Liberty Apparel Co. In Zheng, a garment company outsourced manufacturing work to a factory that subcontracted work from several companies. The garment company regularly sent quality control representatives to the subcon- tractor’s factory to supervise the workforce. A jury found that the garment company was a joint employer with the subcontractor.

Myth 3

Employment Law Liability Is the Responsibility of the Staffing Company

Sometimes, client companies may think that because staffing firms provide contingent workers, only the staffing firm has responsibility for overtime liability, or, at the very least, the staffing firm shares responsibility with the client company. A recent case demonstrates that this is not always true. In fact, in Johnson v. Manpower Professional Services, only the client company was found to have potential liability for overtime. Under an agreement between the companies, the staffing firm would recruit employees for its client company and would handle the administrative and payroll issues. The client company would decide which of the staffing firm’s recruits to hire and would manage and supervise them once hired. As part of the staffing firm’s application process, the plaintiff, an African-American man, submitted to a background check and a drug test. The client company hired the plaintiff for a recruiter position. For his first five weeks, the plaintiff received overtime pay, but then he stopped receiving it. The plaintiff’s supervisor at the client company received negative feedback about the plaintiff’s job performance. The client company then asked the staffing firm to replace the plaintiff. The plaintiff was terminated and replaced by a Caucasian woman who received overtime pay and did not have to take a drug test or undergo a background check.

The plaintiff filed claims for: denial of overtime because of his race, being subject to a background check and drug test because of his race and alleged retaliatory termination under the FLSA. The court found that: the client company and not the staffing firm was the plaintiff’s “employer” for purposes of the overtime denial claim, even though the staffing firm paid the employee, provided benefits, and withheld taxes and workers’ compensation and unemployment compensation. The staffing firm was found not to have any real control over the worker’s actions, so it was deemed not to be an employer for the purposes of the suit.

Myth 4

Workers’ Compensation Exclusivity Is Not Available to Both a Staffing Firm and Its Client Company

Sometimes, joint employment can be mutually beneficial to staffing firms and their client companies. When a contingent worker is injured, the injured worker’s remedy against both the staffing firm and its client company is limited by the workers’ compensation statute. That was exactly the outcome in Jones v. UTI Integrated Logistics Inc. In that case, the plaintiff was employed by a temporary staffing agency, which sent him to work at a client company facility. While working at the client company facility, the plaintiff injured his back and filed suit against the client company. The court determined that the plaintiff was a leased employee, so the staffing agency and the client company were joint employers under Indiana law. Accordingly, the plaintiff was limited to the exclusive remedy of Indiana’s workers’ compensation law, and he could not sue the client company (or the staffing company) for negligence.

Eric H. Rumbaugh is a partner and Mark Lotito is an associate with the law firm Michael Best & Friedrich LLC (www.michaelbest.com). They represent employers in labor, employment and benefits law matters.

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