SI Review: July 2013

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Don’t Get Caught in the Web

How to sidestep some top legal perils

By Sharon Thomas

This article is not intended as legal advice. Managers and owners should consult legal counsel for advice on specific situations.

Eliminating risk in business is impossible, but there are steps companies can take to mitigate it. Today, the staffing industry faces many legal and regulatory challenges, with courts and agencies issuing new rulings and guidance. The changing landscape causes the industry many concerns, the most immediate of which is how staffing firms can prepare for the effects of the Affordable Care Act, which is addressed in a two-part article in this issue and next month.

The Affordable Care Act apart, there are other legal and regulatory issues the industry faces that pose important and tricky twists that have to be dealt with carefully. Navigating areas like indemnification and negligent hiring is complicated. We give you an overview of some of these risks here.

Indemnification

Indemnification is a sensitive issue for many staffing firms, with many large clients including indemnification in their contracts.

In an indemnification agreement, the staffing firm is essentially assuming the role of an insurance company. Like any insurance contract, you can include exclusions and inclusions, but most boilerplate contracts won’t start out that way. And while insurance companies have underwriters who look at risk and decide how much to charge accordingly, staffing firms don’t price their services that way. They aren’t charging for the risk. They are charging for the service of finding and placing talent. However, with the indemnification agreement, they take on this risk that could cost the company millions of dollars should something happen.

In the most severe cases, the client will expect the staffing firm to indemnify it against any act, whether the staffing firm is in control of the situation or not.

Diane Geller, an attorney with law firm Fox Rothschild LLP, calls overbroad indemnification agreements “bet your business” clauses because staffing firms that sign them face the real possibility of going bankrupt should an event occur. Staffing firms have certain aspects of the business for which they are responsible, Geller notes, but the client is the one in direct control over the work and the worker, and the staffing provider should not be accountable for events that are due to the client’s failures.

Ideally, risk should be allocated according to the business interests of each of the parties, Geller says. Staffing firms should be aware of the risk they are assuming each time they sign a contract with an indemnification clause.

Unfortunately, many staffing firms sign them anyway because they fear losing the client. But they may not need to. Most often, these agreements are being drafted by the client’s counsel, and the contingent workforce manager and team don’t fully understand the ramifications of these clauses. Simple education and communication is key, says Bryan Peña, Staffing Industry Analysts’ vice president of contingent workforce strategies and research. Try to understand what specific risks they are trying to address. Sometimes the client is looking to the indemnification clause as a blanket insurance policy to cover all risk in a program, even those risks that are not in the staffing provider’s control.

Explain that you’re willing to indemnify their company against situations that are in your control, but not for cases that you have no control over. Also, many buyers don’t understand that they often run the risk of voiding the indemnification provision in its entirety if they overreach, as many courts take a dim view of unclear risk allocation, Peña explains. While this is not always the case, the CW manager may be willing to work with the staffing provider to get the contract language to reflect proper risk allocation.

So be prepared. Geller advises staffing firms have their own clause at the ready when negotiating contracts, to ensure the risk is allocated properly, and to have counsel review any contract before signing it to ensure the clauses are fair to both parties.

In some cases, indemnity agreements are unnecessary to begin with, asserts Eric Rumbaugh, attorney and partner at Michael Best and Friedrich LLC. He cites a case where both the staffing firm and client had insurance policies that would have covered an event, but because the companies had an indemnification agreement, they ended up going to court to fight over the costs of the incident. Without an indemnification agreement, the insurance companies would have handled the damages. That’s what insurance premiums are for, he says. More important, these premiums are set by underwriters who study the risk and know how to price it out.

Workers’ compensation

In most states, workers’ compensation insurance is carried by the staffing firm that supplies the workers, but because the staffing provider and client share a co-employment relationship, both entities are protected from further claims by what’s known as the “exclusive remedy.” Put simply, workers’ compensation is an injured worker’s only recourse in most cases — they generally cannot collect further damages in a lawsuit from the staffing firm or the client.

Of course, there are exceptions that vary from state to state. For example, in many cases, workers’ comp exclusivity won’t protect a company in the case of an employee deliberately assaulting a contingent worker in order to cause bodily harm. But for your run-of-the- mill workplace injury, the companies are protected — even in the event of a death. The Texas Supreme Court ruled last year that a worksite employer was protected by workers’ comp exclusivity after a workplace accident killed a contingent worker. The family had been paid benefits from the staffing firm’s workers’ compensation insurer, and the court said that was their only recourse.

Co-employment

Some clients balk at the “co-employer” label under any circumstance and specify in their contracts that there is no employer relationship. Clients have actually argued successfully against any employer status, Rumbaugh relates, and lost their exclusivity protections in the process. Staffing firms should make sure their clients understand that the co-employer label can sometimes be a benefit to both parties, certainly in the case of workers comp and exclusivity.

Co-employment comes as a benefit in other cases as well. Take the case of Interstate Fire and Casualty Company v. Washington Hospital Center, where a nurse supplied by a staffing company was involved in a malpractice case. While the hospital tried to argue against an employment arrangement, the court ruled otherwise, thus ensuring the hospital’s malpractice insurance covered the claim.

Negligent hiring

Staffing firms can face liability if they place a person known to be of risk and that person causes damage to the client or its staff (financial or physical). But staffing firms are restricted by law and Equal Employment Opportunity Commission guidance as well as the Fair Credit Reporting Act on how they can use criminal background and credit checks in the hiring process.

The EEOC will frown upon overbroad policies that create a disparate impact (affect one group of people more than others). For example, having a blanket policy that rejects applicants with any criminal background is most likely illegal.

“Every crime must be considered on a case-by-case basis,” Rumbaugh says. Constantly look at the relationship of the job to the crime, he says. Further, he advises that companies work with their counsel to conduct a periodic statistical analysis to see if their hiring decisions based on criminal checks are having a disparate impact on minority groups.

The FCRA also governs how credit check results can be used when obtained through third-party firms, mandating requirements and when and how applicants are notified of the check and results. (See the feature article “Room for Error” for a more detailed look at those restrictions and the risks to staffing firms.)

Wage and Hour

Federal wage and hour lawsuits filed under the Fair Labor Standards Act reached a new high for the 12 months ended March 30, according to a report from law firm Seyfarth Shaw LLP. “With no catalyst during the past 12 months, this strong spike and new high for FLSA claims makes them one of the top threats to U.S. employers,” says Richard Alfred, chair of Seyfarth’s wage and hour practice. Staffing firms and their clients have been the subject of numerous such lawsuits. For example, one staffing firm was ordered to pay $1.9 million in back wages.

Wage and hour class action lawsuits are the biggest source of class litigation in the nation, Rumbaugh says. Staffing firms find themselves in trouble in a couple of ways: when the client insists it won’t pay overtime and pressures the staffing firm to classify a contingent as exempt or from technical mistakes, misunderstanding a state law or other technical issues.

Exempt status is based on the job description, so be sure to review each requisition carefully. Once the worker is placed, make sure the work he or she is actually doing matches what’s in the description, if exempt status was deemed to be appropriate.

Further, work with legal counsel to understand the technicalities. It is a good idea to audit your contingent worker compliance requirements for each state in which you do business. Dot your Is and cross your Ts. Focus on a state at a time, scheduling one or two a month, attorneys advise, reviewing worker job descriptions carefully so you don’t make careless errors.

Independent Contractor Classification

We continue to see large budget allocations for misclassification enforcement efforts within the Department of Labor (DOL). The potential taxes and penalties for cash-strapped states and the federal government make this a clear enforcement focus. Further, the DOL has launched a “Right to Know” survey to gauge workers’ understanding of their employment rights and experience with misclassification.

The Affordable Care Act adds a twist to the issue. If a company’s ICs are determined to be “common law employees” by the IRS or other auditing agency, that could force the employer into “large employer” status or expose the employer into additional tax exposure for failure to offer the “common law employees” minimum level of coverage.

A recent court decision in Perry v. Arise Virtual Solutions brings forth another concern regarding staffing firms’ use of independent contractors. In Perry, the court’s focus on the direction and control exerted over workers during their assignment could mean misclassification exposure for both the client as well as the staffing firm. This could lead to bad press and lawsuits.

An IC’s corporation status does not mitigate misclassification, notes Maria Goyer, vice president of business solutions for Populus Group LLC. Rather, properly structuring the project deliverables and ensuring that the IC maintains controls of how, when and where the work is done are critical when staffing agencies engage independent contractors.

“This additional tax exposure to an already high cost of misclassification is forcing many employers to re-evaluate their engagement and evaluation procedures for their usage of independent contractors,” Goyer says. “With months to go until the 2014 ACA regulations [become effective], and the DOL’s renewed efforts to implement their “Right to Know” documentation of IC status, the engagement of independent contractors is a clear focus of many contingent workforce managers and staffing firms.”

Risk is inherent in any form of business, but with proper planning and structure, that risk can be minimized. Staffing firms need to ensure they are following the law, but their clients should as well. Working together, both entities can minimize their exposure to costly litigation.

Sharon Thomas is an editor at Staffing Industry Review. She can be reached at smthomas@staffingindustry.com

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