CWS 3.0: August 19, 2015

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The co-employment conundrum: It’s in the control

At Staffing Industry Analysts’ Contingent Workforce Strategy Summit last year, a frustrated attendee asked a panel of industry experts: “Why doesn’t the government just change or clarify the laws on co-employment?”

The simple answer is no specific law defines co-employment to begin with. Instead, there are a number of court cases and departmental government regulations that provide guidance on what may take place if you find your company involved in a co-employment related adjudication.

Certainly one of the most renowned cases related to co-employment is the Vizcaino v. Microsoft Corp. (circa 1997). The plaintiffs successfully sued Microsoft Corporation in order to be entitled to participate in the company’s plan benefits because those benefits were available to Microsoft's common law employees.

Another important event was the Supreme Court case Darden v. Nationwide Mutual Insurance Co. (circa 1992), which set forth 13 factors to be considered in determining employee status under the common law agency test:

  1. The hiring party’s right to control the manner and means by which the product/service is accomplished,
  2. Skill required,
  3. The source of the instruments and tools,
  4. The location of the work,
  5. The duration of the relationship between the parties,
  6. Whether the hiring party has the right to assign additional projects to the hired party,
  7. The extent of the hired party’s discretion over when and how long to work,
  8. Method of payment,
  9. The hired party’s role in hiring and paying assistants,
  10. Whether the work is part of the regular business of the hiring party,
  11. Whether the hiring party is in business,
    1. The provision of employee benefits, and
  12. Tax treatment of the hired party.

Some companies turned to business policies such as assigning contingents different name badges, separate parking lot spaces and keeping company gatherings only for employees. Then came Ling Nan Zheng v. Liberty Apparel Co. (circa 2010), in which the client company was subcontracting work to another and was indisputably only visiting the site for quality control purposes. A jury found the client company was a joint employer with the subcontractor. As a joint employer, the company was found to be in violation of the minimum wage and overtime provisions of the Fair Labor Standards Act (FLSA). A key takeaway from this ruling is that co-employment determination cannot be based on isolated factors or upon a single characteristic or technical concepts. Instead, it depends upon the circumstances of the whole activity, including the underlying economic reality. The courts may react unfairly aggressively to determine possible co-employment, even in situations employers would not consider or even imagine co-employment.

Just because the work was subcontracted and even though it is not done on the client’s premises, the client company was not released from its responsibility to ensure FLSA provisions are met for those doing client company work indirectly.

These and similar cases define the current prima facie of co-employment marketplace definitions. The order of the above elements for defining co-employment status has dispositive significance. Two key principles emerge in order to properly classify contingent workers as co-employed and to assess co-employment risk.

The first is control. When determining if a worker is co-employed you need to ask yourself:

  • Who is directing the contingent worker's work?
  • Are they doing work integral to your business?
  • Are they on your work site?
  • Are they using your equipment or resources?

The second is knowledge. Co-employment is often only a problem if you are unaware of it. Co-employment has become a concern with litigation relating to the Internal Revenue Service, the Department of Labor, the Equal Employment Opportunity Commission and other agency investigations. The issues arise from unequal treatment of contingent workers with confidentiality agreements or with issues of employment such as discrimination, harassment, disability and medical leave.

Some fundamental policies and practices that can help to mitigate the risks associated with co-employment are:

  • Review benefit plans, employee pension, profit sharing and stock bonus plans, including 401(k) plans, for the proper definition of a full-time employee. Contingent workers needs to be specifically and effectively defined out of the official corporate benefits plan compared to fulltime employees. 
  • Review benefit plans to ensure non-discrimination testing.
  • Communicate with your insurance company and make sure it knows the structure of your workforce, and then make sure that you’re covered.
  • Protect your intellectual property through non-disclosure and non-compete agreements with your CW providers and workers.
  • Respond reasonably to risks, regardless of employment status. Coordinate these investigations/responses.

Using different badges, establishing tenure limits and excluding contingents from company gatherings may increase your company’s comfort levels apart from making good business sense, but case law suggests they have minimal to zero dispositive impact on defending against co-employment classification. Co-employment exists in numerous circumstances and sometimes can be beneficially leveraged. Co-employment is not the risk, the risk is not properly preparing for its existence as guided by case law.

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This CWS 3.0 opinion does not constitute legal advice. It is recommended that you consult your legal advisors and/or internal company counsel prior to entering into any agreement or establishing company policies.