Some risks in the staffing environment receive routine attention. There are other risks, though, that lurk and can cause considerable harm to your firm. This article addresses three such risks staffing leaders need to be aware of.

DE&I Requests

Diversity, equity and inclusion is a social justice movement adopted by many corporations, educational institutions, the military and government agencies. But some client initiatives can pose serious legal risks to their staffing providers.

DE&I is not the law, and in fact, the Civil Rights Act renders some elements of DE&I unlawful. Programs of concern are those that go beyond affirmative action or are vehicles for divisive indoctrination. Affirmative action makes minority groups aware of their opportunities to compete for jobs, but it stops short of quotas. DE&I programs that include hiring quotas and training exercises that create hostile work environments based on race, gender, age or religion are illegal.

Some states are passing statutory bans on DE&I, and plaintiffs’ lawyers and advocacy groups are filing anti-DE&I lawsuits against employers. If staffing firms comply with clients’ DE&I mandates, they will be vulnerable to these laws and to litigation.

How to mitigate. Staffing firms should watch for client DE&I pressures on temporaries such as quotas, negotiate to exempt temporaries from them and require their clients’ indemnity for damages resulting from them.

Client Bankruptcy

When the economy turns down, it’s not uncommon for some staffing clients file some form of bankruptcy, which can be a very expensive one-two punch for staffing firms.

Staffing firms often extend long-term credit to clients — sometimes for 45, 60, 90, or even 120 days — even though invoice processing takes only a few days. And distressed clients often use staffing firms to finance their labor costs as they approach bankruptcy.

As an unsecured creditor with low claims priority, a staffing firm can expect to recover next to none of its unpaid receivables, losing 40 or more days of billings right away.

Then, about two weeks after the bankruptcy filing, the trustee demands that the staffing firm repay the bankrupt estate all payments that the client made to the staffing firm within the 90 days prior to the filing — called “preferential payments” — and threatens to sue for repayment. That puts the staffing firm’s typical client bankruptcy exposure at about 130 days or more of billings.

Staffing firms with direct contractual relationships to bankrupt clients can usually negotiate away about 50% of preferential payment demands. But when payments flow through an intermediary vendor management system or managed service provider, the intermediary owns the bankruptcy claim, and its contract usually requires staffing firms to pay it 100% of the preferential payments for forwarding to the trustee. The intermediary (with only a 2% or 3% stake) has little financial incentive to pursue the unpaid receivables claim or to negotiate the preferential payment demand.

How to mitigate. Mitigate this risk with short payment terms, aggressive collections and contractual rights with intermediaries for you to own and manage bankruptcy issues.

Differential Billing

Many client contracts require staffing firms to offer Affordable Care Act-compliant healthcare coverage to their temporary workers to mitigate their own risks should the IRS reclassify temporaries as the client’s common law employees, potentially generating penalties if the coverage of the combined workforce is not ACA-compliant. The contracts usually require the staffing firms to indemnify the clients for ACA penalties generated by temporaries.

How to mitigate. ACA regulations allow clients to avoid penalties by taking credit for the coverage offered to temporaries by staffing firms — but only if the clients are billed more for temporaries enrolled in the coverage than they are billed for temporaries not enrolled, which I call “differential billing.” Few staffing firms bill this way, but clients’ penalties (payable by indemnifying staffing firms) could be huge if coverage offered to temporaries is not credited to the clients. Differential billing, which mercifully does not have to match the actual cost of the coverage, is well worth the administrative trouble.