Nowadays, there is a growing trend by employers not to hire regular full-time employees but to hire contingent workers, either independent contractors who are considered to work for themselves, or temporary workers through staffing agencies. It has been estimated that 20% of the American workforce, and up to 30% in high-tech firms, is derived from a temporary/contingent workforce. The National Association of Temporary and Staffing Services estimates that 3 million people are employed through temporary help agencies, and of that number about 12% have spent 24 months or longer in their current assignment.

This trend has certain benefits to employers in appropriate situations, but it is critical that employers are aware of the costly pitfalls of exploiting temporary employees, particularly when the employee is essentially filling a permanent position. In the case of Vizcaino v. Microsoft Corp., thousands of workers brought a class action suit against their former employer, Microsoft, claiming that they should have been entitled to the same benefits as regular employees, including Microsoft's health insurance and stock purchase plans. Of course, true independent contractors would not have been entitled to any benefits. Under the Employees Retirement Insurance Security Act (ERISA), since they were considered employees (calling themselves "permatemps") at Microsoft, not independent contractors, they were entitled to benefits, and the court held in favor of the workers.

Similarly, Time Warner paid $5.5 million in November 2000 to settle a lawsuit the Department of Labor had brought against them for denying employee benefits to hundreds of employees misclassified as independent contractors or temporary workers.

Why choose contractors?

So, given the potential for a costly disaster, why do employers choose independent contractors or temporary employees? There are a number of advantages: cost savings on employee benefits; more relaxed adherence to procedures and regulations (e.g. performance evaluations, FMLA, ADA, FLSA, etc.); scheduling flexibility; no permanent office space necessary; and no payroll deductions necessary. The hiring of temporary employees through a staffing agency is also an attractive advantage to an organization with a growing business or seasonal needs, especially since the need for a workforce can quickly be met by simply placing a call to a temporary staffing agency. This is of particular benefit to companies without a sufficient human resources staff to process applicants quickly.

A range of regulations

However, it is important to note that an employer does not have an unrestricted right to designate any worker to be a contingent worker (either an independent contractor or temporary worker) and to avail itself of the benefits outlined above. The courts, the IRS and other federal and state agencies claim for themselves the right to determine whether a worker is an employee or not. There is an analysis as to whether the employer had the power to hire and fire the worker, whether the worker's schedule and employment conditions were controlled by the company, the method of payment, and whether employment records were maintained. Even more confusing, there are often different tests applied to determine whether a worker is an employee. For example, the IRS uses a "right to control" test, while the courts, for purposes of social security, will utilize a broader "economic reality" test. Many discrimination cases use a combination test which analyzes the economic reality, while focusing on the employer's right to control as the most important factor. The EEOC (Equal Employment Opportunity Commission) has its own 15 factors list to determine worker status.

The new HIPAA health care privacy rules which govern employers' use and electronic distribution of personal health information muddy the waters further. HIPAA applies to both regular employees and contingent workers, including those from staffing agencies and independent contractors. Whether HIPAA will apply depends on whether the worker is a "workforce member" or a "business associate." Generally, a longer term worker will be covered under the regulations as a workforce member, while a worker assigned to a particular project only for a few days would be considered a business associate, not entitled to the protection of HIPAA regulations.

A company may face a legal quagmire when it hires leased workers from a staffing agency. These workers may be in a position of having joint employers - both the staffing agency and the company to which the worker is assigned. If there is a joint employment relationship, the company to which the worker is assigned must comply with various state and federal laws which apply to regular employees such as the Americans with Disabilities Act, and it is liable to the worker for claims of discrimination or sexual harassment.

Factors to consider

There are a number of factors which companies should consider when deciding how to employ workers:

• If the goal is simply to reduce costs, it is risky to hire a temporary employee or an independent contractor. If there is no core business objective or real temporary project that can be associated with the hire, and the worker is present on a full-time basis for any extended period, there is exposure to the company that this worker may be reclassified down the road by a court or the IRS.
   
• If there are two classes of workers employed at the same facility, one group classified as full-time employees entitled to all benefits, and another group of temporary workers from an agency and/or independent contractors, there is a risk that the company may inadvertently set itself up for claims of discrimination by the workers who are not considered employees, especially if these workers all tend to come from the same protected category such as older workers, women, etc.
   
• When using a staffing agency, since it is possible that the company will be treated as a joint employer for almost every purpose except payroll, it is important to select the agency carefully and to ask important questions about their hiring and training practices, insurance issues, and benefits provided.
   
• Consider outsourcing an entire project, with the outsourcing subcontractor or vendor responsible for hiring and supervising all necessary workers, and as separate as possible from the company, providing their own supplies, management, and facilities.
   
• The employee handbook should reflect whether it is intended to apply to temporary workers or independent contractors. For example, are these workers entitled to take advantage of provisions available to regular employees such as progressive discipline, reporting procedures, performance evaluations, or vacations? Silence on these issues may create implied or inferred rights.

Staffing agencies

In the event the employer decides to use a staffing agency, a well-drafted contract is critical. Essential components include:

• An indemnification clause which provides that the agency will pay the cost of defense, and any adverse judgment, should the company be charged with violations of employment laws;
   
• A clause which requires the agency to be responsible for withholding payroll taxes, paying unemployment insurance, worker's compensation, and social security contributions;
   
• Specification that the agency is the primary employer for purposes of the Family Medical Leave Act, and will furnish applicable laws as required to workers;
   
• Requirement that the agency is responsible for control of working conditions, assignment, performance evaluations and discipline, and that the agency will obtain signed acknowledgement from the worker as to this;
   
• A clause that the agency will maintain all employment records.

Independent contractors

If a decision is made instead to hire an independent contractor, there should be a written contract that clearly spells out the arrangement, including the following:

• The independent contractor is responsible for paying all payroll, social security, worker's compensation, and unemployment compensation insurance;
   
• There is no authority on the part of the independent contractor to act as an agent on the company's behalf;
   
• If the independent contractor employs anyone, those persons are directly responsible to the independent contractor as employer and not to the company;
   
• There is a waiver by the independent contractor to any and all benefits under the company's plans;
   
• The independent contractor indemnifies the company from any and all liability as employer.

However, remember that labeling a relationship in a contract will not protect an employer from a later reclassification of a worker as an employee instead of an independent contractor or temporary worker. It must be clear that the worker's hours, working conditions, and itinerary are not exclusively controlled by the employer. Note that in the case of Yak v. Bank Brussels (June, 2001), the court held that a worker who signed an employment contract stating that she was an independent contractor and waiving her rights to employee benefits was found to be an employee. The court ruled that the employment status must be based on control of work and not an employment contract and that ERISA requirements governing employee benefits must override the terms of an employment contract.

Do's and don'ts to avoid pitfalls

There are actions that a company can take to avoid having temporary agency workers or independent contractors potentially reclassified by a court or agency down the road:

• Don't give them business cards, list them in the company directory, provide company badges or identification, or include temporary workers in company sponsored social events.
   
• Require the agency to reimburse workers for expenses, maintain all records, keep separate time records if possible, and discipline and evaluate their workers.
   
• Replace temporary workers reasonably frequently. It is recommended that temporary employees ideally be used for six months or less, although there is no strict parameter to be followed. When temporary employees are hired for a year or more, they begin to look more like permanent employees and may have a claim to dispute their status for purposes of benefits, etc., dependent upon the circumstances presented.
   
• Have the independent contractor complete a questionnaire before hiring. Ask such questions as: business address, name of company, whether location of office differs from home, number and name of employees, description and proof of insurance carried, whether business cards, stationary and invoice forms are maintained, and description of business equipment or facilities owned or operated.
   
• From independent contractors, request documentation including licensure, certificates of insurance, copies of white or yellow pages listings, and a copy of the invoice used to bill services.
   
• From staffing agencies, request documentation including a copy of the worker's application, certificates of insurance of agency, and copies of any contracts between the worker and the agency.

Conclusion

The stakes are high for the employer who faces the potential risk of misclassification of employees, and could include payment of back benefits under ERISA, HIPAA fines and penalties, back taxes, Medicare and Social Security contributions, unemployment taxes, and worker's compensation benefits. Under the FLSA (Fair Labor Standards Act) and related state laws, the employer could be liable for lost wages, overtime and liquidated damages, and more severe penalties for willful violations. Given these substantial areas of exposure, employers are wise to take pains to classify workers carefully with attention to detail at the outset of the working relationship.

FOR MORE INFORMATION On the Web Vizcaino v. Microsoft Corp Permatemps at Microsoft Time Warner lawsuit with DOL FMLA (Family leave and Medical Act) FLSA (Fair Labor Standards Act) ADA (Americans with Disabilities Act) HIPAA (Health Insurance Portability and Accountability Act) Department of Labor A search for "contingent" will bring up numerous articles related to compliance of laws for contingent workers. "Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms" "Enforcement Guidance on the Application of the ADA to Contingent Workers Placed by Temporary Agencies and Other Staffing Firms" Yak v. Bank Brussels Books Hiring Independent Contractors: The Employer's Legal Guide by Stephen Fishman, Amy Delpo Consultants and Independent Contractor Agreements by Stephen Fishman, Amy Delpo (Editor), Lisa Guerin (Editor)

Denise L. Page, Esq., is vice president and shareholder of Barron & Stadfeld, P.C., a Boston-based full-service law firm. She is also a NEHRA member. Denise can be reached at dlp@barronstad.com.