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Temporary, leased and franchise employees — Colorado

There has been dramatic growth in recent years in the use of temporary and leased employees. Those workers, sometimes referred to as “contingent employees,” are often employed by an employment services company or temporary employment firm and are supplied to another employer for whom the workers provide their services. The increasing numbers of contingent employees raises many important legal issues. Often, the essential question is whether employers must treat contingent employees in their workplaces as though they were regular employees.

Definitions of non-employee workers 

Contingent employment

The term “contingent employment” is a catch-all term that refers to various types of work arrangements that fall outside of the traditional employer/employee relationship. Contingent workers are generally divided into one of the following three classifications:

  1. temporary employees
  2. leased employees
  3. independent contractors.

It is difficult to articulate a uniform definition for the three groups listed above, as different entities offer varying definitions. Thus, differences between temporary employees, leased employees and independent contractors can be difficult to recognize under different circumstances. Further complicating matters, the terms are sometimes used interchangeably. In most cases, the question regarding temporary and leased employees becomes: “Who employs this individual?”  The answer is often that both the company that supplies the employee and the company that uses the employee’s services will be considered employers.

Employee and employer classifications

For purposes of this chapter and unless other terms are required by the particular law under discussion, the following terms will be used to identify the various parties in the temporary employee relationship:

  • the entity that supplies employees to the workforce will be called the “supplier employer”
  • the business for whom the work is performed will be the “customer employer”
  • the worker will be referred to as a “temporary employee” or “leased employee.”  These workers do not include “independent contractor.”  For more information about the treatment of independent contractors, see Chapter 08: Independent contractors.

Employee

Employees are part-time or full-time employees on the payroll of an employer whose services are needed for an indefinite period of time and/or whose services are not limited to any particular project.

Employer

Generally, an “employer” is defined as having the right to direct the employee’s time, manner, methods and means of the execution of the work.

Independent contractor

Unlike an employee, an independent contractor is a self-employed individual who performs work for another, generally under a written contract. These workers are typically used for project work that requires specific, in-depth knowledge or expertise. They are not employees of the employer. Accordingly, the employer has no absolute “right to control” the time, manner, method or means in which the task or function is accomplished. The more control an employer exerts over the manner and timing of the work performed, the more likely the individual is misclassified as an independent contractor.

Employee vs. independent contractor

The following is a non-exhaustive list of factors that are frequently considered when determining whether an individual is an employee of an independent contractor:

  • the nature of the business
  • the duration of employment
  • the right to control the conduct of the work
  • the right of termination
  • the method of payment
  • the correlation between the work and the customary business of the employer
  • the belief of the parties regarding the employer-employee relationship
  • the freedom to select and hire helpers
  • the furnishings of tools and equipment
  • where the work is performed
  • self-scheduling of working hours
  • the freedom to offer services to other entities.

Leased employees

Leased employees are employees of a leasing agency who are hired out to an employer on a temporary basis to supplement the employer’s workforce, generally in connection with peak workload periods, employee absences, specific work projects or work that is expected to last for a limited duration.

The Internal Revenue Code (IRC) defines a “leased employee” as any person who is not an employee of the recipient who provides services to the recipient if all of the following conditions are met:

  • such services are provided according to an agreement between the recipient and any other person
  • such person has performed such services for the recipient on a substantially full-time basis for a period of at least one year
  • such services are performed under primary direction or control by the recipient.

In connection with a proposed model employee leasing regulation, the National Association of Professional Employer Organizations (NAPEO) and the National Association of Temporary Services (NATS) have been involved in the formulation of definitions for the terms in the following section.

Client company

A client company is an individual or entity which has contracted with an employee leasing company to supply the client company with temporary employees and related services.

Employee leasing company

A leasing company is an entity that leases its employees to another company for a certain period of time. Under this arrangement, the leasing company places the leased employees on its payroll and leases the employees to a client company for a fee.

Employment responsibilities are shared by the employee leasing company and the client company. The direction and control of workers provided by the employee leasing company is shared by the employee leasing company and the client company, provided that the employee leasing company meets all of the following criteria:

  • reserves and is extended by the client by written contract, a joint or shared right of direction and control over leased employees assigned to the client’s locations
  • retains shared authority with the client company concerning hiring, firing, disciplining and reassigning the leased employees
  • notifies leased employees, formerly employed by the client company, in writing or with an employee manual or handbook, of the change in employment relationship, as well as the employee leasing company’s terms and conditions of employment
  • retains a shared right of direction and control over management of safety, risk and hazard control at the work site or sites affecting the leased employees, including all of the following:
  • responsibility for performing safety inspections of client equipment and premises
  • responsibility for the promulgation and administration of employment and safety policies
  • responsibility for the management of workers’ compensation claims, claims filings and related procedures.

Typically, employee leasing does not include other independent contractor services, such as security services, job shop companies, strike-breaker replacements or any other service which does not perform the functions defined above.

Temporary employees

Temporary employees are part-time or full-time, on-the-payroll employees whose work is limited to a particular project or period of time. Temporary employees are on the payroll, but generally do not perform work for a sufficient period to be eligible for a company’s employee benefits.

Interns and trainees

Employers often view interns as a win-win for the company and the intern. The individual is able to receive substantive work experience and the employer is able to utilize his or her services for free. The Department of Labor (DOL), however, looks deeper than simply an intern’s offer to work without pay when classifying the individual as an intern or an employee.

Internships in the “for-profit” private sector will most often be viewed as compensable employment, unless the six-part test (described below) relating to trainees is met.

The unpaid intern test

Whether an internship or training program meets the exclusion depends upon all of the facts and circumstances of each such program. All seven of the following criteria (adopted in 2018 by the U.S. Department of Labor and known as the "primary beneficiary test") must be applied when making a determination. The primary beneficiary test is a "flexible test" with seven non-exhaustive factors:

  1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
  1. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
  1. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
  1. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
  1. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
  1. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
  1. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The primary beneficiary test replaces a rigid six-factor test that the DOL adopted in 2010 (the 2010 DOL Rule).

Education vs. operations

Generally speaking, the closer an internship program is to a classroom or learning experience versus the performance of the employer’s operations, the more likely that the WHD would classify the program as eligible for “unpaid” status.

Workforce and supervision levels

If the employer would have hired additional employees or required existing staff to work additional hours had the interns not performed the work, then the interns will more likely be viewed as employees and entitled compensation under the FLSA. However, if the employer is providing job-shadowing opportunities that provide the intern the opportunity to learn certain functions under the supervision of regular employees and the intern performs minimal work, the activity is more likely to be viewed as an education experience.

Job expectations at the conclusion of the internship

The internship should be for a set amount of time, established prior to the start of the internship. Further, unpaid internships generally should not be used by the employer as a trial period for individuals seeking employment at the conclusion of the internship. If an intern is placed with the employer for a trial period with the expectation that he or she will then be hired on a permanent basis, that individual generally would be considered an employee under the FLSA and subject to wage and hour laws beginning with the period of training.

Independent contractors

Employers are not required to maintain workers’ comp. for independent contractors.

Subcontractors

With regard to subcontracted employees, the principal, intermediate contractor or subcontractor may be liable for a temporary employee’s workers’ compensation coverage. In other words, an injured worker may bypass his or her immediate employer to seek workers’ compensation benefits from any intermediate or principal employer. In the temporary employment situation, if the supplier employer does not maintain workers’ compensation insurance, the injured temporary employee could potentially collect workers’ compensation benefits from the customer employer that contracted with the supplier employer.

One way for a customer employer to protect themselves from claims of this nature is to require that the supplier employer provide proof of having workers’ compensation insurance for its temporary employees. Typically, this may be accomplished with a certificate of insurance.

Franchisors 

In August 2015 (which has been the subject of much subsequent litigation), the National Labor Relations Board, NLRB, expanded the definition of “joint employer” in Browning-Ferris Industries of California to be defined as any entity that either:

  1. “…could exercise control over another entity’s employees’ terms and conditions of employment, whether it actually does so or not
  2. “…exercises any such control through a third party.” 

This precedent more loosely defined which entities could be considered a joint employer to any employee and has the breadth to implicate franchisors as joint employers. Many states have since brought forth their own legislation as a response to the NLRB ruling in order to put limits on its application.

Safety and health regulations for non-employee workers

The federal Occupational Safety and Health Act (OSH Act) applies to employers engaged in interstate commerce who employ even a single employee. See Chapter 33: Safety and health. The law requires employers to:

  • make sure that the workplace is safe for employees
  • maintain records of illnesses and injuries of employees under its supervision
  • notify employees of hazardous substances in the workplace.

Recording injuries

Under the OSH Act, a customer employer is required to record injuries to employees on its OSHA 300 Log. OSHA’s regulations specifically state that a customer employer must also record injuries to temporary employees at their facility on its OSHA 300 Log if the customer employer supervises those employees on a day-to-day basis. Similarly, if a supplier’s employee becomes injured at the facility, the customer employer is required to record that injury on the log if the customer employer supervises the supplier’s employee on a day-to-day basis. If the supplier employer supervises the supplier’s employee at the customer employer’s workplace, then the supplier employer (not the customer employer) must record the injury on the log. So, the customer employer need only determine whether it supervises a worker on a day-to-day basis to decide whether to include that worker’s injury on its OSHA 300 Log.

Where a violation is found and an employee has been exposed to a hazard, the Occupational Safety and Health Administration (OSHA) may issue citations to the appropriate employer. In the case of temporary employees, OSHA may issue a citation to the supplier employer, the customer employer or both, depending on who it finds to be the temporary employee’s employer. If OSHA determines that the customer employer did not employ the individual who was harmed on the customer employer’s worksite, then OSHA will consider the situation to be one where there are multiple employers at one worksite and it will evaluate whether the customer employer may still be subject to citation as a creating, exposing, correcting or controlling employer. Each of these various types of employers has certain obligations under the OSH Act.

  • Creating employer  A creating employer is one which created a hazardous condition that violates an OSHA standard. Creating employers may be cited even if the only employees exposed are those of other employers (for example, leased employees).
  • Exposing employer  An exposing employer is one whose own employees are exposed to the hazard – regardless of who created the hazard. An exposing employer is subject to citation if, both:
    1. it knew of the hazardous condition or failed to exercise reasonable diligence to discover the condition
    2. it failed to take steps consistent with its authority to protect its employees.
  • Controlling employer  A controlling employer is one which has general supervisory authority over the worksite, including the power to correct safety and health violations itself or require others to correct them (either by contract or in practice). A controlling employer must exercise reasonable care to prevent and detect violations on the site. In determining whether reasonable care was exercised, OSHA will look at:
    • the scale of the project
    • the nature and pace of the work
    • how much the controlling employer knows about the safety history and practices of the employer it controls
    • controlling employer’s knowledge of the other’s prior noncompliance and the other’s safety and health efforts.

Wages and hours for non-employee workers

Under the federal Fair Labor Standards Act (FLSA), employers are required to comply with specified minimum wage, overtime, equal pay, child labor and recordkeeping requirements with respect to employees who are covered under the law. See Chapter 10: Wages and hours. Often, supplier and customer employers are regarded as joint employers who are jointly liable for complying with FLSA’s requirements with respect to temporary employees.

Such joint responsibility derives from the FLSA’s broad definition of employer as any person acting directly or indirectly in the interest of an employer in relation to an employee. In similar broad terms, FLSA defines “to employ” as to suffer or permit to work.

Therefore, customer and supplier employers generally become jointly responsible for satisfying all FLSA requirements including minimum wage, recordkeeping and overtime obligations.

Finally, while temporary employees are covered by the FLSA, the exemptions applicable to certain regular employees also apply to temporary employees. For example, temporary executive, administrative and professional employees are exempt from the FLSA’s requirements. In addition, workers in certain agricultural and service industries may not be protected by the FLSA under certain circumstances.

Other laws applied to non-employee workers

Title VII of the Civil Rights Act and other anti-discrimination laws

Courts have broadly interpreted the coverage of anti-discrimination laws, such as Title VII of the Civil Rights Act and the Age Discrimination in Employment Act (ADEA), focusing primarily on control over the opportunity for and conditions of employment as indicative of employer status. Based on these broad interpretations, courts are willing to hold customer employers liable for their discriminatory acts towards temporary employees. In determining whether a customer employer in a particular case can be subject to liability for acts that discriminate against temporary employees, courts often consider the degree of the customer employer’s supervision of the temporary employee’s daily activities. See Chapter 12: Discrimination.

In a variety of cases, courts and agencies have found that customer employers are subject to liability. For example, where the customer employer shares supervision and control with the supplier employer, courts have held the employers be jointly liable in connection with the unlawful actions of the supplier employer even if the customer employer disagreed with or had no knowledge of those actions.

Americans with Disabilities Act

While many of the considerations above apply equally with respect to the Americans with Disabilities Act (ADA), there are additional considerations under the ADA. See Chapter 13: Disabilities and reasonable accommodation. Specifically, the duty to reasonably accommodate qualified individuals with a disability affects both supplier and customer employers. Supplier employers are required to make reasonable accommodations to qualified temporary employees with disabilities to enable such persons to perform the essential functions of their assignments with customer employers.

Example - Federal guidelines provide that a supplier employer may be required to provide its temporary employee who has the condition of dwarfism with a step stool to enable the person to perform essential functions. The guidelines, however, do not require the supplier to make physical changes to the customer employer’s premises.

The ADA does not specifically discuss a customer employer’s obligations to reasonably accommodate a temporary employee. EEOC guidelines do, however, apply the joint employer doctrine in the temporary employee context. Thus, a supplier employer and its customer employer are both obligated to provide reasonable accommodations to temporary employees. The conservative approach for a customer employer is, therefore, to offer a reasonable accommodation to qualified temporary employees who are disabled.

Family and Medical Leave Act

Under the federal Family and Medical Leave Act (FMLA), separate companies or businesses may be treated as joint employers under certain circumstances. See Chapter 17: Family and medical leave. Where the customer employer has sufficient control over the work or working conditions of the temporary employee, a joint employment relationship exists, and both the supplier and the customer must count the temporary employee to determine whether each respective employer has sufficient employees to be governed by the FMLA. This is determined by considering:

  • the nature and degree of control
  • degree of supervision
  • power to determine pay rates and involvement in payroll functions
  • the direct or indirect right to modify the employment conditions of the workers.

2008 amendments to the FMLA regulations were made to address professional employer organizations (PEO) arrangements. The new regulations clarify that PEO’s that contract with customer employers merely to perform administrative functions, including payroll, benefits, regulatory paperwork and updating employment policies, are not joint employers with their customer employers. Consequently, the customer employer is solely responsible for complying with the FMLA with respect to such workers. The DOL maintains, however, that where a PEO has the right to hire, fire, assign or direct and control the temporary employees or benefits from the work that the temporary employees perform, such a PEO can be considered a joint employer with the customer employer.

According to the DOL, an employer’s responsibilities to a temporary employee under the FMLA differ depending on whether the employer is the primary employer or the secondary employer. To determine which employer is primary and which is secondary, the DOL will consider who has the responsibility for:

  • hiring and terminating the employee
  • assigning/placing the employee
  • paying the employee and providing employment benefits.

Generally, because temporary employees are normally the employees of the supplier employer, the supplier employer will be the primary employer and the customer employer will be the secondary employer.

The primary employer is the only employer responsible for giving required notices to its employees, providing leave, maintenance of health benefits and job restoration. As secondary employers, customer employers must not interfere with a temporary employee’s attempt to exercise an FMLA right or otherwise engage in conduct within the prohibited acts provision of the regulations.

In addition, the final FMLA regulations make it clear that the customer employer has a responsibility to rehire a temporary employee returning from FMLA leave provided by the supplier employer, assuming there is still temporary work available with the customer employer and the customer employer is still doing business with the supplier employer.

Wrongful discharge

In most non-union settings, an employer can terminate the employment of an employee for any reason or no reason, at any time, without notice, as long as the reason does not violate employee protections under state or federal law. However, both supplier and customer employers can be subject to wrongful discharge lawsuits if, in discharging an employee, they breach a written employment agreement, violate federal or state statutes or retaliate against an employee for exercising a right protected by law.

Non-employee workers and unions

Under the National Labor Relations Act (NLRA), employers must respect employees’ statutory rights to engage in protected activities and to collectively bargain. In a variety of ways, customer employers also must treat temporary employees as though they were their own employees under the NLRA.

On rare occasions, the National Labor Relations Board (NLRB) has found that a customer employer is in fact the “sole employer” of temporary employees assigned to it and solely liable for its violations under the NLRA.

On February 26, 2020, the National Labor Relations Board issued its final rule regarding the standard for determining joint employer status. The final rule overturned the standard articulated in the Board’s 2015 Browning-Ferris decision and returned to the pre-Browning-Ferris “direct control” standard. The final rule also provides greater clarity regarding the application of the standard. The purpose of the rule is to increase predictability and consistency with respect to the Board’s determination of joint employer status under the National Labor Relations Act (NLRA). The final rule took effect on April 27, 2020.

Under the previous Browning-Ferris standard, two or more entities were considered joint employers if they were both employers within the meaning of the common law, and if they shared or co-determined those matters governing the essential terms and conditions of employment. Notably, the Board considered whether an entity exercised control over terms and conditions of employment indirectly or whether it reserved the authority to exercise such control, even if it never actually did. The controversial Browning-Ferris decision overruled 30 years of precedent with respect to the joint employer standard.

Under the new final rule, an entity is considered a joint employer under the act only if it possesses and exercises “substantial direct and immediate control” over one or more essential terms and conditions of employment of another employer’s employees “as would warrant finding that the entity meaningfully affects matters relating to the employment relationship with those employees.” Evidence of indirect control over essential terms and conditions of employment, contractually reserved control that is never actually exercised, or control over mandatory subjects of bargaining other than essential terms and conditions of employment is probative of joint employer status only to the extent that it supplements and reinforces evidence of direct and immediate control over an essential term and condition of employment.

The regulation defines “essential terms and conditions of employment” to mean wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction. It also defines “substantial direct and immediate control” as “direct and immediate control that has a regular or continuous consequential effect on an essential term or condition of employment of another employer’s employees.” Control is not “substantial” if it is only exercised on a “sporadic, isolated, or de minimis basis.”

The regulation also provides further clarity regarding what constitutes “direct and immediate control” with respect to each essential term and condition of employment, and conversely, examples of what does not. For example, if the entity “actually determines work schedules or the work hours, including overtime, of another employer’s employees,” the entity exercises direct and immediate control over hours of work. By contrast, establishing operating hours or when the entity needs the services to be provided by another employer does not constitute exercising direct and immediate control over another employer’s employees.

A determination that an entity is a joint employer could result in the entity being subject to joint bargaining obligations and potential joint liability for unfair labor practices or breaches of collective bargaining agreements. The promulgation of this final rule is significant because it will be less likely that entities such as franchisors, staffing agencies and contractors will be considered joint employers under the act.

Income withholding, FICA, FUTA taxes and non-employee workers

Employers are responsible for paying their employees’ wages and employment taxes, as well as the employer’s portion of Social Security (FICA) taxes and federal and state unemployment (FUTA and SUTA) taxes. In fact, the Internal Revenue Code defines “employer” as the person who pays wages.

Because supplier employers usually control the payment of wages to temporary employees, the IRS regards them and not customer employers, as the principal employer for tax purposes. However, the IRS and the courts have held that if a supplier employer defaults on its tax obligations to the government, the customer employer may be liable for taxes corresponding to temporary employees in its workforce.

Non-employee workers’ health and pension benefits

Although no employer is legally required to provide benefit plans to its employees, the Employment Retirement Income Security Act of 1974 (ERISA) governs employee benefit plans if they exist. If a qualified benefit plan provides benefits to all employees, temporary employees could be eligible to participate in the plan if their relationship with the customer employer satisfies the common law test for an employer-employee relationship. This is true even if the agreement between the employee and employer provides that no employer-employee relationship is intended or created.

I-9 requirements and non-employee workers

Under the Immigration Reform and Control Act (IRCA), an employer must complete an I-9 form for each employee attesting that it has verified the employee’s right to work. In this context, temporary employees are considered employees of the employer who pays their wages, and the supplier employer is required to complete I-9 forms for the temporary employees. Nevertheless, a customer employer may not use the temporary employees to knowingly obtain the services of unauthorized aliens. Therefore, if a customer employer has reason to believe that one of its temporary employees is working illegally in the United States, it should notify the supplier employer immediately. Employers must be careful, however, not to make assumptions about an individual’s citizen/alien status based upon an individual’s physical appearance, name or accent.

Even though the supplier employer is typically responsible for completing the temporary employee’s I-9 form, a customer employer should ensure that:

  • its contracts with the supplier employer clarify that the supplier employer has the responsibility for completing the I-9 forms
  • the supplier employer has in fact completed the I-9 forms
  • the supplier employer is not providing workers to customer employer who are not authorized to work in the United States
  • the supplier employer will indemnify the customer employer for any penalties assessed with regard to the hiring of unauthorized workers or I-9 paperwork violations.

See Chapter 05: Immigration.

Summary    

As reflected previously, there are many open questions about the situations in which a customer employer must regard temporary employees as its employees under various labor and employment laws. While in some cases, customer employers may be pleased to be regarded as an “employer” of the temporary employees, such as in the workers’ compensation setting, where employer status shields a party from tort liability for injuries arising out of and in the course of employment, in the majority of cases, customer employers may, understandably, desire to have no employment relationship with their temporary employees because of the potential liability that arises with such a relationship. Often, the answer as to whether a customer employer can actually be regarded as a temporary employee’s employer rests only with a very fact-specific inquiry of the circumstances of each individual case.